What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-11-04 compared with 2022-08-05 · 631 added, 616 removed, 2565 unchanged (33% of the section changed)

1 unchanged sentence

CONSOLIDATED BALANCE SHEETS

September 30,

Cash and due from banks

72 unchanged sentences

40,000,000 shares authorized;

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

15,866,243 shares issued and outstanding at September 30, 2022 and 15,839,944 shares issued and outstanding at December 31, 2021

289,219,000  

15 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

June 30, 2022

June 30, 2021

June 30, 2022

June 30, 2021

Sept 30, 2022

Sept 30, 2021

Sept 30, 2022

Sept 30, 2021

Interest income

37 unchanged sentences

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

June 30, 2022

June 30, 2021

June 30, 2022

June 30, 2021

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

Sept 30, 2022

Sept 30, 2021

Sept 30, 2022

Sept 30, 2021

Other comprehensive income/(loss):

8 unchanged sentences

The following table depicts the change in shareholders’

equity for the three months ended June 30, 2022:

equity for the three months ended September 30, 2022:

($ in thousands except per share amounts)

2 unchanged sentences

Shareholders’

Balances, March 31, 2022

Balances, June 30, 2022

$ 288,199  

3 unchanged sentences

Dividend reinvestment plan ( 6,733 shares)

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

Stock-based compensation expense

Cash dividends ($ 0.32 per common share)

Net income for the three months ended June 30, 2022

Net income for the three months ended September 30, 2022

16,030  

1 unchanged sentence

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

Balances, June 30, 2022

Balances, September 30, 2022

$ 289,219  

7 unchanged sentences

The following table depicts the change in shareholders’

equity for the six months ended June 30, 2022:

equity for the nine months ended September 30, 2022:

($ in thousands except per share amounts)

13 unchanged sentences

Cash dividends ($ 0.94 per common share)

Net income for the six months ended June 30, 2022

Net income for the nine months ended September 30, 2022

39,260  

1 unchanged sentence

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

Balances, June 30, 2022

Balances, September 30, 2022

$ 289,219  

7 unchanged sentences

The following table depicts the change in shareholders’

equity for the three months ended June 30, 2021:

equity for the three months ended September 30, 2021:

($ in thousands except per share amounts)

2 unchanged sentences

Shareholders’

Balances, March 31, 2021

Balances, June 30, 2021

$ 293,232  

4 unchanged sentences

Dividend reinvestment plan ( 7,904 shares)

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

Stock option exercises ( 2,000 shares)

Stock-based compensation expense

1 unchanged sentence

Cash dividends ($ 0.30 per common share)

Net income for the three months ended June 30, 2021

Net income for the three months ended September 30, 2021

15,051  

1 unchanged sentence

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

Balances, June 30, 2021

$ 293,232  

Balances, September 30, 2021

$ 285,033  

7 unchanged sentences

The following table depicts the change in shareholders’

equity for the six months ended June 30, 2021:

equity for the nine months ended September 30, 2021:

($ in thousands except per share amounts)

10 unchanged sentences

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

Stock option exercises ( 2,000 shares)

Stock-based compensation expense

1 unchanged sentence

Cash dividends ($ 0.88 per common share)

Net income for the six months ended June 30, 2021

Net income for the nine months ended September 30, 2021

47,382  

1 unchanged sentence

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

Balances, June 30, 2021

$ 293,232  

Balances, September 30, 2021

$ 285,033  

4 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

June 30, 2022

June 30, 2021

Sept 30, 2022

Sept 30, 2021

Cash flows from operating activities

$ 39,260,000  

$ 47,382,000  

Adjustments to reconcile net income to net cash from operating activities

Depreciation and amortization

9,855,000  

10,200,000  

Accretion of acquired loans

Provision for credit losses

3,500,000  

Stock-based compensation expense

2,398,000  

1,725,000  

Stock grants to directors for retainer fee

347,000  

344,000  

Proceeds from sales of mortgage loans held for sale

195,374,000  

509,763,000  

Origination of mortgage loans held for sale

2 unchanged sentences

Net gain from sales of mortgage loans held for sale

( 6,787,000 )

( 23,551,000 )

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

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

Net loss from sales and write-downs of fixed assets

275,000  

243,000  

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

246,000  

Earnings on bank owned life insurance

( 1,310,000 )

Change in fair value of derivative asset

( 23,836,000 )

( 3,865,000 )

Change in fair value of derivative liability

23,687,000  

4,060,000  

Gain on sale of branch

( 1,058,000 )

Net change in:

Accrued interest receivable

( 4,677,000 )

853,000  

( 11,504,000 )

Accrued interest payable and other liabilities

32,060,000  

( 3,150,000 )

Net cash from operating activities

82,793,000  

19,169,000  

Cash flows from investing activities

1 unchanged sentence

( 426,842,000 )

( 129,522,000 )

Purchases of securities available for sale

( 91,200,000 )

( 257,967,000 )

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

13,262,000  

77,531,000  

Proceeds from sales of foreclosed assets

47,000  

181,000  

Proceeds from sales of former bank premises

2,994,000  

270,000  

Proceeds from Federal Home Loan Bank stock redemption

281,000  

Proceeds from bank owned life insurance death benefits claim

628,000  

Net cash transferred in branch sale

( 2,679,000 )

Net purchases of premises and equipment and lease activity

( 2,166,000 )

( 4,250,000 )

Net cash for investing activities

4 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

June 30, 2022

Six Months

June 30, 2021

Sept 30, 2022

Sept 30, 2021

Cash flows from financing activities

Net decrease in time deposits

( 113,842,000

Net (decrease) increase in all other deposits

24 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation :

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.

The unaudited financial statements for the nine months ended September 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 June 30, 2022 should not be considered as indicative of results for a full year.

The results for the period ended September 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 

3 unchanged sentences

Coronavirus Pandemic :

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

Although there has been an easing of Covid- 19 pandemic-related restrictions, there remains a significant amount of stress and uncertainty across national and global economies due to the pandemic of coronavirus disease 2019 (“Covid- 19”

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

This uncertainty is heightened as certain geographic areas continue to experience surges in Covid- 19 cases and governments at all levels continue to react to changes in circumstances, including supply chain disruptions and inflationary pressures.

This uncertainty is heightened as certain geographic areas continue to experience surges in Covid- 19 cases and governments at all levels continue to react to changes in circumstances, including vaccine hesitancy, booster shot efficacy, supply chain disruptions and inflationary pressures.

In addition, this uncertainty is further heightened by the possibility that new and highly infectious variants and subvariants of Covid- 19 might arise which are capable of evading vaccinations, booster shots and prior immunity.

The Coronavirus Pandemic is a highly unusual, unprecedented and evolving public health and economic crisis and may have a material negative impact on our financial condition and results of operations.

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

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

11 unchanged sentences

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

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.

As of September 30, 2022, we recorded forgiveness transactions on all but five loans aggregating $ 0.5 million.

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

2 unchanged sentences

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

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.

As of September 30, 2022, we recorded forgiveness transactions on all but seven loans aggregating $ 2.1 million.

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

Individual Economic Impact Payments

The Internal Revenue Service has made three rounds of Individual Economic Impact Payments via direct deposit or mailed checks.

In general, and subject to adjusted gross income limitations, qualifying individuals have received payments of $1,200 in April 2020, $600 in January 2021 and $1,400 in March 2021.

The Internal Revenue Service made three rounds of Individual Economic Impact Payments via direct deposit or mailed checks.

In general, and subject to adjusted gross income limitations, qualifying individuals received payments of $1,200 in April 2020, $600 in January 2021 and $1,400 in March 2021.

Troubled Debt Restructuring Relief

10 unchanged sentences

We adopted the CECL methodology effective January 1, 2022.

Earnings Per Share :

Basic earnings per share is based on the weighted average number of common shares and participating securities outstanding during the period.

Diluted earnings per share include the dilutive effect of additional potential common shares issuable under our stock-based compensation plans and are determined using the treasury stock method.

Our unvested restricted shares, which contain non-forfeitable rights to dividends whether paid or accrued (i.e., participating securities), are included in the number of shares outstanding for both basic and diluted earnings per share calculations.

In the event of a net loss, our unvested restricted shares are excluded from the calculation of both basic and diluted earnings per share.

Approximately 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

As of June 30, 2022 and December 31, 2021, all of our debt securities were designated as available for sale.

As of September 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.

3 unchanged sentences

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

7 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 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.

At September 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 $ 3.1 million at September 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.

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 credit losses.

8 unchanged sentences

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans Held for Sale :

1 unchanged sentence

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

As of 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.

As of September 30, 2022 and December 31, 2021, we determined that the fair value of our mortgage loans held for sale was $ 14.7 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 $ 1.37 billion and $ 1.34 billion as of June 30, 2022 and December 31, 2021, respectively.

Mortgage loans serviced for others totaled about $ 1.38 billion and $ 1.34 billion as of September 30, 2022 and December 31, 2021, respectively.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Allowance for Credit Losses ( “

20 unchanged sentences

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 June 30, 2022 were as follows:

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

Commercial Loans

Commercial and Industrial :

Risks to this loan category include industry concentration and the practical limitations associated with monitoring the condition of the collateral which often consists of inventory, accounts receivable, and other non-real estate assets.

Equipment and inventory obsolescence can also pose a risk.

Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt.

Owner Occupied Commercial Real Estate :

Risks to this loan category include industry concentration and the inability to monitor the condition of the collateral.  Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt.  Also, declines in real estate values and lack of suitable alternative use for the properties are risks for loans in this category.

Non-Owner Occupied Commercial Real Estate :

Loans in this category are susceptible to declines in occupancy rates, business failure, and general economic conditions.

Also, declines in real estate values and lack of suitable alternative use for the properties are risks for loans in this category.

Multi-Family and Residential Rental :

Risks to this loan category include industry concentration and the inability to monitor the condition of the collateral.  Loans in this category are susceptible to weakening general economic conditions and increases in unemployment rates, as well as market demand and supply of similar property and the resulting impact on occupancy rates, market rents, cash flow, and income-based real estate values.  Also, the lack of a suitable alternative use for the properties is a risk for loans in this category.

Vacant Land, Land Development and Residential Construction :

Risks common to commercial construction loans are cost overruns, changes in market demand for property, inadequate long-term financing arrangements, and declines in real estate values.

Residential construction loans are susceptible to those same risks as well as those associated with residential mortgage loans.

Changes in market demand for property could lead to longer marketing times resulting in higher carrying costs, declining values, and higher interest rates.

1 - 4 Family Mortgages :

Residential mortgage loans are susceptible to weakening general economic conditions and increases in unemployment rates and declining real estate values.

Other Consumer Loans :

Risks common to these loans include regulatory risks, unemployment, and changes in local economic conditions as well as the inability to monitor collateral consisting of personal property.

The “remaining life methodology”

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

(Continued) 

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

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

The economic forecasts used for our September 30, 2022 allowance calculation reflected a $ 1.0 million allowance balance increase compared to the forecasts used for our June 30, 2022 allowance calculation, in large part reflecting lower economic growth and higher unemployment conditions.

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.

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.

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

8 unchanged sentences

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

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

Effect of other factors such as competition and legal and regulatory requirements

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

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

As of June 30, 2022, we employed two additional qualitative factors:

As of September 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.

6 unchanged sentences

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.

A provision for credit losses of $ 2.9 million was recorded during the third quarter of 2022, compared to a provision expense of $ 1.9 million during the third quarter of 2021.

A provision for credit losses of $ 3.5 million was recorded during the first nine months of 2022, compared to a negative provision of $ 0.9 million during the first nine months of 2021.

The provision expense recorded during the current-year third quarter mainly reflected allocations necessitated by commercial loan and residential mortgage loan growth, increased specific reserves for certain distressed commercial loan relationships, and a decline in forecasted economic conditions. 

The provision expense recorded during the first nine months of 2022 primarily resulted from these factors, along with a higher reserve for residential mortgage loans stemming from slower principal prepayment rates and the associated extended average life of the portfolio. 

The increases were partially mitigated by the recording of net loan recoveries and ongoing strong loan quality metrics during the periods. 

In addition, reflecting improvement in overall Covid- 19 conditions, including increased vaccination rates, the availability of booster shots, and the lifting of many economic growth-restraining restrictions, we reduced the allocation amounts associated with the Covid- 19 environmental factor during the second quarter of 2022.

MERCANTILE BANK CORPORATION

2 unchanged sentences

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.

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

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

8 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

5 unchanged sentences

The accounting for changes in the fair value of derivatives depends on the use of the derivatives and whether the derivatives qualify for hedge accounting.

Used as part of our asset and liability management to help manage interest rate risk, our derivatives have generally consisted of interest rate swap agreements that qualified for hedge accounting.

We do not use derivatives for trading purposes.

Used as part of our asset and liability management to help manage interest rate risk, our derivatives have generally consisted of interest rate swap agreements that qualify for hedge accounting.

We do not use derivatives for speculative purposes.

Changes in the fair value of derivatives that are designated, for accounting purposes, as a hedge of the variability of cash flows to be received on various assets and liabilities and are effective are reported in other comprehensive income.

1 unchanged sentence

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

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

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

If designated as a hedge, we also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in cash flows of the hedged items.

Ineffective hedge gains and losses are recognized immediately in current earnings as noninterest income or expense.

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

We had no derivative instruments designated as hedges as of June 30, 2022 and December 31, 2021.

We had no derivative instruments designated as hedges as of September 30, 2022 and December 31, 2021.

Goodwill and Core Deposit Intangible :

2 unchanged sentences

A more frequent assessment is performed should events or changes in circumstances indicate the carrying value of the goodwill may not be recoverable.

We conducted an annual test during 2021, with no impairment recognized, and no circumstances have arisen in 2022 to warrant an additional impairment analysis beyond the annual test in 2022.

We may elect to perform a qualitative assessment for the annual impairment test.

10 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.

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

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

June 30, 2022

June 30, 2021

June 30, 2022

June 30, 2021

Sept 30, 2022

Sept 30, 2021

Sept 30, 2022

Sept 30, 2021

Service charges on deposit and sweep accounts

35 unchanged sentences

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

Customer service fees are recorded as other noninterest income on our Consolidated Statements of Income.

Newly Issued Not Yet Effective Standards :

11 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

June 30, 2022

September 30, 2022

Government agency debt obligations

14 unchanged sentences

26,245,000  

18,000  

( 3,880,000 )

32 unchanged sentences

$ 592,743,000  

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:

Securities with unrealized losses at September 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

June 30, 2022

September 30, 2022

Government agency debt obligations

11 unchanged sentences

6,366,000  

4,368,000  

Municipal general obligation bonds

20 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURITIES (Continued)

36 unchanged sentences

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

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

At September 30, 2022, 774 debt securities with estimated fair values totaling $ 574 million had unrealized losses aggregating $ 91.8 million.

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

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

At September 30, 2022, unrealized losses aggregating $ 74.6 million were attributable to bonds issued or guaranteed by agencies of the U.S.

federal government, while unrealized losses totaling $ 17.2 million were associated with bonds issued by state-based municipalities.

After considering the issuers of the bonds, and taking into account the fact that no municipal issuer had been subject to a credit rating downgrade by bond credit rating agencies, we determined that the unrealized losses were due to changing interest rate environments.

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

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

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

The contractual maturity is utilized for U.S.

5 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURITIES (Continued)

21 unchanged sentences

$ 582,999,000  

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.

Securities issued by the State of Michigan and all its political subdivisions had combined amortized costs of $ 181 million and $ 155 million at September 30, 2022 and December 31, 2021, respectively, with estimated market values of $ 164 million and $ 158 million, respectively.

Securities issued by all other states and their political subdivisions had combined amortized costs of $ 0.2 million and $ 1.7 million and estimated market values of $ 0.3 million and $ 1.7 million at September 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 $ 203 million and $ 197 million at June 30, 2022 and December 31, 2021, respectively.

Government agency debt obligations and mortgage-backed securities that are pledged to secure repurchase agreements was $ 199 million and $ 197 million at September 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.

LOANS AND ALLOWANCE FOR CREDIT LOSSES

4 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

Our total loans at September 30, 2022 were $ 3.88 billion compared to $ 3.45 billion at December 31, 2021, an increase of $ 427 million, or 12.4 %.

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

September 30, 2022

December 31, 2021

30 unchanged sentences

$ 3,453,459,000  

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.

For September 30, 2022, and December 31, 2021, includes $ 2.6 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 $ 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:

Home equity lines of credit totaled $ 35.6 million and $ 29.5 million as of September 30, 2022 and December 31, 2021, respectively.

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

September 30,

Loans past due 90 days or more still accruing interest

6 unchanged sentences

$ 2,468,000  

(Continued) 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

The recorded principal balance of nonperforming loans was as follows:

September 30,

Commercial and industrial

21 unchanged sentences

$ 2,468,000  

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

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

Commercial and industrial

1 unchanged sentence

$ 249,000  

$ 265,000  

$ 1,213,365,000  

$ 1,213,630,000  

Vacant land, land development, and residential construction

1 unchanged sentence

32,000  

60,938,000  

60,970,000  

Real estate –

13 unchanged sentences

249,000  

297,000  

3,144,766,000  

3,145,063,000  

1-4 family mortgages

21 unchanged sentences

$ 3,880,958,000  

(Continued) 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

60 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

Real estate –

owner occupied

Real estate –

non-owner occupied

Real estate –

multi-family and residential rental

Total commercial

248,000  

1-4 family mortgages

Other consumer loans

1,454,000  

1,455,000  

Total with no allowance recorded

$ 1,703,000  

With an allowance recorded:

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

1-4 family mortgages

84,000  

48,000  

Other consumer loans

84,000  

48,000  

Total with an allowance recorded

$ 84,000  

$ 48,000  

Total nonaccrual loans:

$ 248,000  

1,539,000  

48,000  

Total nonaccrual loans

$ 1,787,000  

$ 48,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

2 unchanged sentences

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

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

Market value estimates of collateral on distressed lending relationships, as well as on foreclosed and repossessed assets, are reviewed periodically.

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

5 unchanged sentences

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

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:

Collateral dependent loans, representing the entire amount of loans on nonaccrual, totaled $ 1.4 million as of September 30, 2022. 

Residential real estate served as collateral on $ 1.2 million in loans categorized as 1 - 4 family mortgages, with non-real estate business assets serving as collateral on $ 0.2 million in loans categorized as commercial and industrial loans. 

Specific reserve allocations on nonaccrual loans totaled less than $ 0.1 million as of September 30, 2022. 

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

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

With no related allowance recorded

14 unchanged sentences

163,000  

218,000  

Real estate –

multi-family and residential rental

multi-family and residential rental

91,000  

46,000  

23,000  

Total commercial

24 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

68 unchanged sentences

$ 24,279,000  

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.

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 balances have been charged-down to estimated collateral fair value.

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

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

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

5 unchanged sentences

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

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

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

Commercial credit exposure –

credit risk profiled by internal credit risk grades:

and Residential

Real Estate -

38 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

43 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

20 unchanged sentences

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’

loans 90 days or more past due are considered nonperforming. 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.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

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

Commercial and Industrial:

26 unchanged sentences

$ 572,511  

$ 641,119  

$ 1,213,630  

Vacant Land, Land Development and Residential Construction:

8 unchanged sentences

18,123  

17,379  

Grades 8 –

100 unchanged sentences

$ 3,145,063  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Term Total  

1-4 Family Mortgages:

8 unchanged sentences

$ 704,274  

Nonperforming

$ 258,144  

$ 243,109  

$ 95,502  

$ 12,576  

$ 15,111  

$ 45,802  

$ 670,244  

$ 35,197  

$ 705,441  

Other Consumer Loans:

6 unchanged sentences

$ 30,454  

Nonperforming

$ 3,810  

12 unchanged sentences

$ 680,862  

$ 55,033  

$ 735,895  

$ 1,065,527  

$ 1,146,370  

$ 585,845  

$ 166,360  

$ 83,598  

$ 136,816  

$ 3,184,516  

$ 696,442  

$ 3,880,958  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

and industrial

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

Commercial 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:

10 unchanged sentences

( 13 )  

( 28 )  

( 109 )  

( 15 )  

Ending balance

26 unchanged sentences

( 18 )  

Ending balance

7 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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):

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

Commercial and industrial

Commercial vacant

development and

Commercial real estate –

Commercial vacant land, land development and residential construction

Commercial real 

estate –

owner occupied

Commercial real estate –

non-owner occupied

Commercial real

estate –

multi-family and

non-owner occupied

Commercial real estate –

multi-family and 

residential rental

Home equity and other

4 family mortgages

Allowance for loan losses:

13 unchanged sentences

( 30 )  

( 263 )  

( 54 )  

( 12 )  

Ending balance

21 unchanged sentences

( 64 )  

( 15 )  

( 12 )  

( 34 )  

Ending balance

45 unchanged sentences

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, 2022 were as follows:

Loans modified as troubled debt restructurings generally reflect other than insignificant payment delays and below market interest rates.

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

Commercial and industrial

19 unchanged sentences

$ 308,000  

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

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

Commercial and industrial

21 unchanged sentences

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:

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

Commercial and industrial

4 unchanged sentences

owner occupied

692,000  

Real estate –

2 unchanged sentences

multi-family and residential rental

Total commercial

93,000  

Home equity and other

Total commercial

279,000  

278,000  

Home equity and other

1-4 family mortgages

1 unchanged sentence

$ 278,000  

424,000  

422,000  

$ 3,947,000  

$ 3,945,000  

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

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

Commercial and industrial

10 unchanged sentences

multi-family and residential rental

Total commercial

93,000  

Home equity and other

485,000  

482,000  

1-4 family mortgages

46,000  

531,000  

528,000  

Total commercial

3,802,000  

3,801,000  

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, 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

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

485,000  

Real estate –

non-owner occupied

Real estate –

multi-family and residential rental

Total commercial

482,000  

Home equity and other

1-4 family mortgages

46,000  

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

46,000  

Vacant land, land development and residential construction

Real estate –

owner occupied

531,000  

Real estate –

non-owner occupied

Real estate –

multi-family and residential rental

Total commercial

528,000  

Home equity and other

1-4 family mortgages

$ 4,333,000  

(Continued) 

$ 4,329,000  

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 three months ended June 30, 2022 is as follows:

We had no loans modified as troubled debt restructurings within the previous twelve months that became over 30 days past due within the three months or nine months ended September 30, 2022.

We had one loan with a balance of less than $ 0.1 million modified as a troubled debt restructuring within the previous twelve months that became over 30 days past due within the three months ended September 30, 2021;

this loan was the only troubled debt restructured loan that became over 30 days past due within the first nine months of 2021.

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

Real Estate -

8 unchanged sentences

Payments (net)

536,000  

Transfers to ORE

5 unchanged sentences

$ 135,000  

$ 88,000  

Other Consumer

12 unchanged sentences

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:

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

Real Estate -

8 unchanged sentences

Payments (net)

324,000  

( 9,682,000 )

6 unchanged sentences

$ 135,000  

$ 88,000  

Other Consumer

14 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

Land Development,

and Residential

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

Real Estate -

1 unchanged sentence

Real Estate -

Multi-Family and Residential

Commercial Loan Portfolio:

12 unchanged sentences

$ 151,000  

$ 92,000  

Retail Loan Portfolio:

5 unchanged sentences

Net Additions/Deletions

412,000  

10,000  

Ending Balance

3 unchanged sentences

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:

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

Real Estate -

13 unchanged sentences

686,000  

92,000  

Ending Balance

2 unchanged sentences

$ 151,000  

$ 92,000  

Retail Loan Portfolio:

12 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PREMISES AND EQUIPMENT, NET

Premises and equipment are comprised of the following:

September 30,

Land and improvements

14 unchanged sentences

$ 57,298,000  

Depreciation expense totaled $ 1.5 million and $ 1.4 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.

Depreciation expense totaled $ 1.5 million during the third quarters of 2022 and 2021.

Depreciation expense totaled $ 4.5 million during the first nine months of 2022, compared to $ 4.3 million during the first nine months of 2021.

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

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.

As of September 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 2.7 years and 2.8 years as of September 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 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 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.

The weighted average discount rate for leases was 5.40 % and 4.70 % as of September 30, 2022 and December 31, 2021, respectively.

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 $ 4.1 million as of September 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 Sheets.

Total operating lease expense associated with the leases aggregated $ 0.2 million during the third quarters of 2022 and 2021, and $ 0.6 million and $ 0.5 million during the first nine months of 2022 and 2021, respectively.

Future lease payments at September 30, 2022 totaled $ 4.7 million, comprised of $ 1.0 million in one year, $ 1.4 million in one to three years, $ 0.7 million in three to five years and $ 1.6 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) 

Net proceeds totaled $ 2.9 million, with a $ 0.3 million loss on sale recorded during the second quarter of 2022.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Our total deposits at September 30, 2022 totaled $ 3.85 billion, a decrease of $ 237 million, or 5.8 %, from December 

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

September 30, 2022

December 31, 2021

Noninterest-bearing demand

$ 1,740,432,000  

$ 1,677,952,000  

1,716,904,000

1,677,952,000

Interest-bearing checking

481,016,000  

538,838,000  

889,035,000  

1,040,176,000  

409,505,000  

394,330,000  

1,040,176,000

Time, under $100,000

120,930,000  

132,776,000  

Time, $100,000 and over

232,975,000  

275,208,000  

Total local deposits

3,873,893,000  

4,059,280,000  

3,846,085,000

4,059,280,000

Out-of-area time, $100,000 and over

23,913,000  

Total deposits

$ 3,873,893,000  

$ 4,083,193,000  

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

3,846,085,000

4,083,193,000

Total time deposits of more than $250,000 totaled $ 187 million and $ 207 million at September 30, 2022 and December 31, 2021, respectively.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

1 unchanged sentence

Information relating to our repurchase agreements follows:

September 30,

Twelve Months

14 unchanged sentences

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

(Continued) 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES

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 %.

Federal Home Loan Bank of Indianapolis (“FHLBI”) bullet advances totaled $ 310 million at September 30, 2022, and were expected to mature at varying dates from October 2022 through June 2027, with fixed rates of interest from 0.55 % to 3.18 % and averaging 1.92 %.

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 June 30, 2022 were as follows:

$ 54,000,000  

80,000,000  

50,000,000  

30,000,000  

40,000,000  

FHLBI amortizing advances totaled $ 28.3 million as of June 30, 2022, with an average rate of 2.52 %.

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

FHLBI amortizing advances totaled $ 28.3 million as of September 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.

Scheduled principal payments of FHLBI amortizing advances were as follows:

353,000  

826,000  

862,000  

899,000  

25,323,000  

Scheduled principal payments on FHLBI amortizing advances as of September 30, 2022 were as follows:

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

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

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

Our borrowing line of credit as of September 30, 2022 totaled $ 1.0 billion, with remaining availability based on collateral equaling $ 659 million.

COMMITMENTS AND OFF-BALANCE SHEET RISK

5 unchanged sentences

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

(Continued) 

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMITMENTS AND OFF-BALANCE SHEET RISK (Continued)

12 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 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:

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 September 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 September 30, 2022 was $ 0.3 million.

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

September 30,

Commercial unused lines of credit

19 unchanged sentences

$ 1,565,871,000  

(Continued) 

MERCANTILE BANK CORPORATION

9 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 June 30, 2022 are reflected in the following table.

Fees paid to us by the correspondent banks are recognized as noninterest income on our Consolidated Statements of Income on the settlement date.

The fair values of derivative instruments as of September 30, 2022 are reflected on a gross basis in the following table.

Notional Amount

Balance Sheet Location

Balance Sheet

Derivative Assets  

2 unchanged sentences

$ 28,445,000  

Derivative Liabilities

Interest rate swaps  

Derivative Liabilities  

Interest rate swaps

359,936,000  

 Other Liabilities  

28,544,000  

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.

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

The effect of interest rate swaps that are not designated as hedging instruments resulted in income of $ 0.2 million during the first nine months of 2022 that was recorded in other noninterest expense on our Consolidated Statements of Income.

The value of interest rate swaps in a liability position, which includes accrued interest, was $ 28.5 million as of September 30, 2022.

We have master netting arrangements with our correspondent banks.

Cash collateral totaling $ 28.0 million was provided to us by the counterparty correspondent banks as of September 30, 2022.

Cash collateral amounts, which are based on daily fair value calculations, are adjusted daily if fair value changes exceed an aggregate of $250,000.

Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $ 360 million as of September 30, 2022.

Associated credit exposure is generally mitigated by securing the interest rates swaps with the underlying collateral of the loan instruments.

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

Notional Amount

Balance Sheet Location

Derivative Assets

Interest rate swaps  

Balance Sheet

Derivative Assets  

Interest rate swaps

$ 279,419,000  

Other Assets  

$ 4,609,000  

Derivative Liabilities

Interest rate swaps

4 unchanged sentences

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.

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 $ 4.9 million as of December 31, 2021.

DERIVATIVES AND HEDGING ACTIVITIES (Continued)

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

The fair value of interest rate swaps in a liability position, which includes accrued interest, was $ 4.9 million as of December 31, 2021.

We have master netting arrangements with our correspondent banks.

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

Cash collateral amounts, which are based on daily fair value calculations, are adjusted daily if fair value changes exceed an aggregate of $250,000.

Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $ 279 million as of December 31, 2021.

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

Associated credit exposure is generally mitigated by securing the interest rates swaps with the underlying collateral of the loan instruments.

FAIR VALUES OF FINANCIAL INSTRUMENTS

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

June 30, 2022

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

September 30, 2022

December 31, 2021

79 unchanged sentences

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

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

The fair values of interest rate swaps are based on discounted cash flows using forecasted yield curves, along with insignificant unobservable inputs, such as borrower credit spreads.

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

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.

31 unchanged sentences

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

There was no such impairment as of June 30, 2022 or December 31, 2021.

There was no such impairment as of September 30, 2022 or December 31, 2021.

We have no Level 1 securities available for sale.

1 unchanged sentence

We measure fair value utilizing models that use primarily market observable inputs, such as forecasted yield curves.

Insignificant unobservable inputs, such as borrower credit spreads, are also utilized.

Mortgage loans held for sale .

1 unchanged sentence

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

As of June 30, 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.

As of September 30, 2022 and December 31, 2021, we determined the fair value of our mortgage loans held for sale to be $ 14.7 million and $ 16.7 million, respectively.

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

11 unchanged sentences

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 June 30, 2022 are as follows:

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

Available for sale securities

21 unchanged sentences

$ 623,000  

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.

Interest rate swaps

28,544,000  

Total liabilities

$ 28,544,000  

There were no sales, purchases or transfers in or out of Level 3 during the first nine months of 2022.

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUES (Continued)

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

22 unchanged sentences

$ 677,000  

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 June 30, 2022 are as follows:

Interest rate swaps

4,857,000  

Total liabilities

$ 4,857,000  

There were no sales, purchases or transfers in or out of Level 3 during 2021.

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

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

Markets for Identical

Collateral dependent loans

$ 1,416,000  

Foreclosed assets

1 unchanged sentence

$ 1,416,000  

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.

EARNINGS PER SHARE

Basic earnings per share is based on the weighted average number of common shares and participating securities outstanding during the period.

Diluted earnings per share include the dilutive effect of additional potential common shares issuable under our stock-based compensation plans and are determined using the treasury stock method.

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 319,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and nine months ended September 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 nine months ended September 30, 2022.

Stock options for approximately 5,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three and nine months ended September 30, 2022.

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

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

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

MERCANTILE BANK CORPORATION

10 unchanged sentences

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

At June 30, 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.

At September 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 September 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:

5 unchanged sentences

Action Regulations

June 30, 2022

September 30, 2022

Total capital (to risk weighted assets)

Consolidated  

$ 613,161  

24 unchanged sentences

REGULATORY MATTERS (Continued)

Actual   

Minimum Required

6 unchanged sentences

Amount  

December 31, 2021

Total capital (to risk weighted assets)

Consolidated  

$ 565,143  

3 unchanged sentences

404,910  

Tier 1 capital (to risk weighted assets)

16 unchanged sentences

248,137  

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.

Our consolidated capital levels as of September 30, 2022 and December 31, 2021 include $ 46.7 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 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.

As of September 30, 2022 and December 31, 2021, all $ 46.7 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.

2 unchanged sentences

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

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

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

MERCANTILE BANK CORPORATION

4 unchanged sentences

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.

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 was paid on September 14, 2022 to shareholders of record as of September 2, 2022.

As of September 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 nine months of 2022.

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

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

SUBORDINATED NOTES

On December 15, 2021, we entered into Subordinated Note Purchase Agreements with certain institutional accredited investors pursuant to which we issued and sold $ 75.0 million in aggregate principal amount of its 3.25 % fixed-to-floating rate subordinated notes (“Notes”).

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

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

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

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

On December 15, 2021, we injected $ 70.0 million of the issuance proceeds to our bank as an increase to equity capital.

On January 14, 2022, we issued an additional $ 15.0 million of its Notes to certain institutional accredited investors, reflecting an expansion of the $75.0 million issuance completed on December 15, 2021.

The additional $ 15.0 million issuance was completed on the same terms as the prior offering and under the existing indenture.

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

SUBSEQUENT EVENTS

On October 13, 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 December 14, 2022 to shareholders of record as of December 2, 2022.

MERCANTILE BANK CORPORATION

44 unchanged sentences

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 (“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.

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 September 30, 2022 and December 31, 2021 and the results of operations for the three months and nine months ended September 30, 2022 and September 30, 2021.

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

69 unchanged sentences

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

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

Mortgage Servicing Rights :

16 unchanged sentences

Coronavirus Pandemic

There remains a significant amount of stress and uncertainty across national and global economies due to the pandemic of coronavirus disease 2019 (“Covid-19”) caused by severe acute respiratory syndrome coronavirus 2 (the “Coronavirus Pandemic”).

This uncertainty is heightened as certain geographic areas continue to experience surges in Covid-19 cases and governments at all levels continue to react to changes in circumstances, including supply chain disruptions and inflationary pressures.

Although there has been an easing of Covid-19 pandemic-related restrictions, there remains a significant amount of stress and uncertainty across national and global economies due to the pandemic of coronavirus disease 2019 (“Covid-19”) caused by severe acute respiratory syndrome coronavirus 2 (the “Coronavirus Pandemic”).

This uncertainty is heightened as certain geographic areas continue to experience surges in Covid-19 cases and governments at all levels continue to react to changes in circumstances, including vaccine hesitancy, booster shot efficacy, supply chain disruptions and inflationary pressures.

In addition, this uncertainty is further heightened by the possibility that new and highly infectious variants and subvariants of Covid-19 might arise which are capable of evading vaccinations, booster shots and prior immunity.

11 unchanged sentences

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

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.

As of September 30, 2022, we recorded forgiveness transactions on all but five loans aggregating $0.5 million.

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

As of September 30, 2022, we recorded forgiveness transactions on all but seven loans aggregating $2.1 million.

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

MERCANTILE BANK CORPORATION

Individual Economic Impact Payments

The Internal Revenue Service has made three rounds of Individual Economic Impact Payments via direct deposit or mailed checks.

In general, and subject to adjusted gross income limitations, qualifying individuals have received payments of $1,200 in April 2020, $600 in January 2021 and $1,400 in March 2021.

The Internal Revenue Service made three rounds of Individual Economic Impact Payments via direct deposit or mailed checks.

In general, and subject to adjusted gross income limitations, qualifying individuals received payments of $1,200 in April 2020, $600 in January 2021 and $1,400 in March 2021.

Troubled Debt Restructuring Relief

9 unchanged sentences

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.

We reported net income of $16.0 million, or $1.01 per diluted share, for the third quarter of 2022, compared with net income of $15.1 million, or $0.95 per diluted share, during the third quarter of 2021.

Net income for the first nine months of 2022 totaled $39.3 million, or $2.48 per diluted share, compared to $47.4 million, or $2.95 per diluted share, during the first nine 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 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.

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

Commercial loans increased $195 million during the first nine months of 2022, reflecting the net impact of growth in core commercial loans and payment activities under the PPP.

Core commercial loans increased $232 million, or almost 11% on an annualized basis, while PPP payment activities aggregated $37.5 million, during the first nine months of 2022.

Core commercial and industrial loans increased $114 million, owner-occupied commercial real estate (“CRE”) loans grew $77.8 million, multi-family and residential rental property loans increased $47.7 million, and vacant land, land development and residential construction loans increased $17.7 million, while non-owner occupied CRE loans were down $24.8 million.

As a percentage of total commercial loans, commercial and industrial loans (excluding PPP loans) and owner occupied CRE loans combined equaled 59.0% as of September 30, 2022, compared to 57.1% at December 31, 2021.

The new commercial loan pipeline remains strong, and at September 30, 2022, we had $169 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 $227 million during the first nine months of 2022, representing a growth rate of over 68% on an annualized basis.

With the increase in residential mortgage loan rates during the first nine months 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.

During the first nine months of 2022, approximately 29% of our residential mortgage loan production was comprised of longer-term fixed rate loans, compared to about 61% during the first nine months of 2021.

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

1 unchanged sentence

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.

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling only 0.04% of total loans as of September 30, 2022.

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

We had no loan charge-offs during the third quarter of 2022, and an aggregated $0.2 million for the first nine months of the year, while recoveries of prior period loan charge-offs equaled $0.2 million and $0.9 million during the respective time periods.

A net loan recovery, as a percentage of average total loans, equaled an annualized 0.03% and 0.02% during the third quarter and first nine months of 2022, respectively.

A provision for credit losses of $2.9 million was recorded during the third quarter of 2022, compared to a provision expense of $1.9 million during the third quarter of 2021. 

A provision for credit losses of $3.5 million was recorded during the first nine months of 2022, compared to a negative provision of $0.9 million during the first nine months of 2021. 

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

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.

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.

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. 

The lower 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;

During the first nine months of 2022, the average balance of these funds equaled $535 million, or 11.2% of average earning assets, compared to $649 million, or 14.6% of average earning assets, during the first nine 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 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.

The elevated levels during 2021 and through the first nine months of 2022 primarily reflected 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.

The level of interest-earning balances has been on a declining trend during 2022, as excess monies have been used to fund loan growth as well as brokered deposit and Federal Home Loan Bank of Indianapolis (“FHLBI”) advance maturities.

Average interest-earning balances equaled $295 million during the third quarter of 2022, compared to $531 million and $784 million during the second and first quarters of 2022, respectively.

Total deposits decreased $237 million during the first nine months of 2022, totaling $3.85 billion at September 30, 2022.

Local deposits decreased $213 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.

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

Net interest income increased $11.3 million and $16.1 million during the third quarter and first nine months of 2022, respectively, compared to the respective time periods in 2021.

Interest income was $12.2 million and $17.1 million higher during the third quarter and first nine months of 2022, respectively, when compared to the same time periods in 2021, in large part reflecting an increasing interest rate environment and higher average balances of earning assets.

Interest expense was $1.0 million and $1.1 million higher during the third quarter and first nine months of 2022, respectively, when compared to the corresponding time periods in 2021, generally reflecting the net impact of lower deposit interest costs and increased costs on borrowed funds mainly resulting from a higher cost of subordinated debentures and the issuance of $90.0 million in subordinated notes in December 2021 and January 2022.

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.

Noninterest income decreased $8.3 million and $19.3 million during the third quarter and first nine months of 2022, respectively, compared to the corresponding time periods in 2021.

Mortgage banking income was $4.8 million and $16.1 million lower during the third quarter and first nine months of 2022, respectively, 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 15% when comparing the third quarter and first nine months of 2022 with the respective time periods in 2021.

Noninterest expense increased $0.5 million and $1.9 million during the third quarter and first nine 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.

Excluding the charitable contribution, overhead costs were up slightly during the 2022 periods when compared to the 2021 periods, in large part reflecting increased compensation costs.

Financial Condition

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.

Our total assets decreased $241 million during the first nine months of 2022, and totaled $5.02 billion as of September 30, 2022.

Total loans increased $427 million, while interest-earning deposits declined $695 million and securities available for sale were down $9.7 million.

Total deposits decreased $237 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.

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.

Commercial loans increased $195 million during the first nine months of 2022, reflecting the net impact of growth in core commercial loans and payment activities under the PPP.

Core commercial loans increased $232 million, or almost 11% on an annualized basis, while PPP payment activities aggregated $37.5 million, during the first nine months of 2022.

Core commercial and industrial loans increased $114 million, owner-occupied CRE loans grew $77.8 million, multi-family and residential rental property loans increased $47.7 million, and vacant land, land development and residential construction loans increased $17.7 million, while non-owner occupied CRE loans were down $24.8 million.

As of September 30, 2022, availability on existing commercial construction and development loans totaled $169 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 $309 million in new lending commitments, a majority of which we expect to be accepted and funded over the next 12 to 18 months.

1 unchanged sentence

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 averaged 34% during the first six months of 2022.

Usage of existing commercial lines of credit averaged 36% during the first nine 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, 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.

Residential mortgage loans, excluding home equity lines of credit, increased $227 million during the first nine months of 2022, totaling $670 million, or 17.3% of total loans, as of September 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 loan volume totaled $523 million during the first nine months of 2022, compared to $742 million during the same time period in 2021, a decline of $219 million, or almost 30%.

Refinance volume declined $249 million, while home purchase and construction loan activity increased $30.1 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.

During the first nine months of 2022, approximately 29% of residential mortgage loan production consisted of longer-term fixed rate loans, compared to a level of about 61% during the first nine months of 2021.

MERCANTILE BANK CORPORATION

Home equity lines of credit and other consumer-related loans increased $5.6 million during the first nine months of 2022, and at September 30, 2022 totaled $66.1 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:

11 unchanged sentences

1,007,361,000

1,027,415,000

Multi-Family & Residential Rental

12 unchanged sentences

3,313,709,000

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.

Includes $2.6 million, $2.9 million, $12.2 million, $40.1 million, and $116 million in loans originated under the Paycheck Protection Program for September 30, 2022, June 30, 2022, March 31, 2022, December 31, 2021, and September 30, 2021, respectively.

For September 30, 2022, June 30, 2022, and March 31, 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.

10 unchanged sentences

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

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.

Nonperforming loans, comprised of nonaccrual loans and loans past due 90 days or more and accruing interest, totaled $1.4 million (less than 0.1% of total loans) as of September 30, 2022, compared to $2.5 million (less than 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.

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

MERCANTILE BANK CORPORATION

23 unchanged sentences

MERCANTILE BANK CORPORATION

NONPERFORMING LOANS RECONCILIATION 

The following tables provide a reconciliation of nonperforming assets:

NONPERFORMING LOANS RECONCILIATION

Beginning balance

7 unchanged sentences

Valuation write-downs

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 had no loan charge-offs during the third quarter of 2022, and an aggregated $0.2 million during the first nine months of 2022.

Recoveries of prior period loan charge-offs equaled $0.2 million and $0.9 million during the respective time periods.

A net loan recovery, as a percentage of average total loans, equaled an annualized 0.03% and 0.02% during the third quarter and first nine 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 $36.0 million, or 0.97% of total loans, and over 2,000% of nonperforming loans as of June 30, 2022.

The allowance equaled $39.1 million, or 1.01% of total loans, and over 2,700% of nonperforming loans as of September 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.

12 unchanged sentences

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

See also Note 3 –

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

As of 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.

See also Note 3 - Loans and Allowance for Credit Losses in this Quarterly Report on Form 10-Q for further information regarding our loan portfolio and allowance.

As of September 30, 2022, the allowance was comprised of $37.6 million in general reserves relating to performing loans and $1.5 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 $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.

Troubled debt restructurings totaled $11.8 million at September 30, 2022, consisting of $0.4 million that are on nonaccrual status and $11.4 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 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.

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

As of September 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:

1 unchanged sentence

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 $10.9 million during the first six months of 2022, totaling $604 million as of June 30, 2022.

Securities available for sale decreased $9.7 million during the first nine months of 2022, totaling $583 million as of September 30, 2022.

Purchases of U.S.

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

Government agency bonds totaled $54.5 million during the first nine 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 totaled $2.1 million during the first nine months of 2022, consisting of investments in CRA-qualified securities, generally reflecting the partial reinvestment of $4.9 million from principal paydowns on U.S.

Government agency guaranteed mortgage-backed securities.

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

Purchases of municipal bonds totaled $34.6 million during the first nine months of 2022;

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

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

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

Government agency bonds (66%), municipal bonds (28%) and U.S.

1 unchanged sentence

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

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

The fair value of securities designated as available for sale at September 30, 2022 totaled $583 million, including a net unrealized loss of $91.8 million.

2 unchanged sentences

In addition, the securities portfolio serves a primary interest rate risk management function.

We expect purchases during the remainder of 2022 to generally consist of U.S.

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

We expect purchases during the remainder of 2022 to generally consist of municipal bonds, with the securities portfolio maintained at about 12% of total assets.

MERCANTILE BANK CORPORATION

6 unchanged sentences

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

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.

FHLBI stock totaled $17.7 million as of September 30, 2022, compared to $18.0 million as of December 31, 2021.

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

2 unchanged sentences

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.

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 level of interest-earning balances has been on a declining trend during 2022, as excess monies have been used to fund loan growth as well as brokered deposit and FHLBI advance maturities.

Average interest-earning balances equaled $295 million during the third quarter of 2022, compared to $531 million and $784 million during the second and first quarters of 2022, respectively.

Net premises and equipment equaled $52.1 million at September 30, 2022, representing a decrease of $5.2 million during the first nine 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.

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

Other assets equaled $97.7 million at September 30, 2022, reflecting an increase of $43.5 million during the first nine months of 2022.

The increase is primarily associated with $23.8 million of growth in the fair value of interest rates swaps and an $18.3 million increase in a deferred tax benefit related to unrealized losses on available for sale securities.

Total deposits decreased $237 million during the first nine months of 2022, totaling $3.85 billion at September 30, 2022.

Local deposits decreased $213 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.

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

Noninterest-bearing deposits increased $39.0 million and savings deposits were up $18.2 million, while interest-bearing checking accounts were down $9.5 million, during the first nine months of 2022.

Money market deposit balances were down $231 million, in large part reflecting the large withdrawal from a single customer.

Local time deposits declined $29.3 million during the first nine months of 2022.

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

Sweep accounts increased $1.1 million during the first nine months of 2022, totaling $199 million as of September 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 $196 million during the first six months of 2022, with a high balance of $224 million and a low balance of $173 million.

The average balance of sweep accounts equaled $199 million during the first nine months of 2022, with a high balance of $233 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.

1 unchanged sentence

MERCANTILE BANK CORPORATION

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

FHLBI advances decreased $35.7 million during the first nine months of 2022, totaling $338 million as of September 30, 2022.

Amortizing FHLBI advances aggregating $28.3 million were obtained, while bullet advances aggregating $64.0 million matured.

2 unchanged sentences

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 June 30, 2022 totaled $932 million, with remaining availability based on collateral equaling $564 million.

Our borrowing line of credit as of September 30, 2022 totaled $1.0 billion, with remaining availability based on collateral equaling $659 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”).

6 unchanged sentences

Shareholders’

equity was $429 million at June 30, 2022, compared to $457 million at December 31, 2021.

equity was $416 million at September 30, 2022, compared to $457 million at December 31, 2021.

Shareholders’

1 unchanged sentence

A $68.7 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 six months of 2022.

equity during the first nine 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.

3 unchanged sentences

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 $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.

Wholesale funds, primarily comprised of deposits from customers outside of our market areas and advances from the FHLBI, totaled $338 million, or 7.7% of combined deposits and borrowed funds, as of September 30, 2022, compared to $398 million, or 8.5% of combined deposits and borrowed funds, as of December 31, 2021.

Sweep accounts increased $1.1 million during the first nine months of 2022, totaling $199 million as of September 30, 2022.

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.

The average balance of sweep accounts equaled $199 million during the first nine months of 2022, with a high balance of $233 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.

1 unchanged sentence

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.

Information regarding our repurchase agreements as of September 30, 2022 and during the first nine months of 2022:

Outstanding balance at September 30, 2022

Weighted average interest rate at September 30, 2022

Maximum daily balance nine months ended September 30, 2022

Average daily balance for nine months ended September 30, 2022

Weighted average interest rate for nine months ended September 30, 2022

FHLBI advances decreased $35.7 million during the first nine months of 2022, totaling $338 million as of September 30, 2022.

Amortizing FHLBI advances aggregating $28.3 million were obtained, while bullet advances aggregating $64.0 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.

1 unchanged sentence

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

Our borrowing line of credit as of September 30, 2022 totaled $1.0 billion, with remaining availability based on collateral equaling $659 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 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 did not access these lines of credit during the first nine months of 2022.

In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged $528 million during the first nine 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 $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:

Using certain municipal bonds as collateral, we could have borrowed up to $26.2 million as of September 30, 2022.

We did not utilize this line of credit during the first nine 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 September 30, 2022, significant fixed and determinable contractual obligations to third parties by payment date, excluding accrued interest:

Deposits without a stated maturity

9 unchanged sentences

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

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

As of September 30, 2022, we had a total of $1.77 billion in unfunded loan commitments and $24.5 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’

6 unchanged sentences

Shareholders’

equity was $429 million at June 30, 2022, compared to $457 million at December 31, 2021.

equity was $416 million at September 30, 2022, compared to $457 million at December 31, 2021.

Shareholders’

1 unchanged sentence

A $68.7 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 six months of 2022.

equity during the first nine months of 2022.

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

4 unchanged sentences

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

We believe that, as of June 30, 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.

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

As of September 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 $46.0 million during the first nine months of 2022, in large part reflecting net income totaling $46.0 million and a $15.0 million equity injection associated with the Notes issuance, which was partially offset by cash dividends paid to us aggregating $19.5 million.

Our bank’s total risk-based capital ratio was also impacted by a $428 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.

As of September 30, 2022, our bank’s total regulatory capital equaled $598 million, or $150 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 September 30, 2022 and December 31, 2021 are disclosed in Note 13 of the Notes to Consolidated Financial Statements.

Results of Operations

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.

We recorded net income of $16.0 million, or $1.01 per basic and diluted share, for the third quarter of 2022, compared to net income of $15.1 million, or $0.95 per basic and diluted share, for the third quarter of 2021.

We recorded net income of $39.3 million, or $2.48 per basic and diluted share, for the first nine months of 2022, compared to net income of $47.4 million, or $2.95 per basic and diluted share, for the first nine months of 2021.

The higher level of net income during the third quarter of 2022 compared to the third quarter of 2021 resulted from increased net interest income, which more than offset decreased noninterest income, a higher credit loss provision, and increased overhead costs during the quarter.

The lower level of net income during the first nine months of 2022 compared to the first nine months of 2021 reflected decreased noninterest income, a higher credit loss provision, and increased overhead costs, which more than offset improved net interest income during the nine-month period.

The higher levels of net interest income during the 2022 periods resulted from an increased net interest margin and earning asset growth.

The reduction in noninterest income during the current-year periods primarily reflected decreased mortgage banking income and interest rate swap income, which outweighed increases in several key fee income categories.

The credit loss provisions recorded during the 2022 periods mainly reflected allocations necessitated by commercial loan and residential mortgage loan growth, increased specific reserves for certain distressed commercial loan relationships, a higher reserve for residential mortgage loans resulting from an increase in the average life of the portfolio, and a deterioration in forecasted economic conditions.

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

The slight increase in overhead costs during the third quarter of 2022 mainly reflected higher compensation costs.

Excluding nonrecurring transactions, overhead costs during the first nine months of 2022 were up less than 3% compared to the respective 2021 period, primarily reflecting higher data processing and compensation costs.

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.

Interest income during the third quarter of 2022 was $48.1 million, an increase of $12.2 million, or 34.1%, from the $35.9 million earned during the third quarter of 2021.

Interest income during the first nine months of 2022 was $124 million, an increase of $17.1 million, or 16.1%, from the $106 million earned during the respective 2021 period.

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

The yield on average earning assets was 4.04% and 3.45% during the third quarter and first nine months of 2022, respectively, up from 3.13% and 3.21% during the respective prior-year periods.

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

The yield on loans was 4.56% and 4.15% during the third quarter and first nine months of 2022, respectively, up from 4.07% and 4.06% during the respective 2021 periods mainly due to higher interest rates on variable-rate commercial loans stemming from the Federal Open Market Committee (“FOMC”) significantly raising the targeted federal funds rate in an effort to curb elevated inflation levels.

The FOMC increased the targeted federal funds rate by 300 basis points during the period of March 2022 through September 2022.

As of September 30, 2022, approximately 64% of the commercial loan portfolio consisted of variable-rate loans.

The increases in loan yield were achieved despite significant reductions in PPP net loan fee accretion.

A nominal level of net loan fee accretion was recorded during the current-year third quarter, compared to $2.8 million during the third quarter of 2021;

accretion totaled $1.0 million during the first nine months of 2022, down from $8.5 million during the respective 2021 period.

On average, lower-yielding other interest-earning assets represented 6.2% and 11.2% of earning assets during the third quarter and first nine months of 2022, respectively, down from 16.1% and 14.6% during the respective prior-year periods, while higher-yielding loans represented 80.7% and 76.0% of earning assets during the current-year third quarter and year-to-date period, respectively, up from 71.9% and 74.5% during the respective 2021 periods.

Average earning assets equaled $4.73 billion during the current-year third quarter, up $169 million, or 3.7%, from the level of $4.56 billion during the respective 2021 period;

average loans and average securities were up $537 million and $70.7 million, respectively, while average other interest-earning assets decreased $439 million.

Average earning assets equaled $4.80 billion during the first nine months of 2022, up $355 million, or 8.0%, from the level of $4.44 billion during the respective prior-year period;

average loans and average securities were up $337 million and $132 million, respectively, while average other interest-earning assets declined $114 million.

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 10 basis points and 51 basis points during the third quarters of 2022 and 2021, respectively, and 29 basis points and 46 basis points during the first nine months 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.

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.

Interest expense during the third quarter of 2022 was $5.8 million, an increase of $1.0 million, or 20.8%, from the $4.8 million expensed during the third quarter of 2021.

The increase is attributable to a higher average weighted cost of, and to a much lesser extent, growth in, interest-bearing liabilities.

The weighted average cost of interest-bearing liabilities was 0.81% during the third quarter of 2022, up from 0.69% during the third quarter of 2021 mainly due to higher costs of borrowings and non-time deposits.

The cost of borrowed funds increased from 1.67% during the third quarter of 2021 to 1.99% during the third quarter of 2022 primarily due to a higher cost of subordinated debentures and the issuance of $90.0 million in subordinated notes in December of 2021 and January of 2022.

The cost of subordinated debentures was 6.57% during the third quarter of 2022, up from 3.70% during the respective 2021 period due to increases in the 90-Day Libor Rate.

The cost of non-time deposits increased from 0.20% during the third quarter of 2021 to 0.30% during the current-year third quarter, reflecting the increasing interest rate environment.

Average interest-bearing liabilities totaled $2.83 billion during the current-year third quarter compared to $2.74 billion during the prior-year third quarter, representing an increase of $93.2 million, or 3.4%.

MERCANTILE BANK CORPORATION

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.

Interest expense during the first nine months of 2022 was $16.0 million, an increase of $1.1 million, or 7.1%, from the $14.9 million expensed during the first nine months of 2021.

The increase is attributable to growth in interest-bearing liabilities, which more than offset a slight decrease in the weighted average cost of interest-bearing liabilities.

Average interest-bearing liabilities were $2.94 billion during the first nine months of 2022, up $265 million, or 9.9%, from the $2.67 billion average during the respective 2021 period.

The weighted average cost of interest-bearing liabilities decreased slightly from 0.75% during the first nine months of 2021 to 0.73% during the respective current-year period mainly due to a lower cost of time deposits, which more than offset increases in the costs of borrowings and non-time deposits.

The cost of time deposits decreased from 1.30% during the first nine months of 2021 to 0.90% during the first nine months of 2022 primarily due to lower interest rates paid on local time deposits.

Net interest income during the third quarter of 2022 was $42.4 million, an increase of $11.3 million, or 36.2%, from the $31.1 million earned during the respective 2021 period.

The increase resulted from an improved net interest margin, and to a much lesser extent, growth in average earning assets.

The net interest margin increased from 2.71% in the third quarter of 2021 to 3.56% in the current-year third quarter due to a higher yield on average earning assets.

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

The cost of funds equaled 0.48% in the third quarter of 2022, up from 0.42% during the prior-year third quarter mainly due to increased costs of borrowings and non-time deposits.

The significant level of excess on-balance sheet liquidity negatively impacted the net interest margin by 7 basis points and 44 basis points during the third quarters of 2022 and 2021, respectively.

Net interest income during the first nine months of 2022 was $108 million, an increase of $16.1 million, or 17.5%, from the $91.5 million earned during the first nine months of 2021.

The increase resulted from a higher net interest margin and growth in average earning assets.

The net interest margin improved from 2.76% in the first nine months of 2021 to 3.00% in the respective 2022 period due to a higher yield on average earning assets.

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

The cost of funds equaled 0.45% during the first nine months of 2022, unchanged from the respective prior-year period as increases in the costs of borrowings and non-time deposits were offset by a lower cost of time deposits.

The significant level of excess on-balance sheet liquidity negatively impacted the net interest margin by 24 basis points and 40 basis points during the first nine 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 third quarters and first nine 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 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.

Tax-exempt securities interest income and yield for the third quarters and first nine 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 third quarter of both 2022 and 2021 and $180,000 in the first nine 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 June 30,

Quarters ended September 30,

(dollars in thousands)

18 unchanged sentences

MERCANTILE BANK CORPORATION

Six months ended June 30,

Nine months ended September 30,

(dollars in thousands)

18 unchanged sentences

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.

A provision for credit losses of $2.9 million was recorded during the third quarter of 2022, compared to a provision expense of $1.9 million during the third quarter of 2021. 

A provision for credit losses of $3.5 million was recorded during the first nine months of 2022, compared to a negative provision of $0.9 million during the first nine months of 2021. 

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 provision expense recorded during the third quarter of 2021 primarily reflected allocations associated with commercial loan growth, while the negative provision expense recorded during the first nine months of 2021 mainly reflected a reduced allocation associated with the economic and business conditions environmental factor, reflecting improvement in both current and forecasted economic conditions, and the recording of net loan recoveries, which more than offset required reserve allocations necessitated by growth in commercial loans.

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.

1 unchanged sentence

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.

During the third quarter of 2022, no loans were charged off, while recoveries of prior period loan charge-offs were $0.2 million, providing for net loan recoveries of $0.2 million, or an annualized 0.03% of average total loans.

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

During the first nine months of 2022, loan charge-offs totaled $0.2 million, while recoveries of prior period loan charge-offs equaled $0.9 million, providing for net loan recoveries of $0.7 million, or an annualized 0.02% of average total loans.

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

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

Noninterest income during the third quarter of 2022 was $7.3 million, down $8.3 million from the $15.6 million recorded during the prior-year third quarter.

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

Excluding the impact of this transaction, noninterest income decreased $7.7 million during the third quarter of 2022 compared to the respective 2021 period.

Noninterest income during the first nine months of 2022 was $24.3 million, compared to $43.6 million during the first nine months of 2021.

During the first nine months of 2022, noninterest income included a $0.5 million bank owned life insurance claim, while noninterest income during the respective prior-year period included a $1.1 million gain on the sale of a branch and the aforementioned recovery of loan collection costs.

Excluding the impacts of these transactions, noninterest income decreased $18.2 million during the first nine months of 2022 compared to the respective 2021 period.

Continued strength in purchase residential mortgage loan originations during the third quarter and first nine 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.

MERCANTILE BANK CORPORATION

The residential mortgage loan sold percentage declined from approximately 69% during the second quarter and first nine months of 2021 to approximately 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

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.

In aggregate, service charges on accounts, credit and debit card income, and payroll processing fees were up 14% and 15% during the third quarter and first nine months of 2022, respectively, compared to the corresponding prior-year periods.

Noninterest expense totaled $26.8 million during the third quarter of 2022, up from $26.2 million during the prior-year third quarter.

Noninterest expense during the first nine months of 2022 was $79.4 million, compared to $77.5 million during the respective prior-year period.

Overhead costs during the first nine months of 2022 included a $0.5 million contribution to The Mercantile Bank Foundation and a $0.3 million net loss on the sale of a former branch facility, while overhead costs during the first nine months of 2021 included $0.6 million in net losses on sales and write-downs of former branch facilities.

Excluding these transactions, noninterest expense increased $1.7 million in the first nine months of 2022 compared to the respective 2021 period.

The higher levels of expense in the 2022 periods mainly reflected increased salary costs, in large part reflecting annual employee merit pay increases, a larger bonus accrual, and higher stock-based compensation costs, which more than offset higher residential mortgage loan deferred salary costs as well as decreased residential mortgage lender commissions and associated 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

Data processing costs, primarily reflecting higher transaction volume and software support costs, and other employee costs, consisting mainly of meals, entertainment, training, travel, and mileage, increased in the 2022 periods.

The higher level of other employee costs primarily reflected the easing of Covid-19 pandemic-related restrictions.

During the third quarter of 2022, we recorded income before federal income tax of $20.0 million and a federal income tax expense of $3.9 million.

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

During the first nine months of 2022, we recorded income before federal income tax of $48.9 million and a federal income tax expense of $9.7 million.

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

The increased federal income tax expense in the third quarter of 2022 resulted from the higher level of income before federal income tax, while the decreased federal income tax expense in the first nine months of 2022 stemmed from the lower level of income before federal income tax.

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

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements