What changed in this filing

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Item 1. Financial Statements

2023-11-03 compared with 2023-08-04 · 519 added, 453 removed, 2571 unchanged (27% of the section changed)

1 unchanged sentence

CONSOLIDATED BALANCE SHEETS

September 30,

Cash and due from banks

19 unchanged sentences

Allowance for credit losses

( 44,721,000 )

( 48,008,000 )  

( 42,246,000 )

50 unchanged sentences

40,000,000 shares authorized;

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

16,023,350 shares issued and outstanding at September 30, 2023 and 15,994,884 shares issued and outstanding at December 31, 2022

293,961,000  

4 unchanged sentences

Accumulated other comprehensive gain (loss)

( 61,517,000 )

( 73,588,000 )  

( 65,341,000 )

8 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

September 30, 2023

September 30, 2022

September 30, 2023

September 30, 2022

Interest income

19 unchanged sentences

Earnings on bank owned life insurance

Gain on sale of other real estate owned

Total noninterest income

5 unchanged sentences

Other expense

Total noninterest expenses

Total noninterest expense

Income before federal income tax expense

7 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

September 30, 2023

September 30, 2022

September 30, 2023

September 30, 2022

Other comprehensive income (loss):

7 unchanged sentences

CHANGES IN SHAREHOLDERS’

($ in thousands except per share amounts)

Comprehensive

Income (Loss)

Shareholders’

Balances, March 31, 2023

($ in thousands except per share amounts)

Income (Loss)

Balances, June 30, 2023

$ 292,906  

1 unchanged sentence

$ ( 61,517 )  

$ 478,702  

Employee stock purchase plan ( 345 shares)

Dividend reinvestment plan ( 6,746 shares)

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

Stock-based compensation expense

Cash dividends ($ 0.34 per common share)

Net income for the three months ended June 30, 2023

( 5,330 )  

Net income for the three months ended September 30, 2023

20,855  

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

Balances, June 30, 2023

( 12,071 )  

Balances, September 30, 2023

$ 293,961  

$ 262,838  

$ ( 73,588 )  

$ 483,211  

See accompanying notes to consolidated financial statements.

3 unchanged sentences

EQUITY (Continued)

($ in thousands except per share amounts)

Comprehensive

Income (Loss)

Shareholders’

($ in thousands except per share amounts)

Income (Loss)

Balances, January 1, 2023

2 unchanged sentences

$ ( 65,341 )  

$ 441,408  

Employee stock purchase plan ( 1,115 shares)

3 unchanged sentences

Cash dividends ($ 1.00 per common share)

Net income for the six months ended June 30, 2023

( 15,662 )  

Net income for the nine months ended September 30, 2023

62,187  

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

Balances, June 30, 2023

( 8,247 )  

Balances, September 30, 2023

$ 293,961  

$ 262,838  

$ ( 73,588 )  

$ 483,211  

See accompanying notes to consolidated financial statements.

3 unchanged sentences

EQUITY (Continued)

($ in thousands except per share amounts)

Comprehensive

Income (Loss)

Shareholders’

Balances, March 31, 2022

($ in thousands except per share amounts)

Income (Loss)

Balances, June 30, 2022

$ 288,199  

1 unchanged sentence

$ ( 47,668 )  

$ 428,983  

Employee stock purchase plan ( 412 shares)

Dividend reinvestment plan ( 6,733 shares)

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

Stock-based compensation expense

Cash dividends ($ 0.32 per common share)

Net income for the three months ended June 30, 2022

( 4,977 )  

Net income for the three months ended September 30, 2022

16,030  

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

Balances, June 30, 2022

( 24,795 )  

Balances, September 30, 2022

$ 289,219  

$ 199,505  

$ ( 72,463 )  

$ 416,261  

See accompanying notes to consolidated financial statements.

3 unchanged sentences

EQUITY (Continued)

($ in thousands except per share amounts)

Comprehensive

Income (Loss)

Shareholders’

($ in thousands except per share amounts)

Income (Loss)

Balances, January 1, 2022

2 unchanged sentences

$ ( 3,729 )  

$ 456,559  

Adoption of ASU 2016-13

5 unchanged sentences

Cash dividends ($ 0.94 per common share)

Net income for the six months ended June 30, 2022

( 14,607 )  

Net income for the nine months ended September 30, 2022

39,260  

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

Balances, June 30, 2022

( 68,734 )  

Balances, September 30, 2022

$ 289,219  

$ 199,505  

$ ( 72,463 )  

$ 416,261  

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

June 30, 2023

June 30, 2022

September 30, 2023

September 30, 2022

Cash flows from operating activities

7 unchanged sentences

( 144,886,000

( 186,881,000

Net gain from sales of mortgage loans held for sale

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

Net loss from sales and write-downs of fixed assets

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

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

Earnings on bank owned life insurance

Net (gain) loss on instruments designated at fair value and related derivatives

Net gain on instruments designated at fair value and related derivatives

Net change in:

9 unchanged sentences

Proceeds from sales of foreclosed assets

Proceeds from sales of former bank premises

Purchases of Federal Home Loan Bank stock

8 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

June 30, 2023

June 30, 2022

September 30, 2023

September 30, 2022

Cash flows from financing activities

2 unchanged sentences

( 183,869,000

( 131,308,000

Net increase in securities sold under agreements to repurchase

Net (decrease) increase in securities sold under agreements to repurchase

Maturities of Federal Home Loan Bank advances

24 unchanged sentences

Basis of Presentation :

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.

The unaudited financial statements for the nine months ended September 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.

2 unchanged sentences

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

The results for the period ended June 30, 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 

The results for the period ended September 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 31, 2022 .

We have five separate business trusts that were formed to issue trust preferred securities.

6 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 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.

Approximately 345,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and nine months ended September 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 nine months ended September 30, 2023 .

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

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

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

MERCANTILE BANK CORPORATION

15 unchanged sentences

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.

At September 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.

7 unchanged sentences

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 ($ 2.2 ) million and ($ 1.0 ) million at June 30, 2023, and December 31, 2022, respectively.

Net unamortized deferred loan fees/(costs) amounted to ($ 2.4 ) million and ($ 1.0 ) million at September 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.

13 unchanged sentences

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

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.

As of September 30, 2023 and December 31, 2022 , we determined that the fair value of our mortgage loans held for sale totaled $ 10.2  million and $ 3.6  million, respectively.

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

16 unchanged sentences

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.

We recorded a provision expense of $ 5.9  million during the first nine months of 

2023 , generally 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 included a reduction of the historical loss information factor which coincided with adjustments to historical loss information and an allocation considering local economic conditions, particularly the potential impacts of the United Auto Workers strike against the three Detroit-based auto manufacturers. 

A higher reserve balance for residential mortgage loans stemming from slower principal prepayment rates and the resulting extended average life of the portfolio also impacted provision expense during the first nine months of 2023.

Net changes in specific reserve balances reduced the reserve balance $ 0.9 million, while updated economic forecasts resulted in a $ 0.1 million reduction during the first nine months of 2023.

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

7 unchanged sentences

SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

Commercial Loans

40 unchanged sentences

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

As of June 30, 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 September 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 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.

The economic forecasts used for our September 30, 2023 allowance calculation reflected a decrease in our allowance balance of $ 0.1  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.

27 unchanged sentences

Mortgage Banking Activities :

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

Mortgage loans serviced for others totaled $ 1.39  billion and $ 1.38 billion as of September 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.

32 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 June 30, 2023, and December 31, 2022.

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

Goodwill and Core Deposit Intangible :

22 unchanged sentences

The following table depicts our sources of noninterest income presented in the Consolidated Statements of Income that are scoped within Topic 606:

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

September 30, 2023

September 30, 2022

September 30, 2023

September 30, 2022

Service charges on deposit and sweep accounts

50 unchanged sentences

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

June 30, 2023

September 30, 2023

Government agency debt obligations

$ 452,330,000  

$ ( 61,070,000 )

$ ( 68,251,000 )  

$ 384,079,000  

Mortgage-backed securities

1 unchanged sentence

( 7,685,000 )  

( 5,864,000 )

28,016,000  

2 unchanged sentences

33,000  

( 8,739,000 )

( 13,530,000 )  

153,425,000  

Municipal revenue bonds

1 unchanged sentence

14,000  

( 2,821,000 )

( 3,733,000 )  

26,285,000  

Other investments

3 unchanged sentences

$ 49,000  

$ ( 78,494,000 )

$ ( 93,199,000 )  

$ 592,305,000  

December 31, 2022

1 unchanged sentence

$ 453,836,000  

$ ( 65,092,000 )

$ 388,744,000  

Mortgage-backed securities

1 unchanged sentence

19,000  

( 6,068,000 )

31,953,000  

Municipal general obligation bonds

1 unchanged sentence

450,000  

( 9,058,000 )

154,433,000  

Municipal revenue bonds

1 unchanged sentence

102,000  

( 3,063,000 )

27,306,000  

Other investments

3 unchanged sentences

$ 571,000  

$ ( 83,281,000 )

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:

$ 602,936,000  

Securities with unrealized losses at September 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

June 30, 2023

September 30, 2023

Government agency debt obligations

76 unchanged sentences

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

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

At September 30, 2023 , 809  debt securities with estimated fair values totaling $ 586  million had unrealized losses aggregating $ 93.2  million.

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

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.

At September 30, 2023 , unrealized losses aggregating $ 75.9  million were attributable to bonds issued or guaranteed by agencies of the U.S.

Federal Government, while unrealized losses totaling $ 17.3  million were associated with bonds issued by state-based municipalities.

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

6 unchanged sentences

SECURITIES (Continued)

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

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

The contractual maturity is utilized for U.S.

25 unchanged sentences

$ 592,305,000  

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.

No securities were sold during the first nine 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 $ 197  million and $ 193 million at September 30, 2023 and 

December 31, 2022 , respectively, with estimated market values of $ 180  million and $ 182 million at the respective dates.

We had no securities issued by all other states and their political subdivisions as of September 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 obligation securities that are pledged to secure repurchase agreements was $ 219 million and $ 194 million at June 30, 2023, and December 31, 2022, respectively.

Government agency debt obligation securities that are pledged to secure repurchase agreements was $ 164  million and $ 194  million at September 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;

Government agency debt obligation securities that are pledged to deposits was $ 96.5  million at September 30, 2023 ;

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

3 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES

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

Our total loans at September 30, 2023 were $ 4.10  billion compared to $ 3.92  billion at December 31, 2022 , an increase of $ 188  million, or 4.8 %.

The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at September 30, 2023 and 

December 31, 2022 , and the percentage change in loans from the end of 2022 to the end of the 

third quarter of 2023 , are as follows:

September 30, 2023

December 31, 2022

39 unchanged sentences

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:

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

September 30,

Loans past due 90 days or more still accruing interest

10 unchanged sentences

The recorded principal balance of nonperforming loans was as follows:

September 30,

Commercial and industrial

26 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

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

Commercial and industrial

3 unchanged sentences

$ 1,165,934,000  

$ 1,166,187,000  

Vacant land, land development, and residential construction

48 unchanged sentences

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

30 –59  

60 –89  

Commercial and industrial

63 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 $ 2.1 million and $ 7.7 million as of June 30, 2023 and December 31, 2022, respectively.

Collateral dependent loans, representing the entire amount of loans on nonaccrual, totaled $ 5.9  million and $ 7.7 million as of September 30, 2023 and December 31, 2022 , respectively.

MERCANTILE BANK CORPORATION

2 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

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

With no allowance recorded:

4 unchanged sentences

owner occupied

738,000  

Real estate –

12 unchanged sentences

Commercial and industrial

$ 3,039,000  

$ 1,233,000  

Vacant land, land development and residential construction

1 unchanged sentence

owner occupied

116,000  

15,000  

Real estate –

22 unchanged sentences

$ 1,425,000  

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

No interest income was recognized on nonaccrual loans during the first nine months of 

MERCANTILE BANK CORPORATION

91 unchanged sentences

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 June 30, 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 

September 30, 2023 based on year of origination (dollars in thousands):

Commercial and Industrial:

29 unchanged sentences

$ 1,166,187  

$ 1,212,196  

Current year-to-date gross write offs

48 unchanged sentences

$ 6,788  

$ 671,083  

Current year-to-date gross write offs

46 unchanged sentences

125,134  

111,623  

Grades 8 –

21 unchanged sentences

$ 3,218,831  

Total Comm current YTD gross write offs

Total Commercial current YTD gross write offs

MERCANTILE BANK CORPORATION

58 unchanged sentences

Grand Total Current YTD gross write offs

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

There were no revolving loans converted to term loans during the first nine months of 

MERCANTILE BANK CORPORATION

2 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

The following table reflects amortized cost of basis of loans as of December 31, 2022 based on year of origination (dollars in thousands):

The following table reflects amortized cost basis of loans as of December 31, 2022 based on year of origination (dollars in thousands):

Commercial and Industrial:

140 unchanged sentences

$ 617,720  

$ 3,131,830  

MERCANTILE BANK CORPORATION

2 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Revolving Loans

1-4 Family Mortgages:

57 unchanged sentences

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 –

Activity in the allowance for credit losses during the three months and nine months ended September 30, 2023 is as follows (dollars in thousands):

Commercial  

real estate –

Commercial  

land development  

Commercial  

multi-family  

and residential

real estate –

reconstruction

owner occupied

Commercial real estate –

non-owner occupied

Commercial real estate –

multi-family and residential rental

1-4 family mortgages

residential rental

Allowance for credit losses:

12 unchanged sentences

( 201 )  

( 270 )  

Ending balance

32 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

Commercial and industrial

Commercial vacant land, land development and residential construction

Commercial real estate –

Activity in the allowance for credit losses during the three months and 

nine months ended September 30, 2022 is as follows (dollars in thousands):

Commercial  

real estate –

Commercial  

land development  

Commercial  

multi-family  

and residential

real estate –

owner occupied

Commercial real estate –

non-owner occupied

Commercial real estate –

multi-family and residential rental

1-4 family mortgages

Other consumer

residential rental

Allowance for credit losses:

9 unchanged sentences

( 13 )  

( 683 )  

( 33 )  

( 28 )  

( 109 )  

( 15 )  

Ending balance

26 unchanged sentences

( 18 )  

Ending balance

7 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

LOANS AND ALLOWANCE FOR CREDIT LOSSES  (Continued)

The following table presents the period-end amortized cost basis of modifications to borrowers experiencing financial difficulty by type of modification made during the three months ended September 30, 2023:

Interest Rate

1 unchanged sentence

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

Real estate – owner occupied

Real estate – non-owner occupied

Real estate – multi-family and residential rental

Total commercial

$ 10,727,000  

1-4 family mortgages

Other consumer loans

$ 10,727,000  

The following table presents the period-end amortized cost basis of modifications to borrowers experiencing financial difficulty by type of modification made during the nine  months ended September 30, 2023:

Interest Rate

Term Extension

Commercial and industrial

Vacant land, land development and residential construction

Real estate – owner occupied

Real estate – non-owner occupied

Real estate – multi-family and residential rental

Total commercial

1-4 family mortgages

Other consumer loans

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

6 unchanged sentences

owner occupied

207,000  

Real estate –

13 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

Loans modified as troubled debt restructurings during the three months ended 

September 30, 2022 were as follows:

Commercial and industrial

19 unchanged sentences

$ 308,000  

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

Loans modified as troubled debt restructurings during the 

nine months ended September 30, 2022 were as follows:

Commercial and industrial

21 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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:

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

Activity for loans categorized as troubled debt restructurings during the three months ended 

September 30, 2022 is as follows:

Real Estate -

9 unchanged sentences

( 891,000 )  

( 3,000 )  

( 4,000 )  

Transfers to ORE

5 unchanged sentences

$ 135,000  

$ 88,000  

Other Consumer

4 unchanged sentences

Payments (net)

( 84,000 )  

Transfers to ORE

8 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

Activity for loans categorized as troubled debt restructurings during the 

nine months ended September 30, 2022 is as follows:

Real Estate -

7 unchanged sentences

$ 91,000  

( 95,000 )  

Payments (net)

( 378,000 )  

( 9,679,000 )

( 9,682,000 )  

( 11,000 )  

Transfers to ORE

1 unchanged sentence

4,566,000  

Ending Balance

( 669,000 )  

Ending Balance

$ 9,066,000  

7 unchanged sentences

Payments (net)

( 253,000 )  

Transfers to ORE

8 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 unchanged sentence

Premises and equipment are comprised of the following:

September 30,

Land and improvements

14 unchanged sentences

$ 51,476,000  

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.

Depreciation expense totaled $ 1.5  million during the third quarters of both 

2023 and 2022 .

Depreciation expense totaled $ 4.4 million during the first nine months of 

2023 , compared to $ 4.5  million during the first nine months of 2022 .

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

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.

As of September 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 

2.2  years as of September 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 5.8 % 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.

The weighted average discount rate for leases was 5.9 % as of September 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 $ 4.0  million and $ 3.5 million as of September 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 $ 0.5 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.

Total operating lease expense associated with the leases aggregated $ 0.4  million and $ 0.2 million during the third quarters of 2023 and 2022 , respectively, and $ 1.3  million and $ 0.6  million during the first nine months of 

2023 and 2022 , respectively.

MERCANTILE BANK CORPORATION

2 unchanged sentences

PREMISES AND EQUIPMENT, NET (Continued)

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

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

$ 354,000  

7 unchanged sentences

Less effect of discounting

( 1,147,000 )

Present value of future lease payments (lease liability)

$ 3,999,000  

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

Our total deposits at September 30, 2023 totaled $ 3.90  billion, an increase of $ 188  million, or 5.1 %, from December 

The components of our outstanding balances at September 30, 2023 and 

December 31, 2022 , and percentage change in deposits from the end of 2022 to the end of the third quarter of 2023, are as follows:

September 30, 2023

December 31, 2022

30 unchanged sentences

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

1 unchanged sentence

Information relating to our repurchase agreements follows:

Six Months Ended

Nine Months Ended

Twelve Months Ended

June 30, 2023

September 30, 2023

December 31, 2022

3 unchanged sentences

Average interest rate at end of period

0.74 %  

Average daily balance during the period

2 unchanged sentences

Average interest rate during the period

1.22 %  

Maximum daily balance during the period

8 unchanged sentences

FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES

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 June 30, 2023 were as follows:

FHLBI bullet advances totaled $ 430  million at September 30, 2023 , and were scheduled to mature at varying dates from October 2023 

through June 2028 , with fixed rates of interest from 0.55 % to 5.05 % and averaging 2.80 %.

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 September 30, 2023 were as follows:

$ 30,000,000  

3 unchanged sentences

90,000,000  

60,000,000  

MERCANTILE BANK CORPORATION

2 unchanged sentences

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 totaled $ 27.9  million as of September 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 on FHLBI amortizing advances as of June 30, 2023 were as follows:

Scheduled principal payments on FHLBI amortizing advances as of 

September 30, 2023 were as follows:

826,000  

5 unchanged sentences

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

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

Our borrowing line of credit as of 

September 30, 2023 totaled $ 888  million, with remaining availability based on collateral of $ 424  million.

19 unchanged sentences

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

The calculated allowance aggregated $ 0.7  million and $ 0.1  million as of September 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 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: 

At September 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 September 30, 2023 and 

December 31, 2022 is as follows: 

September 30,

Commercial unused lines of credit

31 unchanged sentences

DERIVATIVES AND HEDGING ACTIVITIES (Continued)

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

Notional Amount

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

Balance Sheet

Derivative Assets  

Notional Amount

Derivative Assets

Interest rate swaps

1 unchanged sentence

$ 35,060,000  

Derivative Liabilities  

Interest rate swaps

2 unchanged sentences

35,242,000  

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.

The effect of interest rate swaps that are not designated as hedging instruments resulted in income of $ 0.1  million during the first nine 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 $ 35.2  million as of September 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 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.

As of September 30, 2023 , the gross amount of derivative assets subject to master netting agreements presented on the Consolidated Balance Sheets was $ 34.7  million, while cash collateral reflecting cash requirements from our counterparties to us totaled $ 36.1  million, providing for an over-collateralized position on the Consolidated Balance Sheets of $ 1.4 million.

As of September 30, 2023 , the gross amount of derivative liabilities subject to master netting agreements presented on the Consolidated Balance Sheets was $ 0.3  million, while cash collateral reflecting cash requirements from us to our counterparties totaled $ 0.3  million, and the net amount of derivative liabilities not offset on the Consolidated Balance Sheets was less than $ 0.1  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 $ 548 million as of June 30, 2023.

Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $ 592 million as of September 30, 2023 .

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

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

Notional Amount

Balance Sheet

Derivative Assets  

Notional Amount

Derivative Assets

Interest rate swaps

1 unchanged sentence

$ 25,697,000  

Derivative Liabilities  

Interest rate swaps

17 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUES OF FINANCIAL INSTRUMENTS

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

June 30, 2023

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

September 30, 2023

December 31, 2022

37 unchanged sentences

Financial liabilities:

Level 2  

3,900,735  

8 unchanged sentences

FHLBI advances

Level 2  

457,910  

3 unchanged sentences

Subordinated debentures

Level 2  

49,473  

3 unchanged sentences

Subordinated notes

Level 2  

88,885  

14 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.

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.

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 September 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.

4 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

28 unchanged sentences

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

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

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

We have no Level 1 securities available for sale.

8 unchanged sentences

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

As of June 30, 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.

As of September 30, 2023 and December 31, 2022 , we determined the fair value of our mortgage loans held for sale to be $ 10.2  million and $ 3.6 million, respectively.

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

9 unchanged sentences

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

Significant Unobservable

The balances of assets and liabilities measured at fair value on a recurring basis as of 

September 30, 2023 are as follows:

Available for sale securities

30 unchanged sentences

FAIR VALUES (Continued)

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.

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

The $ 0.1 million reduction in Level 3 municipal general obligation bonds during the first nine 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

28 unchanged sentences

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

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

The $ 0.1  million reduction in Level 3 municipal general obligation bonds during 

2022 reflects the scheduled maturities of such bonds.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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

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

Collateral dependent loans

10 unchanged sentences

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

Prices  

Collateral dependent loans

21 unchanged sentences

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

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.

As of September 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 September 30, 2023 , that we believe have changed our bank’s categorization.

MERCANTILE BANK CORPORATION

8 unchanged sentences

Action Regulations

June 30, 2023

September 30, 2023

Total capital (to risk weighted assets)

4 unchanged sentences

392,745  

490,931  

Tier 1 capital (to risk weighted assets)

23 unchanged sentences

362,490  

453,112  

Tier 1 capital (to risk weighted assets)

19 unchanged sentences

REGULATORY MATTERS (Continued)

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.

Our consolidated capital levels as of September 30, 2023 and December 31, 2022 include $ 47.4 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.

1 unchanged sentence

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

As of June 30, 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.

As of September 30, 2023 and December 31, 2022 , all $ 47.4 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.

2 unchanged sentences

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

We believe that, as of June 30, 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 September 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.

1 unchanged sentence

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.

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 was paid on September 13, 2023, to shareholders of record as of September 1, 2023.

As of September 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 nine months of 

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

2 unchanged sentences

SUBSEQUENT EVENTS

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 .

On October 12, 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 December 

13, 2023 , to shareholders of record as of December 1, 2023 .

MERCANTILE BANK CORPORATION

47 unchanged sentences

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

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

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 September 30, 2023 and December 31, 2022 and the results of operations for the three months and nine months ended September 30, 2023 and September 30, 2022.

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

49 unchanged sentences

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.

We reported net income of $20.9 million, or $1.30 per diluted share, for the third quarter of 2023, compared with net income of $16.0 million, or $1.01 per diluted share, during the third quarter of 2022.

Net income for the first nine months of 2023 totaled $62.2 million, or $3.89 per diluted share, compared to $39.3 million, or $2.48 per diluted share, during the first nine 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.

Commercial loans increased $87.0 million during the first nine 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 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 $246 million during the first nine months of 2023.

As a percentage of total commercial loans, commercial and industrial loans and owner occupied commercial real estate (“CRE”) loans combined equaled 57.1% as of September 30, 2023, compared to 58.2% as of December 31, 2022.

The new commercial loan pipeline remains strong, and at September 30, 2023, we had $379 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 $99.9 million during the first nine months of 2023, providing for an annualized growth rate of about 19%.

With increased residential mortgage loan rates during 2022 and the first nine months 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.

During the first nine months of 2023 , approximately 49% of our residential mortgage loan production was comprised of longer-term fixed rate loans, compared to nearly 36% in 2022 and approximately 68% 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 September 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.

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling only 0.14% of total loans as of September 30, 2023.

Accruing loans past due 30 to 89 days remain very low, and foreclosed properties totaled less than $0.1 million as of September 30, 2023.

Gross loan charge-offs totaled $0.8 million during the first nine months of 2023, while recoveries of prior period loan charge-offs aggregated $0.7 million.

We recorded a provision expense of $5.9 million during the first nine months of 2023, generally reflecting allocations necessitated by net loan growth and adjustments to historical loss information to better represent our expectations for future credit losses. 

Net changes in specific reserve balances reduced the reserve balance $0.9 million, while updated economic forecasts resulted in a $0.1 million reduction during the first nine months 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.

During the first nine months of 2023, the average balance of these funds equaled $102 million, or 2.2% of average earning assets, compared to $535 million, or 11.2% of average earning assets, during the first nine 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 elevated level during the first nine months of 2022 primarily reflected increased local deposits stemming from Covid-19-related federal government stimulus payments and reduced business and consumer investing and spending 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.

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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.

Interest-earning deposits totaled $201 million as of September 30, 2023, an increase of $167 million from December 31, 2022, and approximately $100 million higher than the average balance during the first nine months of 2023.

We experienced deposit growth, net of a large transfer from a sweep account to a deposit account, of approximately $100 million during the third quarter of 2023. 

We did not obtain any additional brokered deposits or FHLBI advances during the third quarter of 2023.

Total deposits and sweep accounts increased $158 million during the first nine months of 2023, totaling $4.06 billion at September 30, 2023.

Local deposits and sweep accounts increased $46.4 million, while out-of-area deposits increased $111 million. 

Net interest income increased $6.6 million and $37.3 million during the third quarter and first nine months of 2023, respectively, compared to the respective time periods in 2022.

Interest income was $23.0 million and $74.0 million higher during the third quarter and first nine months of 2023, respectively, when compared to the same time periods in 2022, in large part reflecting an increasing rate environment and ongoing loan growth.

Interest expense was $16.4 million and $36.7 million higher during the third quarter and first nine months of 2023, respectively, when compared to the respective time periods in 2022, primarily reflecting an increasing interest rate environment.

Noninterest income increased $2.0 million and decreased $0.5 million during the third quarter and first nine months of 2023, respectively, compared to the respective time periods in 2022.

Mortgage banking income increased $1.0 million during the respective third quarter periods, while declining $1.2 million during the respective nine month periods, in large part reflecting changes in the volume of refinance activity and residential mortgage loans sold during the various time periods.

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 declined due to increased earnings credit rates on noninterest-bearing checking accounts.

Noninterest expense increased $2.1 million and $5.9 million during the third quarter and first nine months of 2023, respectively, compared to the respective time periods in 2022.

The increased costs primarily resulted from higher compensation and benefit costs, increased Federal Deposit Insurance Corporation ("FDIC") insurance assessments reflecting the industry-wide adjustments effective January 1, 2023, and higher interest rate swap cash collateral holding costs.

Financial Condition

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.

Our total assets increased $378 million during the first nine months of 2023, and totaled $5.25 billion as of September 30, 2023.

Total loans were up $188 million, and interest-earning deposits increased $167 million.

Total deposits increased $188 million, and FHLBI advances were up $150 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.

Commercial loans increased $87.0 million during the first nine 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 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 $246 million during the first nine months of 2023.

Multi-family and residential rental property loans grew $41.8 million, owner-occupied CRE loans were up $31.9 million, non-owner occupied CRE loans increased $21.2 million, and vacant land, land development and residential construction loans were up $11.0 million, while commercial and industrial loans decreased $18.9 million.

As a percentage of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 57.1% as of September 30, 2023, compared to 58.2% as of December 31, 2022.

Commercial loans totaled $3.22 billion, or 78.4% of total loans, as of September 30, 2023, compared to $3.13 billion, or 80.0% of total loans, as of December 31, 2022.

As of September 30, 2023, we had $379 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 $288 million in new lending commitments, a majority of which we expect to be accepted and funded over the next 12 to 18 months.

Our commercial lenders also report ongoing additional opportunities they are currently discussing with existing and potentially new borrowers.

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 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.

Usage of existing commercial lines of credit averaged 40% during the first nine months of 2023, which was at the lower end of our historical range of 40% to 45%.

Residential mortgage loans, excluding home equity lines of credit, increased $99.9 million during the first nine months of 2023, providing for an annualized growth rate of about 19%.

With increased residential mortgage loan rates during 2022 and the first nine months of 2023, we 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.

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 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 September 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.

Home equity lines of credit declined $0.7 million and other consumer-related loans increased $1.6 million during the first nine months of 2023, and at September 30, 2023 totaled $36.7 million and $31.4 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.

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September 30,

Commercial & Industrial

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Non-Owner Occupied Commercial RE

1,000,411,000

Multi-Family & Residential Rental

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

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.

Nonperforming loans totaled $5.9 million, or 0.1% of total loans, as of September 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 $5.9 million (0.1% of total assets) as of September 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.

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September 30,

Residential Real Estate:

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September 30,

Residential Real Estate:

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Valuation write-downs

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.

Loan charge-offs totaled $0.2 million during the third quarter of 2023, and aggregated $0.8 million during the first nine months of 2023, while recoveries of prior period loan charge-offs equaled $0.2 million and $0.7 million during the respective time periods.

Net loan charge-offs, as a percentage of average total loans, equaled an annualized 0.01% during both the third quarter and first nine months of 2023 

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

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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.

The allowance equaled $48.0 million, or 1.17% of total loans and over eight times the level of nonperforming loans, as of September 30, 2023.

As of September 30, 2023, the allowance was comprised of $46.4 million in general reserves relating to performing loans and $1.6 million in specific reserves on other loans, primarily nonperforming loans.

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

As of September 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 $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 six months of 2023.

Securities available for sale decreased $10.6 million during the first nine months of 2023, totaling $592 million as of September 30, 2023.

There were no purchases of 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 $11.6 million during the first six months of 2023;

Government agency bonds during the first nine months of 2023. 

Proceeds from a matured U.S.

Government agency bond totaling $2.0 million were received during the first nine months of 2023. 

There were no purchases of U.S.

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

however, we received $2.3 million of principal paydowns on U.S.

Government agency guaranteed mortgage-backed securities. 

Purchases of municipal bonds totaled $13.0 million during the first nine months of 2023;

proceeds from matured municipal bonds totaled $8.6 million.

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

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

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

Government agency guaranteed mortgage-backed securities (5%).

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

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

The fair value of securities designated as available for sale at September 30, 2023 totaled $592 million, including a net unrealized loss of $93.2 million.

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

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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 $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.

FHLBI stock totaled $21.5 million as of September 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 nine months of 2023.

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

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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 nine months of 2023, the average balance of these funds equaled $102 million, or 2.2% of average earning assets, compared to $535 million, or 11.2% of average earning assets, during the first nine months of 2022.

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.

We experienced deposit growth, net of a large transfer from a sweep account to a deposit account, of approximately $100 million during the third quarter of 2023. 

We did not obtain any additional brokered deposits or FHLBI advances during the third quarter of 2023.

MERCANTILE BANK CORPORATION

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’

Net premises and equipment equaled $52.2 million at September 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 nine months of 2023, comprised of a $0.6 million transfer to foreclosed assets and a write-down of $0.4 million;

this facility was sold during the third quarter of 2023 for $0.6 million. Depreciation expense totaled $4.4 million during the first nine months of 2023, while investments associated with the construction and opening of new facilities and the renovation of existing facilities totaled $6.2 million.

Total deposits increased $188 million during the first nine months of 2023, totaling $3.90 billion at September 30, 2023.

Local deposits increased $76.6 million, while out-of-area deposits increased $111 million.

We experienced a reduction in local deposits during the first part 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.

Local deposits increased $144 million during the third quarter of 2023.

Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $569 million, or about 13% of total funds, as of September 30, 2023, compared to $308 million, or about 7% of total funds, at December 31, 2022.

Noninterest-bearing deposits decreased $295 million during the first nine months of 2023, in large part reflecting the aforementioned customary level of customers’

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

Interest-bearing checking accounts increased $95.8 million, including the aforementioned transfer from the sweep account product, during the first nine months of 2023. 

Savings deposits were down $94.7 million during the first nine months of 2023, primarily reflecting the transfers of funds to higher-paying money market deposit accounts and time deposits.

Money market deposit accounts were up $200 million, in large part reflecting growth in deposits from existing and new municipal depositors, as well as from transfers from no- and low-cost deposit products. 

Local time deposits increased $171 million during the first nine months of 2023.

Sweep accounts decreased $30.3 million during the first nine months of 2023, totaling $164 million as of September 30, 2023.

The decline includes the aforementioned transfer to the interest-bearing checking account product. 

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

The average balance of sweep accounts equaled $212 million during the first nine months of 2023, with a high balance of $269 million and a low balance of $164 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 $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.

FHLBI advances increased $150 million during the first nine months of 2023, totaling $458 million as of September 30, 2023.

Bullet advances aggregating $200 million were obtained during the first nine 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 nine 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 June 30, 2023 totaled $860 million, with remaining availability based on collateral equaling $386 million.

Our borrowing line of credit as of September 30, 2023 totaled $888 million, with remaining availability based on collateral equaling $424 million.

Shareholders’

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

Positively impacting shareholders’

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 six months of 2023.

MERCANTILE BANK CORPORATION 

equity was $483 million at September 30, 2023, compared to $441 million at December 31, 2022.

Negatively impacting shareholders’

equity during the first nine months of 2023 was net income of $62.2 million, which was partially offset by the payment of cash dividends totaling $15.7 million.

An $8.2 million after-tax decrease in the market value of our available for sale securities portfolio, reflecting an increase in market interest rates, negatively impacted shareholders’

equity during the first nine 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 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.

Wholesale funds, comprised of out-of-area deposits and advances from the FHLBI, totaled $569 million, or about 13% of combined deposits and borrowed funds, as of September 30, 2023, compared to $308 million, or about 7% of combined deposits and borrowed funds, as of December 31, 2022.

Sweep accounts decreased $30.3 million during the first nine months of 2023, totaling $164 million as of September 30, 2023.

The decline includes the aforementioned transfer to the interest-bearing checking account product. 

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.

The average balance of sweep accounts equaled $212 million during the first nine months of 2023, with a high balance of $269 million and a low balance of $164 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 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.

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

Outstanding balance at September 30, 2023

Weighted average interest rate at September 30, 2023

Maximum daily balance nine months ended September 30, 2023

Average daily balance for nine months ended September 30, 2023

Weighted average interest rate for nine months ended September 30, 2023

FHLBI advances increased $150 million during the first nine months of 2023, totaling $458 million as of September 30, 2023.

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

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

Our borrowing line of credit as of September 30, 2023 totaled $888 million, with remaining availability based on collateral equaling $424 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 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 accessed one of the lines of credit during the first nine months of 2023, with an average balance of $3.2 million.

In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged $95.0 million during the first nine 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 $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.

Using certain municipal bonds as collateral, we could have borrowed up to $25.4 million as of September 30, 2023.

We did not utilize this line of credit during the first nine 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:

The following table reflects, as of September 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 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 $351 million were for loan commitments generally expected to be accepted and closed and become funded within the next 12 to 18 months.

As of September 30, 2023, we had a total of $1.78 billion in unfunded loan commitments and $19.4 million in unfunded standby letters of credit.

Of the total unfunded loan commitments, $1.49 billion were commitments available as lines of credit to be drawn at any time as customers’

cash needs vary, and $288 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 six months 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 nine 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 $479 million at June 30, 2023, compared to $441 million at December 31, 2022.

equity was $483 million at September 30, 2023, compared to $441 million at December 31, 2022.

Positively impacting shareholders’

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 six months of 2023.

equity during the first nine months of 2023 was net income of $62.2 million, which was partially offset by the payment of cash dividends totaling $15.7 million.

An $8.2 million after-tax decrease in the market value of our available for sale securities portfolio, reflecting an increase in market interest rates, negatively impacted shareholders’

equity during the first nine 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 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 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.

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

As of September 30, 2023, our bank’s total risk-based capital ratio was 13.8%, compared to 13.7% as of December 31, 2022.

Our bank’s total regulatory capital increased $57.2 million during the first nine months of 2023, in large part reflecting net income totaling $70.0 million, which was partially offset by cash dividends paid to us aggregating $19.5 million.

Our bank’s total risk-based capital ratio was also impacted by a $378 million increase in total risk-weighted assets, primarily resulting from net growth in commercial and residential mortgage loans.

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.

As of September 30, 2023, our bank’s total regulatory capital equaled $676 million, or $185 million in excess of the 10.0% minimum that is among the requirements to be categorized as “well capitalized.”

Our and our bank’s capital ratios as of September 30, 2023 and December 31, 2022 are disclosed in Note 12 of the Notes to Consolidated Financial Statements.

MERCANTILE BANK CORPORATION

Results of Operations

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.

We recorded net income of $20.9 million, or $1.30 per basic and diluted share, for the third quarter of 2023, compared with net income of $16.0 million, or $1.01 per basic and diluted share, for the third quarter of 2022.

We recorded net income of $62.2 million, or $3.89 per basic and diluted share, for the first nine months of 2023, compared with net income of $39.3 million, or $2.48 per basic and diluted share, for the first nine months of 2022.

Diluted earnings per share increased $0.29, or 28.7%, during the third quarter of 2023, and $1.41, or 56.9%, during the first nine months of 2023 compared with the respective prior-year periods.

The higher levels of net income during the third quarter and first nine months of 2023 compared to the respective prior-year periods primarily resulted from increased net interest income, which more than offset higher overhead costs and credit loss provisions.

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.

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 collateral holding costs, and FDIC deposit insurance premiums.

The provision expense recorded during the current-year third quarter mainly reflected the establishment of a specific reserve for a distressed commercial loan relationship, a qualitative factor assessment for local economic conditions, allocations necessitated by net loan growth, and a higher reserve for residential mortgage loans stemming from slower principal prepayment rates and the resulting extended average life of the portfolio. The provision expense recorded during the first nine months of 2023 generally reflected allocations necessitated by net loan growth, adjustments to historical loss information to better represent our expectations for future credit losses, and the previously mentioned higher reserve for residential mortgage loans. 

The provision expense recorded during the 2022 periods primarily reflected allocations necessitated by net loan growth, increased specific reserves for certain problem commercial loan relationships, a higher reserve for residential mortgage loans, and a decline in forecasted economic conditions.

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 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 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;

Excluding the impact of a gain on sale of other real estate owned, noninterest income increased $1.6 million, or nearly 22%, during the third quarter of 2023 compared with the prior-year third quarter. 

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

Noninterest income during the first nine months of 2023 declined in comparison to the first nine months of 2022 as higher levels of credit and debit card income, interest rate swap income, and payroll servicing fees were more than offset by lower levels of mortgage banking income and service charges on accounts.

Interest income during the third quarter of 2023 was $71.1 million, an increase of $23.0 million, or 47.8%, from the $48.1 million earned during the third quarter of 2022. 

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

The yield on average earning assets was 5.78% during the third quarter of 2023, up from 4.04% 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 6.37% during the third quarter of 2023, up from 4.56% during the prior-year third 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 375 basis points during the period of July 2022 through July 2023, during which time average variable-rate commercial loans represented approximately 65% of average total commercial loans. 

Increased yields on securities and interest earning deposits, reflecting the rising interest rate environment, along with a change in earning asset mix, comprised of an increase in higher-yielding loans as a percentage of earning assets, also contributed to the higher yield on average earning assets. 

Average loans represented 82.9% of average earning assets during the third quarter of 2023, up from 80.7% during the third quarter of 2022.

A higher level of earning assets also contributed to the increase in interest income during the third quarter of 2023. 

Average earning assets equaled $4.89 billion during the third quarter of 2023, up $163 million, or 3.4%, from the level of $4.73 billion during the prior-year third quarter;

average loans and average securities were up $240 million and $8.7 million, respectively, while average interest-earning deposits were down $86.0 million.

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;

Interest income during the first nine months of 2023 was $198 million, an increase of $74.0 million, or 59.9%, from the $124 million earned during the first nine months of 2022. 

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

The yield on average earning assets was 5.59% during the first nine months of 2023, up from 3.45% 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 6.16% during the first nine months of 2023, up from 4.15% during the first nine months of 2022 primarily due to higher interest rates on variable-rate commercial loans stemming from FOMC rate hikes, which totaled 525 basis points during the period of March 2022 through July 2023. 

A change in earning asset mix, comprised of an increase in higher-yielding loans as a percentage of earning assets, along with increased yields on interest earning deposits and securities, depicting the rising interest rate environment, also contributed to the higher yield on average earning assets. 

On an average basis, higher-yielding loans represented 84.5% of earning assets during the first nine months of 2023, up from 76.0% during the first nine months of 2022.

MERCANTILE BANK CORPORATION

Average earning assets equaled $4.73 billion during the first nine months of 2023, down $63.3 million, or 1.3%, from the level of $4.80 billion during the first nine months of 2022;

average interest-earning deposits declined $432 million, average loans increased $355 million, and average securities were up $13.9 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.

Interest expense during the third quarter of 2023 was $22.2 million, an increase of $16.4 million, or 286%, from the $5.8 million expensed during the third quarter of 2022.

The increase is mainly attributable to a higher average weighted cost of interest-bearing liabilities, which rose from 0.81% during the third quarter of 2022 to 2.69% during the current-year third 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 0.30% during the third quarter of 2022 to 2.17% during the third quarter of 2023, while the cost of time deposits increased from 0.98% to 3.85% 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%.

The cost of borrowed funds increased from 1.99% during the third quarter of 2022 to 2.98% during the third quarter of 2023 mainly due to higher costs of FHLBI advances, sweep accounts, and subordinated debentures. 

The cost of FHLBI advances increased from 1.98% during the third quarter of 2022 to 2.78% during the third quarter of 2023, while the cost of sweep accounts increased from 0.10% to 1.33% during the respective periods, reflecting the rising interest rate environment. 

The cost of subordinated debentures was 9.92% during the third quarter of 2023, up from 6.57% during the respective 2022 period due to increases in the 90-Day Libor Rate.

A change in funding mix, largely consisting of an increase in higher-costing time deposits as a percentage of interest-bearing liabilities, also contributed to the higher cost of interest-bearing liabilities during the third quarter of 2023. 

Average interest-bearing liabilities totaled $3.27 billion during the current-year third quarter, compared to $2.83 billion during the third quarter of 2022, representing an increase of $440 million, or 15.5%.

MERCANTILE BANK CORPORATION

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.

Interest expense during the first nine months of 2023 was $52.7 million, an increase of $36.7 million, or 230%, from the $16.0 million expensed during the first nine months of 2022.

The increase is primarily attributable to a higher average weighted cost of interest-bearing liabilities, which rose from 0.73% during the first nine months of 2022 to 2.28% during the first nine months of 2023 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 0.24% during the first nine months of 2022 to 1.77% during the first nine months of 2023, while the cost of time deposits increased from 0.90% to 3.25% 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 1.86% 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 cost of borrowed funds increased from 1.90% during the first nine months of 2022 to 2.82% during first nine months 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 first nine months of 2022 to 1.22% during the first nine months of 2023, while the cost of FHLBI advances increased from 2.00% to 2.57% during the respective periods, reflecting the rising interest rate environment.  The cost of subordinated debentures was 9.51% during the first nine months of 2023, up from 5.01% during the respective 2022 period due to increases in the 90-Day Libor Rate.

Average interest-bearing liabilities totaled $3.08 billion during the first nine months of 2023, up $145 million, or 4.9%, from $2.94 billion during the respective 2022 period.

Net interest income during the third quarter of 2023 was $49.0 million, an increase of $6.6 million, or 15.5%, from the $42.4 million earned during the respective 2022 period.

The increase primarily resulted from a significantly improved net interest margin and growth in the loan portfolio.

The net interest margin was 3.98% in the third quarter of 2023 up from 3.56% in the prior-year third quarter due to a higher yield on average earning assets, which more than offset an increase in the cost of funds.

The increased yield, mainly stemmed from a higher yield on commercial loans.

The cost of funds equaled 1.80% in the third quarter of 2023, up from 0.48% in the third 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 noninterest-bearing and lower-cost deposits and an increase in higher-cost money market accounts and time deposits, reflecting deposit migration and new deposit relationships. 

Net interest income during the first nine months of 2023 was $145 million, an increase of $37.3 million, or 34.7%, from the $108 million earned during the first nine months of 2022.

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

The net interest margin increased from 3.00% in the first nine months of 2022 to 4.10% 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.

The cost of funds equaled 1.49% during the first nine months of 2023, up from 0.45% 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 following tables set forth certain information relating to our consolidated average interest-earning assets and interest-bearing liabilities and reflect the average yield on assets and average cost of liabilities for the third quarters and first nine months of 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 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.

Tax-exempt securities interest income and yield for the third quarters and first nine 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 third quarter of both 2023 and 2022 and $180,000 in the first nine 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 June 30,

Quarters ended September 30,

(dollars in thousands)

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MERCANTILE BANK CORPORATION

Six months ended June 30,

Nine months ended September 30,

(dollars in thousands)

17 unchanged sentences

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.

Provisions for credit losses of $3.3 million and $2.9 million were recorded during the third quarters of 2023 and 2022, respectively.

A provision for credit losses of $5.9 million was recorded during the first nine months of 2023, compared with a provision of $3.5 million during the first nine months of 2022.

The provision expense recorded during the current year third quarter mainly reflected the establishment of a specific reserve for a distressed commercial loan relationship, a qualitative factor assessment for local economic conditions reflecting the potential impacts of the United Auto Workers strike against the three Detroit-based auto manufacturers, allocations necessitated by net loan growth, and a higher reserve for residential mortgage loans resulting from slower principal prepayment rates and the related extended average life of the portfolio. 

The provision expense recorded during the first nine months of 2023 generally reflected 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 during the first nine months of 2023 included a reduction of the historical loss information factor that coincided with adjustments to historical loss information and an allocation considering local economic conditions, particularly the potential impacts of the aforementioned United Auto Workers strike. 

An increased reserve balance for residential mortgage loans stemming from slower principal prepayment rates and the resulting extended average life of the portfolio also impacted provision expense during the first nine months of 2023. 

Net changes in specific reserve balances reduced the reserve balance $0.9 million, while updated economic forecasts resulted in a $0.1 million reduction to the reserve during the first nine months of 2023. 

The provision expense recorded during the third quarter of 2022 mainly reflected allocations necessitated by commercial loan and residential mortgage loan growth, increased specific reserves for certain distressed commercial loan relationships, and a decline in forecasted economic conditions. 

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

Sustained strength in 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.

Noninterest income during the third quarter of 2023 was $9.2 million, compared to $7.3 million during the respective 2022 period. 

Noninterest income during the third quarter of 2023 included a $0.4 million gain on sale of other real estate owned. 

Excluding the impact of this transaction, noninterest income increased $1.6 million, or approximately 22%, during the third quarter of 2023 compared with the prior-year third quarter.

The increase in mortgage banking income largely reflected a higher loan sold percentage, which increased from approximately 36% in the third quarter of 2022 to approximately 64% in the third quarter of 2023. 

The growth in interest rate swap income, credit and debit card income, and payroll servicing fees primarily resulted from the successful marketing of products and services to existing and new customers. 

The decline in service charges on accounts reflected increased earnings credit rates in response to the increasing interest rate environment.

Noninterest income during the first nine months of 2023 was $23.8 million, compared to $24.3 million during the first nine months of 2022.

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

The reduction in mortgage banking income primarily stemmed from lower production, the impact of which was partially offset by a higher loan sold percentage, which increased from approximately 36% during the first nine months of 2022 to nearly 49% during the first nine months of 2023. 

The decrease in service charges on accounts reflected the aforementioned increase in earnings credit rates. 

Noninterest income during the first nine months of 2023 included a $0.4 million gain on the sale of other real estate owned, while noninterest income during the first nine months of 2022 included a $0.5 million bank owned life insurance claim. 

Noninterest expense totaled $28.9 million during the third quarter of 2023, compared to $26.8 million during the prior-year third quarter.

The increase in noninterest expense primarily stemmed from larger salary and benefit costs, which outweighed decreased residential mortgage lender commissions and incentives and a lower bonus accrual. 

The increase in salary and benefit costs mainly resulted from annual merit pay increases, market adjustments, and higher health insurance accruals, as well as lower residential mortgage loan deferred salary costs. 

The decreased residential mortgage lender commissions and incentives primarily stemmed from reduced loan production. 

The increase in overhead costs during the third quarter of 2023 also resulted from higher levels of FDIC deposit insurance premiums, reflecting an increased industry-wide assessment rate, contributions to The Mercantile Bank Foundation, and interest rate swap collateral holding costs.

Noninterest expense during the first nine months of 2023 was $85.3 million, compared to $79.5 million during the first nine months of 2022. 

The increase in noninterest expense mainly resulted from larger salary and benefit costs, including salary increases and a higher bonus accrual, which outweighed reductions in residential mortgage lender commissions and incentives. 

The higher level of salary and benefit costs primarily stemmed from annual merit pay increases, market adjustments, and increased health insurance accruals, along with lower residential mortgage loan deferred salary costs. 

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

The increase in overhead costs also resulted from the recording of increased credit reserves for unfunded loan commitments and higher levels of FDIC deposit insurance premiums and interest rate swap collateral holding costs. 

Overhead costs during the first nine months of 2023 included a $0.4 million write-down of a former branch facility that was recorded in the first quarter of the year, while overhead costs during the first nine months of 2022 included a $0.4 million expense associated with the sale of a branch facility that occurred in the second quarter of the year. 

During the third quarter of 2023, we recorded income before federal income tax of $26.0 million and a federal income tax expense of $5.1 million. 

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

During the first nine months of 2023, we recorded income before federal income tax of $77.5 million and a federal income tax expense of $15.3 million. 

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

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 19.7% during the third quarter and first nine months of 2023 and the respective 2022 periods.

MERCANTILE BANK CORPORATION

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What changed 10-Q

Item 1. Financial Statements