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Item 1. Financial Statements

2024-05-03 compared with 2023-11-03 · 898 added, 2209 removed, 881 unchanged (78% of the section changed)

1 unchanged sentence

CONSOLIDATED BALANCE SHEETS

September 30,

(Dollars in thousands)

Cash and due from banks

$ 64,551,000  

$ 61,894,000  

$ 52,606 $ 70,408

Interest-earning deposits

201,436,000  

34,878,000  

184,625 60,125

Total cash and cash equivalents

265,987,000  

96,772,000  

237,231 130,533

Securities available for sale

592,305,000  

602,936,000  

609,153 617,092

Federal Home Loan Bank stock

21,513,000  

17,721,000  

21,513 21,513

Mortgage loans held for sale

10,171,000  

3,565,000  

4,104,376,000  

3,916,619,000  

14,393 18,607

4,322,006 4,303,758

Allowance for credit losses

( 48,008,000 )  

( 51,638 ) ( 49,914 )

4,056,368,000  

3,874,373,000  

4,270,368 4,253,844

Premises and equipment, net

52,231,000  

51,476,000  

50,835 50,928

Bank owned life insurance

81,907,000  

80,727,000  

49,473,000  

Core deposit intangible, net

212,000  

583,000  

120,845,000  

94,993,000  

$ 5,251,012,000  

$ 4,872,619,000  

85,528 85,668

49,473 49,473

127,459 125,566

$ 5,465,953 $ 5,353,224

LIABILITIES AND SHAREHOLDERS' EQUITY

Noninterest-bearing

$ 1,309,672,000  

$ 1,604,750,000  

$ 1,134,995 $ 1,247,640

Interest-bearing

2,591,063,000  

2,108,061,000  

2,872,815 2,653,278

Total deposits

3,900,735,000  

3,712,811,000  

4,007,810 3,900,918

Securities sold under agreements to repurchase

164,082,000  

194,340,000  

228,618 229,734

Federal Home Loan Bank advances

457,910,000  

308,263,000  

447,083 467,910

Subordinated debentures

49,473,000  

48,958,000  

49,815 49,644

Subordinated notes

88,885,000  

88,628,000  

89,057 88,971

Accrued interest and other liabilities

106,716,000  

78,211,000  

106,926 93,902

Total liabilities

4,767,801,000  

4,431,211,000  

4,929,309 4,831,079

Commitments and contingent liabilities (Note 8)

4 unchanged sentences

40,000,000 shares authorized;

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  

290,436,000  

16,122,503 shares issued and outstanding at March 31, 2024 and 16,125,662 shares issued and outstanding at December 31, 2023

296,065 295,106

Retained earnings

262,838,000  

216,313,000  

293,554 277,526

Accumulated other comprehensive gain (loss)

( 73,588,000 )  

( 52,975 ) ( 50,487 )

Total shareholders’

483,211,000  

441,408,000  

Total liabilities and shareholders’

$ 5,251,012,000  

$ 4,872,619,000  

Total shareholders’ equity

536,644 522,145

Total liabilities and shareholders’ equity

$ 5,465,953 $ 5,353,224

See accompanying notes to consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF INCOME

September 30, 2023

September 30, 2022

September 30, 2023

September 30, 2022

(Dollars in thousands except per share amounts)

March 31, 2024

March 31, 2023

Interest income

14 unchanged sentences

Service charges on deposit and sweep accounts

Credit and debit card income

Mortgage banking income

Credit and debit card income

Interest rate swap fees

1 unchanged sentence

Earnings on bank owned life insurance

Gain on sale of other real estate owned

Total noninterest income

3 unchanged sentences

Data processing costs

Charitable foundation contribution

Charitable foundation contributions

Other expense

9 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

September 30, 2023

September 30, 2022

September 30, 2023

September 30, 2022

(Dollars in thousands)

March 31, 2024

March 31, 2023

Other comprehensive income (loss):

6 unchanged sentences

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’

Comprehensive

Shareholders’

($ in thousands except per share amounts)

Income (Loss)

Balances, June 30, 2023

$ 292,906  

$ 247,313  

$ ( 61,517 )  

$ 478,702  

Employee stock purchase plan ( 345 shares)

Dividend reinvestment plan ( 6,746 shares)

Stock-based compensation expense

Cash dividends ($ 0.34 per common share)

( 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

( 12,071 )  

Balances, September 30, 2023

$ 293,961  

$ 262,838  

$ ( 73,588 )  

$ 483,211  

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’

EQUITY (Continued)

CHANGES IN SHAREHOLDERS’ EQUITY

Comprehensive

Shareholders’

($ in thousands except per share amounts)

Shareholders’

(Dollars in thousands except per share amounts)

Income (Loss)

Balances, January 1, 2024

$ 290,436  

$ 216,313  

$ ( 65,341 )  

$ 441,408  

$ 0 $ 295,106 $ 277,526 $ ( 50,487 ) $ 522,145

Employee stock purchase plan ( 290 shares)

3 unchanged sentences

Cash dividends ($ 0.35 per common share)

( 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

( 8,247 )  

Balances, September 30, 2023

$ 293,961  

$ 262,838  

$ ( 73,588 )  

$ 483,211  

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’

EQUITY (Continued)

Comprehensive

Shareholders’

($ in thousands except per share amounts)

Income (Loss)

Balances, June 30, 2022

$ 288,199  

$ 188,452  

$ ( 47,668 )  

$ 428,983  

Employee stock purchase plan ( 412 shares)

Dividend reinvestment plan ( 6,733 shares)

Stock-based compensation expense

Cash dividends ($ 0.32 per common share)

( 4,977 )  

Net income for the three months ended September 30, 2022

16,030  

( 5,534 ) ( 5,534 )

Net income for the three months ended March 31, 2024

21,562 21,562

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

( 24,795 )  

Balances, September 30, 2022

$ 289,219  

$ 199,505  

$ ( 72,463 )  

$ 416,261  

( 2,488 ) ( 2,488 )

Balances, March 31, 2024

$ 0 $ 296,065 $ 293,554 $ ( 52,975 ) $ 536,644

See accompanying notes to consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’

EQUITY (Continued)

CHANGES IN SHAREHOLDERS’ EQUITY (Continued)

Comprehensive

Shareholders’

($ in thousands except per share amounts)

Shareholders’

(Dollars in thousands except per share amounts)

Income (Loss)

Balances, January 1, 2023

$ 285,752  

$ 174,536  

$ ( 3,729 )  

$ 456,559  

Adoption of ASU 2016-13

$ 0 $ 290,436 $ 216,313 $ ( 65,341 ) $ 441,408

Employee stock purchase plan ( 412 shares)

Dividend reinvestment plan ( 6,733 shares)

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

Stock option exercises ( 1,355 shares)

Stock-based compensation expense

Cash dividends ($ 0.32 per common share)

( 14,607 )  

Net income for the nine months ended September 30, 2022

39,260  

( 5,164 ) ( 5,164 )

Net income for the three months ended March 31, 2023

20,974 20,974

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

( 68,734 )  

Balances, September 30, 2022

$ 289,219  

$ 199,505  

$ ( 72,463 )  

$ 416,261  

Balances, March 31, 2023

$ 0 $ 291,516 $ 232,123 $ ( 56,267 ) $ 467,372

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

September 30, 2023

September 30, 2022

(Dollars in thousands)

March 31, 2024

March 31, 2023

Cash flows from operating activities

6 unchanged sentences

Origination of mortgage loans held for sale

( 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 valuation write-downs of former bank premises

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

Net loss from sales and write-downs of fixed assets

Earnings on bank owned life insurance

Net gain on instruments designated at fair value and related derivatives

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

Net change in:

4 unchanged sentences

Loan originations and payments, net

( 188,007,000

( 426,842,000

Purchases of securities available for sale

1 unchanged sentence

Proceeds from sales of foreclosed assets

Proceeds from sales of former bank premises

Purchases of Federal Home Loan Bank stock

Proceeds from Federal Home Loan Bank stock redemption

Proceeds from bank owned life insurance death benefits claim

1 unchanged sentence

Net cash for investing activities

( 197,051,000

( 502,996,000

See accompanying notes to consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

September 30, 2023

September 30, 2022

(Dollars in thousands)

March 31, 2024

March 31, 2023

Cash flows from financing activities

Net (decrease) increase in time deposits

Net decrease in all other deposits

( 183,869,000

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

Maturities of Federal Home Loan Bank advances

Net increase in time deposits

Net increase (decrease) in all other deposits

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

Net increase in federal funds purchased

Proceeds from Federal Home Loan Bank advances

Net proceeds from subordinated notes issuance

Proceeds from stock option exercises, net of cashless exercises

Payoffs of and paydowns on Federal Home Loan Bank advances

Employee stock purchase plan

1 unchanged sentence

Payment of cash dividends to common shareholders

Net cash (for) from financing activities

( 270,943,000

Net cash from financing activities

Net change in cash and cash equivalents

( 691,146,000

Cash and cash equivalents at beginning of period

2 unchanged sentences

Cash paid during the period for:

Federal income tax

Noncash financing and investing activities:

Transfers from premises and equipment to other assets

Transfers from bank premises to other real estate owned

3 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation :

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.

and Mercantile Community Partners.

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

The unaudited financial statements for the three months ended March 31, 2024 include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries.

These subsidiaries include Mercantile Community Partners, LLC ("MCP") and Mercantile Bank (“our bank”) and its subsidiaries, including Mercantile Insurance Center, Inc.

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

The results for the period ended September 30, 2023 should not be considered as indicative of results for a full year.

The results for the period ended March 31, 2024 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, 2023 .

7 unchanged sentences

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

Approximately 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 .

Approximately 327,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three months ended March 31, 2024 .

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

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

4 unchanged sentences

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

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

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

2 unchanged sentences

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

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

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

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

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

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

At March 31, 2024 , and December 31, 2023 , there was no allowance related to the available for sale debt securities portfolio.

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

3 unchanged sentences

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

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

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

1 unchanged sentence

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

Net unamortized deferred loan fees/(costs) amounted to ($ 2.4 ) million and ($ 1.0 ) million at September 30, 2023 , and December 31, 2022 , respectively.

Net unamortized deferred loan costs amounted to $ 2.5 million and $ 2.4 million at March 31, 2024 , and December 31, 2023 , 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.

8 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

2 unchanged sentences

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

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.

As of March 31, 2024 and December 31, 2023 , we determined that the fair value of our mortgage loans held for sale totaled $ 14.6 million and $ 19.0 million, respectively.

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

3 unchanged sentences

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

Allowance for Credit Losses ( “

Allowance ”

On January 1, 2022, we adopted ASU No.

2016 - 13, Financial Instruments –

Credit Losses (Topic 32 ):

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

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

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

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

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

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

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

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

We recorded a provision expense of $ 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.

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

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

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

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

Commercial Loans

Commercial and Industrial :

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

Equipment and inventory obsolescence can also pose a risk.

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

Owner Occupied Commercial Real Estate :

Risks to this loan category include industry concentration and the inability to monitor the condition of the collateral.

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

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

Non-Owner Occupied Commercial Real Estate :

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

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

Multi-Family and Residential Rental :

Risks to this loan category include industry concentration and the inability to monitor the condition of the collateral.

Loans in this category are susceptible to weakening general economic conditions and increases in unemployment rates, as well as market demand and supply of similar property and the resulting impact on occupancy rates, market rents, cash flow, and income-based real estate values.

Also, the lack of a suitable alternative use for the properties is a risk for loans in this category.

Vacant Land, Land Development and Residential Construction :

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

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

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

1 - 4 Family Mortgages :

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

Other Consumer Loans :

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

The “remaining life methodology”

is utilized for substantially all loan pools.

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

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

Allowance for Credit Losses ( “a llowance ” ) :

The allowance is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.

The allowance is increased by a provision for credit losses and decreased by charge-offs, net of recoveries of amounts previously charged-off.

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

The allowance is measured on a collective pool basis when similar risk characteristics exist and on an individual basis when a loan exhibits unique risk characteristic which differentiate the loan from other loans within the loan segments.

Loan segments are further discussed in Note 3 - Loans and Allowance for Credit Losses.

The “remaining life methodology” is utilized for substantially all loan pools.

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

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

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

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

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

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

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

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

Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult or may not be possible in later periods.

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

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 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 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.

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

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

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

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

Traditional qualitative factors include:

Changes in lending policies and procedures

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

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

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

Changes in the quality of the loan review program

Changes in the value of underlying collateral dependent loans

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

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Our qualitative factors include:

o Changes in lending policies and procedures

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

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

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

o Changes in the quality of the loan review program

o Changes in the value of underlying collateral dependent loans

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

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

o Local or regional conditions that depart from the conditions and forecasts for the entire country

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

1 unchanged sentence

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

We recorded a provision for credit losses of $ 1.3 million during the first three months of 2024 .

The provision for credit losses recorded during the current-year first quarter primarily reflected an individual allocation for a nonperforming commercial loan relationship, allocations necessitated by net loan growth, and a change in the historical loss information qualitative factor for commercial loans, which more than offset the impacts of an improved economic forecast and changes to the loan portfolio composition.

Accrued interest receivable on loans totaling $ 17.4 million and $ 16.9 million as of March 31, 2024 and December 31, 2023 , respectively, is included in other assets on the Consolidated Balance Sheets.

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

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

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

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

In some cases, we may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within the loan segments.

In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation.

Specific reserve allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed and collateral deficiencies, among other things.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

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

For individually analyzed loans which are deemed to be collateral dependent loans, we adopted the practical expedient to measure the allowance based on the fair value of collateral.

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

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

Fair value estimates of collateral on individually analyzed loans, as well as on foreclosed and repossessed assets, are reviewed periodically.

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

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

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

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

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

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

Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheets and is increased or decreased via other noninterest expense on our Consolidated Statement of Income.

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

1 unchanged sentence

Mortgage Banking Activities :

Mortgage loans serviced for others totaled $ 1.39  billion and $ 1.38 billion as of September 30, 2023 and December 31, 2022 , respectively.

Mortgage loans serviced for others totaled $ 1.42 billion and $ 1.40 billion as of March 31, 2024 and December 31, 2023 , respectively.

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

5 unchanged sentences

Amortization of mortgage loan servicing rights is netted against mortgage loan servicing income and recorded in mortgage banking activities in the income statement.

Troubled Debt Restructurings :

A loan is accounted for as a troubled debt restructuring if we, for economic or legal reasons, grant a concession to a borrower considered to be experiencing financial difficulties that we would not otherwise consider.

A troubled debt restructuring may involve the receipt of assets from the debtor in partial or full satisfaction of the loan, or a modification of terms such as a reduction of the stated interest rate or balance of the loan, a reduction of accrued interest, an extension of the maturity date or renewal of the loan at a stated interest rate lower than the current market rate for a new loan with similar risk, or some combination of these concessions.

Troubled debt restructurings can be in either accrual or nonaccrual status.

Nonaccrual troubled debt restructurings are included in nonperforming loans.

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

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

Impairment for these loans is measured on a loan-by-loan basis.

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

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

The accounting guidance for troubled debt restructurings by creditors in Subtopic 310 - 40, Receivables –

Troubled Debt Restructurings by Creditors was eliminated upon our adoption of ASU No.

2022 - 02 Financial Instruments –

Credit Losses (Topic 326 ):

Troubled Debt Restructurings and Vintage Disclosures effective January 1, 2023.

Derivatives :

3 unchanged sentences

We do not use derivatives for trading purposes.

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

They are later reclassified into earnings in the same periods during which the hedged transaction affects earnings and are included in the line item in which the hedged cash flows are recorded.

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 September 30, 2023 , and December 31, 2022 .

Goodwill and Core Deposit Intangible :

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

We employ a variety of means in determination of the fair value, including the use of discounted cash flow analysis, market comparisons and projected future revenue streams.

For certain items we concluded to have the appropriate expertise to determine the fair value, we may choose to use our own calculation of fair value.

In other cases, where the fair value is not readily determined, consultation with outside parties is used to determine fair value.

Once valuations have been determined, the net difference between the price paid for the acquired company and the fair value of the balance sheet is recorded as goodwill.

Goodwill is assessed at least annually for impairment, with any such impairment recognized in the period identified.

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

We conducted an annual test during 2022 using step zero, with no impairment identified.

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

We had no derivative instruments designated as hedges as of March 31, 2024 , and December 31, 2023 .

The acquisition method of accounting requires that assets and liabilities acquired in a business combination are recorded at fair value as of the acquisition date.

The valuation of assets and liabilities often involves estimates based on third -party valuations or internal valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective.

This typically results in goodwill, the amount by which the cost of net assets acquired in a business combination exceeds their fair value, which is subject to impairment testing at least annually.

We review goodwill for impairment on an annual basis as of October 1 or more often if events or circumstances indicate that it is more-likely-than- not that the fair value of a reporting unit is below its carrying value.

Based on our annual impairment analysis of goodwill as of October 1, it was determined that the fair value was in excess of its respective carrying value as of October 1, 2023; therefore, goodwill is considered not impaired.

Revenue from Contracts with Customers :

We record revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers”

(“Topic 606”

We record revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606” ).

Under Topic 606, we must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) we satisfy a performance obligation.

2 unchanged sentences

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

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

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

September 30, 2023

September 30, 2022

September 30, 2023

September 30, 2022

(Dollars in thousands)

March 31, 2024 March 31, 2023

Service charges on deposit and sweep accounts

$ 1,370,000  

$ 1,579,000  

$ 3,411,000  

$ 4,489,000  

$ 1,531 $ 976

Credit and debit card fees

2,232,000  

2,086,000  

6,717,000  

6,101,000  

Payroll processing

591,000  

533,000  

1,908,000  

1,635,000  

Customer service fees

205,000  

210,000  

612,000  

654,000  

Service Charges on Deposit and Sweep Accounts:

17 unchanged sentences

Standards Recently Adopted :

2022 - 02 Financial Instruments –

Credit Losses (Topic 326 ):

2022 - 02, Troubled Debt Restructurings and Vintage Disclosures .

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

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

This ASU eliminated the accounting guidance for troubled debt restructurings (“TDRs”) by creditors in Subtopic 310 - 40, Receivables – Troubled Debt Restructurings by Creditors, while adding disclosures for certain loan restructurings by creditors when a borrower is experiencing financial difficulty.

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

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

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

The prospective adoption of this ASU did not have a material impact on our financial results.

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

We have adopted the standard and included the required disclosures in our financial statements.

2023 - 02, Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method .

This ASU permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization if certain conditions are met.

A reporting entity makes an accounting policy election to apply the proportional amortization method on a tax-credit-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments.

Mercantile adopted the standard using a modified retrospective transition approach to the amendments related to our low-income housing tax credit ("LIHTC") investments that are eligible to apply proportional amortization, which were previously accounted for under the equity method.

The cumulative effect to retained earnings as of January 1, 2023 was immaterial.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

September 30, 2023

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

(Dollars in thousands)

Cost Gains Losses Value

March 31, 2024

Government agency debt obligations

$ 452,330,000  

$ ( 68,251,000 )  

$ 384,079,000  

$ 438,662 $ 0 $ ( 52,953 ) $ 385,709

Mortgage-backed securities

35,699,000  

( 7,685,000 )  

28,016,000  

34,059 10 ( 6,287 ) 27,782

Municipal general obligation bonds

166,922,000  

33,000  

( 13,530,000 )  

153,425,000  

172,279 1,244 ( 6,891 ) 166,632

Municipal revenue bonds

30,004,000  

14,000  

( 3,733,000 )  

26,285,000  

30,708 151 ( 2,329 ) 28,530

Other investments

500,000  

$ 685,455,000  

$ 49,000  

$ ( 93,199,000 )  

$ 592,305,000  

$ 676,208 $ 1,405 $ ( 68,460 ) $ 609,153

December 31, 2023

Government agency debt obligations

$ 453,836,000  

$ ( 65,092,000 )  

$ 388,744,000  

$ 442,496 $ 0 $ ( 52,000 ) $ 390,496

Mortgage-backed securities

38,002,000  

19,000  

( 6,068,000 )  

31,953,000  

35,168 20 ( 5,715 ) 29,473

Municipal general obligation bonds

163,041,000  

450,000  

( 9,058,000 )  

154,433,000  

172,126 1,924 ( 6,190 ) 167,860

Municipal revenue bonds

30,267,000  

102,000  

( 3,063,000 )  

27,306,000  

30,708 262 ( 2,207 ) 28,763

Other investments

500,000  

$ 685,646,000  

$ 571,000  

$ ( 83,281,000 )  

$ 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:

$ 680,998 $ 2,206 $ ( 66,112 ) $ 617,092

Securities with unrealized losses at March 31, 2024 and December 31, 2023 , aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

Less than 12 Months

12 Months or More

September 30, 2023

(Dollars in thousands)

Value Loss Value Loss Value Loss

March 31, 2024

Government agency debt obligations

$ 2,679,000  

$ 1,124,000  

$ 381,400,000  

$ 67,127,000  

$ 384,079,000  

$ 68,251,000  

$ 0 $ 0 $ 385,709 $ 52,953 $ 385,709 $ 52,953

Mortgage-backed securities

26,231,000  

7,558,000  

1,604,000  

127,000  

27,835,000  

7,685,000  

201 3 27,089 6,284 27,290 6,287

Municipal general obligation bonds

33,136,000  

2,992,000  

115,872,000  

10,538,000  

149,008,000  

13,530,000  

20,393 189 100,489 6,702 120,882 6,891

Municipal revenue bonds

6,710,000  

1,043,000  

18,066,000  

2,690,000  

24,776,000  

3,733,000  

$ 68,756,000  

$ 12,717,000  

$ 516,942,000  

$ 80,482,000  

$ 585,698,000  

$ 93,199,000  

1,141 10 21,061 2,319 22,202 2,329

Other investments

$ 21,735 $ 202 $ 534,348 $ 68,258 $ 556,083 $ 68,460

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURITIES (Continued)

1 unchanged sentence

12 Months or More

(Dollars in thousands)

Value Loss Value Loss Value Loss

December 31, 2023

Government agency debt obligations

$ 53,019,000  

$ 5,713,000  

$ 335,725,000  

$ 59,379,000  

$ 388,744,000  

$ 65,092,000  

$ 0 $ 0 $ 390,496 $ 52,000 $ 390,496 $ 52,000

Mortgage-backed securities

31,127,000  

6,068,000  

12,000  

31,139,000  

6,068,000  

114 0 28,749 5,715 28,863 5,715

Municipal general obligation bonds

97,252,000  

4,516,000  

32,870,000  

4,542,000  

130,122,000  

9,058,000  

1,109 6 106,171 6,184 107,280 6,190

Municipal revenue bonds

12,532,000  

1,141,000  

10,609,000  

1,922,000  

23,141,000  

3,063,000  

$ 193,930,000  

$ 17,438,000  

$ 379,216,000  

$ 65,843,000  

$ 573,146,000  

$ 83,281,000  

1,506 8 20,602 2,199 22,108 2,207

Other investments

$ 2,729 $ 14 $ 546,018 $ 66,098 $ 548,747 $ 66,112

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

1 unchanged sentence

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

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

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

At March 31, 2024 , 679 debt securities with estimated fair values totaling $ 556 million had unrealized losses aggregating $ 68.5 million.

At December 31, 2023 , 641 debt securities with estimated fair values totaling $ 549 million had unrealized losses aggregating $ 66.1 million.

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.

At March 31, 2024 , unrealized losses aggregating $ 59.2 million were attributable to bonds issued or guaranteed by agencies of the U.S.

Federal Government, while unrealized losses totaling $ 9.2 million were associated with bonds issued by state-based municipalities.

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

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURITIES (Continued)

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

The amortized cost and fair value of debt securities at March 31, 2024 , by maturity, are shown in the following table.

The contractual maturity is utilized for U.S.

3 unchanged sentences

Weighted average yields are also reflected, with yields for municipal securities shown at their tax equivalent yield.

0.35 %  

$ 10,635,000  

$ 10,560,000  

(Dollars in thousands)

$ 53,520 $ 52,568

Due in 2025 through 2029

319,456,000  

289,600,000  

329,740 301,553

Due in 2030 through 2034

278,377,000  

227,860,000  

227,431 196,189

Due in 2035 and beyond

40,788,000  

35,769,000  

30,958 30,561

Mortgage-backed securities

35,699,000  

28,016,000  

34,059 27,782

Other investments

500,000  

Total available for sale securities

1.78 %  

$ 685,455,000  

$ 592,305,000  

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 .

$ 676,208 $ 609,153

No securities were sold during the first three months of 2024 or the full-year 2023 .

Securities issued by the State of Michigan and all its political subdivisions had a combined amortized cost of $ 203 million as of both March 31, 2024 and December 31, 2023 , with estimated market values of $ 195 million and $ 197 million at the respective dates.

We had no securities issued by all other states and their political subdivisions as of March 31, 2024 , and December 31, 2023 .

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

Government and its agencies and the State of Michigan and all its political subdivisions, did not exceed 10% of shareholders’

The carrying value of U.S.

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.

Government and its agencies and the State of Michigan and all its political subdivisions, did not exceed 10% of shareholders’ equity.

The carrying value of U.S.

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 .

Government agency debt obligation securities that are pledged to secure repurchase agreements was $ 229 million and $ 230 million at March 31, 2024 , and December 31, 2023 , respectively.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES

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

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

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

Retail loans are divided into one of two groups based on risk characteristics and source of repayment.

Our allowance for credit loss pools are consistent with those used for loan note disclosure purposes.

Our loan portfolio segments as of March 31, 2024 were as follows:

Commercial Loans

Commercial and Industrial :

$ 1,166,187,000  

28.4 %  

$ 1,185,083,000  

30.3 %  

Vacant land, land development, and residential construction

72,921,000  

61,873,000  

Real estate –

owner occupied

671,083,000  

639,192,000  

Real estate –

non-owner occupied *

1,000,411,000  

979,214,000  

Real estate –

Equipment and inventory obsolescence can also pose a risk.

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

Owner Occupied Commercial Real Estate :

Risks to this loan category include industry concentration and the inability to monitor the condition of the collateral.

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

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

Non-Owner Occupied Commercial Real Estate :

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

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

Multi-Family and Residential Rental :

308,229,000  

266,468,000  

Total commercial

3,218,831,000  

3,131,830,000  

Risks to this loan category include industry concentration and the inability to monitor the condition of the collateral.

Also, the lack of a suitable alternative use for the properties is a risk for loans in this category.

Vacant Land, Land Development and Residential Construction :

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

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

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

1 - 4 Family Mortgages :

854,175,000  

755,036,000  

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

Other Consumer Loans :

31,370,000  

29,753,000  

885,545,000  

784,789,000  

$ 4,104,376,000  

100.0 %  

$ 3,916,619,000  

100.0 %  

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

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

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

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

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

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

September 30,

Loans past due 90 days or more still accruing interest

Nonaccrual loans

5,889,000  

7,728,000  

Total nonperforming loans

$ 5,889,000  

$ 7,728,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

The recorded principal balance of nonperforming loans was as follows:

September 30,

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

During the year ended December 31, 2023, we changed the segmentation of credit cards to business customers from other consumer loans to commercial and industrial loans.

This division of the credit card balances was done to better align the risk characteristics of the portfolio, which include the customer type and source of repayment.

Credit cards to business customers totaled $ 17.8 million as of December 31, 2023.

We also changed the segmentation of home equity lines of credit from 1 - 4 family mortgage loans to other consumer loans during the year ended December 31, 2023.

Home equity lines of credit share many of the same risk characteristics of both segments, however, losses are primarily driven by a lack of underlying collateral value during distressed situations as many of the loans are in a second lien position, and thus, best segmented within the other consumer portfolio.

Home equity lines of credit totaled $ 38.1 million as of December 31, 2023.

Our total loans at March 31, 2024 were $ 4.32 billion compared to $ 4.30 billion at December 31, 2023 , an increase of $ 18.2 million, or 0.4 %.

The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at March 31, 2024 and December 31, 2023 , and the percentage change in loans from the end of 2023 to the end of the first quarter of 2024 , are as follows:

March 31, 2024

December 31, 2023

(Dollars in thousands)

Balance % Balance % (Decrease)

Commercial and industrial

$ 3,288,000  

$ 6,024,000  

$ 1,222,637 28.3 % $ 1,254,586 29.2 % ( 2.5 )%

Vacant land, land development, and residential construction

Real estate –

owner occupied

738,000  

248,000  

Real estate –

non-owner occupied

Real estate –

multi-family and residential rental

75,091 1.7 74,753 1.7 0.5

Real estate – owner occupied

719,338 16.6 717,667 16.7 0.2

Real estate – non-owner occupied

1,045,615 24.2 1,035,684 24.1 1.0

Real estate – multi-family and residential rental

366,961 8.5 332,609 7.7 10.3

Total commercial

4,026,000  

6,272,000  

3,429,642 79.3 3,415,299 79.4 0.4

1-4 family mortgages

1,863,000  

1,456,000  

840,653 19.5 837,406 19.5 0.4

Other consumer loans

1,863,000  

1,456,000  

Total nonperforming loans

$ 5,889,000  

$ 7,728,000  

51,711 1.2 51,053 1.1 1.3

892,364 20.7 888,459 20.6 0.4

$ 4,322,006 100.0 % $ 4,303,758 100.0 % 0.4 %

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

An age analysis of past due loans is as follows as of March 31, 2024 :

30 – 59 60 – 89 Than 89

(Dollars in thousands)

Past Due Past Due Past Due Past Due Current Loans Accruing

Commercial and industrial

$ 4,000  

$ 249,000  

$ 253,000  

$ 1,165,934,000  

$ 1,166,187,000  

$ 16 $ 0 $ 249 $ 265 $ 1,222,372 $ 1,222,637 $ 0

Vacant land, land development, and residential construction

72,921,000  

Real estate –

owner occupied

70,000  

671,013,000  

671,083,000  

Real estate –

non- owner occupied

1,000,411,000  

Real estate –

multi-family and residential rental

308,229,000  

0 0 0 0 75,091 75,091 0

Real estate – owner occupied

0 0 0 0 719,338 719,338 0

Real estate – non- owner occupied

0 0 0 0 1,045,615 1,045,615 0

Real estate – multi-family and residential rental

0 0 0 0 366,961 366,961 0

Total commercial

319,000  

323,000  

3,218,508,000  

3,218,831,000  

16 0 249 265 3,429,377 3,429,642 0

1-4 family mortgages

680,000  

499,000  

132,000  

1,311,000  

852,864,000  

854,175,000  

508 71 165 744 839,909 840,653 0

Other consumer loans

31,369,000  

31,370,000  

681,000  

499,000  

132,000  

1,312,000  

884,233,000  

885,545,000  

37 0 27 64 51,647 51,711 0

545 71 192 808 891,556 892,364 0

Total past due loans

$ 685,000  

$ 499,000  

$ 451,000  

$ 1,635,000  

$ 4,102,741,000  

$ 4,104,376,000  

$ 561 $ 71 $ 441 $ 1,073 $ 4,320,933 $ 4,322,006 $ 0

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

30 –59  

60 –89  

30 – 59 60 – 89 Than 89

(Dollars in thousands)

Past Due Past Due Past Due Past Due Current Loans Accruing

Commercial and industrial

$ 5,705,000  

$ 249,000  

$ 5,954,000  

$ 1,179,129,000  

$ 1,185,083,000  

$ 4 $ 0 $ 249 $ 253 $ 1,254,333 $ 1,254,586 $ 0

Vacant land, land development, and residential construction

61,873,000  

Real estate –

owner occupied

248,000  

638,944,000  

639,192,000  

Real estate –

non-owner occupied

979,214,000  

Real estate –

multi-family and residential rental

266,468,000  

0 0 0 0 74,753 74,753 0

Real estate – owner occupied

0 0 70 70 717,597 717,667 0

Real estate – non-owner occupied

0 0 0 0 1,035,684 1,035,684 0

Real estate – multi-family and residential rental

0 0 0 0 332,609 332,609 0

Total commercial

5,953,000  

249,000  

6,202,000  

3,125,628,000  

3,131,830,000  

4 0 319 323 3,414,976 3,415,299 0

1-4 family mortgages

1,334,000  

88,000  

116,000  

1,538,000  

753,498,000  

755,036,000  

934 145 38 1,117 836,289 837,406 0

Other consumer loans

15,000  

16,000  

29,737,000  

29,753,000  

1,349,000  

89,000  

116,000  

1,554,000  

783,235,000  

784,789,000  

97 0 0 97 50,956 51,053 0

1,031 145 38 1,214 887,245 888,459 0

Total past due loans

$ 1,349,000  

$ 6,042,000  

$ 365,000  

$ 7,756,000  

$ 3,908,863,000  

$ 3,916,619,000  

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

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

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

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

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

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

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

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

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

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

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.

$ 1,035 $ 145 $ 357 $ 1,537 $ 4,302,221 $ 4,303,758 $ 0

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

Nonaccrual loans as of March 31, 2024 were as follows:

(Dollars in thousands)

Balance Allowance

With no allowance recorded:

Commercial and industrial

$ 249,000  

Vacant land, land development and residential construction

Real estate –

owner occupied

738,000  

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

987,000  

1-4 family mortgages

1,366,000  

Other consumer loans

1,366,000  

Total with no allowance recorded

$ 2,353,000  

With an allowance recorded:

Commercial and industrial

$ 3,039,000  

$ 1,233,000  

$ 2,652 $ 2,050

Vacant land, land development and residential construction

Real estate –

owner occupied

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

3,039,000  

1,233,000  

1-4 family mortgages

497,000  

192,000  

Other consumer loans

497,000  

192,000  

Total with an allowance recorded

$ 3,536,000  

$ 1,425,000  

$ 3,565 $ 2,379

Total nonaccrual loans:

$ 4,026,000  

$ 1,233,000  

1,863,000  

192,000  

$ 2,668 $ 2,050

Total nonaccrual loans

$ 5,889,000  

$ 1,425,000  

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

$ 6,039 $ 2,379

Nonaccrual loans represent the entire balance of collateral dependent loans.

As of March 31, 2024 and December 31, 2023 , all collateral dependent loans were secured by real estate, with the exception of those classified as commercial and industrial, which were secured by accounts receivable, inventory, and equipment.

Interest income recognized on nonaccrual loans totaled $ 0.2 million and less than $ 0.1 million during the three months ended March 31, 2024 and 2023 , respectively, reflecting the collection of interest at the time of principal pay-off.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

(Dollars in thousands)

Balance Allowance

With no allowance recorded:

Commercial and industrial

$ 249,000  

Vacant land, land development and residential construction

Real estate –

owner occupied

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

249,000  

1-4 family mortgages

1,064,000  

Other consumer loans

1,064,000  

Total with no allowance recorded

$ 1,313,000  

With an allowance recorded:

Commercial and industrial

$ 5,775,000  

$ 2,051,000  

Vacant land, land development and residential construction

Real estate –

owner occupied

248,000  

32,000  

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

6,023,000  

2,083,000  

1-4 family mortgages

392,000  

200,000  

Other consumer loans

392,000  

200,000  

Total with an allowance recorded

$ 6,415,000  

$ 2,283,000  

$ 1,073 $ 241

Total nonaccrual loans:

$ 6,272,000  

$ 2,083,000  

1,456,000  

200,000  

Total nonaccrual loans

$ 7,728,000  

$ 2,283,000  

No interest income was recognized on nonaccrual loans during 2022 .

$ 3,415 $ 241

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

7 unchanged sentences

All commercial loans are graded using the following criteria:

“Exceptional”  Loans with this rating contain very little, if any, risk.

“Outstanding”  Loans with this rating have excellent and stable sources of repayment and conform to bank policy and regulatory requirements.

“Very Good”  Loans with this rating have strong sources of repayment and conform to bank policy and regulatory requirements.

“Exceptional” Loans with this rating contain very little, if any, risk.

“Outstanding” Loans with this rating have excellent and stable sources of repayment and conform to bank policy and regulatory requirements.

“Very Good” Loans with this rating have strong sources of repayment and conform to bank policy and regulatory requirements.

These are loans for which repayment risks are acceptable.

“Good”  Loans with this rating have solid sources of repayment and conform to bank policy and regulatory requirements.

“Good” Loans with this rating have solid sources of repayment and conform to bank policy and regulatory requirements.

These are loans for which repayment risks are modest.

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

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

These are for loans for which repayment risks are satisfactory.

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

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

Generally, if further deterioration is observed, these credits will be downgraded to the criticized asset report.

“Special Mention”  Loans with this rating have potential weaknesses that deserve management’s close attention.

“Special Mention” Loans with this rating have potential weaknesses that deserve management’s close attention.

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

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

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

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

They are characterized by the distinct possibility of loss if the deficiencies are not corrected.

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

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

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

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

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

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

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

Retail loans that reach 90 days or more past due are generally placed into nonaccrual status and are categorized as nonperforming.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

The following table reflects amortized cost basis of loans and year-to-date loan charge-offs as of 

September 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 March 31, 2024 based on year of origination:

(Dollars in thousands)

2024 2023 2022 2021 2020 Prior Term Total Loans Total

Commercial and Industrial:

Grades 1 –

$ 94,356  

$ 94,042  

$ 100,652  

$ 25,063  

$ 7,012  

$ 9,411  

$ 330,536  

$ 384,697  

$ 715,233  

Grades 5 –

112,012  

67,379  

32,543  

19,118  

238,835  

180,387  

419,222  

Grades 8 –

25,323  

31,732  

$ 210,042  

$ 163,860  

$ 133,491  

$ 44,181  

$ 14,641  

$ 9,565  

$ 575,780  

$ 590,407  

$ 1,166,187  

Current year-to-date gross write offs

$ 27,101 $ 96,301 $ 69,429 $ 82,590 $ 18,922 $ 12,501 $ 306,844 $ 392,847 $ 699,691

22,011 152,270 50,958 15,246 16,947 8,116 265,548 233,465 499,013

3,608 314 1,968 290 0 0 6,180 17,753 23,933

$ 52,720 $ 248,885 $ 122,355 $ 98,126 $ 35,869 $ 20,617 $ 578,572 $ 644,065 $ 1,222,637

Year-to-date gross write offs

$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 6 $ 6

Vacant Land, Land Development and Residential Construction:

Grades 1 –

$ 17,966  

$ 15,813  

$ 1,751  

$ 2,832  

$ 38,649  

Grades 5 –

13,749  

17,194  

34,178  

Grades 8 –

$ 31,725  

$ 33,007  

$ 4,110  

$ 3,151  

$ 72,921  

Current year-to-date gross write offs

Real Estate –

Owner Occupied:

Grades 1 –

$ 165,698  

$ 117,923  

$ 82,222  

$ 49,528  

$ 17,511  

$ 16,968  

$ 449,850  

$ 450,306  

Grades 5 –

62,259  

62,487  

36,949  

29,235  

10,064  

210,608  

216,940  

Grades 8 –

$ 227,957  

$ 184,137  

$ 119,171  

$ 78,803  

$ 27,125  

$ 27,102  

$ 664,295  

$ 6,788  

$ 671,083  

Current year-to-date gross write offs

Real Estate –

Non-Owner Occupied:

Grades 1 –

$ 92,790  

$ 88,742  

$ 113,072  

$ 101,821  

$ 28,307  

$ 17,189  

$ 441,921  

Grades 5 –

162,540  

126,362  

128,389  

96,612  

26,013  

546,469  

Grades 8 –

12,021  

$ 255,330  

$ 221,611  

$ 246,975  

$ 198,433  

$ 34,860  

$ 43,202  

$ 1,000,411  

Current year-to-date gross write offs

Real Estate –

Multi-Family and Residential Rental:

Grades 1 –

$ 20,509  

$ 42,674  

$ 61,279  

$ 35,615  

$ 4,974  

$ 5,780  

$ 170,831  

Grades 5 –

52,733  

53,171  

125,134  

Grades 8 –

11,250  

12,264  

$ 84,492  

$ 95,845  

$ 66,264  

$ 46,356  

$ 7,757  

$ 7,515  

$ 308,229  

Current year-to-date gross write offs

$ 6,294 $ 19,799 $ 3,727 $ 604 $ 189 $ 270 $ 30,883 $ 0 $ 30,883

7,269 16,830 19,371 134 2 594 44,200 0 44,200

0 8 0 0 0 0 8 0 8

$ 13,563 $ 36,637 $ 23,098 $ 738 $ 191 $ 864 $ 75,091 $ 0 $ 75,091

Year-to-date gross write offs

$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

Real Estate – Owner Occupied:

$ 25,025 $ 198,247 $ 108,314 $ 82,699 $ 45,264 $ 14,792 $ 474,341 $ 0 $ 474,341

18,703 96,197 60,108 26,866 22,119 8,604 232,597 11,972 244,569

0 0 391 0 37 0 428 0 428

$ 43,728 $ 294,444 $ 168,813 $ 109,565 $ 67,420 $ 23,396 $ 707,366 $ 11,972 $ 719,338

Year-to-date gross write offs

$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

Real Estate – Non-Owner Occupied:

$ 22,924 $ 104,075 $ 84,362 $ 112,211 $ 100,079 $ 30,405 $ 454,056 $ 0 $ 454,056

83,233 220,686 89,221 79,662 87,033 20,946 580,781 0 580,781

0 10,778 0 0 0 0 10,778 0 10,778

$ 106,157 $ 335,539 $ 173,583 $ 191,873 $ 187,112 $ 51,351 $ 1,045,615 $ 0 $ 1,045,615

Year-to-date gross write offs

$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

Real Estate – Multi-Family and Residential Rental:

$ 454 $ 41,659 $ 10,860 $ 65,700 $ 34,642 $ 8,054 $ 161,369 $ 0 $ 161,369

3,309 96,528 75,412 4,556 8,854 4,672 193,331 49 193,380

0 11,225 0 0 987 0 12,212 0 12,212

$ 3,763 $ 149,412 $ 86,272 $ 70,256 $ 44,483 $ 12,726 $ 366,912 $ 49 $ 366,961

Year-to-date gross write offs

$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

Total Commercial

$ 809,546  

$ 698,460  

$ 570,011  

$ 370,924  

$ 84,426  

$ 88,269  

$ 2,621,636  

$ 597,195  

$ 3,218,831  

Total Commercial current YTD gross write offs

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

$ 219,931 $ 1,064,917 $ 574,121 $ 470,558 $ 335,075 $ 108,954 $ 2,773,556 $ 656,086 $ 3,429,642

Total Commercial year-to-date gross write offs

$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 6 $ 6

1-4 Family Mortgages:

$ 104,955  

$ 334,373  

$ 235,394  

$ 83,701  

$ 10,833  

$ 46,666  

$ 815,922  

$ 36,390  

$ 852,312  

$ 11,675 $ 138,657 $ 326,965 $ 225,658 $ 78,013 $ 56,449 $ 837,417 $ 0 $ 837,417

Nonperforming

$ 105,097  

$ 334,686  

$ 235,727  

$ 83,701  

$ 10,844  

$ 47,730  

$ 817,785  

$ 36,390  

$ 854,175  

Current year-to-date gross write offs

0 101 1,660 268 0 1,207 3,236 0 3,236

$ 11,675 $ 138,758 $ 328,625 $ 225,926 $ 78,013 $ 57,656 $ 840,653 $ 0 $ 840,653

Year-to-date gross write offs

$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

Other Consumer Loans:

$ 4,449  

$ 2,954  

$ 1,667  

$ 10,606  

$ 20,764  

$ 31,370  

$ 1,653 $ 4,553 $ 2,237 $ 1,311 $ 522 $ 1,179 $ 11,455 $ 40,121 $ 51,576

Nonperforming

$ 4,449  

$ 2,954  

$ 1,667  

$ 10,606  

$ 20,764  

$ 31,370  

Current year-to-date gross write offs

$ 109,546  

$ 337,640  

$ 237,394  

$ 84,243  

$ 11,502  

$ 48,066  

$ 828,391  

$ 57,154  

$ 885,545  

Total Retail Current YTD gross write offs

$ 919,092  

$ 1,036,100  

$ 807,405  

$ 455,167  

$ 95,928  

$ 136,335  

$ 3,450,027  

$ 654,349  

$ 4,104,376  

Grand Total Current YTD gross write offs

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

108 0 0 0 0 0 108 27 135

$ 1,761 $ 4,553 $ 2,237 $ 1,311 $ 522 $ 1,179 $ 11,563 $ 40,148 $ 51,711

Year-to-date gross write offs

$ 0 $ 1 $ 0 $ 8 $ 0 $ 0 $ 9 $ 0 $ 9

$ 13,436 $ 143,311 $ 330,862 $ 227,237 $ 78,535 $ 58,835 $ 852,216 $ 40,148 $ 892,364

Total Retail year-to-date gross write offs

$ 0 $ 1 $ 0 $ 8 $ 0 $ 0 $ 9 $ 0 $ 9

$ 233,367 $ 1,208,228 $ 904,983 $ 697,795 $ 413,610 $ 167,789 $ 3,625,772 $ 696,234 $ 4,322,006

Total year-to-date gross write offs

$ 0 $ 1 $ 0 $ 8 $ 0 $ 0 $ 9 $ 6 $ 15

There were lines of credit with principal balances of $ 2.8 million that were converted to term loans during the first three months of 2024 .

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

The following table reflects amortized cost 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, 2023 and loan charge-offs during three months ended March 31, 2023 based on year of origination:

(Dollars in thousands)

2023 2022 2021 2020 2019 Prior Term Total Loans Total

Commercial and Industrial:

Grades 1 –

$ 115,494  

$ 141,481  

$ 43,961  

$ 9,194  

$ 3,230  

$ 9,851  

$ 323,211  

$ 396,372  

$ 719,583  

Grades 5 –

151,783  

47,030  

31,697  

240,042  

210,363  

450,405  

Grades 8 –

10,985  

15,095  

$ 271,061  

$ 188,760  

$ 75,658  

$ 18,064  

$ 3,847  

$ 9,973  

$ 567,363  

$ 617,720  

$ 1,185,083  

$ 103,531 $ 79,883 $ 90,107 $ 20,577 $ 5,978 $ 9,160 $ 309,236 $ 414,920 $ 724,156

174,668 57,979 20,075 18,361 7,450 119 278,652 227,155 505,807

3,671 2,122 277 0 0 0 6,070 18,553 24,623

$ 281,870 $ 139,984 $ 110,459 $ 38,938 $ 13,428 $ 9,279 $ 593,958 $ 660,628 $ 1,254,586

Year-to-date gross write offs

$ 0 $ 36 $ 0 $ 0 $ 0 $ 0 $ 36 $ 0 $ 36

Vacant Land, Land Development and Residential Construction:

Grades 1 –

$ 31,756  

$ 6,196  

$ 3,428  

$ 41,711  

Grades 5 –

10,270  

20,057  

Grades 8 –

$ 42,026  

$ 14,956  

$ 3,779  

$ 1,048  

$ 61,873  

Real Estate –

Owner Occupied:

Grades 1 –

$ 194,072  

$ 113,528  

$ 53,630  

$ 19,670  

$ 19,279  

$ 6,162  

$ 406,341  

Grades 5 –

115,720  

56,173  

33,913  

10,245  

12,550  

229,766  

Grades 8 –

$ 312,711  

$ 169,701  

$ 87,587  

$ 29,915  

$ 31,951  

$ 7,327  

$ 639,192  

Real Estate –

Non-Owner Occupied:

Grades 1 –

$ 121,281  

$ 152,035  

$ 89,125  

$ 44,196  

$ 10,079  

$ 12,018  

$ 428,734  

Grades 5 –

176,217  

142,645  

133,163  

35,200  

13,456  

37,399  

538,080  

Grades 8 –

12,400  

$ 304,210  

$ 300,368  

$ 222,288  

$ 79,396  

$ 23,535  

$ 49,417  

$ 979,214  

Real Estate –

Multi-Family and Residential Rental:

Grades 1 –

$ 39,342  

$ 49,178  

$ 36,348  

$ 5,306  

$ 3,082  

$ 4,003  

$ 137,259  

Grades 5 –

56,018  

47,474  

19,666  

129,160  

Grades 8 –

$ 95,360  

$ 96,652  

$ 56,014  

$ 8,468  

$ 5,639  

$ 4,335  

$ 266,468  

$ 24,875 $ 6,570 $ 1,108 $ 2,110 $ 0 $ 281 $ 34,944 $ 0 $ 34,944

17,799 21,244 138 2 40 496 39,719 0 39,719

9 0 0 0 0 81 90 0 90

$ 42,683 $ 27,814 $ 1,246 $ 2,112 $ 40 $ 858 $ 74,753 $ 0 $ 74,753

Year-to-date gross write offs

$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

Real Estate – Owner Occupied:

$ 205,379 $ 110,130 $ 85,982 $ 47,630 $ 14,362 $ 2,908 $ 466,391 $ 1,948 $ 468,339

111,197 63,271 27,729 27,029 9,419 439 239,084 9,718 248,802

0 417 0 38 0 71 526 0 526

$ 316,576 $ 173,818 $ 113,711 $ 74,697 $ 23,781 $ 3,418 $ 706,001 $ 11,666 $ 717,667

Year-to-date gross write offs

$ 0 $ 14 $ 0 $ 0 $ 0 $ 0 $ 14 $ 0 $ 14

Real Estate – Non-Owner Occupied:

$ 109,125 $ 84,912 $ 113,846 $ 102,279 $ 27,664 $ 13,193 $ 451,019 $ 0 $ 451,019

233,471 118,464 109,238 88,315 6,148 18,135 573,771 0 573,771

10,894 0 0 0 0 0 10,894 0 10,894

$ 353,490 $ 203,376 $ 223,084 $ 190,594 $ 33,812 $ 31,328 $ 1,035,684 $ 0 $ 1,035,684

Year-to-date gross write offs

$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

Real Estate – Multi-Family and Residential Rental:

$ 36,038 $ 28,512 $ 64,244 $ 35,129 $ 4,883 $ 3,649 $ 172,455 $ 0 $ 172,455

72,916 55,964 4,816 9,372 2,699 2,136 147,903 0 147,903

11,250 0 0 1,001 0 0 12,251 0 12,251

$ 120,204 $ 84,476 $ 69,060 $ 45,502 $ 7,582 $ 5,785 $ 332,609 $ 0 $ 332,609

Year-to-date gross write offs

$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

Total Commercial

$ 1,025,368  

$ 770,437  

$ 445,326  

$ 135,893  

$ 64,986  

$ 72,100  

$ 2,514,110  

$ 617,720  

$ 3,131,830  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

$ 1,114,823 $ 629,468 $ 517,560 $ 351,843 $ 78,643 $ 50,668 $ 2,743,005 $ 672,294 $ 3,415,299

Total Commercial year-to-date gross write offs

$ 0 $ 50 $ 0 $ 0 $ 0 $ 0 $ 50 $ 0 $ 50

1-4 Family Mortgages:

$ 313,611  

$ 242,950  

$ 91,936  

$ 12,094  

$ 14,297  

$ 41,622  

$ 716,510  

$ 37,070  

$ 753,580  

$ 133,823 $ 332,098 $ 231,842 $ 82,002 $ 10,515 $ 44,003 $ 834,283 $ 27 $ 834,310

Nonperforming

$ 313,753  

$ 243,032  

$ 91,936  

$ 12,094  

$ 14,500  

$ 42,651  

$ 717,966  

$ 37,070  

$ 755,036  

108 1,728 305 0 10 945 3,096 0 3,096

$ 133,931 $ 333,826 $ 232,147 $ 82,002 $ 10,525 $ 44,948 $ 837,379 $ 27 $ 837,406

Year-to-date gross write offs

$ 0 $ 0 $ 0 $ 0 $ 0 $ 42 $ 42 $ 0 $ 42

Other Consumer Loans:

$ 4,349  

$ 2,870  

$ 1,040  

$ 1,074  

$ 10,158  

$ 19,595  

$ 29,753  

$ 5,138 $ 2,569 $ 1,664 $ 608 $ 651 $ 716 $ 11,346 $ 39,707 $ 51,053

Nonperforming

$ 4,349  

$ 2,870  

$ 1,040  

$ 1,074  

$ 10,158  

$ 19,595  

$ 29,753  

$ 318,102  

$ 245,902  

$ 92,976  

$ 13,168  

$ 14,895  

$ 43,081  

$ 728,124  

$ 56,665  

$ 784,789  

$ 1,343,470  

$ 1,016,339  

$ 538,302  

$ 149,061  

$ 79,881  

$ 115,181  

$ 3,242,234  

$ 674,385  

$ 3,916,619  

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

0 0 0 0 0 0 0 0 0

$ 5,138 $ 2,569 $ 1,664 $ 608 $ 651 $ 716 $ 11,346 $ 39,707 $ 51,053

Year-to-date gross write offs

$ 0 $ 3 $ 0 $ 0 $ 0 $ 1 $ 4 $ 10 $ 14

$ 139,069 $ 336,395 $ 233,811 $ 82,610 $ 11,176 $ 45,664 $ 848,725 $ 39,734 $ 888,459

Total Retail year-to-date gross write offs

$ 0 $ 3 $ 0 $ 0 $ 0 $ 43 $ 46 $ 10 $ 56

$ 1,253,892 $ 965,863 $ 751,371 $ 434,453 $ 89,819 $ 96,332 $ 3,591,730 $ 712,028 $ 4,303,758

Total year-to-date gross write offs

$ 0 $ 53 $ 0 $ 0 $ 0 $ 43 $ 96 $ 10 $ 106

There were lines of credit with principal balances of $ 6.4 million as of December 31, 2022 that were converted to term loans during 2023.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

non-owner occupied

residential rental

Allowance for credit losses:

Balance at 6-30-23

$ 6,472  

$ 5,838  

$ 8,689  

$ 3,700  

$ 19,498  

$ 44,721  

Provision for credit losses

( 1,071 )  

( 56 )  

( 21 )  

( 40 )  

( 201 )  

Ending balance

$ 8,998  

$ 6,434  

$ 9,253  

$ 2,635  

$ 20,184  

$ 48,008  

Balance at 12-31-22

$ 10,203  

$ 5,914  

$ 9,242  

$ 2,191  

$ 14,027  

$ 42,246  

Provision for credit losses

( 1,123 )  

( 167 )  

( 40 )  

( 19 )  

( 218 )  

( 54 )  

( 513 )  

( 25 )  

Ending balance

$ 8,998  

$ 6,434  

$ 9,253  

$ 2,635  

$ 20,184  

$ 48,008  

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

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

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

We determined that the look-back period commencing on January 1, 2011 through the current reporting date was reasonable and appropriate, which was used in the calculation of both the March 31, 2024 and December 31, 2023 allowance for credit losses.

Our prepayment speed assumptions are developed at the loan segment level based upon the consideration of all relevant data which we believe could impact anticipated customer behavior, including changes in interest rates, economic conditions, and underlying property valuations.

For the commercial portfolio segments, we assumed a 2.0 % prepayment speed as of both March 31, 2024 and December 31, 2023 as we deemed there to be no considerable changes from historical experience.

For the retail 1 - 4 family mortgage and retail other consumer portfolios, we used a prepayment speed of 9.0 % as of March 31, 2024 and December 31, 2023 .

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

As of March 31, 2024 and December 31, 2023 , we used a one -year reasonable and supportable economic forecast period, with a six -month straight-line reversion period for all loan segments.

The economic forecasts used for our March 31, 2024 allowance calculation reflected a $ 2.3 million allowance balance reduction.

The forecasts used for our December 31, 2023 allowance calculation reflected a $ 2.0 million allowance balance reduction.

Individual loans exhibiting unique risk characteristics which differentiated the loans from other loans within the loan segments and were evaluated for expected credit losses on an individual basis totaled $ 7.9 million and $ 5.4 million as of March 31, 2024 and December 31, 2023 , respectively.

Individual allowance allocations totaled $ 2.5 million and $ 0.4 million as of March 31, 2024 and December 31, 2023 , respectively.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

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

non-owner occupied

residential rental

Allowance for credit losses:

Activity in the allowance for credit losses during the three months ended March 31, 2024 is as follows:

land development Commercial Commercial real estate –

Commercial and real estate – real estate – multi-family Other

and residential owner non-owner and 1-4 family consumer

industrial construction occupied occupied residential rental mortgages loans Unallocated Total

Balance at 12-31-23

$ 8,608  

$ 5,578  

$ 9,249  

$ 1,639  

$ 10,267  

$ 35,974  

$ 7,441 $ 384 $ 7,186 $ 9,852 $ 3,184 $ 18,986 $ 2,881 $ 0 $ 49,914

Provision for credit losses

( 206 )  

( 13 )  

1,466 2 ( 151 ) 289 232 ( 476 ) ( 77 ) 15 1,300

( 6 ) 0 0 0 0 0 ( 9 ) 0 ( 15 )

277 1 57 0 4 70 30 0 439

Ending balance

$ 9,740  

$ 5,972  

$ 9,043  

$ 1,739  

$ 11,951  

$ 39,120  

$ 9,178 $ 387 $ 7,092 $ 10,141 $ 3,420 $ 18,580 $ 2,825 $ 15 $ 51,638

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

land development Commercial Commercial real estate –

Commercial and real estate – real estate – multi-family Other

and residential owner non-owner and 1-4 family consumer

industrial construction occupied occupied residential rental mortgages loans Unallocated Total

Balance at 12-31-22

$ 10,782  

$ 6,045  

$ 12,990  

$ 2,006  

$ 2,449  

$ 35,363  

Adoption of ASU 2016-13

( 1,571 )  

( 43 )  

( 560 )  

( 2,534 )  

( 621 )  

( 411 )  

( 55 )  

$ 10,203 $ 490 $ 5,914 $ 9,242 $ 2,191 $ 14,027 $ 160 $ 19 $ 42,246

Credit risk reclassifications

90 0 0 0 0 ( 697 ) 607 0 0

Balance after reclassifications

10,293 490 5,914 9,242 2,191 13,330 767 19 42,246

Provision for credit losses

( 1,413 )  

( 74 )  

( 170 )  

( 29 )  

( 18 )  

( 757 ) ( 41 ) ( 28 ) ( 115 ) 313 1,168 3 57 600

( 36 ) 0 ( 14 ) 0 0 ( 42 ) ( 14 ) 0 ( 106 )

21 1 48 0 7 41 19 0 137

Ending balance

$ 9,740  

$ 5,972  

$ 9,043  

$ 1,739  

$ 11,951  

$ 39,120  

$ 9,521 $ 450 $ 5,920 $ 9,127 $ 2,511 $ 14,497 $ 775 $ 76 $ 42,877

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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:

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 March 31, 2024 :

Interest Rate

Term Extension

(Dollars in thousands)

Reduction Term Extension Forgiveness

Commercial and industrial

$ 0 $ 500 $ 0

Vacant land, land development and residential construction

Real estate – owner occupied

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

$ 0 $ 500 $ 0

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.

$ 0 $ 500 $ 0

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

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

Commercial and industrial

$ 8,184,000  

Vacant land, land development and residential construction

Real estate –

owner occupied

Real estate –

non-owner occupied

Real estate –

multi-family and residential rental

Total commercial

$ 8,184,000  

1-4 family mortgages

Other consumer loans

$ 8,184,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Loans modified as troubled debt restructurings during the three months ended 

September 30, 2022 were as follows:

Commercial and industrial

$ 19,000  

Vacant land, land development and residential construction

Real estate –

owner occupied

Real estate –

non-owner occupied

Real estate –

multi-family and residential rental

Total commercial

19,000  

1-4 family mortgages

289,000  

Other consumer loans

289,000  

$ 308,000  

Loans modified as troubled debt restructurings during the 

nine months ended September 30, 2022 were as follows:

(Dollars in thousands)

Commercial and industrial

$ 6,593,000  

$ 18,506 $ 0 $ 0 $ 18,506

Vacant land, land development and residential construction

Real estate –

owner occupied

Real estate –

non-owner occupied

Real estate –

multi-family and residential rental

Real estate – owner occupied

Real estate – non-owner occupied

10,778 0 0 10,778

Real estate – multi-family and residential rental

Total commercial

6,593,000  

$ 29,284 $ 0 $ 0 $ 29,284

1-4 family mortgages

501,000  

500,000  

Other consumer loans

501,000  

500,000  

$ 7,094,000  

$ 7,093,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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 -

Commercial Loan Portfolio:

Beginning Balance

$ 9,938,000  

$ 87,000  

$ 139,000  

$ 88,000  

Payments (net)

( 891,000 )  

( 3,000 )  

( 4,000 )  

Transfers to ORE

Net Additions/Deletions

19,000  

Ending Balance

$ 9,066,000  

$ 84,000  

$ 135,000  

Other Consumer

Retail Loan Portfolio:

Beginning Balance

$ 2,339,000  

$ 3,000  

Payments (net)

( 84,000 )  

Transfers to ORE

Net Additions/Deletions

289,000  

Ending Balance

$ 2,544,000  

$ 2,000  

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Activity for loans categorized as troubled debt restructurings during the 

nine months ended September 30, 2022 is as follows:

Real Estate -

Commercial Loan Portfolio:

Beginning Balance

$ 4,973,000  

$ 10,435,000  

$ 146,000  

$ 91,000  

( 95,000 )  

Payments (net)

( 378,000 )  

( 9,682,000 )  

( 11,000 )  

Transfers to ORE

Net Additions/Deletions

4,566,000  

( 669,000 )  

Ending Balance

$ 9,066,000  

$ 84,000  

$ 135,000  

Other Consumer

Retail Loan Portfolio:

Beginning Balance

$ 627,000  

$ 1,202,000  

Payments (net)

( 253,000 )  

Transfers to ORE

Net Additions/Deletions (1)

2,170,000  

$ 0 $ 0 $ 0 $ 0

Ending Balance

$ 2,544,000  

$ 2,000  

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

$ 29,284 $ 0 $ 0 $ 29,284

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PREMISES AND EQUIPMENT, NET

Premises and equipment are comprised of the following:

September 30,

(Dollars in thousands)

Land and improvements

$ 13,072,000  

$ 13,532,000  

57,076,000  

53,865,000  

$ 12,782 $ 12,782

57,881 56,778

Furniture and equipment

24,658,000  

22,941,000  

94,806,000  

90,338,000  

25,428 25,157

96,091 94,717

accumulated depreciation

42,575,000  

38,862,000  

45,256 43,789

Premises and equipment, net

$ 52,231,000  

$ 51,476,000  

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 .

$ 50,835 $ 50,928

Depreciation expense totaled $ 1.6 million and $ 1.5 million during the first quarters of 2024 and 2023 , respectively.

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

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 .

As of March 31, 2024 , we were under lease contracts for ten of our banking facilities.

The leases have maturity dates ranging from April, 2024 through May, 2048, with a weighted average life of 9.6 years as of March 31, 2024 .

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 5.9 % 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 $ 0.4  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.

The weighted average discount rate for leases was 6.5 % as of March 31, 2024 .

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 $ 4.7 million and $ 3.7 million as of March 31, 2024 , and December 31, 2023 , 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 Sheets.

Total operating lease expense associated with the leases aggregated $ 0.4 million during the first three months of 2024 and $ 0.3 million during the first three months of 2023.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PREMISES AND EQUIPMENT, NET (Continued)

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

$ 354,000  

1,210,000  

721,000  

612,000  

553,000  

1,696,000  

Future lease payments were as follows as of March 31, 2024 :

(Dollars in thousands)

Total undiscounted lease payments

5,146,000  

Less effect of discounting

( 1,147,000 )

Present value of future lease payments (lease liability)

$ 3,999,000  

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

Our total deposits at March 31, 2024 totaled $ 4.01 billion, an increase of $ 107 million, or 2.7 %, from December 31, 2023.

The components of our outstanding balances at March 31, 2024 and December 31, 2023 , and percentage change in deposits from the end of 2023 to the end of the first quarter of 2024, are as follows:

March 31, 2024

December 31, 2023

(Dollars in thousands)

Balance % Balance % (Decrease)

Noninterest-bearing checking

$ 1,309,672,000  

33.6 %  

$ 1,604,750,000  

43.2 %  

$ 1,134,995 28.3 % $ 1,247,640 32.1 % ( 9.0 )%

Interest-bearing checking

670,843,000  

575,028,000  

976,348,000  

776,723,000  

286,868,000  

381,602,000  

622,287 15.5 635,790 16.3 ( 2.1 )

1,137,877 28.4 957,434 24.5 18.8

259,556 6.5 262,566 6.7 ( 1.1 )

Time, under $100,000

155,511,000  

113,099,000  

187,249 4.7 175,741 4.5 6.5

Time, $100,000 and over

390,213,000  

261,609,000  

492,734 12.3 453,366 11.6 8.7

Total local deposits

3,789,455,000  

3,712,811,000  

3,834,698 95.7 3,732,537 95.7 2.7

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

111,280,000  

173,112 4.3 168,381 4.3 2.8

Total deposits

$ 3,900,735,000  

100.0 %  

$ 3,712,811,000  

100.0 %  

$ 4,007,810 100.0 % $ 3,900,918 100.0 % 2.7 %

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase (“repurchase agreements”) are offered principally to certain large deposit customers.

Information relating to our repurchase agreements follows:

Nine Months Ended

Securities sold under agreements to repurchase (“repurchase agreements”) are offered principally to certain large deposit customers.

Information relating to our repurchase agreements is as follows:

Three Months Ended

Twelve Months Ended

September 30, 2023

December 31, 2022

(Dollars in thousands)

March 31, 2024 December 31, 2023

Outstanding balance at end of period

$ 164,082,000  

$ 194,340,000  

$ 228,618 $ 229,734

Average interest rate at end of period

0.74 %  

3.30 % 3.17 %

Average daily balance during the period

$ 211,680,000  

$ 200,499,000  

$ 216,674 $ 204,334

Average interest rate during the period

1.22 %  

3.06 % 1.33 %

Maximum daily balance during the period

$ 269,324,000  

$ 235,577,000  

$ 247,056 $ 269,324

Repurchase agreements have maturities of one business day.

3 unchanged sentences

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

FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES

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  

90,000,000  

80,000,000  

90,000,000  

60,000,000  

FHLBI bullet advances totaled $ 420 million at March 31, 2024 , and were scheduled to mature at varying dates from April 2024 through January 2029 , with fixed rates of interest from 0.55 % to 4.54 % and averaging 2.96 %.

FHLBI bullet advances totaled $ 440 million at December 31, 2023 , and were scheduled to mature at varying dates from January 2024 through December 2028 , with fixed rates of interest from 0.55 % to 5.05 % and averaging 2.93 %.

Maturities of FHLBI bullet advances as of March 31, 2024 were as follows:

(Dollars in thousands)

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES (Continued)

FHLBI amortizing advances totaled $ 27.9  million as of 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 totaled $ 27.1 million as of March 31, 2024 , with an average rate of 2.52 % and with final maturities in 2042 .

FHLBI amortizing advances totaled $ 27.9 million as of December 31, 2023 , 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 

September 30, 2023 were as follows:

826,000  

862,000  

899,000  

938,000  

24,385,000  

Scheduled principal payments on FHLBI amortizing advances as of March 31, 2024 were as follows:

(Dollars in thousands)

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

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

Our borrowing line of credit as of 

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

Our borrowing line of credit as of March 31, 2024 totaled $ 908 million, with remaining availability based on collateral of $ 464 million.

COMMITMENTS AND OFF-BALANCE SHEET RISK

8 unchanged sentences

We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

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

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

4 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMITMENTS AND OFF-BALANCE SHEET RISK (Continued)

For commercial lines of credit, retail lines of credit and credit card average outstanding balances, we determined allowance requirements by calculating the difference between the average percent outstanding of the funded commitments over the past several years to actual percent outstanding at the end of the period and applying the respective expected loss allocation factors to the difference as this difference represents the average of unfunded commitments we expect to eventually be drawn upon.

The calculated allowance aggregated $ 0.7  million and $ 0.1  million as of September 30, 2023 and December 31, 2022 , respectively.

For commitments to make loans, we determine an allowance by applying the expected loss allocation factor to the amount expected to fund.

The calculated allowance aggregated $ 0.8 million and $ 1.3 million as of March 31, 2024 and December 31, 2023 , 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 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,

At March 31, 2024 , and December 31, 2023 , the rates on existing off-balance sheet instruments were substantially equivalent to current market rates, considering the underlying credit standing of the counterparties.

A summary of the contractual amounts of our financial instruments with off-balance sheet risk at March 31, 2024 and December 31, 2023 is as follows:

(Dollars in thousands)

Commercial unused lines of credit

$ 1,603,414,000  

$ 1,283,703,000  

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

74,130,000  

71,972,000  

$ 1,562,294 $ 1,557,429

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

74,824 74,120

Credit card unused lines of credit

135,886,000  

123,687,000  

150,098 142,096

Other consumer unused lines of credit

58,486,000  

75,747,000  

40,140 50,063

Commitments to make loans

287,510,000  

329,646,000  

234,946 270,403

Standby letters of credit

19,367,000  

23,539,000  

$ 2,178,793,000  

$ 1,908,294,000  

19,540 19,393

$ 2,081,842 $ 2,113,504

DERIVATIVES AND HEDGING ACTIVITIES

11 unchanged sentences

DERIVATIVES AND HEDGING ACTIVITIES (Continued)

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

The fair values of derivative instruments as of March 31, 2024 , are reflected in the following table.

Balance Sheet

Notional Amount

(Dollars in thousands)

Notional Amount Location

Derivative Assets

Interest rate swaps

$ 591,790,000  

$ 35,060,000  

$ 766,564 Other Assets

Derivative Liabilities

Interest rate swaps

591,790,000  

764,537 Other Liabilities

35,242,000  

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 .

The effect of interest rate swaps that are not designated as hedging instruments resulted in income of $ 0.1 million during the first three months of 2024 that was recorded in other noninterest expense on our Consolidated Statements of Income.

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

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

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 $ 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 netting of derivative instruments as of March 31, 2024 is presented in the following table.

Gross Amounts Not Offset on the Consolidated Balance Sheet

(Dollars in thousands)

Net Amounts Recognized

Financial Instruments

Cash Collateral Received or Posted

Derivative Assets

Interest rate swaps

$ 29,661 $ 2,303 $ 22,770 $ 4,588

Derivative Liabilities

Interest rate swaps

30,036 2,303 2,250 25,483

The fair values of derivative instruments as of December 31, 2023 , are reflected in the following table.

Balance Sheet

Notional Amount

(Dollars in thousands)

Notional Amount Location

Derivative Assets

Interest rate swaps

$ 401,572,000  

$ 25,697,000  

$ 676,526 Other Assets

Derivative Liabilities

Interest rate swaps

401,572,000  

674,499 Other Liabilities

25,900,000  

MERCANTILE BANK CORPORATION

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DERIVATIVES AND HEDGING ACTIVITIES (Continued)

The effect of interest rate swaps that are not designated as hedging instruments resulted in income of less than $ 0.1 million during the year-ended December 31, 2022 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 $ 25.9 million as of December 31, 2022 .

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

The netting agreement also allows us to net related cash collateral received and transferred up to the fair value exposure amount.

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

As of December 31, 2022 , the gross amount of derivative assets subject to master netting agreements presented on the Consolidated Balance Sheets was $ 25.3 million, while cash collateral reflecting cash requirements from our counterparties to us totaled $ 25.2 million, and the net amount of derivative assets not offset in the Consolidated Balance Sheets was $ 0.1 million.

As of December 31, 2022 , the gross amount of derivative liabilities subject to master netting agreements presented on the Consolidated Balance Sheets was $ 0.4 million, while cash collateral reflecting cash requirements from us to our counterparties totaled $ 0.4 million, and the net amount of derivative liabilities not offset on the Consolidated Balance Sheets was $ 0 .

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 $ 402 million as of December 31, 2022 .

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

The effect of interest rate swaps that are not designated as hedging instruments resulted in expense of $ 0.3 million during the year ended December 31, 2023 that was recorded in other noninterest expense on our Consolidated Statements of Income.

The netting of derivative instruments as of December 31, 2023 is presented in the following table.

Gross Amounts Not Offset on the Consolidated Balance Sheet

(Dollars in thousands)

Net Amounts Recognized

Financial Instruments

Cash Collateral Received or Posted

Derivative Assets

Interest rate swaps

$ 27,505 $ 5,175 $ 14,010 $ 8,320

Derivative Liabilities

Interest rate swaps

27,964 5,175 3,120 19,669

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUES OF FINANCIAL INSTRUMENTS

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

September 30, 2023

The carrying amounts, estimated fair values and level within the fair value hierarchy of financial instruments were as follows as of March 31, 2024 and December 31, 2023 :

March 31, 2024

December 31, 2023

(Dollars in thousands)

Hierarchy Values Values Values Values

Financial assets:

Cash and cash equivalents

$ 265,987  

$ 96,772  

$ 237,231 $ 237,231 $ 130,533 $ 130,533

Securities available for sale

592,305  

602,936  

21,513  

17,721  

4,056,368  

3,953,468  

3,874,373  

3,800,042  

(1) 609,153 609,153 617,092 617,092

(2) 21,513 21,513 21,513 21,513

4,270,368 4,243,647 4,253,844 4,191,644

Mortgage loans held for sale

10,171  

10,246  

Mortgage servicing rights

11,391  

19,451  

11,837  

17,727  

14,393 14,603 18,607 19,027

Accrued interest receivable

19,607  

15,476  

21,681 21,681 19,806 19,806

Interest rate swaps

35,060  

25,697  

29,661 29,661 27,505 27,505

Financial liabilities:

Level 2  

3,900,735  

3,558,860  

3,712,811  

3,379,403  

Repurchase agreements

164,082  

194,340  

Level 2 4,007,810 3,900,366 3,900,918 3,814,778

Securities sold under agreements to repurchase

228,618 228,618 229,734 229,734

FHLBI advances

Level 2  

457,910  

434,992  

308,263  

292,044  

Level 2 447,083 430,397 467,910 454,857

Subordinated debentures

Level 2  

49,473  

56,009  

48,958  

49,531  

Level 2 49,815 49,824 49,644 49,653

Subordinated notes

Level 2  

88,885  

77,528  

88,628  

75,024  

Level 2 89,057 78,131 88,971 77,218

Accrued interest payable

10,107 10,107 9,012 9,012

Interest rate swaps

35,242  

25,900  

30,036 30,036 27,964 27,964

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

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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 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 for deposit accounts other than noninterest-bearing checking accounts 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.

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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.

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

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

There was no such impairment as of March 31, 2024 , or December 31, 2023 .

We have no Level 1 securities available for sale.

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

As of September 30, 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.

As of March 31, 2024 and December 31, 2023 , we determined the fair value of our mortgage loans held for sale to be $ 14.6 million and $ 19.0 million, respectively.

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

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

September 30, 2023 are as follows:

The balances of assets and liabilities measured at fair value on a recurring basis as of March 31, 2024 are as follows:

(Dollars in thousands)

Total (Level 1) (Level 2) (Level 3)

Available for sale securities

Government agency debt obligations

$ 384,079,000  

$ 385,709 $ 0 $ 385,709 $ 0

Mortgage-backed securities

28,016,000  

27,782 0 27,782 0

Municipal general obligation bonds

153,425,000  

152,885,000  

540,000  

166,632 0 166,126 506

Municipal revenue bonds

26,285,000  

28,530 0 28,530 0

Other investments

500,000  

Interest rate swaps

35,060,000  

$ 627,365,000  

$ 626,825,000  

$ 540,000  

29,661 0 29,661 0

$ 638,814 $ 0 $ 638,308 $ 506

Interest rate swaps

35,242,000  

30,036 0 30,036 0

Total liabilities

$ 35,242,000  

$ 30,036 $ 0 $ 30,036 $ 0

MERCANTILE BANK CORPORATION

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FAIR VALUES (Continued)

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.

There were no sales, purchases or transfers in or out of Level 3 during the first three months of 2024 .

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

(Dollars in thousands)

Total (Level 1) (Level 2) (Level 3)

Available for sale securities

Government agency debt obligations

$ 388,744,000  

$ 390,496 $ 0 $ 390,496 $ 0

Mortgage-backed securities

31,953,000  

29,473 0 29,473 0

Municipal general obligation bonds

154,433,000  

153,855,000  

578,000  

167,860 0 167,347 513

Municipal revenue bonds

27,306,000  

28,763 0 28,763 0

Other investments

500,000  

Interest rate swaps

25,697,000  

$ 628,633,000  

$ 628,055,000  

$ 578,000  

27,505 0 27,505 0

$ 644,597 $ 0 $ 644,084 $ 513

Interest rate swaps

25,900,000  

27,964 0 27,964 0

Total liabilities

$ 25,900,000  

$ 27,964 $ 0 $ 27,964 $ 0

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

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 2023 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 September 30, 2023 are as follows:

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2024 are as follows:

(Dollars in thousands)

Total (Level 1) (Level 2) (Level 3)

Collateral dependent loans

$ 3,346,000  

$ 1,573 $ 0 $ 0 $ 1,573

Foreclosed assets

51,000  

$ 3,397,000  

$ 1,773 $ 0 $ 0 $ 1,773

MERCANTILE BANK CORPORATION

2 unchanged sentences

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

(Dollars in thousands)

Total (Level 1) (Level 2) (Level 3)

Collateral dependent loans

$ 5,290,000  

$ 1,434 $ 0 $ 0 $ 1,434

Foreclosed assets

$ 5,290,000  

$ 1,634 $ 0 $ 0 $ 1,634

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

15 unchanged sentences

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

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.

As of March 31, 2024 and December 31, 2023 , our bank was in the well capitalized category under the regulatory framework for prompt corrective action.

There are no conditions or events since March 31, 2024 , that we believe have changed our bank’s categorization.

MERCANTILE BANK CORPORATION

1 unchanged sentence

REGULATORY MATTERS (Continued)

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

Our actual capital levels and the minimum levels required to be categorized as adequately and well capitalized were:

Minimum Required

4 unchanged sentences

Action Regulations

September 30, 2023

(Dollars in thousands)

March 31, 2024

Total capital (to risk weighted assets)

$ 692,252  

14.1 %  

$ 392,930  

675,953  

392,745  

490,931  

$ 729,410 14.1 % $ 415,299 8.0 % $ NA

712,688 13.8 413,264 8.0 516,580 10.0 %

Tier 1 capital (to risk weighted assets)

554,634  

294,697  

627,220  

294,559  

392,745  

587,888 11.3 311,474 6.0 NA

660,223 12.8 309,948 6.0 413,264 8.0

Common equity tier 1 (to risk weighted assets)

507,235  

221,023  

627,220  

220,919  

319,105  

540,147 10.4 233,606 4.5 NA

660,223 12.8 232,461 4.5 335,777 6.5

Tier 1 capital (to average assets)

554,634  

208,523  

627,220  

208,432  

260,540  

587,888 10.9 216,108 4.0 NA

660,223 12.3 215,092 4.0 268,865 5.0

December 31, 2023

Total capital (to risk weighted assets)

$ 634,729  

14.0 %  

$ 362,675  

618,709  

362,490  

453,112  

$ 710,905 13.7 % $ 415,841 8.0 % $ NA

694,431 13.4 414,019 8.0 517,524 10.0

Tier 1 capital (to risk weighted assets)

503,855  

272,007  

576,463  

271,868  

362,490  

570,730 11.0 311,881 6.0 NA

643,227 12.4 310,514 6.0 414,019 8.0

Common equity tier 1 (to risk weighted assets)

456,970  

204,005  

576,463  

203,901  

294,523  

523,160 10.1 233,911 4.5 NA

643,227 12.4 232,886 4.5 336,391 6.5

Tier 1 capital (to average assets)

503,855  

199,647  

576,463  

199,563  

249,453  

570,730 10.8 210,527 4.0 NA

643,227 12.2 210,427 4.0 263,034 5.0

MERCANTILE BANK CORPORATION

1 unchanged sentence

REGULATORY MATTERS (Continued)

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.

Our consolidated capital levels as of March 31, 2024 and December 31, 2023 include $ 47.7 million and $ 47.6 million, respectively, of trust preferred securities.

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

1 unchanged sentence

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

As of September 30, 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.

As of March 31, 2024 and December 31, 2023 , all $ 47.7 million and $ 47.6 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 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.

We believe that, as of March 31, 2024 , our bank meets all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

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

On January 11, 2024, our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.35 per share that was paid on March 13, 2024 to shareholders of record as of March 1, 2024.

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.

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 

As of March 31, 2024 , we had the ability to repurchase up to $ 6.8 million in common stock shares from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations as part of a $ 20.0 million common stock repurchase program announced in May 2021.

No shares were repurchased during the first three months of 2024 .

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

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SUBSEQUENT EVENTS

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 .

On April 11, 2024 , our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.35 per share that will be paid on June 19, 2024 , to shareholders of record as of June 7, 2024 .

MERCANTILE BANK CORPORATION

Management ’

s Discussion and Analysis of Financial Condition and Results of Operations

Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This report contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and our company.

Words such as “anticipates,”

“believes,”

“estimates,”

“expects,”

“intends,”

“is likely,”

“plans,”

“projects,”

“indicates,”

“strategy,”

“future,”

“likely,”

“may,”

“should,”

“will,”

and variations of such words and similar expressions are intended to identify such forward-looking statements.

These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence.

Words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects,” “indicates,” “strategy,” “future,” “likely,” “may,” “should,” “will,” and variations of such words and similar expressions are intended to identify such forward-looking statements.

Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements.

25 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 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.

The following discussion compares the financial condition of Mercantile Bank Corporation and its consolidated subsidiaries, including Mercantile Community Partners, LLC ("MCP") and Mercantile Bank (“our bank”) and its subsidiaries, including Mercantile Insurance Center, Inc.

at March 31, 2024 and December 31, 2023 and the results of operations for the three months ended March 31, 2024 and March 31, 2023.

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

Unless the text clearly suggests otherwise, references in this report to “us,”

“we,”

“our”

or “the company”

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

Critical Accounting Policies  

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

Unless the text clearly suggests otherwise, references in this report to “us,” “we,” “our” or “the company” include Mercantile Bank Corporation and its consolidated subsidiaries referred to above.

Critical Accounting Policies

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

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited financial statements included in this report.

For a discussion of our significant accounting estimates, see Note 1 of the Notes to our Consolidated Financial Statements included in our Form 10-K for the fiscal year ended December 31, 2023 (Commission file number 000-26719).

3 unchanged sentences

MERCANTILE BANK CORPORATION

Allowance for Credit Losses ( “

Allowance ”

On January 1, 2022, we adopted ASU No.

2016-13, Financial Instruments –

Credit Losses (Topic 32):

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

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

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

Allowance for Credit Losses ( “a llowance ” ) :

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

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

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

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

See also Note 3 –

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

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

MERCANTILE BANK CORPORATION

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.

The allowance equaled $51.6 million, or 1.19% of total loans, and 855% of nonperforming loans, as of March 31, 2024.

As of March 31, 2024, the allowance was comprised of $49.1 million in general reserves relating to performing loans and $2.5 million in specific reserves on other loans, primarily nonperforming loans.

Loans with an aggregate carrying value of $0.4 million as of March 31, 2024 had been subject to previous partial charge-offs aggregating $0.4 million over the past several years.

As of March 31, 2024, 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 decreased $10.6 million during the first nine months of 2023, totaling $592 million as of September 30, 2023.

The following table reflects the composition of our allowance for credit losses, nonaccrual loans, and net charge-offs as of and for the period ended March 31, 2024.

(Dollars in thousands)

Allowance for Credit Losses

Allowance for Credit Losses to Total Loans

Nonaccrual Loans

Nonaccrual Loans to Total Loans

Allowance for Credit Losses to Nonaccrual Loans

Net Charge-Offs

Annualized Net Charge-Offs to Average Loans

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

MERCANTILE BANK CORPORATION

Securities available for sale decreased $7.9 million during the first quarter of 2024, totaling $609 million as of March 31, 2024.

There were no purchases of U.S.

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. 

Government agency bonds during the first quarter of 2024, while proceeds from maturities aggregated $4.0 million.

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

Government agency guaranteed mortgage-backed securities during the first quarter of 2024, while proceeds from principal paydowns on U.S.

Government agency guaranteed mortgage-backed securities aggregated $1.1 million.

Purchases of municipal bonds totaled $0.6 million during the first quarter of 2024, while proceeds from matured municipal bonds totaled $0.2 million.

At March 31, 2024, the portfolio was primarily comprised of U.S.

Government agency bonds (63%), municipal bonds (32%) and U.S.

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

Government agency guaranteed mortgage-backed securities (5.0%).

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

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

The fair value of securities designated as available for sale at March 31, 2024 totaled $609 million, including a net unrealized loss of $67.1 million.

The net unrealized loss equaled $63.9 million as of December 31, 2023.

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

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

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

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

We expect any upcoming purchases to generally consist of U.S.

Government agency bonds and municipal bonds, with the securities portfolio maintained at about 12% to 15% of total assets.

Market values on our U.S.

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

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.

FHLBI stock totaled $21.5 million as of March 31, 2024, unchanged from December 31, 2023.

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

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

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

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.

The higher average balance primarily reflects an increase in deposits and our desire to maintain higher levels of on balance sheet liquidity.

Historically, we have maintained interest-earning deposits at approximately $75 million.

Net premises and equipment equaled $50.8 million at March 31, 2024, compared to $50.9 million as of December 31, 2023.

Depreciation expense totaled $1.6 million during the first quarter of 2024, while investments associated with renovations of existing facilities totaled $1.5 million.

MERCANTILE BANK CORPORATION

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

Total deposits increased $107 million during the first quarter of 2024, providing for an annualized growth rate of about 11%.

Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $620 million, or about 13% of total funds, as of March 31, 2024, compared to $636 million, or about 14% of total funds, as of December 31, 2023.

Noninterest-bearing deposits decreased $113 million during the first quarter of 2024, in large part reflecting the aforementioned customary level of customers’ tax and bonus payments and partnership distributions.

Interest-bearing checking accounts declined $13.5 million, and savings deposits were down $3.0 million.

Money market deposit accounts increased $180 million and local time deposits were up $50.9 million, primarily reflecting growth in deposits from existing customers and initial deposits from new customers.

Uninsured deposits totaled approximately $1.9 billion, or 47% of total deposits, as of March 31, 2024, compared to approximately $1.9 billion, or 48% of total deposits, as of December 31, 2023.

The uninsured amounts are estimates based on the methodologies and assumptions we use for regulatory reporting requirements.

Securities sold under agreements to repurchase (“sweep accounts”) decreased $1.1 million during the first quarter of 2024, totaling $229 million as of March 31, 2024.

The aggregate balance of sweep accounts is subject to relatively large daily fluctuations given the nature of the customers utilizing this product and the sizable balances that many of the customers maintain.

The average balance of sweep accounts equaled $217 million during the first quarter of 2024, with a high balance of $247 million and a low balance of $166 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 $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.

FHLBI advances decreased $20.8 million during the first quarter of 2024, totaling $447 million as of March 31, 2024.

Bullet advances aggregating $10.0 million were obtained during the first quarter of 2024, while bullet advance maturities aggregated $30.0 million.

Payments on amortizing FHLBI advances totaled $0.8 million.

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

Shareholders’

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.

Our borrowing line of credit as of March 31, 2024 totaled $908 million, with remaining availability based on collateral equaling $464 million.

Shareholders’ equity increased $14.5 million during the first quarter of 2024, equaling $537 million at March 31, 2024.

Positively impacting shareholders’ equity during the first quarter was net income of $21.6 million, which was partially offset by the payment of a cash dividend totaling $5.5 million.

Activity relating to the issuance and sale of common stock through various stock-based compensation programs and our dividend reinvestment plan positively impacted shareholders’ equity by $1.0 million.

A $2.5 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 quarter of 2024.

MERCANTILE BANK CORPORATION

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

Sweep accounts decreased $1.1 million during the first quarter of 2024, totaling $229 million as of March 31, 2024.

The average balance of sweep accounts equaled $217 million during the first quarter of 2024, with a high balance of $247 million and a low balance of $166 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 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.

Information regarding our repurchase agreements as of March 31, 2024 and during the first three months of 2024 is as follows:

(Dollars in thousands)

Outstanding balance at March 31, 2024

Weighted average interest rate at March 31, 2024

Maximum daily balance three months ended March 31, 2024

Average daily balance for three months ended March 31, 2024

Weighted average interest rate for three months ended March 31, 2024

FHLBI advances decreased $20.8 million during the first quarter of 2024, totaling $447 million as of March 31, 2024.

Bullet advances aggregating $10.0 million were obtained during the first quarter of 2024, while bullet advance maturities aggregated $30.0 million.

Payments on amortizing FHLBI advances totaled $0.8 million.

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

Our borrowing line of credit as of March 31, 2024 totaled $908 million, with remaining availability based on collateral equaling $464 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 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 did not access these lines of credit during the first quarter of 2024.

In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged $140 million during the first quarter of 2024.

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 $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.

Using certain municipal bonds as collateral, we could have borrowed up to $26.6 million as of March 31, 2024.

We did not utilize this line of credit during the first quarter of 2024 or at any time during the previous 15 fiscal years, and do not plan to access this line of credit in future periods.

MERCANTILE BANK CORPORATION

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

The following table reflects, as of March 31, 2024, significant fixed and determinable contractual obligations to third parties by payment date, excluding accrued interest:

(Dollars in thousands)

Deposits without a stated maturity

3,243,731,000

Time deposits

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Other borrowed money

Property leases

Premises and equipment leases

The balance of certificates of deposit exceeding the FDIC insured limit and their maturity profile as of March 31, 2024 and December 31, 2023 were as follows:

(Dollars in thousands)

March 31, 2024

December 31, 2023

Up to three months

Three months to six months

Six months to twelve months

Over twelve months

Total certificates of deposit

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

As of September 30, 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.

As of March 31, 2024, we had a total of $2.06 billion in unfunded loan commitments and $19.5 million in unfunded standby letters of credit.

Of the total unfunded loan commitments, $1.83 billion were commitments available as lines of credit to be drawn at any time as customers’ cash needs vary, and $235 million were for loan commitments generally expected to close 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 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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Capital Resources

Shareholders’

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

Positively 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.

Shareholders’ equity increased $14.5 million during the first quarter of 2024, equaling $537 million at March 31, 2024.

Positively impacting shareholders’ equity during the first quarter was net income of $21.6 million, which was partially offset by the payment of a cash dividend totaling $5.5 million.

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

Failure to meet the various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

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

Institutions that do not meet this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in cash dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.

The capital buffer requirement was phased in over three years beginning in 2016.

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

We believe that, as of September 30, 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 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.

As of March 31, 2024, our bank’s total risk-based capital ratio was 13.8%, compared to 13.4% at December 31, 2023.

Our bank’s total regulatory capital increased $18.3 million during the first quarter of 2024, in large part reflecting net income totaling $24.3 million, which was partially offset by cash dividends paid to us aggregating $7.3 million.

Our bank’s total risk-based capital ratio was also impacted by a $9.4 million decrease in total risk-weighted assets.

As of March 31, 2024, our bank’s total regulatory capital equaled $713 million, or $196 million in excess of the 10.0% minimum that is among the requirements to be categorized as “well capitalized.” Our and our bank’s capital ratios as of March 31, 2024 and December 31, 2023 are disclosed in Note 12 of the Notes to Consolidated Financial Statements.

MERCANTILE BANK CORPORATION

Results of Operations

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 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 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 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 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 1.99% 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%.

We recorded net income of $21.6 million, or $1.34 per basic and diluted share, for the first quarter of 2024, compared with net income of $21.0 million, or $1.31 per basic and diluted share, for the first quarter of 2023.

The higher level of net income during the first quarter of 2024 compared to the respective 2023 period resulted from increased noninterest income, which more than offset decreased net interest income and higher overhead costs and provision expense.

The growth in noninterest income mainly stemmed from increased mortgage banking income, treasury management fees, interest rate swap revenue, and bank owned life insurance income, along with profits generated from an investment in a private equity fund.

The increase in bank owned life insurance income primarily resulted from the receipt of death benefit claims during the first three months of 2024.

Net interest income declined as increased yields on, along with growth in, earning assets were more than offset by a higher cost of funds.

The increase in overhead costs mainly reflected larger salary and benefit costs and contributions to the Foundation.

The provision expense recorded during the first quarter of 2024 primarily reflected an individual allocation for a nonperforming commercial loan relationship, allocations necessitated by net loan growth, and a change in a commercial loan environmental factor.

Interest income during the first quarter of 2024 was $76.7 million, an increase of $16.2 million, or 26.8%, from the $60.5 million earned during the first quarter of 2023.

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

The yield on average earning assets was 6.06% during the first quarter of 2024, up from 5.35% during the respective 2023 period.

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

The yield on loans was 6.65% during the first three months of 2024, up from 5.90% during the respective prior-year period mainly due to higher interest rates on variable-rate commercial loans stemming from the 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 100 basis points during the period of February 2023 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 a decrease in lower-yielding securities as a percentage of earning assets, also contributed to the higher yield on average earning assets.

Average earning assets equaled $5.08 billion during the first quarter of 2024, up $496 million, or 10.8%, from the level of $4.59 billion during the first quarter of 2023;

average loans were up $371 million, average interest-earning deposits grew $119 million, and average securities increased $6.5 million.

MERCANTILE BANK CORPORATION

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 1.90% 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.

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 first nine months of 2023. 

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 1.49% 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.

Interest expense during the first quarter of 2024 was $29.4 million, an increase of $17.3 million, or 143%, from the $12.1 million expensed during the first quarter of 2023.

The increase is mainly attributable to a higher average weighted cost of interest-bearing liabilities, which rose from 1.72% during the first three months of 2023 to 3.27% during the respective current-year period primarily due to higher rates on deposits and borrowings.

Reflecting the rising interest rate environment, the cost of interest-bearing, non-time deposits increased from 1.27% during the first quarter of 2023 to 2.61% during the first quarter of 2024, while the cost of time deposits increased from 2.29% to 4.60% during the respective periods.

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

A change in funding mix, primarily consisting of a decrease in noninterest-bearing and lower-cost deposits and an increase in higher-cost money market accounts and time deposits stemming from deposit migration and new deposit relationships, also contributed to the increased cost of funds.

The cost of borrowed funds increased from 2.51% during the first quarter of 2023 to 3.51% during the first quarter of 2024 mainly due to higher costs of sweep accounts and FHLBI advances.

The cost of sweep accounts increased from 0.84% during the first three months of 2023 to 3.06% during the first three months of 2024, while the cost of FHLBI advances increased from 2.12% to 2.92% during the respective periods, reflecting the rising interest rate environment.

Growth in interest-bearing liabilities also contributed to the increase in interest expense during the first quarter of 2024 compared to the prior-year first quarter.

Average interest-bearing liabilities totaled $3.61 billion during the current-year first quarter, compared to $2.86 billion during the first quarter of 2023, representing an increase of $746 million, or 26.1%.

Net interest income during the first quarter of 2024 was $47.4 million, a decrease of $1.0 million, or 2.1%, from the $48.4 million earned during the respective 2023 period.

The decline reflected a lower net interest margin, which more than offset growth in earning assets.

The net interest margin was 3.74% in the first quarter of 2024, down from 4.28% in the prior-year first quarter due to a higher cost of funds, which more than offset an increased yield on earning assets.

The cost of funds equaled 2.32% in the first quarter of 2024, up from 1.07% in the first quarter of 2023 primarily due to higher costs of deposits and borrowed funds, reflecting the impact of the rising interest rate environment.

The increased yield on average earning assets mainly resulted from a higher yield on commercial loans primarily stemming from the aforementioned FOMC rate hikes.

The following table sets forth certain information relating to our consolidated average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the first quarters of 2024 and 2023.

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

Tax-exempt securities interest income and yield for the third quarters and first nine months of 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 September 30,

(dollars in thousands)

Investment securities

Interest-earning deposits

Total interest - earning assets

Allowance for credit losses

LIABILITIES AND SHAREHOLDERS’

Interest-bearing deposits

Short-term borrowings

Federal Home Loan Bank advances

Other borrowings

Total interest-bearing liabilities

Noninterest-bearing deposits

Other liabilities

Shareholders’

Total liabilities and shareholders’

Net interest income

Net interest rate spread

Net interest spread on average assets

Net interest margin on earning assets

Tax-exempt securities interest income and yield for the first quarters of 2024 and 2023 have been computed on a tax equivalent basis using a marginal tax rate of 21.0%.

Securities interest income was increased by $60,000 in the first quarters of 2024 and 2023 for this non-GAAP, but industry standard, adjustment.

These adjustments equated to increases in our net interest margin of less than one basis point for both periods.

MERCANTILE BANK CORPORATION

Nine months ended September 30,

Quarters ended March 31,

(dollars in thousands)

3 unchanged sentences

Allowance for credit losses

LIABILITIES AND SHAREHOLDERS’

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest-bearing deposits

5 unchanged sentences

Other liabilities

Shareholders’

Total liabilities and shareholders’

Shareholders’ equity

Total liabilities and shareholders’ equity

Net interest income

2 unchanged sentences

Net interest margin on earning assets

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 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.

Provisions for credit losses of $1.3 million and $0.6 million were recorded during the first quarters of 2024 and 2023, respectively.

The provision expense recorded during the current-year first quarter primarily reflected an individual allocation for a nonperforming commercial loan relationship, allocations necessitated by net loan growth, and a change in a commercial loan environmental factor, which more than offset the impacts of an improved economic forecast and changes to the loan portfolio composition.

The provision expense recorded during the first quarter of 2023 mainly reflected allocations necessitated by loan growth.

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

Noninterest income totaled $10.9 million during the first quarter of 2024, compared to $7.0 million during the first quarter of 2023.

Noninterest income during the first three months of 2024 included bank owned life insurance death benefit claims totaling $0.7 million.

Excluding these transactions, noninterest income increased $3.2 million, or 45.6%, in the first quarter of 2024 compared to the prior-year first quarter.

The growth primarily stemmed from a higher level of mortgage banking income, mainly reflecting an increased loan sold percentage, which equaled approximately 74% during the first quarter of 2024 compared to approximately 35% during the prior-year first quarter, and higher loan production.

Increases in all treasury management fee income categories, consisting of service charges on accounts, payroll servicing fees, and credit and debit card income, and revenue associated with an investment in a private equity fund also contributed to the higher level of noninterest income.

The growth in treasury management fees primarily resulted from the successful marketing of products and services to existing and new customers.

Noninterest expense totaled $29.9 million during the first quarter of 2024, compared to $28.6 million during the prior-year first quarter.

Overhead costs during the first three months of 2024 included contributions to the Foundation totaling $0.7 million, while overhead costs during the respective 2023 period included a $0.4 million write-down of a former branch facility.

Excluding these transactions, noninterest expense increased $1.0 million, or 3.6%, during the first quarter of 2024 compared to the first quarter of 2023.

The increase in noninterest expense mainly stemmed from larger salary and benefit costs, reflecting annual merit pay increases, market adjustments, lower residential mortgage loan deferred salary costs, higher payroll taxes, and increased health insurance claims, which more than offset decreased credit reserves for unfunded loan commitments.

During the first quarter of 2024, we recorded income before federal income tax of $27.0 million and a federal income tax expense of $5.4 million.

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

The increase in federal income tax expense during the current-year first quarter resulted from a higher level of income before federal income tax.

Our effective tax rate was 20.1% during the first three months of 2024, compared to 19.8% during the respective prior-year period.

MERCANTILE BANK CORPORATION

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What changed 10-Q

Item 1. Financial Statements