What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-08-04 compared with 2023-05-05 · 811 added, 449 removed, 2213 unchanged (36% of the section changed)

54 unchanged sentences

194,340,000  

Federal funds purchased

17,207,000  

Federal Home Loan Bank advances

19 unchanged sentences

40,000,000 shares authorized;

16,001,448 shares outstanding at March 31, 2023 and 15,994,884 shares outstanding at December 31, 2022

16,018,048 shares issued and outstanding at June 30, 2023 and 15,994,884 shares issued and outstanding at December 31, 2022

292,906,000  

3 unchanged sentences

216,313,000  

Accumulated other comprehensive income (loss)

Accumulated other comprehensive gain (loss)

( 61,517,000 )

9 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

Interest income

7 unchanged sentences

Federal Home Loan Bank advances

Subordinated debentures and other borrowings

Subordinated debt and other borrowings

Total interest expense

7 unchanged sentences

Interest rate swap fees

Payroll processing

Payroll services income

Earnings on bank owned life insurance

4 unchanged sentences

Data processing costs

Charitable foundation contribution

Other expense

9 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

Other comprehensive income (loss):

1 unchanged sentence

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

Other comprehensive income (loss), net of tax effect

Other comprehensive income (loss), net of tax

Comprehensive income (loss)

1 unchanged sentence

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’

($ in thousands except per share amounts)

2 unchanged sentences

Shareholders’

Balances, March 31, 2023

$ 291,516  

$ 232,123  

$ 467,372  

Employee stock purchase plan ( 443 shares)

Dividend reinvestment plan ( 7,821 shares)

Stock grants to directors for retainer fees ( 10,455 shares)

Stock-based compensation expense

Cash dividends ($ 0.33 per common share)

Net income for the three months ended June 30, 2023

20,357  

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

Balances, June 30, 2023

$ 292,906  

$ 247,313  

$ 478,702  

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’

EQUITY (Continued)

($ in thousands except per share amounts)

Comprehensive

Income (Loss)

Shareholders’

Balances, January 1, 2023

4 unchanged sentences

Dividend reinvestment plan ( 14,701 shares)

Stock grants to directors for retainer fees ( 10,455 shares)

Stock-based compensation expense

Cash dividends ($ 0.66 per common share)

Net income for the three months ended March 31, 2023

Net income for the six months ended June 30, 2023

41,332  

1 unchanged sentence

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

Balances, June 30, 2023

$ 292,906  

$ 247,313  

$ 478,702  

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’

EQUITY (Continued)

($ in thousands except per share amounts)

Comprehensive

Income (Loss)

Shareholders’

Balances, March 31, 2022

2 unchanged sentences

$ 436,471  

Employee stock purchase plan ( 336 shares)

Dividend reinvestment plan ( 6,835 shares)

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

Stock-based compensation expense

Cash dividends ($ 0.31 per common share)

Net income for the three months ended June 30, 2022

11,737  

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

Balances, June 30, 2022

$ 288,199  

$ 188,452  

$ 428,983  

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION 

CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’

EQUITY (Continued)

10 unchanged sentences

Dividend reinvestment plan ( 12,670 shares)

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

Stock option exercises ( 1,355 shares)

1 unchanged sentence

Cash dividends ($ 0.62 per common share)

Net income for the three months ended March 31, 2022

Net income for the six months ended June 30, 2022

23,229  

1 unchanged sentence

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

Balances, March 31, 2022

Balances, June 30, 2022

$ 288,199  

4 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

March 31, 2023

March 31, 2022

June 30, 2023

June 30, 2022

Cash flows from operating activities

3 unchanged sentences

Stock-based compensation expense

Stock grants to directors for retainer fee

Proceeds from sales of mortgage loans held for sale

Origination of mortgage loans held for sale

( 127,413,000

Net gain from sales of mortgage loans held for sale

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

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

Net loss from sales and write-downs of fixed assets

Earnings on bank owned life insurance

2 unchanged sentences

Accrued interest receivable

Accrued interest and other liabilities

Accrued interest payable and other liabilities

Net cash from operating activities

2 unchanged sentences

( 135,410,000

( 269,930,000

Purchases of securities available for sale

1 unchanged sentence

Proceeds from sales of foreclosed assets

Purchases of Federal Home Loan Bank stock

Proceeds from Federal Home Loan Bank stock redemption

Proceeds from bank owned life insurance death benefits claim

Net purchases of premises and equipment and lease activity

1 unchanged sentence

( 145,325,000

( 336,399,000

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

June 30, 2023

June 30, 2022

Cash flows from financing activities

Net increase (decrease) in time deposits

Net (decrease) increase in time deposits

Net decrease in all other deposits

( 183,553,000

( 131,308,000

Net increase in securities sold under agreements to repurchase

Net change in federal funds purchased

Maturities of Federal Home Loan Bank advances

Proceeds from Federal Home Loan Bank advances

Payoffs of and paydowns on Federal Home Loan Bank advances

Net proceeds from subordinated notes issuance

Proceeds from stock option exercises, net of cashless exercises

Employee stock purchase plan

Net proceeds from stock option exercises

Dividend reinvestment plan

Proceeds from subordinated notes issuance

Payment of cash dividends to common shareholders

Net cash from (for) financing activities

Net cash (for) from financing activities

( 209,653,000

Net change in cash and cash equivalents

2 unchanged sentences

Cash and cash equivalents at end of period

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

March 31, 2023

March 31, 2022

Supplemental disclosures of cash flows information

Cash paid during the period for:

Federal income tax

Noncash financing and investing activities:

Transfers from loans to foreclosed assets

Transfers from premises and equipment to other assets

Transfers from bank premises to other real estate owned

Transfers from loans to foreclosed assets

See accompanying notes to consolidated financial statements.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation :

The unaudited financial statements for the three months ended March 31, 2023 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.

The unaudited financial statements for the six months ended June 30, 2023 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 subsidiaries, Mercantile Insurance Center, Inc.

and Mercantile Community Partners.

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

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

The results for the period ended March 31, 2023 should not be considered as indicative of results for a full year.

The results for the period ended June 30, 2023 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 

7 unchanged sentences

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

Approximately 360,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three months ended March 31, 2023.

Stock options for 5,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three months ended March 31, 2023.

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

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

Approximately 350,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and six months ended June 30, 2023.

Stock options for 5,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three and six months ended June 30, 2023.

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.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Debt Securities :

9 unchanged sentences

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Changes in the allowance are recorded as provisions for (or reversals of) credit loss expense.

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

At March 31, 2023, and December 31, 2022, there was no allowance related to the available for sale debt securities portfolio.

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

At June 30, 2023, and December 31, 2022, there was no allowance related to the available for sale debt securities portfolio.

Interest income includes amortization of purchase premiums and accretion of discounts.

3 unchanged sentences

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

FHLBI stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.

Federal Home Loan Bank of Indianapolis (“FHLBI”) stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.

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.

1 unchanged sentence

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

Net unamortized deferred loan fees/(costs) amounted to ($ 1.4 ) million and ($ 1.0 ) million at March 31, 2023, and December 31, 2022, respectively.

Net unamortized deferred loan fees/(costs) amounted to ($ 2.2 ) million and ($ 1.0 ) million at June 30, 2023, and December 31, 2022, respectively.

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

6 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 March 31, 2023 and December 31, 2022, we determined that the fair value of our mortgage loans held for sale totaled $ 3.9 million and $ 3.6 million, respectively.

As of June 30, 2023 and December 31, 2022, we determined that the fair value of our mortgage loans held for sale totaled $ 12.2 million and $ 3.6 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.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Allowance for Credit Losses ( “

Allowance ”

In June 2016, the FASB issued ASU No.

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

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

The standard replaced the current “incurred loss”

approach with an “expected loss”

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

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

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

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

We recorded a provision expense of $ 0.6 million during the first quarter of 2023, mainly reflecting allocations necessitated by net loan growth;

nominal loan charge-offs and continued strong loan quality metrics in large part mitigated additional reserves associated with loan growth.

We did not adjust any qualitative reserve factors during the first quarter of 2023, and the impact of the updated economic forecast was less than $ 0.1 million.

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

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

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

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

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

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

On January 1, 2022, we adopted ASU No.

2016 - 13, Financial Instruments –

Credit Losses (Topic 32 ):

Measurement of Credit Losses on Financial Instruments , as amended, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost and certain off-balance sheet credit exposures.

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

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

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

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

We estimate the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts.

Historical credit loss experience provides the basis for the estimation of expected credit losses.

Adjustments to historical loss information are made for changes in current loan-specific risk characteristics such as changes in underwriting standards, portfolio mix, delinquency level or other relevant factors.

We recorded a provision expense of $ 2.6 million during the first six months of 2023, mainly reflecting allocations necessitated by net loan growth and adjustments to historical loss information to better represent our expectations for future credit losses.

Changes to qualitative factors were limited to a reduction of the historical loss information factor which coincided with adjustments to historical loss information.

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

5 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Our loan portfolio segments as of March 31, 2023 and December 31, 2022 were as follows:

Our loan portfolio segments as of June 30, 2023 and December 31, 2022 were as follows:

Commercial Loans

22 unchanged sentences

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.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

The “remaining life methodology”

2 unchanged sentences

Our historical loss rate is then applied to the monthly estimated future loan balances at the instrument level.

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

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

7 unchanged sentences

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

As of March 31, 2023 and December 31, 2022, we used a one -year reasonable and supportable economic forecast period, with a six -month straight-line reversion period for all loan segments.

As of June 30, 2023 and December 31, 2022, we used a one -year reasonable and supportable economic forecast period, with a six -month straight-line reversion period for all loan segments.

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 March 31, 2023 allowance calculation reflected a less than $ 0.1 million allowance balance increase compared to the forecasts used for our December 31, 2022 allowance calculation.

The economic forecasts used for our June 30, 2023 allowance calculation reflected a decrease in our allowance balance of $ 0.7 million compared to the forecasts used for our December 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.

10 unchanged sentences

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 collectability 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.

Effective January 1, 2022, we established a historical loss information factor to address the relatively low level of loan losses during the look-back period.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

Effective January 1, 2022, we established a historical loss information factor to address the relatively low level of loan losses during the look-back period.

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

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

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

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

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

3 unchanged sentences

Mortgage Banking Activities :

Mortgage loans serviced for others totaled approximately $ 1.37 billion and $ 1.38 billion as of March 31, 2023 and December 31, 2022, respectively.

Mortgage loans serviced for others totaled $ 1.37 billion and $ 1.38 billion as of June 30, 2023 and December 31, 2022, respectively.

Mortgage loan servicing rights are recognized as assets based on the allocated value of retained servicing rights on mortgage loans sold.

17 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

12 unchanged sentences

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

We had no derivative instruments designated as hedges as of March 31, 2023, and December 31, 2022.

We had no derivative instruments designated as hedges as of June 30, 2023, and December 31, 2022.

Goodwill and Core Deposit Intangible :

15 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 presented in the Consolidated Statements of Income that are scoped within Topic 606:

Ended March 31,

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

Service charges on deposit and sweep accounts

1 unchanged sentence

$ 1,495,000  

$ 2,041,000  

$ 2,910,000  

Credit and debit card fees

1 unchanged sentence

2,134,000  

4,485,000  

4,015,000  

Payroll processing

1 unchanged sentence

464,000  

1,317,000  

1,102,000  

Customer service fees

1 unchanged sentence

202,000  

407,000  

444,000  

Service Charges on Deposit and Sweep Accounts:

16 unchanged sentences

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

Adoption of New Accounting Standards :

Standards Recently Adopted :

2022 - 02 Financial Instruments –

1 unchanged sentence

Troubled Debt Restructurings and Vintage Disclosures .

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

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

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

5 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

March 31, 2023

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, 2023

Government agency debt obligations

51 unchanged sentences

$ 602,936,000  

Securities with unrealized losses at March 31, 2023 and December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

Securities with unrealized losses at June 30, 2023 and December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

Less than 12 Months

12 Months or More

March 31, 2023

June 30, 2023

Government agency debt obligations

34 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURITIES (Continued)

39 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 March 31, 2023, 653 debt securities with estimated fair values totaling $ 560 million had unrealized losses aggregating $ 72.5 million.

At June 30, 2023, 736 debt securities with estimated fair values totaling $ 578 million had unrealized losses aggregating $ 78.5 million.

At December 31, 2022, 732 debt securities with estimated fair values totaling $ 573 million had unrealized losses aggregating $ 83.3 million.

At March 31, 2023, unrealized losses aggregating $ 63.4 million were attributable to bonds issued or guaranteed by agencies of the U.S.

At June 30, 2023, unrealized losses aggregating $ 66.9 million were attributable to bonds issued or guaranteed by agencies of the U.S.

federal government, while unrealized losses totaling $ 11.6 million were associated with bonds issued by state-based municipalities.

5 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURITIES (Continued)

The amortized cost and fair value of debt securities at March 31, 2023, by maturity, are shown in the following table.

The amortized cost and fair value of debt securities at June 30, 2023, by maturity, are shown in the following table.

The contractual maturity is utilized for U.S.

5 unchanged sentences

$ 12,635,000  

$ 12,401,000  

Due in 2024 through 2028

16 unchanged sentences

$ 686,841,000  

No securities were sold during the first three months of 2023 or the full-year 2022.

Securities issued by the State of Michigan and all its political subdivisions had a combined amortized cost of $ 200 million and $ 193 million at March 31, 2023 and December 31, 2022, respectively, with estimated market values of $ 192 million and $ 182 million at the respective dates.

We had no securities issued by all other states and their political subdivisions as of March 31, 2023, and December 31, 2022.

$ 608,972,000  

No securities were sold during the first six months of 2023 or the full-year 2022.

Securities issued by the State of Michigan and all its political subdivisions had a combined amortized cost of $ 196 million and $ 193 million at June 30, 2023 and December 31, 2022, respectively, with estimated market values of $ 185 million and $ 182 million at the respective dates.

We had no securities issued by all other states and their political subdivisions as of June 30, 2023, and December 31, 2022.

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 $ 227 million and $ 194 million at March 31, 2023, and December 31, 2022, respectively.

Government agency debt obligation securities that are pledged to secure repurchase agreements was $ 219 million and $ 194 million at June 30, 2023, and December 31, 2022, respectively.

The carrying value of U.S.

Government agency debt obligation securities that are pledged to deposits was $ 58.4 million at June 30, 2023;

we had no securities pledged to deposits as of December 31, 2022.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES

Our total loans at March 31, 2023 were $ 3.97 billion compared to $ 3.92 billion at December 31, 2022, an increase of $ 48.9 million, or 1.2 %.

The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at March 31, 2023 and December 31, 2022, and the percentage change in loans from the end of 2022 to the end of the first quarter of 2023, are as follows:

March 31, 2023

Our total loans at June 30, 2023 were $ 4.05 billion compared to $ 3.92 billion at December 31, 2022, an increase of $ 135 million, or 3.5 %.

The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at June 30, 2023 and December 31, 2022, and the percentage change in loans from the end of 2022 to the end of the second quarter of 2023, are as follows:

June 30, 2023

December 31, 2022

2 unchanged sentences

29.9 %  

$ 1,185,083,000  

30.3 %  

Vacant land, land development, and residential construction

26 unchanged sentences

100.0 %  

For March 31, 2023, and December 31, 2022, includes $ 0.4 million and $ 0.9 million in loans originated under the Paycheck Protection Program, respectively.

Nonperforming loans as of March 31, 2023 and December 31, 2022 were as follows:

$ 3,916,619,000  

100.0 %  

We have made certain reclassifications of how multi-family construction loans are disaggregated by loan segment.

The table above reflects an increase of $ 54.5 million in Real Estate –

Multi-Family and Residential Rental loans and a corresponding decrease in Real Estate –

Non-Owner Occupied loans as of December 31, 2022.

All the tables that follow have been adjusted to reflect the reclassifications as of the applicable dates.

Nonperforming loans as of June 30, 2023 and December 31, 2022 were as follows:

Loans past due 90 days or more still accruing interest

7 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

26 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

An age analysis of past due loans is as follows as of March 31, 2023:

An age analysis of past due loans is as follows as of June 30, 2023:

Commercial and industrial

3 unchanged sentences

$ 1,212,196,000  

$ 1,173,440,000  

Vacant land, land development, and residential construction

7 unchanged sentences

659,201,000  

629,708,000  

630,187,000  

Real estate –

6 unchanged sentences

287,285,000  

219,312,000  

219,339,000  

Total commercial

3 unchanged sentences

3,188,585,000  

3,139,547,000  

3,140,420,000  

1-4 family mortgages

14 unchanged sentences

863,258,000  

823,819,000  

825,108,000  

Total past due loans

7 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

65 unchanged sentences

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

Collateral dependent loans, representing the entire amount of loans on nonaccrual, totaled $ 7.8 million and $ 7.7 million as of March 31, 2023 and December 31, 2022, respectively.

Collateral dependent loans, representing the entire amount of loans on nonaccrual, totaled $ 2.1 million and $ 7.7 million as of June 30, 2023 and December 31, 2022, respectively.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Nonaccrual loans as of March 31, 2023 were as follows:

Nonaccrual loans as of June 30, 2023 were as follows:

With no allowance recorded:

4 unchanged sentences

owner occupied

229,000  

Real estate –

12 unchanged sentences

Commercial and industrial

$ 3,668,000  

$ 2,060,000  

Vacant land, land development and residential construction

1 unchanged sentence

owner occupied

116,000  

15,000  

Real estate –

22 unchanged sentences

$ 307,000  

No interest income was recognized on nonaccrual loans during the first quarter of 2023.

No interest income was recognized on nonaccrual loans during the first six months of 2023.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

54 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

23 unchanged sentences

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

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

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

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

3 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

The following table reflects amortized cost basis of loans and year-to-date loan charge-offs as of March 31, 2023 based on year of origination (dollars in thousands):

The following table reflects amortized cost basis of loans and year-to-date loan charge-offs as of June 30, 2023 based on year of origination (dollars in thousands):

Commercial and Industrial:

43 unchanged sentences

31,106  

Grades 8 –

31,280  

Grades 8 –

$ 24,230  

33 unchanged sentences

$ 659,201  

$ 630,187  

Current year-to-date gross write offs

18 unchanged sentences

524,382  

589,557  

Grades 8 –

53 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

55 unchanged sentences

Grand Total Current YTD gross write offs

There were no revolving loans converted to term loans during the first three months of 2023.

There were no revolving loans converted to term loans during the first six months of 2023.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

142 unchanged sentences

$ 617,720  

$ 3,131,830  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Revolving Loans

1-4 Family Mortgages:

53 unchanged sentences

There were no revolving loans converted to term loans during 2022.

Activity in the allowance for credit losses during the three months ended March 31, 2023 is as follows (dollars in thousands):

and industrial

Commercial vacant

development and

Commercial real

estate –

Commercial real

estate –

Commercial real

estate –

multi-family and

residential rental

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, 2023 is as follows (dollars in thousands):

Commercial and industrial

Commercial vacant land, land development and residential construction

Commercial real estate –

owner occupied

Commercial real estate –

non-owner occupied

Commercial real estate –

multi-family and residential rental

1-4 family mortgages

Allowance for credit losses:

Beginning balance

Balance at 3-31-23

$ 10,181  

10 unchanged sentences

( 182 )  

( 270 )  

Ending balance

5 unchanged sentences

$ 44,721  

Balance at 12-31-22

$ 10,203  

$ 5,914  

$ 9,242  

$ 2,191  

$ 14,027  

$ 42,246  

Provision for credit losses

( 3,623 )  

( 198 )  

( 132 )  

( 553 )  

( 218 )  

( 14 )  

( 312 )  

( 23 )  

Ending balance

$ 6,472  

$ 5,838  

$ 8,689  

$ 3,700  

$ 19,498  

$ 44,721  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

and industrial

Commercial vacant

development and

Commercial real

estate –

Commercial real

estate –

Commercial real

estate –

multi-family and

residential rental

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

Commercial and industrial

Commercial vacant land, land development and residential construction

Commercial real estate –

owner occupied

Commercial real estate –

non-owner occupied

Commercial real estate –

multi-family and residential rental

1-4 family mortgages

Other consumer

Allowance for credit losses:

Beginning balance

Balance at 3-31-22

$ 8,413  

4 unchanged sentences

$ 35,153  

Provision for credit losses

( 10 )  

( 251 )  

( 683 )  

( 33 )  

( 28 )  

( 109 )  

( 15 )  

Ending balance

$ 8,608  

$ 5,578  

$ 9,249  

$ 1,639  

$ 10,267  

$ 35,974  

Balance at 12-31-21

$ 10,782  

$ 6,045  

$ 12,990  

$ 2,006  

$ 2,449  

$ 35,363  

Adoption of ASU 2016-13

12 unchanged sentences

( 29 )  

( 18 )  

Ending balance

7 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

There were no loans modified to borrowers experiencing financial difficulty during the first three months of 2023.

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

The following table presents the financial effect by type of modification made to borrowers experiencing financial difficulty and loan segment:

Interest Rate

Term Extension

Commercial and industrial

$ 10,520,000  

Vacant land, land development and residential construction

1 unchanged sentence

owner occupied

207,000  

Real estate –

3 unchanged sentences

Total commercial

$ 10,727,000  

1-4 family mortgages

Other consumer loans

$ 10,727,000  

Loans listed under Term Extension were generally granted a series of short-term maturity extensions as part of workout process and associated forbearance agreements.

The following table presents the period-end amortized cost basis of loans that have been modified in the past twelve months to borrowers experiencing financial difficulty by payment status and loan segment:

Commercial and industrial

$ 10,520,000  

Vacant land, land development and residential construction

Real estate –

owner occupied

207,000  

Real estate –

non-owner occupied

Real estate –

multi-family and residential rental

Total commercial

$ 10,727,000  

1-4 family mortgages

Other consumer loans

1 unchanged sentence

$ 10,727,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

Commercial and industrial

$ 6,573,000  

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended March 31, 2022 ( amounts as of period end):

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

6,573,000  

1-4 family mortgages

84,000  

Other consumer loans

84,000  

$ 6,657,000  

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

Commercial and industrial

$ 6,573,000  

Vacant land, land development and residential construction

6 unchanged sentences

Total commercial

6,573,000  

1-4 family mortgages

212,000  

Other consumer loans

212,000  

$ 6,785,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

Land Development,

and Residential Construction

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)

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

Real Estate -

1 unchanged sentence

Real Estate -

and Residential

Commercial Loan Portfolio:

4 unchanged sentences

$ 90,000  

( 9,677,000 )

Payments (net)

536,000  

Transfers to ORE

Net Additions/Deletions

6,573,000  

Ending Balance

$ 9,938,000  

$ 87,000  

$ 139,000  

$ 88,000  

Other Consumer

Retail Loan Portfolio:

Beginning Balance

$ 2,346,000  

$ 13,000  

Payments (net)

Transfers to ORE

Net Additions/Deletions

84,000  

Ending Balance

$ 2,339,000  

$ 3,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

Real Estate -

Commercial Loan Portfolio:

Beginning Balance

$ 4,973,000  

$ 10,435,000  

$ 146,000  

$ 91,000  

Payments (net)

324,000  

( 9,679,000 )

Transfers to ORE

Net Additions/Deletions

4,641,000  

Ending Balance

8 unchanged sentences

$ 1,202,000  

Payments (net)

Transfers to ORE

8 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PREMISES AND EQUIPMENT, NET

16 unchanged sentences

$ 51,476,000  

Depreciation expense totaled $ 1.5 million and $ 1.6 million during the first quarters of 2023 and 2022, respectively.

Depreciation expense totaled $ 1.4 million and $ 1.5 million during the second quarters of 2023 and 2022, respectively.

Depreciation expense totaled $ 2.9 million during the first six months of 2023, compared to $ 3.1 million during the first six months of 2022.

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

As of March 31, 2023, we were under lease contracts for eleven of our branch facilities.

The leases have maturity dates ranging from February, 2024 through December, 2029, with a weighted average life of 2.7 years as of March 31, 2023.

As of June 30, 2023, we were under lease contracts for eleven of our banking facilities.

The leases have maturity dates ranging from February, 2024 through December, 2029, with a weighted average life of 2.4 years as of June 30, 2023.

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 5.79 % as of March 31, 2023.

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, totaled $ 3.9 million and $ 3.5 million as of March 31, 2023, and December 31, 2022, respectively.

The weighted average discount rate for leases was 5.8 % as of June 30, 2023.

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, totaled $ 3.8 million and $ 3.5 million as of June 30, 2023, and December 31, 2022, respectively.

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 $ 0.3 million during the first three months of 2023 and $ 1.3 million during the full year 2022.

Future lease payments were as follows as of March 31, 2023:

Total operating lease expense associated with the leases aggregated $ 0.5 million and $ 0.2 million during the second quarters of 2023 and 2022, respectively, and $ 0.9 million and $ 0.4 million during the first six months of 2023 and 2022, respectively.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PREMISES AND EQUIPMENT, NET (Continued)

Future lease payments were as follows as of June 30, 2023:

$ 604,000  

7 unchanged sentences

Less effect of discounting

( 1,169,000 )

Present value of future lease payments (lease liability)

3,750,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Our total deposits at March 31, 2023 totaled $ 3.60 billion, a decrease of $ 115 million, or 3.1 %, from December 

The components of our outstanding balances at March 31, 2023 and December 31, 2022, and percentage change in deposits from the end of 2022 to the end of the first quarter of 2023, are as follows:

March 31, 2023

Our total deposits at June 30, 2023 totaled $ 3.76 billion, an increase of $ 44.0 million, or 1.2 %, from December 

The components of our outstanding balances at June 30, 2023 and December 31, 2022, and percentage change in deposits from the end of 2022 to the end of the second quarter of 2023, are as follows:

June 30, 2023

December 31, 2022

Noninterest-bearing checking

1,376,782,000

1,604,750,000

$ 1,371,633,000  

36.5 %  

$ 1,604,750,000  

43.2 %  

Interest-bearing checking

541,168,000  

575,028,000  

927,143,000  

776,723,000  

314,606,000  

381,602,000  

Time, under $100,000

144,052,000  

113,099,000  

Time, $100,000 and over

346,908,000  

261,609,000  

Total local deposits

3,645,510,000  

3,712,811,000  

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

111,279,000  

Total deposits

3,598,018,000

3,712,811,000

$ 3,756,789,000  

100.0 %  

$ 3,712,811,000  

100.0 %  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

1 unchanged sentence

Information relating to our repurchase agreements follows:

Three Months Ended

Six Months Ended

Twelve Months Ended

March 31, 2023

June 30, 2023

December 31, 2022

15 unchanged sentences

The securities, which are included in securities available for sale on our Consolidated Balance Sheets, are held in safekeeping by a correspondent bank.

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 $ 350 million at March 31, 2023, and were scheduled to mature at varying dates from April 2023 through March 2028, with fixed rates of interest from 0.55 % to 4.37 % and averaging 2.31 %.

FHLBI bullet advances totaled $ 440 million at June 30, 2023, and were scheduled to mature at varying dates from July 2023 through June 2028, with fixed rates of interest from 0.55 % to 5.05 % and averaging 2.79 %.

FHLBI bullet advances totaled $ 280 million at December 31, 2022, and were scheduled to mature at varying dates from January 2023 through June 2027, with fixed rates of interest from 0.55 % to 3.13 % and averaging 1.84 %.

Maturities of FHLBI bullet advances as of March 31, 2023 were as follows:

$ 70,000,000  

Maturities of FHLBI bullet advances as of June 30, 2023 were as follows:

$ 40,000,000  

3 unchanged sentences

90,000,000  

FHLBI amortizing advances totaled $ 27.9 million as of March 31, 2023, with an average rate of 2.52 % and with final maturities in 2042.

FHLBI amortizing advances total $ 28.3 million as of December 31, 2022, with an average rate of 2.52 % and with final maturities in 2042.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES (Continued)

FHLBI amortizing advances totaled $ 27.9 million as of June 30, 2023, with an average rate of 2.52 % and with final maturities in 2042.

FHLBI amortizing advances totaled $ 28.3 million as of December 31, 2022, with an average rate of 2.52 % and with final maturities in 2042.

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 as of March 31, 2023 were as follows:

Scheduled principal payments on FHLBI amortizing advances as of June 30, 2023 were as follows:

826,000  

862,000  

899,000  

938,000  

24,385,000  

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 March 31, 2023 totaled $ 665 million, with remaining availability based on collateral of $ 281 million.

Our borrowing line of credit as of June 30, 2023 totaled $ 860 million, with remaining availability based on collateral of $ 386 million.

COMMITMENTS AND OFF-BALANCE SHEET RISK

5 unchanged sentences

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMITMENTS AND OFF-BALANCE SHEET RISK (Continued)

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

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.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMITMENTS AND OFF-BALANCE SHEET RISK (Continued)

For commercial lines of credit, retail lines of credit and credit card average outstanding balances, we determined allowance requirements by calculating the difference between the average percent outstanding of the funded commitments over the past several years to actual percent outstanding at the end of the period 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 aggregated $ 0.2 million and $ 0.1 million as of March 31, 2023 and December 31, 2022, respectively.

The calculated allowance aggregated $ 0.6 million and $ 0.1 million as of June 30, 2023 and December 31, 2022, respectively.

We do not reserve for residential mortgage construction loans, as the loans are for one year or less and draws are governed by the receipt and satisfactory review of contractor and subcontractor sworn statements, lien waivers and title insurance company endorsements.

Letters of credit are rarely drawn.

At March 31, 2023, and December 31, 2022, the rates on existing off-balance sheet instruments were substantially equivalent to current market rates, considering the underlying credit standing of the counterparties.

A summary of the contractual amounts of our financial instruments with off-balance sheet risk at March 31, 2023 and December 31, 2022 is as follows: 

At June 30, 2023, and December 31, 2022, the rates on existing off-balance sheet instruments were substantially equivalent to current market rates, considering the underlying credit standing of the counterparties.

A summary of the contractual amounts of our financial instruments with off-balance sheet risk at June 30, 2023 and December 31, 2022 is as follows: 

Commercial unused lines of credit

23 unchanged sentences

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DERIVATIVES AND HEDGING ACTIVITIES (Continued)

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

3 unchanged sentences

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 March 31, 2023, are reflected in the following table.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DERIVATIVES AND HEDGING ACTIVITIES (Continued)

The fair values of derivative instruments as of June 30, 2023, are reflected in the following table.

Notional Amount

9 unchanged sentences

27,190,000  

The effect of interest rate swaps that are not designated as hedging instruments resulted in expense of $ 0.2 million during the first three months of 2023 that was recorded 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 $ 23.3 million as of March 31, 2023.

The effect of interest rate swaps that are not designated as hedging instruments resulted in expense of $ 0.1 million during the first six months of 2023 that was recorded 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 $ 27.2 million as of June 30, 2023.

We have master netting arrangements with our correspondent banks that allow us to net receivables and payables.

1 unchanged sentence

We have elected to not offset these transactions on the Consolidated Balance Sheets.

As of March 31, 2023, the gross amount of derivative assets subject to master netting agreements presented on the Consolidated Balance Sheets was $ 19.6 million, while cash collateral reflecting cash requirements from our counterparties to us totaled $ 20.8 million, providing for an over-collateralized position on the Consolidated Balance Sheets of $ 1.2 million.

As of March 31, 2023, the gross amount of derivative liabilities subject to master netting agreements presented on the Consolidated Balance Sheets was $ 3.3 million, while cash collateral reflecting cash requirements from us to our counterparties totaled $ 3.0 million, and the net amount of derivative liabilities not offset on the Consolidated Balance Sheets was $ 0.3 million.

As of June 30, 2023, the gross amount of derivative assets subject to master netting agreements presented on the Consolidated Balance Sheets was $ 25.8 million, while cash collateral reflecting cash requirements from our counterparties to us totaled $ 27.0 million, providing for an over-collateralized position on the Consolidated Balance Sheets of $ 1.2 million.

As of June 30, 2023, the gross amount of derivative liabilities subject to master netting agreements presented on the Consolidated Balance Sheets was $ 1.4 million, while cash collateral reflecting cash requirements from us to our counterparties totaled $ 1.2 million, and the net amount of derivative liabilities not offset on the Consolidated Balance Sheets was $ 0.2 million.

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 $ 471 million as of March 31, 2023.

Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $ 548 million as of June 30, 2023.

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

27 unchanged sentences

FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying amounts, estimated fair values and level within the fair value hierarchy of financial instruments were as follows as of March 31, 2023 and December 31, 2022 ( dollars in thousands):

March 31, 2023

The carrying amounts, estimated fair values and level within the fair value hierarchy of financial instruments were as follows as of June 30, 2023 and December 31, 2022 ( dollars in thousands):

June 30, 2023

December 31, 2022

19 unchanged sentences

Mortgage loans held for sale

11,942  

12,202  

Mortgage servicing rights

50 unchanged sentences

Fair value for loans is based on an exit price model as required by ASU 2016 - 01, taking into account inputs such as discounted cash flows, probability of default and loss given default assumptions.

Fair value for deposit accounts other than noninterest-bearing checking accounts is based on discounted cash flows using current market rates applied to the estimated life.

As of December 31, 2022, the fair value for deposit accounts other than noninterest-bearing checking accounts is based on discounted cash flows using current market rates applied to the estimated life, while as of June 30, 2023, the fair value only for time deposits is based on discounted cash flows using current market rates applied to the estimated life.

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

34 unchanged sentences

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

There was no such impairment as of March 31, 2023, or December 31, 2022.

There was no such impairment as of June 30, 2023, or December 31, 2022.

We have no Level 1 securities available for sale.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUES (Continued)

Derivatives .

1 unchanged sentence

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUES (Continued)

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 March 31, 2023 and December 31, 2022, we determined the fair value of our mortgage loans held for sale to be $ 3.9 million and $ 3.6 million, respectively.

As of June 30, 2023 and December 31, 2022, we determined the fair value of our mortgage loans held for sale to be $ 12.2 million and $ 3.6 million, respectively.

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

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

The balances of assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 are as follows:

The balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2023 are as follows:

Significant Unobservable

Available for sale securities

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FAIR VALUES (Continued)

There were no sales, purchases or transfers in or out of Level 3 during the first quarter of 2023.

There were no sales, purchases or transfers in or out of Level 3 during the first six months of 2023.

The $ 0.1 million reduction in Level 3 municipal general obligation bonds during the first six months of 2023 reflects the scheduled maturities of such bonds.

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

Significant Unobservable

Available for sale securities

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Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2023 are as follows:

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2023 are as follows:

Collateral dependent loans

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

Quoted  

Prices  

Collateral dependent loans

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

As of March 31, 2023 and December 31, 2022, our bank was in the well capitalized category under the regulatory framework for prompt corrective action.

There are no conditions or events since March 31, 2023 that we believe have changed our bank’s categorization.

As of June 30, 2023 and December 31, 2022, 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, 2023, that we believe have changed our bank’s categorization.

MERCANTILE BANK CORPORATION

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Action Regulations

March 31, 2023

June 30, 2023

Total capital (to risk weighted assets)

Consolidated  

$ 671,323  

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478,209  

462,134  

Tier 1 capital (to risk weighted assets)

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Total capital (to risk weighted assets)

Consolidated  

$ 634,729  

3 unchanged sentences

453,112  

Tier 1 capital (to risk weighted assets)

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REGULATORY MATTERS (Continued)

Our consolidated capital levels as of March 31, 2023 and December 31, 2022 include $ 47.1 million and $ 46.9 million, respectively, of trust preferred securities.

Our consolidated capital levels as of June 30, 2023 and December 31, 2022 include $ 47.2 million and $ 46.9 million, respectively, of trust preferred securities.

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

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

As of March 31, 2023 and December 31, 2022, all $ 47.1 million and $ 46.9 million, respectively, of the trust preferred securities were included in our consolidated Tier 1 capital.

As of June 30, 2023 and December 31, 2022, all $ 47.2 million and $ 46.9 million, respectively, of the trust preferred securities were included in our consolidated Tier 1 capital.

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

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

We believe that, as of March 31, 2023, our bank meets all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

We believe that, as of June 30, 2023, our bank meets all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

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

On January 12, 2023, our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.33 per share that was paid on March 15, 2023 to shareholders of record as of March 3, 2023.

As of March 31, 2023, 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 quarter of 2023.

On April 13, 2023, our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.33 per share that was paid on June 14, 2023, to shareholders of record as of June 2, 2023.

As of June 30, 2023, 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 2023.

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

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SUBSEQUENT EVENTS

On April 13, 2023, our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.33 per share that will be paid on June 14, 2023, to shareholders of record as of June 2, 2023.

On July 13, 2023 , our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.34 per share that will be paid on September 13, 2023 , to shareholders of record as of September 1, 2023 .

MERCANTILE BANK CORPORATION

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

The following discussion compares the financial condition of Mercantile Bank Corporation and its consolidated subsidiaries, including Mercantile Bank of Michigan (“our bank”) and our bank’s subsidiary, Mercantile Insurance Center, Inc., at March 31, 2023 and December 31, 2022 and the results of operations for the three months ended March 31, 2023 and March 31, 2022.

The following discussion compares the financial condition of Mercantile Bank Corporation and its consolidated subsidiaries, including Mercantile Bank (“our bank”) and our bank’s subsidiaries, Mercantile Insurance Center, Inc., and Mercantile Community Partners, at June 30, 2023 and December 31, 2022 and the results of operations for the three months and six months ended June 30, 2023 and June 30, 2022.

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

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include Mercantile Bank Corporation and its consolidated subsidiaries referred to above.

Critical Accounting Estimates  

Critical Accounting Policies  

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

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Allowance ”

On January 1, 2022, we adopted ASU No.

2016-13, Financial Instruments –

Credit Losses (Topic 32):

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost and certain off-balance sheet credit exposures.

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

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

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

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

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

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

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

In June 2016, the FASB issued ASU No.

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

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

This standard replaced the “incurred loss”

approach with an “expected loss”

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

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

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

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

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

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

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

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

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.

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Any impairment of a grouping is reported as a valuation allowance.

MERCANTILE BANK CORPORATION

Accounting rules require us to determine the fair value of all the assets and liabilities of an acquired entity, and to record their fair value on the date of acquisition.

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A more frequent assessment is performed if there are material changes in the market place or within the organizational structure.

First Quarter 2023 Financial Overview

We reported net income of $21.0 million, or $1.31 per diluted share, for the first quarter of 2023, compared with net income of $11.5 million, or $0.73 per diluted share, during the first quarter of 2022.

The improved operating results were in large part driven by higher net interest income, stemming from an improved net interest margin and ongoing robust loan growth, and continued strength in asset quality metrics providing for limited provision expense.

Commercial loans increased $8.6 million during the first quarter of 2023, providing for an annualized growth rate of about 1%.

Full payoffs and partial paydowns of certain larger commercial loan relationships, primarily reflecting customers selling businesses and assets and using excess cash flows generated within their operations to make unscheduled principal payments and line of credit reductions, totaled about $65 million during the first quarter of 2023.

Non-owner occupied commercial real estate (“CRE”) loans increased $17.5 million, multi-family and residential rental property loans grew $7.4 million, vacant land, land development and residential construction loans increased $4.4 million, commercial and industrial loans declined $11.6 million and owner occupied CRE loans were down $9.0 million.

As a percent of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 57.4% as of March 31, 2023, compared to 58.2% at December 31, 2022.

The new commercial loan pipeline remains strong, and as of March 31, 2023, we had $285 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 $40.1 million during the first quarter of 2023, representing an annualized growth rate of approximately 23%.

With increased residential mortgage loans rates during 2022 and into 2023, we have witnessed a shift in borrowers primarily selecting adjustable rate residential mortgage loans compared to fixed rate residential mortgage loans.

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

During the first quarter of 2023, approximately 35% of our residential mortgage loan production was comprised of longer-term fixed rate loans, compared to a similar level during 2022 but about 68% in 2021.

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

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

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling only 0.20% of total loans as of March 31, 2023.

Accruing loans past due 30 to 89 days remain very low, and foreclosed properties excluding the former branch facility totaled less than $0.1 million as of March 31, 2023.

Gross loan charge-offs totaled $0.1 million during the first quarter of 2023, while recoveries of prior period loan charge-offs also totaled $0.1 million.

We recorded a provision expense of $0.6 million during the first quarter of 2023, compared to $0.1 million during the prior-year first quarter.

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

nominal loan charge-offs and continued strong loan quality metrics during the periods in large part mitigated additional reserves associated with loan growth.

We did not adjust any qualitative reserve factors during the first quarter of 2023, and the impact of the updated economic forecast was less than $0.1 million.

Total deposits decreased $115 million during the first three months of 2023, providing for an annualized reduction rate of approximately 12%.

The reduction primarily reflected a customary level of customers’

tax and bonus payments and partnership distributions, as well as transfers to the repurchase agreement (“sweep account”) product.

Wholesale funds, comprised of Federal Home Loan Bank of Indianapolis (“FHLBI”) advances, totaled $378 million, or about 9% of total funds, as of March 31, 2023, compared to $308 million, or about 7% of total funds, at December 31, 2022.

MERCANTILE BANK CORPORATION

Net interest income increased $17.5 million during the first quarter of 2023 compared to the first quarter of 2022.

Interest income was up $24.6 million, while interest expense increased $7.1 million.

Interest income on loans increased significantly quarter-over-quarter, reflecting the increased interest rate environment and strong commercial and residential mortgage loan growth over the past twelve months.

Our yield on loans was 5.90% during the first quarter of 2023, compared to 3.87% during the first quarter of 2022.

We also recorded growth in interest income on securities, reflecting portfolio growth and the higher interest rate environment.

Interest expense on deposits increased due to the increased interest rate environment and enhanced competition for deposits.

We also recorded higher interest costs on borrowed funds, in large part reflecting increased costs of our floating rate subordinated debentures.

Noninterest income totaled $7.0 million during the first quarter of 2023, compared to $9.3 million during the first quarter of 2022.

The lower level of noninterest income primarily stemmed from decreased mortgage banking income, service charges on accounts and interest rate swap income, which more than offset growth in credit and debit card income and payroll servicing fees.

Higher residential mortgage loan rates negatively affected mortgage banking income during the first quarter of 2023.

The decline in service charge income reflected increased earnings credit rates in response to the higher interest rate environment, while the decrease in interest rate swap income mainly reflected a lower volume of transactions.

Noninterest expense totaled $28.6 million during the first quarter of 2023, compared to $25.7 million during the same time period in 2022.

Overhead costs during the first three months of 2023 included a $0.4 million write-down of a former branch facility that is under contract to sell.

The higher level of noninterest expense primarily resulted from increased compensation costs, including a $1.4 million bonus accrual;

no bonus accrual was recorded during the first quarter of 2022.

Lower residential mortgage lender commissions mitigated the impact of merit pay increases, market adjustments and promotions over the past twelve months.

Financial Overview

We reported net income of $20.4 million, or $1.27 per diluted share, for the second quarter of 2023, compared with net income of $11.7 million, or $0.74 per diluted share, during the second quarter of 2022.

Net income for the first six months of 2023 totaled $41.3 million, or $2.58 per diluted share, compared to $23.2 million, or $1.47 per diluted share, during the first six months of 2022.

The improved operating results were in large part driven by higher net interest income stemming from a higher net interest margin and ongoing loan growth, and continued strength in loan quality metrics providing for limited provision expense.

Commercial loans increased $56.8 million during the first six months of 2023, providing for an annualized growth rate of about 4%.

While we experienced strong loan funding activities, the full pay-offs and partial paydowns of certain larger commercial lending relationships, primarily reflecting customers selling businesses and assets, refinancing debt on the secondary market, and using excess cash flows generated within their operations to make unscheduled principal payments and line of credit reductions, aggregated $174 million during the first six months of 2023.

As a percentage of total commercial loans, commercial and industrial loans and owner occupied commercial real estate (“CRE”) loans combined equaled 58.7% as of June 30, 2023, compared to 58.2% as of December 31, 2022.

The new commercial loan pipeline remains strong, and at June 30, 2023, we had $327 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 $78.7 million during the first six months of 2023, representing a growth rate of about 22% on an annualized basis.

With increased residential mortgage loan rates during 2022 and the first half of 2023, we have witnessed a shift in borrowers primarily 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 2023 , approximately 40% of our residential mortgage loan production was comprised of longer-term fixed rate loans, compared to a similar level in 2022 but approaching 70% in 2021.

The shift in production mix has resulted in residential mortgage loans comprising a larger percentage of total loans, increasing from about 13% at year-end 2021 to about 20% as of June 30, 2023.

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

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

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling only 0.05% of total loans as of June 30, 2023.

Accruing loans past due 30 to 89 days remain very low, and foreclosed properties excluding a former branch facility totaled less than $0.1 million as of June 30, 2023.

Gross loan charge-offs totaled $0.6 million during the first six months of 2023, while recoveries of prior period loan charge-offs aggregated $0.5 million.

We recorded provisions for credit losses of $2.0 million and $2.6 million during the second quarter and first six months of 2023, respectively, compared to $0.5 million and $0.6 million during the respective time periods in 2022.

The provisions made during the 2023 periods mainly reflect adjustments to historical baseline loss allocations to better represent our expectations for future credit losses.

Changes to qualitative factors were limited to a reduction of the historical loss information factor which coincided with the adjustments to the historical baseline loss allocations.

Reserve allocations associated with net loan growth during both 2023 periods were largely mitigated by lower reserve allocations stemming from modestly improved economic forecasts.

The elimination of certain specific reserve allocations had a positive impact on provision expense during the second quarter of 2023.

MERCANTILE BANK CORPORATION

Interest-earning deposits, 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 2023, the average balance of these funds equaled $48.1 million, or 1.0% of average earning assets, compared to $657 million, or 13.6% of average earning assets, during the first six months of 2022.

Typically, we maintain interest-earning deposits at approximately $75 million, or about 2% of average earning assets.

The elevated level during the first six 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 during 2021 and into 2022.

The level of interest-earning deposits was on a declining trend throughout 2022 as excess monies were used to fund loan growth and securities purchases, as well as out-of-area deposit and Federal Home Loan Bank of Indianapolis (“FHLBI”) advance maturities.

We also experienced a decline in local deposits throughout 2022.

Interest-earning deposits totaled $34.9 million at year-end 2022.

Interest-earning deposits totaled $139 million as of June 30, 2023, an increase of $104 million from December 31, 2022, and approximately $91 million higher than the average balance during the first six months of 2023.

We obtained $111 million in brokered deposits and $90.0 million in FHLBI advances during the second quarter of 2023, combined with $70.0 million in FHLBI advances during the first quarter of 2023, to offset the impact of loan fundings and net deposit withdrawals during the first half of 2023, and to rebuild our on-balance sheet liquidity position.

Total deposits increased $44.0 million during the first six months of 2023, totaling $3.76 billion at June 30, 2023.

Local deposits decreased $67.3 million, while out-of-area deposits increased $111 million.

The reduction in local deposits largely occurred during the first few months of 2023, reflecting a typical level of customers’

tax and bonus payments and partnership distributions.

Local deposits increased $47.5 million during the second quarter of 2023.

Net interest income increased $13.3 million and $30.7 million during the second quarter and first six months of 2023, respectively, compared to the respective time periods in 2022.

Interest income was $26.4 million and $51.0 million higher during the second quarter and first six months of 2023, respectively, when compared to the same time periods in 2022, in large part reflecting an increasing rate environment.

Interest expense was $13.1 million and $20.3 million higher during the second quarter and first six months of 2023, respectively, when compared to the respective time periods in 2022, primarily reflecting an increasing interest rate environment.

Noninterest income decreased $0.1 million and $2.4 million during the second quarter and first six months of 2023, respectively, compared to the respective time periods in 2022.

Mortgage banking income was essentially unchanged during the second quarter of 2023 when compared to the second quarter of 2022;

however, it declined $2.2 million during the first six months of 2023 when compared to the first six months of 2022, in large part reflecting increased residential mortgage loan rates beginning in late 2021 and continuing into 2022 which substantially reduced the volume of refinance activity starting during the latter half of the first quarter of 2022.

We continued to record growth in treasury management-related fee income categories, such as credit and debit card income and payroll processing, while service charges on accounts have declined due to increased earnings credit rates on noninterest-bearing checking accounts.

Noninterest expense increased $0.9 million and $3.7 million during the second quarter and first six months of 2023, respectively, compared to the respective time periods in 2022.

The increased costs primarily resulted from higher compensation costs, increased reserve allocations for unfunded loan commitments and higher interest rate swap cash collateral holding costs.

Financial Condition

Our total assets increased $23.3 million during the first quarter of 2023, and totaled $4.90 billion as of March 31, 2023.

Total loans increased $48.9 million and securities available for sale grew $17.0 million, while interest-earning deposits declined $24.1 million.

Total deposits decreased $115 million, while FHLBI advances increased $69.6 million and sweep accounts grew $33.1 million during the first three months of 2023.

Commercial loans increased $8.6 million during the first quarter of 2023, providing for an annualized growth rate of about 1%.

Non-owner occupied CRE loans increased $17.5 million, multi-family and residential rental property loans grew $7.4 million, vacant land, land development and residential construction loans increased $4.4 million, commercial and industrial loans declined $11.6 million and owner occupied CRE loans were down $9.0 million.

As a percent of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 57.4% as of March 31, 2023, compared to 58.2% at December 31, 2022.

We believe our loan portfolio remains well diversified.

As of March 31, 2023, we had $285 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase which we expect to be drawn over the next 12 to 18 months.

Our total assets increased $265 million during the first six months of 2023, and totaled $5.14 billion as of June 30, 2023.

Total loans were up $135 million, and interest-earning deposits increased $104 million.

FHLBI advances were up $160 million, and total deposits increased $44.0 million.

MERCANTILE BANK CORPORATION

Commercial loans increased $56.8 million during the first six months of 2023, providing for an annualized growth rate of about 4%.

Commercial and industrial loans increased $27.1 million, multi-family and residential rental property loans grew $20.8 million, owner-occupied CRE loans were up $20.0 million, and vacant land, land development and residential construction loans increased $10.8 million, while non-owner occupied CRE loans were down $22.0 million.

As a percentage of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 58.7% as of June 30, 2023, compared to 58.2% as of December 31, 2022.

Commercial loans totaled $3.19 billion, or 78.7% of total loans, as of June 30, 2023, compared to $3.13 billion, or 80.0% of total loans, as of December 31, 2022.

As of June 30, 2023, we had $327 million in unfunded commitments on commercial construction and development loans that are in the construction phase which are 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 $351 million in new lending commitments, a majority of which we expect to be accepted and funded over the next 12 to 18 months.

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

Usage of existing commercial lines of credit averaged 41% during the first quarter of 2023, similar to the 42% average during all of 2022.

MERCANTILE BANK CORPORATION

Residential mortgage loans, excluding home equity lines of credit, increased $40.1 million during the first three months of 2023, representing an annualized growth rate of approximately 23%.

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

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

Home equity lines of credit declined $0.1 million, while other consumer-related loans increased $0.3 million during the first quarter of 2023, and at March 31, 2023 totaled $37.3 million and $30.1 million, respectively, or an aggregate 1.7% of total loans.

Usage of existing commercial lines of credit averaged 41% during the first six months of 2023, which was within our historical range of 40% to 45%.

Residential mortgage loans, excluding home equity lines of credit, increased $78.7 million during the first six months of 2023, representing a growth rate of about 22% on an annualized basis.

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

The shift in production mix has resulted in residential mortgage loans comprising a larger percentage of total loans, increasing from about 13% at year-end 2021 to about 20% as of June 30, 2023.

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

Home equity lines of credit declined $0.6 million and other consumer-related loans increased $0.3 million during the first six months of 2023, and at June 30, 2023 totaled $36.8 million and $30.1 million, respectively, or an aggregate 1.7% of total loans.

These loan segments equated to 1.7% of total loans as of December 31, 2022.

We expect both loan portfolio segments to remain relatively steady in dollar amount but decline as a percent of total loans in future periods as commercial and residential mortgage loan portfolios grow.

We expect both loan portfolio segments to remain relatively steady in dollar amount but decline as a percent of total loans in future periods as the commercial and residential mortgage loan portfolios grow.

MERCANTILE BANK CORPORATION

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

September 30,

Commercial & Industrial

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Non-Owner Occupied Commercial RE

1,051,221,000

1,033,734,000

1,002,638,000

1,003,118,000

1,007,361,000

Multi-Family & Residential Rental

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3,723,800,000

Includes $0.4 million, $0.9 million, $2.6 million, $2.9 million, and $12.2 million in loans originated under the Paycheck Protection Program for March 31, 2023, December 31, 2022, September 30, 2022, June 30, 2022, and March 31, 2022, respectively.

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

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

MERCANTILE BANK CORPORATION

Nonperforming loans totaled $7.8 million, or 0.2% of total loans, as of March 31, 2023, compared to $7.7 million, or 0.2% of total loans, as of December 31, 2022.

Nonperforming assets, comprised of nonaccrual loans, loans past due 90 days or more and accruing interest and foreclosed properties, totaled $8.4 million (0.2% of total assets) as of March 31, 2023, compared to $7.7 million (0.2% of total assets) as of December 31, 2022.

Nonperforming loans totaled $2.1 million, or 0.1% of total loans, as of June 30, 2023, compared to $7.7 million, or 0.2% of total loans, as of December 31, 2022.

Nonperforming assets, comprised of nonaccrual loans, loans past due 90 days or more and accruing interest and foreclosed properties, totaled $2.8 million (0.1% of total assets) as of June 30, 2023, compared to $7.7 million (0.2% of total assets) as of December 31, 2022.

The volume of nonperforming assets has remained under 0.3% of total assets since year-end 2015.

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

MERCANTILE BANK CORPORATION

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

NONPERFORMING LOANS

September 30,

Residential Real Estate:

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Consumer Assets

MERCANTILE BANK CORPORATION

OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS

September 30,

Residential Real Estate:

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Consumer Assets

MERCANTILE BANK CORPORATION

The following tables provide a reconciliation of nonperforming assets:

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Valuation write-downs

MERCANTILE BANK CORPORATION

During the first quarter of 2023, loan charge-offs totaled $0.1 million, while recoveries of prior period loan charge-offs also equaled $0.1 million.

Loan charge-offs totaled $0.5 million during the second quarter of 2023, and aggregated $0.6 million during the first six months of 2023, while recoveries of prior period loan charge-offs equaled $0.3 million and $0.5 million during the respective time periods.

Net loan charge-offs, as a percentage of average total loans, equaled an annualized 0.02% and 0.01% during the second quarter and first six months of 2023, respectively.

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

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

The allowance equaled $42.9 million, or 1.08% of total loans, and 551% of nonperforming loans, as of March 31, 2023.

As of March 31, 2023, the allowance was comprised of $40.2 million in general reserves relating to performing loans and $2.7 million in specific reserves on other loans, primarily nonperforming loans.

Loans with an aggregate carrying value of $0.6 million as of March 31, 2023 had been subject to previous partial charge-offs aggregating $0.3 million over the past several years.

As of March 31, 2023, there were no specific reserves allocated to loans that had been subject to a previous partial charge-off.

MERCANTILE BANK CORPORATION

The allowance equaled $44.7 million, or 1.10% of total loans, or over 2,000% of nonperforming loans, as of June 30, 2023.

As of June 30, 2023, the allowance was comprised of $44.2 million in general reserves relating to performing loans and $0.5 million in specific reserves on other loans, primarily nonperforming loans.

Loans with an aggregate carrying value of $0.4 million as of June 30, 2023 had been subject to previous partial charge-offs aggregating $0.3 million over the past several years.

As of June 30, 2023, there were no specific reserves allocated to loans that had been subject to a previous partial charge-off.

Although we believe the allowance is adequate to absorb loan losses in our 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 $17.0 million during the first three months of 2023, totaling $620 million as of March 31, 2023.

Securities available for sale increased $6.0 million during the first six months of 2023, totaling $609 million as of June 30, 2023.

There were no purchases or maturities of U.S.

Government agency bonds during the first quarter of 2023.

Government agency bonds during the first six months of 2023.

There were no purchases of U.S.

Government agency guaranteed mortgage-backed securities during the first three months of 2023;

however, we did receive $0.8 million in principal paydowns on U.S.

Government agency guaranteed mortgage-backed securities during the first six months of 2023;

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

Government agency guaranteed mortgage-backed securities.

Purchases of municipal bonds totaled $7.4 million during the first quarter of 2023;

Purchases of municipal bonds totaled $11.6 million during the first six months of 2023;

proceeds from matured municipal bonds totaled $8.6 million.

At March 31, 2023, the portfolio was primarily comprised of U.S.

At June 30, 2023, the portfolio was primarily comprised of U.S.

Government agency bonds (65%), municipal bonds (30%) and U.S.

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

The fair value of securities designated as available for sale at March 31, 2023 totaled $620 million, including a net unrealized loss of $71.2 million.

The fair value of securities designated as available for sale at June 30, 2023 totaled $609 million, including a net unrealized loss of $77.9 million.

The net unrealized loss equaled $82.7 million as of December 31, 2022.

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

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

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

FHLBI stock totaled $17.7 million as of March 31, 2023, unchanged from December 31, 2022.

FHLBI stock totaled $21.5 million as of June 30, 2023, compared to $17.7 million as of December 31, 2022.

The $3.8 million increase reflects additional stock purchased in association with an increase in outstanding advances during the first six months of 2023.

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

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

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

Typically, we maintain interest-earning deposits at approximately $75 million, or about 2% of average earning assets.

We also experienced a decline in local deposits throughout 2022.

Interest-earning deposits totaled $34.9 million at year-end 2022.

MERCANTILE BANK CORPORATION

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

During the first three months of 2023, the average balance of these funds equaled $31.1 million, or 0.7% of average earning assets, compared to $784 million, or 16.1% of average earning assets, during the first quarter of 2022.

Historically, we maintained interest-earning deposits at approximately 2% of average earning assets.

The elevated level during the first quarter of 2022 primarily reflected increased local deposits stemming from COVID-19-related federal government stimulus programs and reduced business and consumer investing and spending.

The level of interest-earning deposits declined throughout 2022 and into the first quarter of 2023 as we used the excess monies to fund loan growth as well as brokered deposit and FHLBI advance maturities.

We also experienced a net decline in local deposit balances during that time period.

Our deposit balance at the Federal Reserve Bank of Chicago equaled $5.5 million as of March 31, 2023.

Net premises and equipment equaled $51.5 million at March 31, 2023, unchanged from December 31, 2022.

We recorded a reduction of $1.0 million associated with the planned sale of a former branch facility during the first quarter, comprised of a $0.6 million transfer to foreclosed assets and a write-down of $0.4 million.

Depreciation expense totaled $1.5 million during the first quarter of 2023, while investments associated with the construction and opening of new facilities and the renovation of existing facilities totaled $2.5 million.

Total deposits decreased $115 million during the first three months of 2023, providing for an annualized reduction rate of approximately 12%.

The reduction primarily reflected a customary level of customers’

tax and bonus payments and partnership distributions, as well as transfers to the sweep account product.

Wholesale funds, comprised of FHLBI advances, totaled $378 million, or about 9% of total funds, as of March 31, 2023, compared to $308 million, or about 7% of total funds, at December 31, 2022.

Noninterest-bearing deposits decreased $228 million during the first three months of 2023, in large part reflecting the aforementioned customary level of customers’

tax and bonus payments and partnership distributions and transfers to the sweep account, but also includes transfers to interest-bearing deposits and withdrawals associated with the sales of businesses.

Identified deposit withdrawals associated with the heightened concern over the health of the banking industry stemming from the failure of two large financial institutions in March, 2023 were limited at less than 1% of total deposits.

Interest-bearing checking accounts and money market deposit accounts were up $1.7 million and $65.8 million, respectively, while savings deposits declined $41.4 million.

Local time deposits increased $87.1 million.

Sweep accounts increased $33.1 million during the first three months of 2023, totaling $227 million as of March 31, 2023.

The increase is primarily related to transfers from interest-bearing deposit accounts.

Net premises and equipment equaled $52.3 million at June 30, 2023, an increase of $0.8 million from December 31, 2022.

We recorded a reduction of $1.0 million associated with the planned sale of a former branch facility during the first six months of 2023, comprised of a $0.6 million transfer to foreclosed assets and a write-down of $0.4 million.

Depreciation expense totaled $2.9 million during the first six months of 2023, while investments associated with the construction and opening of new facilities and the renovation of existing facilities totaled $4.7 million.

Total deposits increased $44.0 million during the first six months of 2023, totaling $3.76 billion at June 30, 2023.

Local deposits decreased $67.3 million, while out-of-area deposits increased $111 million.

The reduction in local deposits largely occurred during the initial months of 2023, reflecting a typical level of customers’

tax and bonus payments and partnership distributions.

Local deposits increased $47.5 million during the second quarter of 2023.

Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $579 million, or about 13% of total funds, as of June 30, 2023, compared to $308 million, or about 7% of total funds, at December 31, 2022.

Noninterest-bearing deposits decreased $233 million during the first six months of 2023, in large part reflecting the aforementioned customary level of customers’

tax and bonus payments and partnership distributions during the initial months of 2023, but also includes transfers to interest-bearing deposits and withdrawals associated with the sales of businesses.

Interest-bearing checking accounts and savings deposits were down $33.9 million and $67.0 million during the first six months of 2023, respectively, primarily reflecting the transfers of funds to higher-paying money market deposit accounts and time deposits.

Money market deposit accounts were up $150 million and local time deposits increased $116 million during the first six months of 2023.

Sweep accounts increased $25.1 million during the first six months of 2023, totaling $219 million as of June 30, 2023.

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 quarter of 2023, with a high balance of $255 million and a low balance of $181 million.

The average balance of sweep accounts equaled $214 million during the first six months of 2023, with a high balance of $263 million and a low balance of $181 million.

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

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All of our repurchase agreements are accounted for as secured borrowings.

FHLBI advances increased $69.6 million during the first quarter of 2023, totaling $378 million as of March 31, 2023.

Bullet advances aggregating $80.0 million were obtained during the first quarter of 2023, consisting of $70.0 million to fund loan growth and mitigate a portion of the decline in total deposits and $10.0 million to replace a scheduled FHLBI bullet advance maturity.

Payments on amortizing FHLBI advances totaled $0.4 million during the first quarter of 2023.

FHLBI advances increased $160 million during the first six months of 2023, totaling $468 million as of June 30, 2023.

Bullet advances aggregating $200 million were obtained during the first six months of 2023, consisting of $160 million to fund loan growth and rebuild on-balance sheet liquidity, and $40.0 million to replace FHLBI bullet advance maturities.

Payments on amortizing FHLBI advances totaled $0.4 million during the first six months of 2023.

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

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

Our borrowing line of credit as of March 31, 2023 totaled $665 million, with remaining availability based on collateral equaling $281 million.

MERCANTILE BANK CORPORATION

Our borrowing line of credit as of June 30, 2023 totaled $860 million, with remaining availability based on collateral equaling $386 million.

Shareholders’

equity was $467 million at March 31, 2023, compared to $441 million at December 31, 2022.

equity was $479 million at June 30, 2023, compared to $441 million at December 31, 2022.

Positively impacting shareholders’

equity during the first quarter was net income of $21.0 million, which was partially offset by the payment of a cash dividend totaling $5.2 million.

equity during the first six months of 2023 was net income of $41.3 million, which was partially offset by the payment of cash dividends totaling $10.3 million.

A $3.8 million after-tax increase in the market value of our available for sale securities portfolio, reflecting a decline in market interest rates, positively impacted shareholders’

equity during the first quarter of 2023.

equity during the first six months of 2023.

MERCANTILE BANK CORPORATION 

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

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

Wholesale funds, comprised of advances from the FHLBI, totaled $378 million, or about 9% of combined deposits and borrowed funds, as of March 31, 2023, compared to $308 million, or about 7% of combined deposits and borrowed funds, as of December 31, 2022.

Sweep accounts increased $33.1 million during the first three months of 2023, totaling $227 million as of March 31, 2023.

The increase is primarily related to transfers from interest-bearing deposit accounts.

Wholesale funds, comprised of out-of-area deposits and advances from the FHLBI, totaled $579 million, or about 13% of combined deposits and borrowed funds, as of June 30, 2023, compared to $308 million, or about 7% of combined deposits and borrowed funds, as of December 31, 2022.

Sweep accounts increased $25.1 million during the first six months of 2023, totaling $219 million as of June 30, 2023.

The average balance of sweep accounts equaled $196 million during the first quarter of 2023, with a high balance of $255 million and a low balance of $181 million.

The average balance of sweep accounts equaled $214 million during the first six months of 2023, with a high balance of $263 million and a low balance of $181 million.

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

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All of our repurchase agreements are accounted for as secured borrowings.

Information regarding our repurchase agreements as of March 31, 2023 and during the first three months of 2023 is as follows:

Outstanding balance at March 31, 2023

Weighted average interest rate at March 31, 2023

Maximum daily balance three months ended March 31, 2023

Average daily balance for three months ended March 31, 2023

Weighted average interest rate for three months ended March 31, 2023

FHLBI advances increased $69.6 million during the first quarter of 2023, totaling $378 million as of March 31, 2023.

Payments on amortizing FHLBI advances totaled $0.4 million during the first quarter of 2023.

Information regarding our repurchase agreements as of June 30, 2023 and during the first six months of 2023 is as follows:

Outstanding balance at June 30, 2023

Weighted average interest rate at June 30, 2023

Maximum daily balance six months ended June 30, 2023

Average daily balance for six months ended June 30, 2023

Weighted average interest rate for six months ended June 30, 2023

FHLBI advances increased $160 million during the first six months of 2023, totaling $468 million as of June 30, 2023.

Payments on amortizing FHLBI advances totaled $0.4 million during the first six months of 2023.

Our borrowing line of credit as of March 31, 2023 totaled $665 million, with remaining availability based on collateral equaling $281 million.

MERCANTILE BANK CORPORATION

Our borrowing line of credit as of June 30, 2023 totaled $860 million, with remaining availability based on collateral equaling $386 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 accessed one of the lines of credit during the first quarter of 2023, with an average balance of $4.3 million.

In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged $25.4 million during the first quarter of 2023.

We accessed one of the lines of credit during the first six months of 2023, with an average balance of $4.8 million.

In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged $42.1 million during the first six months of 2023.

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 $27.6 million as of March 31, 2023.

We did not utilize this line of credit during the first quarter of 2023 or at any time during the previous 14 fiscal years, and do not plan to access this line of credit in future periods.

The following table reflects, as of March 31, 2023, 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 $26.7 million as of June 30, 2023.

We did not utilize this line of credit during the first six months of 2023 or at any time during the previous 14 fiscal years, and do not plan to access this line of credit in future periods.

MERCANTILE BANK CORPORATION

The following table reflects, as of June 30, 2023, significant fixed and determinable contractual obligations to third parties by payment date, excluding accrued interest:

Deposits without a stated maturity

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

As of March 31, 2023, we had a total of $1.97 billion in unfunded loan commitments and $22.7 million in unfunded standby letters of credit.

As of June 30, 2023, we had a total of $2.15 billion in unfunded loan commitments and $24.1 million in unfunded standby letters of credit.

Of the total unfunded loan commitments, $1.80 billion were commitments available as lines of credit to be drawn at any time as customers’

cash needs vary, and $347 million were for loan commitments generally expected to close and become funded within the next 12 to 18 months.

cash needs vary, and $351 million were for loan commitments generally expected to be accepted and closed and become funded within the next 12 to 18 months.

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

While we have observed the well-publicized liquidity problems at certain financial institutions during the first quarter of 2023, we do not believe that we are subject to the same circumstances that apparently caused those crises.

While we have observed the well-publicized liquidity problems at certain financial institutions during the first six months of 2023, we do not believe that we are subject to the same circumstances that apparently caused those crises.

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

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Shareholders’

equity was $467 million at March 31, 2023, compared to $441 million at December 31, 2022.

equity was $479 million at June 30, 2023, compared to $441 million at December 31, 2022.

Positively impacting shareholders’

equity during the first quarter was net income of $21.0 million, which was partially offset by the payment of a cash dividend totaling $5.2 million.

equity during the first six months of 2023 was net income of $41.3 million, which was partially offset by the payment of cash dividends totaling $10.3 million.

A $3.8 million after-tax increase in the market value of our available for sale securities portfolio, reflecting a decline in market interest rates, positively impacted shareholders’

equity during the first quarter of 2023.

equity during the first six months of 2023.

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

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

We believe that, as of March 31, 2023, our bank met all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

We believe that, as of June 30, 2023, our bank met all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

MERCANTILE BANK CORPORATION

As of March 31, 2023, our bank’s total risk-based capital ratio was 13.8%, compared to 13.7% at December 31, 2022.

Our bank’s total regulatory capital increased $17.7 million during the first quarter of 2023, in large part reflecting net income totaling $23.6 million, which was partially offset by cash dividends paid to us aggregating $6.5 million.

As of June 30, 2023, our bank’s total risk-based capital ratio was 13.7%, unchanged from December 31, 2022.

Our bank’s total regulatory capital increased $36.1 million during the first six months of 2023, in large part reflecting net income totaling $46.5 million, which was partially offset by cash dividends paid to us aggregating $13.0 million.

Our bank’s total risk-based capital ratio was also impacted by a $251 million increase in total risk-weighted assets, primarily resulting from net growth in commercial and residential mortgage loans.

As of March 31, 2023, our bank’s total regulatory capital equaled $636 million, or $174 million in excess of the 10.0% minimum that is among the requirements to be categorized as “well capitalized.”

Our and our bank’s capital ratios as of March 31, 2023 and December 31, 2022 are disclosed in Note 12 of the Notes to Consolidated Financial Statements.

As of June 30, 2023, our bank’s total regulatory capital equaled $655 million, or $177 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, 2023 and December 31, 2022 are disclosed in Note 12 of the Notes to Consolidated Financial Statements.

Results of Operations

We recorded net income of $21.0 million, or $1.31 per basic and diluted share, for the first quarter of 2023, compared to net income of $11.5 million, or $0.73 per basic and diluted share, for the first quarter of 2022.

Diluted earnings per share increased $0.58, or 79.5%, during the first quarter of 2023 compared to the prior-year first quarter.

The higher level of net income during the first quarter of 2023 compared to the first quarter of 2022 resulted from a significant increase in net interest income, primarily reflecting a substantially improved net interest margin and loan growth.

The credit loss provisions recorded during the first quarters of 2023 and 2022 mainly reflected reserve allocations necessitated by commercial loan and residential mortgage loan growth;

sustained strength in asset quality metrics and low levels of charge-offs during both periods partially mitigated the amount of reserve allocations associated with loan growth.

Noninterest income declined during the first three months of 2023 compared to the respective 2022 period primarily due to lower levels of mortgage banking income, service charges on accounts, and interest rate swap income, which more than offset growth in credit and debit card income and payroll servicing fees.

Overhead expenses were up in the first quarter of 2023 compared to the prior-year first quarter mainly due to increased compensation costs, including higher bonus accruals and salary outlays.

Interest income during the first quarter of 2023 was $60.5 million, an increase of $24.6 million, or 68.6%, from the $35.9 million earned during the first quarter of 2022.

The increase resulted from a higher yield on average earning assets.

The yield on average earning assets was 5.35% during the first three months of 2023, up from 2.99% during the respective 2022 period.

We recorded net income of $20.4 million, or $1.27 per basic and diluted share, for the second quarter of 2023, compared with net income of $11.7 million, or $0.74 per basic and diluted share, for the second quarter of 2022.

We recorded net income of $41.3 million, or $2.58 per basic and diluted share, for the first six months of 2023, compared with net income of $23.2 million, or $1.47 per basic and diluted share, for the first six months of 2022.

Diluted earnings per share increased $0.53, or 71.6%, during the second quarter of 2023, and $1.11, or 75.5%, during the first six months of 2023 compared with the respective prior-year periods.

The higher levels of net income during the second quarter and first six months of 2023 compared to the respective prior-year periods resulted from increased net interest income, which more than offset higher overhead costs and credit loss provisions, as well as lower noninterest income.

The increases in net interest income during the 2023 periods mainly resulted from significantly improved net interest margins and loan growth.

The higher levels of overhead costs during the 2023 periods primarily reflected increases in compensation costs, credit reserves for unfunded loan commitments, interest rate swap credit reserves and associated collateral interest costs, and Federal Deposit Insurance Corporation (“FDIC”) deposit insurance premiums.

The credit loss provisions recorded during the current-year periods mainly reflected allocations commanded by net loan growth and adjustments to historical loss factors to better represent our expectations for future credit losses.

Continuing strong loan quality measures, including low levels of loan charge-offs, during the 2023 and 2022 periods largely mitigated additional reserves associated with these factors.

Excluding the impact of a bank owned life insurance claim recorded during the second quarter of 2022, noninterest income increased $0.4 million, or 6.0%, during the second quarter of 2023 compared with the prior-year second quarter.

The higher level of noninterest income mainly stemmed from increased interest rate swap income, credit and debit card income, and payroll servicing fees, which more than offset decreased service charges on accounts and mortgage banking income.

The lower level of noninterest income during the first six months of 2023 primarily reflected decreases in mortgage banking income and service charges on accounts, which more than offset increases in credit and debit card income and payroll servicing fees.

Interest income during the second quarter of 2023 was $65.9 million, an increase of $26.4 million, or 66.7%, from the $39.5 million earned during the second quarter of 2022.

The increase mainly resulted from a higher yield on average earning assets.

The yield on average earning assets was 5.61% during the second quarter of 2023, up from 3.32% during the respective 2022 period.

The higher yield primarily resulted from an increased yield on loans, reflecting the rising interest rate environment.

The yield on loans was 5.90% during the first quarter of 2023, up from 3.87% during the prior-year first quarter 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 475 basis points during the period of March 2022 through March 2023.

As of March 31, 2023, approximately 64% of the commercial loan portfolio consisted of variable-rate loans.

The yield on loans was 6.19% during the second quarter of 2023, up from 3.97% during the prior-year second quarter 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 475 basis points during the period of May 2022 through May 2023.

During the period of March 2022 through June 2023, variable-rate commercial loans represented approximately 64% of total commercial loans on an average basis.

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, along with increased yields on securities and interest-earning deposits, reflecting the rising interest rate environment, also contributed to the higher yield on average earning assets.

On average, lower-yielding interest-earning deposits represented 0.7% of earning assets during the first quarter of 2023, down from 16.1% during the respective 2022 period, while higher-yielding loans represented 85.6% of earning assets during the current-year first quarter, up from 71.4% during the first quarter of 2022.

Average earning assets equaled $4.59 billion during the first quarter of 2023, down $295 million, or 6.0%, from the level of $4.88 billion during the first quarter of 2022;

On average, lower-yielding interest-earning deposits represented 1.4% of earning assets during the second quarter of 2023, down from 11.1% during the respective 2022 period, while higher-yielding loans represented 85.2% of earning assets during the current-year second quarter, up from 76.0% during the second quarter of 2022.

MERCANTILE BANK CORPORATION

A significant volume of excess on-balance sheet liquidity, which initially surfaced in the second quarter of 2020 in large part due to government stimulus programs related to the Covid-19 environment, negatively impacted the yield on average earning assets by 28 basis points during the second quarter of 2022.

The excess funds, consisting almost entirely of low-yielding deposits with the Federal Reserve Bank of Chicago, were mainly a product of local deposit growth and the Paycheck Protection Program.

Average earning assets equaled $4.72 billion during the second quarter of 2023, down $62.6 million, or 1.3%, from the level of $4.78 billion during the second quarter of 2022;

average loans and average securities were up $384 million and $18.9 million, respectively, while average interest-earning deposits were down $466 million.

A significant volume of excess on-balance sheet liquidity, which initially surfaced in the second quarter of 2020 in large part due to government stimulus programs related to the COVID-19 environment, negatively impacted the yield on average earning assets by 45 basis points during the first quarter of 2022.

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

Interest income during the first six months of 2023 was $126 million, an increase of $51.0 million, or 67.6%, from the $75.4 million earned during the first six months of 2022.

The increase primarily resulted from a higher yield on average earning assets.

The yield on average earning assets was 5.48% during the first six months of 2023, up from 3.16% during the respective 2022 period.

The higher yield mainly resulted from an increased yield on loans, reflecting the rising interest rate environment.

The yield on loans was 6.05% during the first six months of 2023, up from 3.92% during the first six months of 2022 primarily due to higher interest rates on variable-rate commercial loans stemming from FOMC rate hikes.

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, along with increased yields on securities and interest-earning deposits, depicting the rising interest rate environment, also contributed to the higher yield on average earning assets.

On average, lower-yielding interest-earning deposits represented 1.0% of earning assets during the first six months of 2023, down from 13.6% during the respective 2022 period, while higher-yielding loans represented 85.4% of earning assets during the first six months of 2023, up from 73.7% during the first six months of 2022.

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

Average earning assets equaled $4.65 billion during the first six months of 2023, down $178 million, or 3.7%, from the level of $4.83 billion during the first six months of 2022;

average interest-earning deposits declined $609 million, average loans increased $414 million, and average securities were up $16.6 million.

Interest expense during the second quarter of 2023 was $18.4 million, an increase of $13.2 million, or 252%, from the $5.2 million expensed during the second quarter of 2022.

The increase is mainly attributable to a higher average weighted cost of interest-bearing liabilities, which rose from 0.72% during the second quarter of 2022 to 2.37% during the current-year second quarter primarily due to increased costs of deposits and borrowings.

Reflecting the rising interest rate environment, the cost of interest-bearing, non-time deposits increased from 0.24% during the second quarter of 2022 to 1.85% during the second quarter of 2023, while the cost of time deposits increased from 0.83% to 3.27% during the respective periods.

The higher cost of interest-bearing, non-time deposits primarily resulted from increased rates paid on money market accounts.

The cost of borrowed funds increased from 1.90% during the second quarter of 2022 to 2.90% during the second quarter of 2023 mainly due to higher costs of sweep accounts, FHLBI advances, and subordinated debentures.

The cost of sweep accounts increased from 0.10% during the second quarter of 2022 to 1.45% during the second quarter of 2023, while the cost of FHLBI advances increased from 2.02% to 2.68% during the respective periods, reflecting the rising interest rate environment.

The cost of subordinated debentures was 9.57% during the second quarter of 2023, up from 4.63% during the respective 2022 period due to increases in the 90-Day Libor Rate.

A change in funding mix, consisting of increases in higher-costing time deposits and borrowings as a percentage of interest-bearing liabilities, also contributed to the higher cost of interest-bearing liabilities during the second quarter of 2023.

Average interest-bearing liabilities totaled $3.11 billion during the current-year second quarter, compared to $2.91 billion during the second quarter of 2022, representing an increase of $198 million, or 6.8%.

MERCANTILE BANK CORPORATION

Interest expense during the first quarter of 2023 was $12.1 million, an increase of $7.1 million, or 142%, from the $5.0 million expensed during the first quarter of 2022.

The increase is attributable to a higher average weighted cost of interest-bearing liabilities, which rose from 0.66% during the first quarter of 2022 to 1.72% during the respective 2023 period mainly due to increased costs of deposits and borrowings.

Reflecting the rising interest rate environment, the cost of interest-bearing, non-time deposits increased from 0.20% during the first quarter of 2022 to 1.27% during the current-year first quarter, while the cost of time deposits increased from 0.89% to 2.29% during the respective periods.

Interest expense during the first six months of 2023 was $30.5 million, an increase of $20.3 million, or 198%, from the $10.2 million expensed during the first six months of 2022.

The increase is attributable to a higher average weighted cost of interest-bearing liabilities, which rose from 0.69% during the first six months of 2022 to 2.06% during the first six months of 2023 primarily due to increased costs of deposits and borrowings.

Reflecting the rising interest rate environment, the cost of interest-bearing, non-time deposits increased from 0.22% during the first six months of 2022 to 1.56% during the first six months of 2023, while the cost of time deposits increased from 0.86% to 2.84% during the respective periods.

The higher cost of interest-bearing, non-time deposits primarily resulted from increased rates paid on money market accounts.

The cost of borrowed funds increased from 1.82% during the first quarter of 2022 to 2.51% during the first quarter of 2023 mainly due to higher costs of subordinated debentures and sweep accounts.

The cost of subordinated debentures was 9.05% during the first quarter of 2023, up from 3.80% during the respective 2022 period due to increases in the 90-Day Libor Rate.

The cost of sweep accounts increased from 0.10% during the first quarter of 2022 to 0.84% during the first quarter of 2023, reflecting the rising interest rate environment.

A change in borrowing mix, consisting of an increase in higher-costing subordinated debentures and subordinated notes as a percentage of average total borrowings, also contributed to the increased cost of borrowings during the first quarter of 2023.

Average interest-bearing liabilities totaled $2.86 billion during the current-year first quarter, compared to $3.07 billion during the prior-year first quarter, representing a decrease of $211 million, or 6.9%.

Net interest income during the first quarter of 2023 was $48.4 million, an increase of $17.5 million, or 56.7%, from the $30.9 million earned during the respective 2022 period.

The increase resulted from a significantly improved net interest margin and loan growth.

The net interest margin increased from 2.57% in the first quarter of 2022 to 4.28% in the current-year first quarter due to a higher yield on average earning assets.

The increased yield primarily resulted from a higher yield on loans, reflecting the rising interest rate environment.

The cost of funds equaled 1.07% in the first quarter of 2023, up from 0.42% during the prior-year first quarter mainly due to higher costs of deposits and borrowings, reflecting the impact of the increasing interest rate environment.

The significant level of excess on-balance sheet liquidity negatively impacted the net interest margin by approximately 40 basis points during the first quarter of 2022.

The following table sets forth certain information relating to our consolidated average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the first quarters of 2023 and 2022.

The cost of borrowed funds increased from 1.86% during the first six months of 2022 to 2.73% during the first six months of 2023 mainly due to higher costs of subordinated debentures, sweep accounts, and FHLBI advances.

The cost of subordinated debentures was 9.31% during the first six months of 2023, up from 4.22% during the respective 2022 period due to increases in the 90-Day Libor Rate.

The cost of sweep accounts increased from 0.10% during the first six months of 2022 to 1.17% during the first six months of 2023, while the cost of FHLBI advances increased from 2.01% to 2.44% during the respective periods, reflecting the rising interest rate environment.

Average interest-bearing liabilities totaled $2.98 billion during the first six months of 2023, down slightly from $2.99 billion during the respective 2022 period.

Net interest income during the second quarter of 2023 was $47.6 million, an increase of $13.3 million, or 38.5%, from the $34.3 million earned during the respective 2022 period.

The increase primarily resulted from a significantly improved net interest margin.

The net interest margin increased from 2.88% in the second quarter of 2022 to 4.05% in the current-year second quarter due to a higher yield on average earning assets, which more than offset an increase in the cost of funds.

The increased yield primarily stemmed from a higher yield on commercial loans.

The cost of funds equaled 1.56% in the second quarter of 2023, up from 0.44% in the second quarter of 2022 primarily due to higher costs of deposits and borrowed funds, reflecting the impact of the rising interest rate environment, and a change in funding mix, consisting of a decrease in lower-cost non-time deposits and increases in higher-cost time deposits and borrowings as a percentage of interest-bearing liabilities.

The significant level of excess on-balance sheet liquidity negatively impacted the net interest margin by 23 basis points during the second quarter of 2022.

Net interest income during the first six months of 2023 was $95.9 million, an increase of $30.7 million, or 47.1%, from the $65.2 million earned during the first six months of 2022.

The increase mainly resulted from a substantially improved net interest margin.

The net interest margin increased from 2.73% in the first six months of 2022 to 4.16% in the respective 2023 period due to a higher yield on average earning assets, which more than offset an increase in the cost of funds.

The increased yield on average earning assets primarily resulted from a higher yield on commercial loans.

The cost of funds equaled 1.32% during the first six months of 2023, up from 0.43% during the respective prior-year period mainly due to higher costs of deposits and borrowed funds, reflecting the impact of the increasing interest rate environment, and a change in funding mix, consisting of a decrease in lower-cost non-time deposits and increases in higher-cost time deposits and borrowings as a percentage of interest-bearing liabilities.

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

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 2023 and 2022.

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

Tax-exempt securities interest income and yield for the first quarters of 2023 and 2022 have been computed on a tax equivalent basis using a marginal tax rate of 21.0%.

Securities interest income was increased by $60,000 in the first quarters of 2023 and 2022 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 both periods.

Tax-exempt securities interest income and yield for the second quarters and first six months of 2023 and 2022 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 2023 and 2022 and $120,000 in the first six months of both 2023 and 2022 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 2023 and 2022 periods.

MERCANTILE BANK CORPORATION

Quarters ended March 31,

Quarters ended June 30,

(dollars in thousands)

Investment securities

Other interest-earning assets

Interest-earning deposits

Total interest - earning assets

14 unchanged sentences

Net interest margin on earning assets

Mercantile recorded provisions for credit losses of $0.6 million and $0.1 million during the first quarters of 2023 and 2022, respectively.

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

ongoing strong loan quality metrics and low levels of loan charge-offs during the periods in large part mitigated additional reserves associated with loan growth.

MERCANTILE BANK CORPORATION

Noninterest income during the first quarter of 2023 was $7.0 million, compared to $9.3 million during the respective 2022 period.

The lower level of noninterest income primarily stemmed from decreased mortgage banking income, service charges on accounts, and interest rate swap income, which more than offset growth in credit and debit card income and payroll servicing fees.

Higher residential mortgage loan rates in the rising interest rate environment negatively affected mortgage banking income in the first quarter of 2023.

Residential mortgage loan production totaled $72.0 million during the first quarter of 2023, down $96.2 million, or 57.2%, from $168 million during the prior-year first quarter;

refinance activity and purchase activity declined $51.5 million and $44.7 million, respectively.

The decline in service charges on accounts reflected increased earnings credit rates in response to the increasing interest rate environment, while the decrease in interest rate swap income mainly reflected a lower volume of transactions.

Noninterest expense totaled $28.6 million during the first quarter of 2023, compared to $25.7 million during the prior-year first quarter.

Overhead costs during the first quarter of 2023 included a $0.4 million write-down of a former branch facility.

Excluding this transaction, noninterest expense increased $2.5 million in the first quarter of 2023 compared to the respective 2022 period.

The higher noninterest expense mainly resulted from increased compensation costs, including a $1.4 million bonus accrual and salary increases, which outweighed reductions in residential mortgage lender commissions and incentives and higher residential mortgage loan deferred salary costs.

No bonus accrual was recorded during the first quarter of 2022.

The higher level of salary costs primarily stemmed from annual merit pay increases and market adjustments.

The decreased residential mortgage lender commissions and incentives resulted from reduced loan production, while 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.

A $0.5 million aggregate increase in interest rate swap reserves and collateral costs, along with a $0.3 million increase in FDIC deposit insurance premiums, reflecting a higher industry-wide assessment rate that became effective on January 1, 2023, also contributed to the higher level of overhead costs during the first quarter of 2023.

During the first quarter of 2023, we recorded income before federal income tax of $26.1 million and a federal income tax expense of $5.1 million.

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

The increase in federal income tax expense in the first three months of 2023 resulted from the higher level of income before federal income tax.

Our effective tax rate was 19.8% during both the first quarter of 2023 and the prior-year first quarter.

Six months ended June 30,

(dollars in thousands)

Investment securities

Interest-earning deposits

Total interest - earning assets

Allowance for credit losses

LIABILITIES AND SHAREHOLDERS ’

Interest-bearing deposits

Short-term borrowings

Federal Home Loan Bank advances

Other borrowings

Total interest-bearing liabilities

Noninterest-bearing deposits

Other liabilities

Shareholders’

Total liabilities and shareholders’

Net interest income

Net interest rate spread

Net interest spread on average assets

Net interest margin on earning assets

Provisions for credit losses of $2.0 million and $0.5 million were recorded during the second quarters of 2023 and 2022, respectively.

A provision for credit losses of $2.6 million was recorded during the first six months of 2023, compared with a provision of $0.6 million during the first six months of 2022.

The provision expense recorded during the 2023 periods mainly reflected allocations necessitated by net loan growth and adjustments to historical loss factors to better represent our expectations for future credit losses.

The provision expense recorded during the prior-year periods primarily reflected allocations required by net 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.

Ongoing strong loan quality metrics, including low levels of loan charge-offs, during the 2023 and 2022 periods largely mitigated additional reserves associated with the previously mentioned factors.

MERCANTILE BANK CORPORATION

Noninterest income during the second quarter of 2023 was $7.6 million, compared to $7.7 million during the respective 2022 period, while noninterest income during the first six months of 2023 was $14.6 million, compared to $17.0 million during the first six months of 2022.

Noninterest income during the second quarter and first six months of 2022 included a $0.5 million bank owned life insurance claim.

Excluding the impact of this transaction, noninterest income increased $0.4 million, or 6.0%, during the second quarter of 2023 compared with the prior-year second quarter, and decreased $1.9 million, or 11.5%, during the first six months of 2023 compared with the first six months of 2022.

The higher level of noninterest income during the second quarter of 2023 primarily stemmed from increased interest rate swap income, credit and debit card income, and payroll servicing fees, which more than offset decreased service charges on accounts and mortgage banking income.

Growth in credit and debit card income and payroll servicing fees during the first six months of 2023 was outweighed by lower levels of mortgage banking income and service charges on accounts, resulting in a decline in noninterest income compared to the respective prior-year period.

The declines in service charges on accounts reflected increased earnings credit rates in response to the increasing interest rate environment, while the reductions in mortgage banking income reflected higher residential mortgage loan rates stemming from the rising interest rate environment, resulting in significantly lower levels of refinance activity.

Noninterest expense totaled $27.8 million during the second quarter of 2023, compared to $26.9 million during the prior-year second quarter.

Noninterest expense totaled $56.4 million during the first six months of 2023, compared to $52.7 million during the first six months of 2022.

The increases in noninterest expense mainly resulted from larger compensation costs, including salary increases and higher bonus and commercial lender incentive accruals, which outweighed reductions in residential mortgage lender commissions and incentives.

The higher levels of salary expense primarily stemmed from annual merit pay increases and market adjustments, as well as lower residential mortgage loan deferred salary costs.

The reduced residential mortgage lender commissions and incentives mainly resulted from decreased loan production.

The increases in overhead costs also resulted from the recording of increased credit reserves for unfunded loan commitments and higher levels of FDIC deposit insurance premiums, reflecting a higher industry-wide assessment rate, interest rate swap credit reserves and associated collateral interest costs, and health insurance accruals.

Overhead costs during the first six months of 2023 included a $0.4 million write-down of a former branch facility in the first quarter of the year, while 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.

During the second quarter of 2023, we recorded income before federal income tax of $25.4 million and a federal income tax expense of $5.0 million.

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 first six months of 2023, we recorded income before federal income tax of $51.5 million and a federal income tax expense of $10.2 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.

The increase in federal income tax expense in both 2023 periods resulted from higher levels of income before federal income tax.

Our effective tax rate was 19.8% during the second quarter and first six months of 2023 and the respective 2022 periods.

MERCANTILE BANK CORPORATION

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

What changed 10-Q

Item 1. Financial Statements