What changed in this filing

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Item 1. Financial Statements

2024-11-01 compared with 2024-08-02 · 345 added, 381 removed, 1613 unchanged (31% of the section changed)

1 unchanged sentence

CONSOLIDATED BALANCE SHEETS

September 30,

(Dollars in thousands)

47 unchanged sentences

40,000,000 shares authorized;

16,137,646 shares issued and outstanding at June 30, 2024 and 16,125,662 shares issued and outstanding at December 31, 2023

16,142,433 shares issued and outstanding at September 30, 2024 and 16,125,662 shares issued and outstanding at December 31, 2023

298,704 295,106

11 unchanged sentences

(Dollars in thousands except per share amounts)

June 30, 2024

June 30, 2023

June 30, 2024

June 30, 2023

September 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

Interest income

Loans, including fees

$ 72,819 $ 62,006 $ 144,089 $ 119,159

Securities, taxable

2,656 2,207 5,101 4,338

Securities, tax-exempt

968 904 1,945 1,780

Interest-earning deposits

2,436 801 4,469 1,125

Total interest income

78,879 65,918 155,604 126,402

Interest expense

24,710 12,379 46,934 20,286

Short-term borrowings

1,757 914 3,412 1,373

Federal Home Loan Bank advances

3,252 3,051 6,651 4,845

Subordinated debt and other borrowings

2,088 2,023 4,173 3,963

Total interest expense

31,807 18,367 61,170 30,467

Net interest income

47,072 47,551 94,434 95,935

Provision for credit losses

3,500 2,000 4,800 2,600

Net interest income after provision for credit losses

43,572 45,551 89,634 93,335

Noninterest income

Service charges on deposit and sweep accounts

1,692 1,064 3,224 2,041

Mortgage banking income

3,023 1,835 5,365 3,050

Credit and debit card income

2,266 2,426 4,387 4,485

Interest rate swap fees

766 748 2,104 1,785

Payroll services income

686 572 1,582 1,317

Earnings on bank owned life insurance

437 402 1,609 802

811 598 2,277 1,117

Total noninterest income

9,681 7,645 20,548 14,597

Noninterest expense

Salaries and benefits

17,913 16,461 36,150 33,143

2,220 2,098 4,509 4,387

Furniture and equipment depreciation, rent and maintenance

923 878 1,852 1,700

Data processing costs

3,415 2,881 6,704 6,043

Charitable foundation contributions

Other expense

5,262 5,509 9,758 11,144

Total noninterest expense

29,737 27,829 59,680 56,429

Income before federal income tax expense

23,516 25,367 50,502 51,503

Federal income tax expense

4,730 5,010 10,154 10,171

$ 18,786 $ 20,357 $ 40,348 $ 41,332

Basic earnings per share

$ 1.17 $ 1.27 $ 2.50 $ 2.58

Diluted earnings per share

$ 1.17 $ 1.27 $ 2.50 $ 2.58

Average basic shares outstanding

16,122,813 16,003,372 16,120,836 15,999,775

Average diluted shares outstanding

16,122,813 16,003,372 16,120,836 15,999,775

See accompanying notes to consolidated financial statements.

2 unchanged sentences

(Dollars in thousands)

June 30, 2024

June 30, 2023

June 30, 2024

June 30, 2023

$ 18,786 $ 20,357 $ 40,348 $ 41,332

September 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

Other comprehensive income (loss):

Unrealized holding gains (losses) on securities available for sale

( 342 ) ( 6,645 ) ( 3,491 ) 4,841

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

73 1,395 734 ( 1,017 )

Other comprehensive income (loss), net of tax

( 269 ) ( 5,250 ) ( 2,757 ) 3,824

Comprehensive income (loss)

$ 18,517 $ 15,107 $ 37,591 $ 45,156

See accompanying notes to consolidated financial statements.

6 unchanged sentences

Income (Loss)

Balances, March 31, 2024

Balances, June 30, 2024

$ 0 $ 297,591 $ 306,804 $ ( 53,244 ) $ 551,151

1 unchanged sentence

Dividend reinvestment plan ( 4,531 shares)

Stock grants to directors for retainer fees ( 11,247 shares)

Stock-based compensation expense

1 unchanged sentence

( 5,700 ) ( 5,700 )

Net income for the three months ended June 30, 2024

Net income for the three months ended September 30, 2024

19,618 19,618

1 unchanged sentence

17,129 17,129

Balances, June 30, 2024

Balances, September 30, 2024

$ 0 $ 298,704 $ 320,722 $ ( 36,115 ) $ 583,311

15 unchanged sentences

( 16,771 ) ( 16,771 )

Net income for the six months ended June 30, 2024

Net income for the nine months ended September 30, 2024

59,967 59,967

1 unchanged sentence

14,372 14,372

Balances, June 30, 2024

Balances, September 30, 2024

$ 0 $ 298,704 $ 320,722 $ ( 36,115 ) $ 583,311

7 unchanged sentences

Income (Loss)

Balances, March 31, 2023

Balances, June 30, 2023

$ 0 $ 292,906 $ 247,313 $ ( 61,517 ) $ 478,702

1 unchanged sentence

Dividend reinvestment plan ( 6,746 shares)

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

Stock-based compensation expense

1 unchanged sentence

( 5,330 ) ( 5,330 )

Net income for the three months ended June 30, 2023

Net income for the three months ended September 30, 2023

20,855 20,855

1 unchanged sentence

( 12,071 ) ( 12,071 )

Balances, June 30, 2023

Balances, September 30, 2023

$ 0 $ 293,961 $ 262,838 $ ( 73,588 ) $ 483,211

15 unchanged sentences

( 15,662 ) ( 15,662 )

Net income for the six months ended June 30, 2023

Net income for the nine months ended September 30, 2023

62,187 62,187

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

Balances, June 30, 2023

( 8,247 ) ( 8,247 )

Balances, September 30, 2023

$ 0 $ 293,961 $ 262,838 $ ( 73,588 ) $ 483,211

See accompanying notes to consolidated financial statements.

2 unchanged sentences

(Dollars in thousands)

June 30, 2024 June 30, 2023

September 30, 2024

September 30, 2023

Cash flows from operating activities

$ 40,348 $ 41,332

Adjustments to reconcile net income to net cash from operating activities

2 unchanged sentences

Stock-based compensation expense

Stock grants to directors for retainer fees

Stock grants to directors for retainer fee

Proceeds from sales of mortgage loans held for sale

147,849 70,280

Origination of mortgage loans held for sale

( 146,731 ) ( 76,088 )

Net gain from sales of mortgage loans held for sale

( 4,637 ) ( 2,569 )

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

Net gain from sale and write-down of former bank premises

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

Net loss from sales and write-downs of fixed assets

Earnings on bank owned life insurance

( 1,609 ) ( 802 )

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

1 unchanged sentence

Accrued interest receivable

( 1,169 ) ( 1,486 )

( 16,679 ) ( 1,338 )

Accrued interest payable and other liabilities

20,113 ( 2,873 )

Net cash from operating activities

49,349 37,467

Cash flows from investing activities

Loan originations and payments, net

( 133,793 ) ( 135,410 )

Purchases of securities available for sale

( 57,592 ) ( 11,641 )

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

23,185 10,198

Proceeds from sales of foreclosed assets

Proceeds from sales of fomer bank premises

Proceeds from sales of former bank premises

Purchases of Federal Home Loan Bank stock

1 unchanged sentence

Net purchases of premises and equipment and lease activity

( 2,330 ) ( 4,680 )

Net cash for investing activities

( 168,605 ) ( 145,325 )

See accompanying notes to consolidated financial statements.

2 unchanged sentences

(Dollars in thousands)

June 30, 2024 June 30, 2023

September 30, 2024

September 30, 2023

Cash flows from financing activities

Net increase in time deposits

71,902 227,531

Net increase (decrease) in all other deposits

173,754 ( 183,553 )

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

( 7,836 ) 25,117

Net decrease in securities sold under agreements to repurchase

Maturities of Federal Home Loan Bank advances

( 50,827 ) ( 40,353 )

Proceeds from Federal Home Loan Bank advances

10,000 200,000

Employee stock purchase plan

1 unchanged sentence

Payment of cash dividends to common shareholders

( 11,070 ) ( 10,332 )

Net cash from financing activities

186,352 218,882

Net change in cash and cash equivalents

67,096 111,024

Cash and cash equivalents at beginning of period

130,533 96,772

Cash and cash equivalents at end of period

$ 197,629 $ 207,796

Supplemental disclosures of cash flows information

Cash paid during the period for:

$ 59,477 $ 28,038

Federal income tax

$ 11,600 $ 13,850

Noncash financing and investing activities:

6 unchanged sentences

Basis of Presentation :

The unaudited financial statements for the six months ended June 30, 2024 include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries.

The unaudited financial statements for the nine months ended September 30, 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.

1 unchanged sentence

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

The results for the period ended June 30, 2024 should not be considered as indicative of results for a full year.

The results for the period ended September 30, 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 .

2 unchanged sentences

The trusts are not consolidated, but instead we report the subordinated debentures issued to the trusts as a liability.

Recently Issued Accounting Standards:

2003 - 07, Segment Reporting (Topic 323 ):

Improvements to Reportable Segment Disclosures.

This ASU enhances disclosures of significant segment expenses by requiring entities to disclose significant segment expenses regularly provided to the chief operating decision maker, extend certain annual disclosures to interim periods, and permit more than one measure of segment profit or loss to be reported under certain conditions.

This ASU takes effect for annual reporting periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted.

We do not expect the adoption of this ASU to have a material impact on our Financial Statements.

ASU 2023 - 09, Income Taxes (Topic 740 ):

Improvements to Income Tax Disclosures.

This ASU modifies the rules on income tax disclosures to require entities to disclose ( 1 ) specific categories in the rate reconciliation, ( 2 ) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and ( 3 ) income tax expense or benefit from continuing operations (separated by federal, state and foreign).

This ASU also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes.

This ASU takes effect in reporting periods beginning after December 15, 2024, with early adoption permitted.

We do not expect the adoption of this ASU to have a material impact on our Financial Statements.

Earnings Per Share :

3 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 303,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and six months ended June 30, 2024 .

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

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

Approximately 311,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and nine months ended September 30, 2024 .

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 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, 2023 .

MERCANTILE BANK CORPORATION

14 unchanged sentences

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

At June 30, 2024 , and December 31, 2023 , there was no allowance related to the available for sale debt securities portfolio.

At September 30, 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.

7 unchanged sentences

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

Net unamortized deferred loan costs amounted to $ 2.6 million and $ 2.4 million at June 30, 2024 , and December 31, 2023 , respectively.

Net unamortized deferred loan costs amounted to $ 2.6 million and $ 2.4 million at September 30, 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.

12 unchanged sentences

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

As of June 30, 2024 and December 31, 2023 , we determined that the fair value of our mortgage loans held for sale totaled $ 22.5 million and $ 19.0 million, respectively.

As of September 30, 2024 and December 31, 2023 , we determined that the fair value of our mortgage loans held for sale totaled $ 29.7 million and $ 19.0 million, respectively.

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

18 unchanged sentences

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

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.

We are not required to develop and use our own economic forecast model, and we 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.

16 unchanged sentences

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 $ 4.8 million during the first six months of 2024 .

The provision for credit losses recorded during the first six months of 2024 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 $ 17.8 million and $ 16.9 million as of June 30, 2024 and December 31, 2023 , respectively, is included in other assets on the Consolidated Balance Sheets.

We recorded a provision for credit losses of $ 5.9 million during the first nine months of 2024 .

The provision for credit losses primarily reflected an individual allocation for a nonperforming commercial loan relationship, allocations necessitated by net loan growth, a change in the volume and severity of past due loans, nonaccrual loans and adversely classified loans for commercial and industrial loans 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 $ 17.5 million and $ 16.9 million as of September 30, 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 loans become 90 days past due, or earlier if we believe the collection of interest is doubtful.

17 unchanged sentences

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 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 $ 1.45 billion and $ 1.40 billion as of June 30, 2024 and December 31, 2023 , respectively.

Mortgage loans serviced for others totaled $ 1.50 billion and $ 1.40 billion as of September 30, 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.

4 unchanged sentences

The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned.

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

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

MERCANTILE BANK CORPORATION

4 unchanged sentences

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

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

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

We do not use derivatives for trading purposes.

2 unchanged sentences

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

We had no derivative instruments designated as hedges as of June 30, 2024 , and December 31, 2023 .

We had no derivative instruments designated as hedges as of September 30, 2024 , and December 31, 2023 .

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

16 unchanged sentences

(Dollars in thousands)

June 30, 2024

June 30, 2023

June 30, 2024

June 30, 2023

September 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

Service charges on deposit and sweep accounts

29 unchanged sentences

Cost Gains Losses Value

June 30, 2024

September 30, 2024

Government agency debt obligations

19 unchanged sentences

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

Securities with unrealized losses at June 30, 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:

Securities with unrealized losses at September 30, 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

2 unchanged sentences

Value Loss Value Loss Value Loss

June 30, 2024

September 30, 2024

Government agency debt obligations

30 unchanged sentences

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

At June 30, 2024 , 736 debt securities with estimated fair values totaling $ 593 million had unrealized losses aggregating $ 68.3 million.

At September 30, 2024 , 609 debt securities with estimated fair values totaling $ 544 million had unrealized losses aggregating $ 49.6 million.

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

At June 30, 2024 , unrealized losses aggregating $ 57.7 million were attributable to bonds issued or guaranteed by agencies of the U.S.

At September 30, 2024 , unrealized losses aggregating $ 42.5 million were attributable to bonds issued or guaranteed by agencies of the U.S.

Federal Government, while unrealized losses totaling $ 7.1 million were associated with bonds issued by state-based municipalities.

6 unchanged sentences

SECURITIES (Continued)

The amortized cost and fair value of debt securities at June 30, 2024 , by maturity, are shown in the following table.

The amortized cost and fair value of debt securities at September 30, 2024 , by maturity, are shown in the following table.

The contractual maturity is utilized for U.S.

15 unchanged sentences

$ 749,090 $ 703,375

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

Securities issued by the State of Michigan and all its political subdivisions had combined amortized costs of $ 202 million and $ 203 million as of June 30, 2024 and December 31, 2023 , respectively, with estimated market values of $ 193 million and $ 197 million at the respective dates.

We had no securities issued by all other states and their political subdivisions as of June 30, 2024 , and December 31, 2023 .

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

Securities issued by the State of Michigan and all its political subdivisions had combined amortized costs of $ 211 million and $ 203 million as of September 30, 2024 and December 31, 2023 , respectively, with estimated market values of $ 206 million and $ 197 million at the respective dates.

We had no securities issued by all other states and their political subdivisions as of September 30, 2024 , and December 31, 2023 .

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

1 unchanged sentence

The carrying value of U.S.

Government agency debt obligation securities that are pledged to secure repurchase agreements was $ 222 million and $ 230 million at June 30, 2024 , and December 31, 2023 , respectively.

Government agency debt obligation securities that are pledged to secure repurchase agreements was $ 221 million and $ 230 million at September 30, 2024 , and December 31, 2023 , respectively.

MERCANTILE BANK CORPORATION

5 unchanged sentences

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

Our loan portfolio segments as of both June 30, 2024 and December 31, 2023 were as follows:

Our loan portfolio segments as of both September 30, 2024 and December 31, 2023 were as follows:

Commercial Loans

31 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Our total loans at June 30, 2024 were $ 4.44 billion compared to $ 4.30 billion at December 31, 2023 , an increase of $ 134 million, or 3.1 %.

The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at June 30, 2024 and December 31, 2023 , and the percentage change in loans from the end of 2023 to the end of the second quarter of 2024 , are as follows:

June 30, 2024

Our total loans at September 30, 2024 were $ 4.55 billion compared to $ 4.30 billion at December 31, 2023 , an increase of $ 249 million, or 5.8 %.

The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at September 30, 2024 and December 31, 2023 , and the percentage change in loans from the end of 2023 to the end of the third quarter of 2024 , are as follows:

September 30, 2024

December 31, 2023

(Dollars in thousands)

Balance % Balance % (Decrease)

Commercial and industrial

19 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

An age analysis of past due loans is as follows as of June 30, 2024 :

An age analysis of past due loans is as follows as of September 30, 2024 :

30 – 59 60 – 89 Than 89

49 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Nonaccrual loans as of June 30, 2024 were as follows:

Nonaccrual loans as of September 30, 2024 were as follows:

(Dollars in thousands)

27 unchanged sentences

Nonaccrual loans represent the entire balance of collateral dependent loans.

As of June 30, 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 $ 0.4 million and less than $ 0.1 million during the six months ended June 30, 2024 and 2023 , respectively, reflecting the collection of interest at the time of principal pay-off.

As of September 30, 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 $ 0.5 million and less than $ 0.1 million during the nine months ended September 30, 2024 and 2023 , respectively, reflecting the collection of interest at the time of principal pay-off.

MERCANTILE BANK CORPORATION

62 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

The following table reflects amortized cost basis of loans and year-to-date loan charge-offs as of June 30, 2024 based on year of origination:

The following table reflects amortized cost basis of loans and year-to-date loan charge-offs as of September 30, 2024 based on year of origination:

(Dollars in thousands)

59 unchanged sentences

$ 0 $ 1 $ 18 $ 8 $ 0 $ 6 $ 33 $ 18 $ 51

There were lines of credit with principal balances of $ 5.0 million that were converted to term loans during the first six months of 2024 .

There were lines of credit with principal balances of $ 5.0 million that were converted to term loans during the first nine months of 2024 .

MERCANTILE BANK CORPORATION

1 unchanged sentence

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

The following table reflects amortized cost basis of loans as of December 31, 2023 and loan charge-offs during the six months ended June 30, 2023 based on year of origination:

The following table reflects amortized cost basis of loans as of December 31, 2023 and loan charge-offs during the nine months ended September 30, 2023 based on year of origination:

(Dollars in thousands)

66 unchanged sentences

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 June 30, 2024 and December 31, 2023 allowance for credit losses.

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 September 30, 2024 and December 31, 2023 allowance for credit losses.

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.

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 June 30, 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 June 30, 2024 and December 31, 2023 .

For the commercial portfolio segments, we assumed a 2.0 % prepayment speed as of both September 30, 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 September 30, 2024 and December 31, 2023 .

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

As of June 30, 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 June 30, 2024 allowance calculation reflected a $ 2.3 million allowance balance reduction.

As of September 30, 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 September 30, 2024 allowance calculation reflected a $ 2.1 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 $ 10.9 million and $ 5.4 million as of June 30, 2024 and December 31, 2023 , respectively.

Individual allowance allocations totaled $ 6.3 million and $ 0.4 million as of June 30, 2024 and December 31, 2023 , respectively.

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 $ 11.6 million and $ 5.4 million as of September 30, 2024 and December 31, 2023 , respectively.

Individual allowance allocations totaled $ 6.3 million and $ 0.4 million as of September 30, 2024 and December 31, 2023 , respectively.

MERCANTILE BANK CORPORATION

1 unchanged sentence

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Activity in the allowance for credit losses during the three and six months ended June 30, 2024 is as follows:

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

Activity in the allowance for credit losses during the three and nine months ended September 30, 2024 is as follows:

(Dollars in thousands)

Commercial and industrial Commercial vacant land, land development and residential construction Commercial real estate – owner occupied Commercial real estate – non-owner occupied Commercial real estate – multi-family and residential rental 1-4 family mortgages

Other consumer loans Unallocated

Balance at 6-30-24

14 unchanged sentences

$ 14,914 $ 354 $ 7,528 $ 10,600 $ 3,224 $ 18,192 $ 1,725 $ 53 $ 56,590

Activity in the allowance for credit losses during the three and six months ended June 30, 2023 is as follows:

real estate –

residential rental

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

(Dollars in thousands)

Commercial and industrial

Commercial vacant land, land development and residential construction

Commercial real estate – owner occupied

Commercial real estate – non-owner occupied

Commercial real estate – multi-family and residential rental

1-4 family mortgages

Other consumer loans

Balance at 6-30-23

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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 June 30, 2024 :

Interest Rate

12 unchanged sentences

$ 0 $ 5,670 $ 0

The following table presents the period-end amortized cost basis of modifications to borrowers experiencing financial difficulty by type of modification made during the six months ended June 30, 2024 :

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, 2024 :

Interest Rate

16 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

There were no loans modified to borrowers experiencing financial difficulty during the three months ended September 30, 2023.

Interest Rate

12 unchanged sentences

$ 0 $ 8,184 $ 0

The following table presents the 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 as of June 30, 2024 :

(Dollars in thousands)

16 unchanged sentences

Premises and equipment are comprised of the following:

September 30,

(Dollars in thousands)

9 unchanged sentences

$ 54,230 $ 50,928

Depreciation expense totaled $ 1.5 million and $ 1.4 million during the second quarters of 2024 and 2023 , respectively.

Depreciation expense totaled $ 1.5 million during the third quarters of both 2024 and 2023 .

Depreciation expense totaled $ 4.6 million during the first nine months of 2024 , compared to $ 4.4 million during the first nine months of 2023 .

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

As of June 30, 2024 , we were under lease contracts for ten of our banking facilities.

The leases have maturity dates ranging from February, 2025 through May, 2048, with a weighted average life of 9.2 years as of June 30, 2024 .

As of September 30, 2024 , we were under lease contracts for eleven of our banking facilities.

The leases have maturity dates ranging from February, 2025 through May, 2048, with a weighted average life of 9.1 years as of September 30, 2024 .

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

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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 6.5 % as of June 30, 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 $ 4.9 million and $ 3.7 million as of June 30, 2024 , and December 31, 2023 , respectively.

The weighted average discount rate for leases was 6.7 % as of September 30, 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 September 30, 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 second quarter of 2024 and $ 0.5 million during the second quarter 2023.

Total operating lease expense associated with the leases aggregated $ 0.4 million during the third quarter of 2024 and $ 0.5 million during the third quarter 2023 , respectively, and $ 1.2 million and $ 1.3 million during the nine months ended September 30, 2024 and 2023 , respectively.

MERCANTILE BANK CORPORATION

1 unchanged sentence

PREMISES AND EQUIPMENT, NET (Continued)

Future lease payments were as follows as of June 30, 2024 :

Future lease payments were as follows as of September 30, 2024 :

(Dollars in thousands)

2 unchanged sentences

Present value of future lease payments (lease liability)

Our total deposits at June 30, 2024 totaled $ 4.15 billion, an increase of $ 246 million, or 6.3 %, from December 31, 2023 .

The components of our outstanding balances at June 30, 2024 and December 31, 2023 , and percentage change in deposits from the end of 2023 to the end of the second quarter of 2024, are as follows:

June 30, 2024

Our total deposits at September 30, 2024 totaled $ 4.46 billion, an increase of $ 555 million, or 14.2 %, from December 31, 2023 .

The components of our outstanding balances at September 30, 2024 and December 31, 2023 , and percentage change in deposits from the end of 2023 to the end of the third quarter of 2024, are as follows:

September 30, 2024

December 31, 2023

(Dollars in thousands)

Balance % Balance % (Decrease)

Noninterest-bearing checking

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Information relating to our repurchase agreements is as follows:

Six Months Ended

Nine Months Ended

Twelve Months Ended

(Dollars in thousands)

June 30, 2024 December 31, 2023

September 30, 2024

December 31, 2023

Outstanding balance at end of period

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FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES

FHLBI bullet advances totaled $ 400 million at June 30, 2024 , and were scheduled to mature at varying dates from July 2024 through January 2029 , with fixed rates of interest from 0.69 % to 4.54 % and averaging 3.03 %.

FHLBI bullet advances totaled $ 390 million at September 30, 2024 , and were scheduled to mature at varying dates from November 2024 through January 2029 , with fixed rates of interest from 0.69 % to 4.54 % and averaging 3.03 %.

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 June 30, 2024 were as follows:

Maturities of FHLBI bullet advances as of September 30, 2024 were as follows:

(Dollars in thousands)

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FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES (Continued)

FHLBI amortizing advances totaled $ 27.1 million as of June 30, 2024 , with an average rate of 2.52 % and with final maturities in 2042 .

FHLBI amortizing advances totaled $ 27.1 million as of September 30, 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 June 30, 2024 were as follows:

Scheduled principal payments on FHLBI amortizing advances as of September 30, 2024 were as follows:

(Dollars in thousands)

1 unchanged sentence

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

Our borrowing line of credit as of June 30, 2024 totaled $ 1.01 billion, with remaining availability based on collateral of $ 576 million.

Our borrowing line of credit as of September 30, 2024 totaled $ 1.03 billion, with remaining availability based on collateral of $ 607 million.

COMMITMENTS AND OFF-BALANCE SHEET RISK

18 unchanged sentences

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

The calculated allowance aggregated $ 0.7 million and $ 1.3 million as of June 30, 2024 and December 31, 2023 , respectively.

The calculated allowance aggregated $ 0.8 million and $ 1.3 million as of September 30, 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 June 30, 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 June 30, 2024 and December 31, 2023 is as follows:

At September 30, 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 September 30, 2024 and December 31, 2023 is as follows:

September 30,

(Dollars in thousands)

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DERIVATIVES AND HEDGING ACTIVITIES (Continued)

The fair values of derivative instruments as of June 30, 2024 , are reflected in the following table.

The fair values of derivative instruments as of September 30, 2024 , are reflected in the following table.

Balance Sheet

7 unchanged sentences

856,283 Other Liabilities

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

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

1 unchanged sentence

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

The netting of derivative instruments as of June 30, 2024 is presented in the following table.

The netting of derivative instruments as of September 30, 2024 is presented in the following table.

Gross Amounts Not Offset on the Consolidated Balance Sheet

22 unchanged sentences

DERIVATIVES AND HEDGING ACTIVITIES (Continued)

The effect of interest rate swaps that are not designated as hedging instruments resulted in expense of $ 0.1 million during the six months ended June 30, 2023 that was recorded in other noninterest expense on our Consolidated Statements of Income.

The effect of interest rate swaps that are not designated as hedging instruments resulted in expense of $ 0.1 million during the nine months ended September 30, 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.

13 unchanged sentences

FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying amounts, estimated fair values and level within the fair value hierarchy of financial instruments were as follows as of June 30, 2024 and December 31, 2023 :

June 30, 2024

The carrying amounts, estimated fair values and level within the fair value hierarchy of financial instruments were as follows as of September 30, 2024 and December 31, 2023 :

September 30, 2024

December 31, 2023

71 unchanged sentences

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

There was no such impairment as of June 30, 2024 , or December 31, 2023 .

There was no such impairment as of September 30, 2024 , or December 31, 2023 .

We have no Level 1 securities available for sale.

8 unchanged sentences

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

As of June 30, 2024 and December 31, 2023 , we determined the fair value of our mortgage loans held for sale to be $ 22.5 million and $ 19.0 million, respectively.

As of September 30, 2024 and December 31, 2023 , we determined the fair value of our mortgage loans held for sale to be $ 29.7 million and $ 19.0 million, respectively.

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

9 unchanged sentences

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2024 are as follows:

The balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2024 are as follows:

(Dollars in thousands)

20 unchanged sentences

FAIR VALUES (Continued)

There were no sales, purchases or transfers in or out of Level 3 during the six months ended June 30, 2024 .

The $ 0.1 million reduction in Level 3 municipal general obligation bonds during the six months ended June 30, 2024 reflects the scheduled maturities of such bonds.

There were no sales, purchases or transfers in or out of Level 3 during the nine months ended September 30, 2024 .

The $ 0.1 million reduction in Level 3 municipal general obligation bonds during the nine months ended September 30, 2024 reflects the scheduled maturities of such bonds.

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

(Dollars in thousands)

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

Available for sale securities

18 unchanged sentences

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2024 are as follows:

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2024 are as follows:

(Dollars in thousands)

31 unchanged sentences

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

As of June 30, 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 June 30, 2024 , that we believe have changed our bank’s categorization.

As of September 30, 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 September 30, 2024 , that we believe have changed our bank’s categorization.

MERCANTILE BANK CORPORATION

9 unchanged sentences

(Dollars in thousands)

June 30, 2024

September 30, 2024

Total capital (to risk weighted assets)

26 unchanged sentences

REGULATORY MATTERS (Continued)

Our consolidated capital levels as of June 30, 2024 and December 31, 2023 include $ 47.9 million and $ 47.6 million, respectively, of trust preferred securities.

Our consolidated capital levels as of September 30, 2024 and December 31, 2023 include $ 48.1 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 June 30, 2024 and December 31, 2023 , all $ 47.9 million and $ 47.6 million, respectively, of the trust preferred securities were included in our consolidated Tier 1 capital.

As of September 30, 2024 and December 31, 2023 , all $ 48.1 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 June 30, 2024 , our bank meets all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

We believe that, as of September 30, 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.

1 unchanged sentence

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 was paid on June 19, 2024 , to shareholders of record as of June 7, 2024 .

As of June 30, 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 six months of 2024 .

On July 11, 2024 , our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.36 per share that was paid on September 18, 2024 , to shareholders of record as of September 6, 2024 .

As of September 30, 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 nine months of 2024 .

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

2 unchanged sentences

SUBSEQUENT EVENTS

On July 11, 2024 , our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.36 per share that will be paid on September 18, 2024 , to shareholders of record as of September 6, 2024 .

On October 10, 2024 , our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.36 per share that will be paid on December 18, 2024 , to shareholders of record as of December 6, 2024 .

MERCANTILE BANK CORPORATION

32 unchanged sentences

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 June 30, 2024 and December 31, 2023 and the results of operations for the six months ended June 30, 2024 and June 30, 2023.

at September 30, 2024 and December 31, 2023 and the results of operations for the three and nine months ended September 30, 2024 and 2023.

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

38 unchanged sentences

Financial Overview

We reported net income of $18.8 million, or $1.17 per diluted share, for the second quarter of 2024, compared with net income of $20.4 million, or $1.27 per diluted share, during the second quarter of 2023.

Net income during the first six months of 2024 totaled $40.3 million, or $2.50 per diluted share, compared to $41.3 million, or $2.58 per diluted share, during the first six months of 2023.

While noninterest income increased during both periods, net income was negatively impacted by higher provisions for credit losses and increased noninterest expenses.

Net interest income levels were relatively similar in both comparable periods.

Commercial loans increased $118 million during the first six months of 2024, providing for an annualized growth rate of about 7%.

Multi-family and residential rental property loans increased $56.8 million, in large part reflecting draws on multi-family construction loans, while non-owner occupied commercial real estate (“CRE”) loans grew $23.4 million, and commercial and industrial loans increased $21.2 million.

As a percent of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 56.8% as of June 30, 2024, compared to 57.7% at December 31, 2023.

The commercial loan pipeline remains strong, and as of June 30, 2024, we had $320 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase.

Residential mortgage loans increased $12.2 million during the first six months of 2024, representing an annualized growth rate of about 3%.

Residential mortgage loan originations totaled $203 million during the first six months of 2024, of which almost 75% were originated with the intent to sell.

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling 0.21% of total loans as of June 30, 2024.

We reported net income of $19.6 million, or $1.22 per diluted share, for the third quarter of 2024, compared with net income of $20.9 million, or $1.30 per diluted share, during the third quarter of 2023.

Net income during the first nine months of 2024 totaled $60.0 million, or $3.72 per diluted share, compared to $62.2 million, or $3.89 per diluted share, during the first nine months of 2023.

While noninterest income increased during both periods, net income was negatively impacted by expected lower net interest income and increased noninterest expenses.

Provision expense was lower during the third quarter of 2024 when compared to the third quarter of 2023, and was the same during the first nine months of 2024 as it was during the first nine months of 2023.

Commercial loans increased $233 million during the first nine months of 2024, providing for an annualized growth rate of about 9%.

Multi-family and residential rental property loans increased $93.8 million, in large part reflecting draws on multi-family construction loans, while non-owner occupied commercial real estate (“CRE”) loans grew $60.3 million, commercial and industrial loans increased $58.2 million and owner occupied CRE loans were up $29.0 million.

As a percent of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 56.5% as of September 30, 2024, compared to 57.7% at December 31, 2023.

The commercial loan pipeline remains strong, and as of September 30, 2024, we had $241 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase.

Residential mortgage loans increased $6.7 million during the first nine months of 2024, representing an annualized growth rate of about 1%.

Residential mortgage loan originations totaled $364 million during the first nine months of 2024, of which almost 77% were originated with the intent to sell.

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling 0.22% of total loans as of September 30, 2024.

Accruing loans past due 30 to 89 days remain very low, and we had no foreclosed properties at quarter end.

Gross loan charge-offs totaled less than $0.1 million during the first six months of 2024, while recoveries of prior period loan charge-offs aggregated $0.7 million.

We recorded a provision expense of $3.5 million and $4.8 million during the second quarter and first six months of 2024, respectively.

The second quarter 2024 provision expense primarily reflects a specific allocation associated with a nonperforming nonreal-estate-related commercial loan relationship and allocations necessitated by net loan growth, which were partially mitigated by lower baseline reserve allocations stemming from ongoing low levels of loan charge-offs.

The first six months’ provision expense also includes a specific allocation recorded during the first quarter of 2024 for a different nonperforming nonreal-estate-related commercial loan relationship.

Gross loan charge-offs totaled less than $0.1 million during the first nine months of 2024, while recoveries of prior period loan charge-offs aggregated $0.8 million.

We recorded a provision expense of $1.1 million and $5.9 million during the third quarter and first nine months of 2024, respectively.

The third quarter 2024 provision expense primarily reflects an increase in environmental factor allocations associated with the commercial and industrial loan segment and allocations necessitated by net loan growth, which were partially mitigated by decreases in the calculated allowance due primarily from the payoffs of two larger accruing problem commercial lending relationships.

The provision expense during the first nine months of 2024 also includes specific allocations for two nonperforming non-real-estate-related commercial loan relationships that were established during the first and second quarters, along with allocations necessitated by net loan growth.

MERCANTILE BANK CORPORATION

Interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, averaged $166 million during the first six months of 2024, compared to $48.1 million during the first six months of 2023.

Interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, averaged $206 million during the first nine months of 2024, compared to $102 million during the first nine months of 2023.

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

Total deposits increased $246 million during the first six months of 2024, providing for an annualized growth rate of about 13%.

Growth in money market deposit accounts and local time deposits more than offset a reduction in business noninterest-bearing checking accounts reflecting the customary level of customers’ tax and bonus payments and partnership distributions during the early part of each first quarter.

Federal Home Loan Bank of Indianapolis (“FHLBI”) advances declined $40.8 million during the first six months of 2024.

Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $580 million, or about 12% of total funds, as of June 30, 2024.

Net interest income declined $0.5 million and $1.5 million during the second quarter and first six months of 2024, respectively, compared to the same prior-year time periods, reflecting the net impact of $13.0 million and $29.2 million increases in interest income and $13.5 million and $30.7 million increases in interest expense, during the respective periods.

Our net interest margin declined 42 basis points and 48 basis points during the second quarter and first six months of 2024, respectively, compared to the same prior-year time periods.

Total deposits increased $555 million during the first nine months of 2024, providing for an annualized growth rate of about 19%.

Growth in money market deposit accounts and local time deposits more than offset a reduction in business noninterest-bearing checking accounts primarily reflecting the customary level of customers’ tax and bonus payments and partnership distributions during the early part of each first quarter.

Federal Home Loan Bank of Indianapolis (“FHLBI”) advances declined $50.8 million during the first nine months of 2024.

Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $540 million, or about 11% of total funds, as of September 30, 2024.

Net interest income declined $0.7 million and $2.2 million during the third quarter and first nine months of 2024, respectively, compared to the same prior-year time periods, reflecting the net impact of $12.2 million and $41.4 million increases in interest income and $12.9 million and $43.6 million increases in interest expense, during the respective periods.

Our net interest margin declined 46 basis points and 48 basis points during the third quarter and first nine months of 2024, respectively, compared to the same prior-year time periods.

Although our yield on earning assets increased 30 basis points and 47 basis points, respectively, during those time periods, our cost of funds was up 76 basis points and 95 basis points, respectively.

1 unchanged sentence

Our net interest margin peaked during the latter part of 2022 and early stages of 2023.

Noninterest income totaled $9.7 million and $20.5 million during the second quarter and first six months of 2024, respectively, compared to $7.6 million and $14.6 million during the second quarter and first six months of 2023, respectively.

Noninterest income totaled $9.7 million and $30.2 million during the third quarter and first nine months of 2024, respectively, compared to $9.2 million and $23.8 million during the third quarter and first nine months of 2023, respectively.

The higher level of noninterest income during both time periods primarily stemmed from increases in service charges on deposit accounts, primarily reflecting growth in treasury management fees, and mortgage banking income.

Growth in interest rate swap income benefited noninterest income during both time periods, while revenue associated with a private equity investment positively impacted noninterest income during the first six months of 2024.

Benefit claims on bank owned life insurance policies were recorded during the first quarter of 2024.

Noninterest expense totaled $29.7 million and $59.7 million during the second quarter and first six months of 2024, respectively, compared to $27.8 million and $56.4 million during the second quarter and first six months of 2023, respectively.

Growth in payroll service income and revenue associated with a private equity investment also benefited noninterest income during both time periods, and benefit claims on bank owned life insurance policies were recorded during the first quarter of 2024.

Noninterest expense totaled $32.3 million and $92.0 million during the third quarter and first nine months of 2024, respectively, compared to $28.9 million and $85.3 million during the third quarter and first nine months of 2023, respectively.

The higher level of noninterest expense primarily resulted from increased compensation and benefit costs along with higher data processing expenses.

Contributions to The Mercantile Bank Foundation ("Foundation") totaled $0.7 million during the first six months of 2024.

Contributions to The Mercantile Bank Foundation ("Foundation") totaled $0.7 million during the first quarter of 2024 and $0.4 million during the third quarter of 2023.

MERCANTILE BANK CORPORATION

Financial Condition

Our total assets increased $249 million during the first six months of 2024, and totaled $5.60 billion as of June 30, 2024.

Our total assets increased $564 million during the first nine months of 2024, and totaled $5.92 billion as of September 30, 2024.

Total loans increased $249 million, interest-earning deposits were up $181 million and securities available for sale grew $86.3 million.

Total deposits increased $246 million, while FHLBI advances decreased $40.8 million during the first six months of 2024.

Commercial loans increased $118 million during the first six months of 2024, providing for an annualized growth rate of about 7%.

Multi-family and residential rental property loans increased $56.8 million, in large part reflecting draws on multi-family construction loans, while non-owner occupied CRE loans grew $23.4 million, and commercial and industrial loans increased $21.2 million.

As a percent of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 56.8% as of June 30, 2024, compared to 57.7% at December 31, 2023.

Commercial loans totaled $3.53 billion, or 79.6% of total loans, as of June 30, 2024, compared to $3.42 billion, or 79.4% of total loans, as of December 31, 2023.

As of June 30, 2024, we had $320 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase, which we expect to be drawn over the next 12 to 18 months.

Total deposits increased $555 million, while FHLBI advances decreased $50.8 million during the first nine months of 2024.

Commercial loans increased $233 million during the first nine months of 2024, providing for an annualized growth rate of about 9%.

Multi-family and residential rental property loans increased $93.8 million, in large part reflecting draws on multi-family construction loans, while non-owner occupied CRE loans grew $60.3 million, commercial and industrial loans increased $58.2 million and owner occupied CRE loans were up $29.0 million.

As a percent of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 56.5% as of September 30, 2024, compared to 57.7% at December 31, 2023.

As of September 30, 2024, we had $241 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase, which we expect to be drawn over the next 12 to 18 months.

Our current pipeline reports indicate continued strong commercial loan funding opportunities in future periods, including approximately $236 million in new lending commitments, a majority of which we expect to be accepted and funded over the next 12 to 18 months.

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

Usage of existing commercial lines of credit averaged about 40% during the first six months of 2024, unchanged from the average during all of 2023.

Residential mortgage loans increased $12.2 million during the first six months of 2024, representing an annualized growth rate of about 3%.

Residential mortgage loan originations totaled $203 million during the first six months of 2024, of which almost 75% were originated with the intent to sell.

Residential mortgage loan originations totaled $190 million during the first six months of 2023, of which about 40% were originated with the intent to sell.

Usage of existing commercial lines of credit averaged about 42% during the first nine months of 2024, compared to approximately 40% during all of 2023.

Residential mortgage loans increased $6.7 million during the first nine months of 2024, representing an annualized growth rate of about 1%.

Residential mortgage loan originations totaled $364 million during the first nine months of 2024, of which almost 77% were originated with the intent to sell.

Residential mortgage loan originations totaled $298 million during the first nine months of 2023, of which about 49% were originated with the intent to sell.

In mid-2023, we altered our residential mortgage loan pricing strategy to encourage borrowers to select fixed rate residential mortgage loan products that we could sell rather than selecting adjustable rate residential mortgage loan products that we had to fund on our balance sheet.

The strategy not only provided for less residential mortgage loans being funded on our balance sheet, but also resulted in higher mortgage banking income.

Other consumer-related loans totaled $55.3 million, or 1.2% of total loans, at June 30, 2024, compared to $51.1 million, or 1.1% of total loans, as of December 31, 2023.

Other consumer-related loans totaled $60.6 million, or 1.3% of total loans, at September 30, 2024, compared to $51.1 million, or 1.1% of total loans, as of December 31, 2023.

We expect this loan portfolio segment to remain relatively stable in dollar amount but decline as a percentage of total loans in future periods as the commercial loan segment grows.

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

Nonperforming loans totaled $9.1 million, or 0.2% of total loans, as of June 30, 2024, compared to $3.4 million, or 0.1% of total loans, as of December 31, 2023.

Nonperforming assets, comprised of nonaccrual loans, loans past due 90 days or more and accruing interest and foreclosed properties, totaled $9.1 million (0.2% of total assets) as of June 30, 2024, compared to $3.6 million (0.1% of total assets) as of December 31, 2023.

Nonperforming loans totaled $9.9 million, or 0.2% of total loans, as of September 30, 2024, compared to $3.4 million, or 0.1% of total loans, as of December 31, 2023.

Nonperforming assets, comprised of nonaccrual loans, loans past due 90 days or more and accruing interest and foreclosed properties, totaled $9.9 million (0.2% of total assets) as of September 30, 2024, compared to $3.6 million (0.1% of total assets) as of December 31, 2023.

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

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

During the first six months of 2024, loan charge-offs totaled less than $0.1 million, while recoveries of prior period loan charge-offs equaled $0.7 million.

During the first nine months of 2024, loan charge-offs totaled less than $0.1 million, while recoveries of prior period loan charge-offs equaled $0.8 million.

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

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MERCANTILE BANK CORPORATION

The allowance equaled $55.4 million, or 1.25% of total loans and 607% of nonperforming loans, as of June 30, 2024.

As of June 30, 2024, the allowance was comprised of $49.1 million in general reserves relating to performing loans and $6.3 million in specific reserves on other loans, primarily nonperforming loans.

Loans with an aggregate carrying value of $0.3 million as of June 30, 2024 had been subject to previous partial charge-offs aggregating $0.3 million over the past several years.

As of June 30, 2024, there were no specific reserves allocated to loans that had been subject to a previous partial charge-off.

The allowance equaled $56.6 million, or 1.24% of total loans and 573% of nonperforming loans, as of September 30, 2024.

As of September 30, 2024, the allowance was comprised of $50.3 million in general reserves relating to performing loans and $6.3 million in specific reserves on other loans, primarily nonperforming loans.

Loans with an aggregate carrying value of $0.3 million as of September 30, 2024 had been subject to previous partial charge-offs aggregating $0.3 million over the past several years.

As of September 30, 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.

The following table reflects the composition of our allowance for credit losses, nonaccrual loans, and net charge-offs as of and for the six months ended June 30, 2024.

The following table reflects the composition of our allowance for credit losses, nonaccrual loans, and net charge-offs as of and for the nine months ended September 30, 2024.

(Dollars in thousands)

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MERCANTILE BANK CORPORATION

Securities available for sale increased $30.8 million during the first six months of 2024, totaling $648 million as of June 30, 2024.

Securities available for sale increased $86.3 million during the first nine months of 2024, totaling $703 million as of September 30, 2024.

Purchases of U.S.

Government agency bonds during the first six months of 2024 aggregated $46.0 million, while proceeds from maturities totaled $10.0 million.

Government agency bonds during the first nine months of 2024 aggregated $83.6 million, while proceeds from maturities totaled $22.0 million.

There were no purchases of U.S.

Government agency guaranteed mortgage-backed securities during the first six months of 2024, while proceeds from principal paydowns aggregated $1.6 million.

Purchases of municipal bonds totaled $11.6 million during the first six months of 2024, while proceeds from matured municipal bonds aggregated $11.6 million.

At June 30, 2024, the portfolio was primarily comprised of U.S.

Government agency guaranteed mortgage-backed securities during the first nine months of 2024, while proceeds from principal paydowns aggregated $2.6 million.

Purchases of municipal bonds totaled $20.9 million during the first nine months of 2024, while proceeds from matured municipal bonds aggregated $12.0 million.

At September 30, 2024, the portfolio was primarily comprised of U.S.

Government agency bonds (67%), municipal bonds (29%) and U.S.

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

The fair value of securities designated as available for sale at June 30, 2024 totaled $648 million, including a net unrealized loss of $67.4 million.

The fair value of securities designated as available for sale at September 30, 2024 totaled $703 million, including a net unrealized loss of $45.7 million.

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

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

FHLBI stock totaled $21.5 million as of June 30, 2024, unchanged from December 31, 2023.

FHLBI stock totaled $21.5 million as of September 30, 2024, unchanged from December 31, 2023.

Our investment in FHLBI stock is necessary to engage in the FHLBI’s 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.

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

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

Historically, we have maintained interest-earning deposits at approximately $75.0 million.

Net premises and equipment equaled $50.2 million at June 30, 2024, compared to $50.9 million as of December 31, 2023.

Depreciation expense totaled $3.1 million during the first six months of 2024, while investments associated with renovations of existing facilities totaled $2.4 million.

Net premises and equipment equaled $54.2 million at September 30, 2024, compared to $50.9 million as of December 31, 2023.

Depreciation expense totaled $4.6 million during the first nine months of 2024, while investments associated with the purchase of an office building that will house certain administrative functions and renovations of existing facilities totaled $7.9 million.

MERCANTILE BANK CORPORATION

Total deposits increased $246 million during the first six months of 2024, providing for an annualized growth rate of about 13%.

Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $580 million, or about 12% of total funds, as of June 30, 2024, compared to $636 million, or about 14% of total funds, as of December 31, 2023.

Noninterest-bearing deposits decreased $128 million during the first six months of 2024, in large part reflecting the aforementioned customary level of customers’ tax and bonus payments and partnership distributions in early 2024.

Interest-bearing checking accounts increased $6.1 million, and savings deposits were down $16.0 million.

Money market deposit accounts increased $311 million, and time deposits were up $71.9 million, primarily reflecting growth in deposits from existing customers and initial deposits from new customers.

Uninsured deposits totaled approximately $2.0 billion, or 49% of total deposits, as of June 30, 2024, compared to approximately $1.9 billion, or 48% of total deposits, as of December 31, 2023.

Total deposits increased $555 million during the first nine months of 2024, providing for an annualized growth rate of about 19%.

FHLBI advances declined $50.8 million during the first nine months of 2024.

Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $540 million, or about 11% of total funds, as of September 30, 2024.

Noninterest-bearing deposits decreased $65.4 million during the first nine months of 2024, in large part reflecting the aforementioned customary level of customers’ tax and bonus payments and partnership distributions in early 2024.

Interest-bearing checking accounts increased $75.0 million, primarily reflecting growth in and transfers from noninterest-bearing checking accounts to the IntraFi insured cash sweep account product.

Savings deposits were down $32.5 million, in large part reflecting transfers to higher-costing money market deposit and time deposit accounts.

Money market deposit accounts increased $484 million, and local time deposits were up $139 million, primarily reflecting growth in deposits from existing customers and initial deposits from new customers stemming from our strategic initiative to grow local deposits to lower the loan-to-deposit ratio.

Out-of-area deposits were down $45.2 million from year-end 2023.

Uninsured deposits totaled approximately $2.3 billion, or about 53% of total deposits, as of September 30, 2024, compared to approximately $1.9 billion, or 49% 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 $7.8 million during the first six months of 2024, totaling $222 million as of June 30, 2024.

Securities sold under agreements to repurchase (“sweep accounts”) decreased $8.8 million during the first nine months of 2024, totaling $221 million as of September 30, 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 $221 million during the first six months of 2024, with a high balance of $258 million and a low balance of $166 million.

The average balance of sweep accounts equaled $226 million during the first nine months of 2024, with a high daily balance of $278 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 decreased $40.8 million during the first six months of 2024, totaling $427 million as of June 30, 2024.

Bullet advances aggregating $10.0 million were obtained during the first six months of 2024, while bullet advance maturities aggregated $50.0 million.

FHLBI advances decreased $50.8 million during the first nine months of 2024, totaling $417 million as of September 30, 2024.

Bullet advances aggregating $10.0 million were obtained during the first nine months of 2024, while bullet advance maturities aggregated $60.0 million.

Payments on amortizing FHLBI advances totaled $0.8 million.

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

Our borrowing line of credit as of June 30, 2024 totaled $1.01 billion, with remaining availability based on collateral equaling $576 million.

Shareholders’ equity increased $29.0 million during the first six months of 2024, equaling $551 million at June 30, 2024.

Positively impacting shareholders’ equity during the first six months of 2024 was net income of $40.3 million, which was partially offset by the payment of cash dividends totaling $11.1 million.

Our borrowing line of credit as of September 30, 2024 totaled $1.03 billion, with remaining availability based on collateral equaling $607 million.

Shareholders’ equity increased $61.2 million during the first nine months of 2024, equaling $583 million at September 30, 2024.

Positively impacting shareholders’ equity during the first nine months of 2024 was net income of $60.0 million, which was partially offset by the payment of cash dividends totaling $16.8 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 $3.6 million.

A $2.8 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 six months of 2024.

A $14.4 million after-tax increase in the market value of our available for sale securities portfolio, reflecting a decline in market interest rates, positively impacted shareholders’ equity during the first nine months 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.

Sweep accounts decreased $7.8 million during the first six months of 2024, totaling $222 million as of June 30, 2024.

Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $540 million, or about 11% of total funds, as of September 30, 2024, compared to $636 million, or about 14% of total funds, as of December 31, 2023.

Sweep accounts decreased $8.8 million during the first nine months of 2024, totaling $221 million as of September 30, 2024.

The average balance of sweep accounts equaled $221 million during the first six months of 2024, with a high balance of $258 million and a low balance of $166 million.

The average balance of sweep accounts equaled $226 million during the first nine months of 2024, with a high daily balance of $278 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 June 30, 2024 and during the first six months of 2024 is as follows:

Information regarding our repurchase agreements as of September 30, 2024 and during the first nine months of 2024 is as follows:

(Dollars in thousands)

Outstanding balance at June 30, 2024

Weighted average interest rate at June 30, 2024

Maximum daily balance six months ended June 30, 2024

Average daily balance for six months ended June 30, 2024

Weighted average interest rate for six months ended June 30, 2024

FHLBI advances decreased $40.8 million during the first six months of 2024, totaling $427 million as of June 30, 2024.

Bullet advances aggregating $10.0 million were obtained during the first six months of 2024, while bullet advance maturities aggregated $50.0 million.

Outstanding balance at September 30, 2024

Weighted average interest rate at September 30, 2024

Maximum daily balance nine months ended September 30, 2024

Average daily balance for nine months ended September 30, 2024

Weighted average interest rate for nine months ended September 30, 2024

FHLBI advances decreased $50.8 million during the first nine months of 2024, totaling $417 million as of September 30, 2024.

Bullet advances aggregating $10.0 million were obtained during the first nine months of 2024, while bullet advance maturities aggregated $60.0 million.

Payments on amortizing FHLBI advances totaled $0.8 million.

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Our borrowing line of credit as of June 30, 2024 totaled $1.01 billion, with remaining availability based on collateral equaling $576 million.

Our borrowing line of credit as of September 30, 2024 totaled $1.03 billion, with remaining availability based on collateral equaling $607 million.

We also have the ability to borrow up to an aggregate $70.0 million on a daily basis through correspondent banks using established unsecured federal funds purchased lines of credit.

We did not access these lines of credit during the first six months of 2024.

In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged $154 million during the first six months of 2024.

We did not access these lines of credit during the first nine months of 2024.

In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged $192 million during the first nine months 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 $25.7 million as of June 30, 2024.

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

Using certain municipal bonds as collateral, we could have borrowed up to $158 million as of September 30, 2024.

We did not utilize this line of credit during the first nine months 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 June 30, 2024, significant fixed and determinable contractual obligations to third parties by payment date, excluding accrued interest:

The following table reflects, as of September 30, 2024, significant fixed and determinable contractual obligations to third parties by payment date, excluding accrued interest:

(Dollars in thousands)

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Premises and equipment leases

The balance of certificates of deposit exceeding the FDIC insured limit and their maturity profile as of June 30, 2024 and December 31, 2023 were as follows:

The balance of certificates of deposit exceeding the FDIC insured limit and their maturity profile as of September 30, 2024 and December 31, 2023 were as follows:

(Dollars in thousands)

June 30, 2024

September 30, 2024

December 31, 2023

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

As of June 30, 2024, we had a total of $2.04 billion in unfunded loan commitments and $19.9 million in unfunded standby letters of credit.

As of September 30, 2024, we had a total of $1.98 billion in unfunded loan commitments and $19.1 million in unfunded standby letters of credit.

Of the total unfunded loan commitments, $1.74 billion were commitments available as lines of credit to be drawn at any time as customers’ cash needs vary, and $236 million were for loan commitments generally expected to close and become funded within the next 12 to 18 months.

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Capital Resources

Shareholders’ equity increased $29.0 million during the first six months of 2024, equaling $551 million at June 30, 2024.

Positively impacting shareholders’ equity during the first six months of 2024 was net income of $40.3 million, which was partially offset by the payment of cash dividends totaling $11.1 million.

Shareholders’ equity increased $61.2 million during the first nine months of 2024, equaling $583 million at September 30, 2024.

Positively impacting shareholders’ equity during the first nine months of 2024 was net income of $60.0 million, which was partially offset by the payment of cash dividends totaling $16.8 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.

As of June 30, 2024, our bank’s total risk-based capital ratio was 13.9%, compared to 13.4% at December 31, 2023.

Our bank’s total regulatory capital increased $36.2 million during the first six months of 2024, in large part reflecting net income totaling $45.9 million, which was partially offset by cash dividends paid to us aggregating $14.6 million.

Our bank’s total risk-based capital ratio was also impacted by a $94.7 million increase in total risk-weighted assets.

As of June 30, 2024, our bank’s total regulatory capital equaled $731 million, or $204 million in excess of the 10.0% minimum that is among the requirements to be categorized as “well capitalized.” Our and our bank’s capital ratios as of June 30, 2024 and December 31, 2023 are disclosed in Note 12 of the Notes to Consolidated Financial Statements.

As of September 30, 2024, our bank’s total risk-based capital ratio was 13.9%, compared to 13.4% at December 31, 2023.

Our bank’s total regulatory capital increased $52.6 million during the first nine months of 2024, in large part reflecting net income totaling $68.2 million, which was partially offset by cash dividends paid to us aggregating $21.8 million.

Our bank’s total risk-based capital ratio was also impacted by a $202 million increase in total risk-weighted assets, in large part reflecting net growth in commercial loans.

As of September 30, 2024, our bank’s total regulatory capital equaled $747 million, or $209 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, 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 $18.8 million, or $1.17 per basic and diluted share, for the second quarter of 2024, compared with net income of $20.4 million, or $1.27 per basic and diluted share, for the second quarter of 2023.

We recorded net income of $40.3 million, or $2.50 per basic and diluted share, for the first six months of 2024, compared with net income of $41.3 million, or $2.58 per basic and diluted share, for the first six months of 2023.

Diluted earnings per share decreased $0.10, or 7.9%, during the second quarter of 2024, and $0.08, or 3.1%, during the first six months of 2024, compared with the respective prior-year periods.

The lower levels of net income during the second quarter and first six months of 2024 compared to the respective 2023 periods primarily resulted from higher overhead costs and provisions for credit losses and decreased net interest income, which more than offset notable increases in noninterest income.

We recorded net income of $19.6 million, or $1.22 per basic and diluted share, for the third quarter of 2024, compared with net income of $20.9 million, or $1.30 per basic and diluted share, for the third quarter of 2023.

We recorded net income of $60.0 million, or $3.72 per basic and diluted share, for the first nine months of 2024, compared with net income of $62.2 million, or $3.89 per basic and diluted share, for the first nine months of 2023.

Diluted earnings per share decreased $0.08, or 6.2%, during the third quarter of 2024, and $0.17, or 4.4%, during the first nine months of 2024, compared with the respective prior-year periods.

The lower levels of net income during the third quarter and first nine months of 2024 compared to the respective 2023 periods resulted from increased overhead costs and decreased net interest income, which more than offset higher levels of noninterest income.

The increase in noninterest expense during the 2024 periods mainly resulted from larger salary and data processing costs;

increased contributions to the Foundation also contributed to the higher level of overhead costs during the first six months of 2024.

The provision expense recorded during the 2024 periods primarily reflected individual allocations assigned to two different nonperforming nonreal-estate-related commercial loan relationships, with one each being recorded in the first quarter and second quarter, and allocations necessitated by net loan growth.

increased contributions to the Foundation also contributed to the higher level of overhead costs during the first nine months of 2024.

Net interest income declined during the 2024 periods as higher yields on, along with growth in, earning assets were more than offset by an increased cost of funds.

The growth in noninterest income during the 2024 periods mainly resulted from increased mortgage banking income and service charges on accounts;

higher levels of payroll service fees, interest rate swap income, and gains on the sales of other real estate owned also contributed to the increased noninterest income during the periods.

Revenue associated with a private equity investment and benefit claims on bank owned life insurance policies positively impacted noninterest income during the first six months of 2024.

Interest income during the second quarter of 2024 was $78.9 million, an increase of $13.0 million, or 19.7%, from the $65.9 million earned during the second quarter of 2023.

The growth in noninterest income during the 2024 periods primarily resulted from increased mortgage banking income and treasury management fees;

higher levels of payroll service fees also contributed to the increased noninterest income during the periods.

Revenue associated with a private equity investment and benefit claims on bank owned life insurance policies positively impacted noninterest income during the first nine months of 2024.

The provision expense recorded during the third quarter of 2024 primarily reflected an increase in environmental factor allocations and allocations necessitated by net loan growth, which were partially offset by decreases in the calculated allowance due primarily from the payoffs of two larger problem commercial lending relationships previously included in the collective evaluation.

The provision expense recorded during the first nine months of 2024 mainly reflected individual allocations assigned to two different nonperforming nonreal-estate-related commercial loan relationships and allocations necessitated by net loan growth, which were partly offset by the aforementioned reduction in the calculated allowance.

The provision expense recorded during the prior-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.

Interest income during the third quarter of 2024 was $83.4 million, an increase of $12.3 million, or 17.2%, from the $71.1 million earned during the third quarter of 2023.

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

Average earning assets equaled $5.22 billion during the second quarter of 2024, up $502 million, or 10.7%, from the level of $4.72 billion during the second quarter of 2023;

Average earning assets equaled $5.45 billion during the third quarter of 2024, up $561 million, or 11.5%, from the level of $4.89 billion during the prior-year third quarter;

average loans were up $413 million, average interest-earning deposits grew $75.3 million, and average securities increased $73.2 million.

The yield on average earning assets was 6.07% during the second quarter of 2024, up from 5.61% during the respective 2023 period.

The yield on average earning assets was 6.08% during the third quarter of 2024, up from 5.78% during the respective 2023 period.

The higher yield primarily resulted from an increased yield on loans.

The yield on loans was 6.64% during the second quarter of 2024, up from 6.19% during the second quarter of 2023 mainly due to higher interest rates on variable-rate commercial loans resulting from the FOMC raising the targeted federal funds rate in an effort to reduce elevated inflation levels.

The FOMC increased the targeted federal funds rate by 75 basis points during the period of March 2023 through July 2023, during which time average variable-rate commercial loans represented approximately 68% 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.

Interest income during the first six months of 2024 was $156 million, an increase of $29.2 million, or 23.1%, from the $126 million earned during the first six months of 2023.

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

Average earning assets equaled $5.15 billion during the first six months of 2024, up $499 million, or 10.7%, from the level of $4.65 billion during the first six months of 2023;

The yield on loans was 6.69% during the third quarter of 2024, up from 6.37% during the third quarter of 2023 mainly due to higher interest rates on variable-rate commercial loans resulting from the FOMC raising the targeted federal funds rate in an effort to curb elevated inflation levels and a significant level of commercial loans being originated over the past 15 months in the higher interest rate environment.

The FOMC increased the targeted federal funds rate by 25 basis points in July of 2023, at which time average variable-rate commercial loans represented approximately 65% of average total commercial loans.

The positive impact of the rate hike was partially mitigated by the FOMC’s lowering of the targeted federal funds rate by 50 basis points in mid-September 2024.

Increased yields on securities and interest-earning deposits, reflecting the higher interest rate environment, also contributed to the improved yield on average earning assets.

Interest income during the first nine months of 2024 was $239 million, an increase of $41.5 million, or 21.0%, from the $198 million earned during the first nine months of 2023.

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

Average earning assets equaled $5.25 billion during the first nine months of 2024, up $520 million, or 11.0%, from the level of $4.73 billion during the first nine months of 2023;

average loans increased $387 million, average interest-earning deposits were up $104 million, and average securities grew $28.7 million.

The yield on average earning assets was 6.06% during the first six months of 2024, up from 5.48% during the respective 2023 period.

The higher yield mainly resulted from an increased yield on loans.

The yield on loans was 6.65% during the first six months of 2024, up from 6.05% during the first six months of 2023 primarily due to higher interest rates on variable-rate commercial loans stemming from FOMC rate hikes.

The yield on average earning assets was 6.06% during the first nine months of 2024, up from 5.59% during the respective 2023 period.

The higher yield mainly resulted from an increased yield on loans, which rose from 6.16% during the first nine months of 2023 to 6.66% during the first nine months of 2024 primarily due to higher interest rates on variable-rate commercial loans stemming from FOMC rate hikes and a substantial level of commercial loans being originated since the beginning of 2023 in the higher interest rate environment.

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.

Higher yields on securities and interest-earning deposits, reflecting the rising interest rate environment, along with a change in earning asset mix, consisting of a decline in lower-yielding securities as a percentage of earning assets, also contributed to the increased yield on average earning assets.

The positive impact of the rate hikes was somewhat mitigated by the FOMC’s lowering of the targeted federal funds rate by 50 basis points in mid-September 2024.

An increased yield on securities, reflecting the higher interest rate environment, also contributed to the improved yield on average earning assets.

MERCANTILE BANK CORPORATION

Interest expense during the second quarter of 2024 was $31.8 million, an increase of $13.4 million, or 73.2%, from the $18.4 million expensed during the second quarter of 2023.

The increase is mainly attributable to a higher average weighted cost of interest-bearing liabilities, which rose from 2.37% during the second quarter of 2023 to 3.40% during the current-year second quarter primarily due to higher rates on deposits and borrowings.

Interest expense during the third quarter of 2024 was $35.1 million, an increase of $12.9 million, or 58.3%, from the $22.2 million expensed during the third quarter of 2023.

The increase is mainly attributable to a higher average weighted cost of interest-bearing liabilities, which grew from 2.69% during the third quarter of 2023 to 3.53% during the current-year third quarter primarily due to higher rates on deposits and borrowings.

A change in funding mix, mainly 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.

Reflecting the rising interest rate environment, the cost of interest-bearing, non-time deposits increased from 1.85% during the second quarter of 2023 to 2.79% during the second quarter of 2024, while the cost of time deposits increased from 3.27% to 4.73% during the respective periods.

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

The cost of borrowed funds increased from 2.90% during the second quarter of 2023 to 3.56% during the second quarter of 2024 mainly due to higher costs of sweep accounts and FHLBI advances.

The cost of sweep accounts increased from 1.45% during the second quarter of 2023 to 3.12% during the second quarter of 2024, while the cost of FHLBI advances increased from 2.68% to 2.96% 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 second quarter of 2024 compared to the prior-year second quarter.

Average interest-bearing liabilities totaled $3.76 billion during the second quarter of 2024, compared to $3.11 billion during the second quarter of 2023, representing an increase of $652 million, or 21.0%.

Interest expense during the first six months of 2024 was $61.2 million, an increase of $30.7 million, or 101%, from the $30.5 million expensed during the first six months of 2023.

The increase primarily stemmed from a higher average weighted cost of interest-bearing liabilities, which rose from 2.06% during the first six months of 2023 to 3.33% during the respective 2024 period mainly due to higher rates on deposits and borrowings.

Reflecting the higher interest rate environment, the cost of interest-bearing, non-time deposits increased from 2.17% during the third quarter of 2023 to 2.96% during the third quarter of 2024, while the cost of time deposits increased from 3.85% to 4.79% during the respective periods.

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

The cost of borrowed funds increased from 2.98% during the third quarter of 2023 to 3.75% during the third quarter of 2024 mainly due to higher costs of sweep accounts and FHLBI advances.

The cost of sweep accounts increased from 1.33% during the third quarter of 2023 to 3.73% during the third quarter of 2024, while the cost of FHLBI advances increased from 2.78% to 3.00% during the respective periods, reflecting the higher interest rate environment.

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

Average interest-bearing liabilities totaled $3.94 billion during the third quarter of 2024, compared to $3.27 billion during the third quarter of 2023, representing an increase of $669 million, or 20.4%.

Interest expense during the first nine months of 2024 was $96.3 million, an increase of $43.6 million, or 82.9%, from the $52.7 million expensed during the first nine months of 2023.

The increase primarily stemmed from a higher average weighted cost of interest-bearing liabilities, which rose from 2.28% during the first nine months of 2023 to 3.40% during the respective 2024 period mainly due to higher rates on deposits and borrowings.

A change in funding mix, mainly comprising of a decline 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.

Reflecting the rising interest rate environment, the cost of interest-bearing, non-time deposits increased from 1.56% during the first six months of 2023 to 2.70% during the first six months of 2024, while the cost of time deposits increased from 2.84% to 4.67% during the respective periods.

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

The cost of borrowed funds increased from 2.73% during the first six months of 2023 to 3.53% during the first six months of 2024 mainly due to higher costs of sweep accounts and FHLBI advances.

The cost of sweep accounts increased from 1.17% during the first six months of 2023 to 3.09% during the first six months of 2024, while the cost of FHLBI advances increased from 2.44% to 2.94% 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 six months of 2024 compared to the respective 2023 period.

Average interest-bearing liabilities totaled $3.68 billion during the first six months of 2024, compared to $2.98 billion during the first six months of 2023, representing an increase of $698 million, or 23.4%.

Net interest income during the second quarter of 2024 was $47.1 million, a decrease of $0.5 million, or 1.0%, from the $47.6 million earned during the respective 2023 period.

Reflecting the higher interest rate environment, the cost of interest-bearing, non-time deposits increased from 1.77% during the first nine months of 2023 to 2.80% during the first nine months of 2024, while the cost of time deposits increased from 3.25% to 4.71% during the respective periods.

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

The cost of borrowed funds increased from 2.82% during the first nine months of 2023 to 3.60% during the first nine months of 2024 mainly due to higher costs of sweep accounts and FHLBI advances.

The cost of sweep accounts increased from 1.22% during the first nine months of 2023 to 3.32% during the first nine months of 2024, while the cost of FHLBI advances increased from 2.57% to 2.96% during the respective periods, reflecting the higher interest rate environment.

Growth in interest-bearing liabilities also contributed to the increase in interest expense during the first nine months of 2024 compared to the respective 2023 period.

Average interest-bearing liabilities totaled $3.77 billion during the first nine months of 2024, compared to $3.08 billion during the first nine months of 2023, representing an increase of $688 million, or 22.3%.

Net interest income during the third quarter of 2024 was $48.3 million, a decrease of $0.7 million, or 1.4%, from the $49.0 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 3.63% in the second quarter of 2024, down from 4.05% in the prior-year second quarter due to a higher cost of funds, which more than offset an increased yield on earning assets.

The cost of funds equaled 2.44% in the second quarter of 2024, up from 1.56% in the second 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 previously mentioned FOMC rate hikes.

Net interest income during the first six months of 2024 was $94.4 million, a decline of $1.5 million, or 1.6%, from the $95.9 million earned during the respective 2023 period.

The net interest margin was 3.52% in the third quarter of 2024, down from 3.98% in the prior-year third quarter due to a higher cost of funds, which more than offset an increased yield on earning assets.

The cost of funds equaled 2.56% in the third quarter of 2024, up from 1.80% in the third quarter of 2023 primarily due to higher costs of deposits and borrowed funds, reflecting the impact of the higher interest rate environment, and a change in funding mix, mainly 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.

The increased yield on average earning assets mainly resulted from a higher yield on commercial loans primarily stemming from the previously mentioned FOMC rate hike and a significant level of commercial loans being originated over the past 15 months in the higher interest rate environment.

Net interest income during the first nine months of 2024 was $143 million, a decline of $2.2 million, or 1.5%, from the $145 million earned during the respective 2023 period.

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

The net interest margin was 3.68% in the first six months of 2024, down from 4.16% in the first six months of 2023 due to an increased cost of funds, which more than offset a higher yield on earning assets.

The cost of funds equaled 2.38% in the first six months of 2024, up from 1.32% in the respective prior-year period mainly 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 increases.

The following tables set forth certain information relating to our consolidated average interest-earning assets and interest-bearing liabilities and reflect the average yield on assets and average cost of liabilities for the second quarters and first six months of 2024 and 2023.

The net interest margin was 3.62% in the first nine months of 2024, down from 4.10% in the first nine months of 2023 due to an increased cost of funds, which more than offset a higher yield on earning assets.

The cost of funds equaled 2.44% in the first nine months of 2024, up from 1.49% in the respective prior-year period mainly due to higher costs of deposits and borrowed funds, reflecting the impact of the heightened interest rate environment, and a change in funding mix, comprising of a decline in noninterest-bearing and lower-cost deposits and an increase in higher-cost money market accounts and time deposits resulting from deposit migration and new deposit relationships.

The increased yield on average earning assets primarily resulted from a higher yield on commercial loans mainly stemming from the aforementioned FOMC rate hikes and a substantial level of commercial loans being originated since the beginning of 2023 in the higher interest rate environment.

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 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 second quarters and first six months 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 second quarter of both 2024 and 2023 and $120,000 in the first six months of both 2024 and 2023 for this non-GAAP, but industry standard, adjustment.

Tax-exempt securities interest income and yield for the third quarters and first nine months 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 third quarter of both 2024 and 2023 and $180,000 in the first nine months of both 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 each of the 2024 and 2023 periods.

MERCANTILE BANK CORPORATION

Quarters ended June 30,

Quarters ended September 30,

(dollars in thousands)

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MERCANTILE BANK CORPORATION

Six months ended June 30,

Nine months ended September 30,

(dollars in thousands)

18 unchanged sentences

MERCANTILE BANK CORPORATION

Provisions for credit losses of $3.5 million and $2.0 million were recorded during the second quarters of 2024 and 2023, respectively, and $4.8 million and $2.6 million during the first six months of 2024 and 2023, respectively.

The provision expense recorded during the second quarter of 2024 primarily reflected an individual allocation for a nonperforming nonreal-estate-related commercial loan relationship and allocations necessitated by net loan growth, while the provision expense recorded during the first six months of 2024 mainly reflected the aforementioned individual allocation, an individual allocation for a different nonperforming nonreal-estate-related commercial loan relationship during the first quarter, and allocations required by net loan growth.

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

Ongoing strong loan quality metrics, including low levels of loan charge-offs, during the 2024 and 2023 periods largely mitigated additional reserves associated with the previously mentioned factors.

Noninterest income totaled $9.7 million during the second quarter of 2024, up $2.0 million, or 26.6%, from the $7.7 million recorded during the second quarter of 2023.

The growth primarily resulted from increases in mortgage banking income and service charges on accounts, with the latter mainly stemming from enhanced use of cash management products.

The higher level of mortgage banking income primarily resulted from an increased percentage of loans originated with the intent to sell, which rose from approximately 43% during the second quarter of 2023 to approximately 75% during the second quarter of 2024.

Increases in payroll service fees, bank owned life insurance income, and interest rate swap income also contributed to the higher level of noninterest income.

Noninterest income during the current-year second quarter included $0.3 million in gains on the sales of other real estate owned.

Noninterest income totaled $20.5 million during the first six months of 2024, compared to $14.6 million during the first six months of 2023.

Noninterest income during the first six months of 2024 included bank owned life insurance death benefit claims and gains on the sales of other real estate owned totaling $0.7 million and $0.4 million, respectively.

Excluding these transactions, noninterest income increased $4.8 million, or 33.1%, in the first six months of 2024 compared to the respective 2023 period.

The growth primarily stemmed from higher levels of mortgage banking income, mainly reflecting an increased percentage of residential mortgage loans originated with the intent to sell, and service charges on accounts, in large part reflecting expanded use of cash management products.

The percentage of residential mortgage loans originated with the intent to sell increased from approximately 40% during the first six months of 2023 to approximately 74% during the first six months of 2024.

Increases in interest rate swap income and payroll service fees, along with revenue associated with a private equity investment, also contributed to the growth in noninterest income.

Noninterest expense totaled $29.7 million during the second quarter of 2024, compared to $27.8 million during the prior-year second quarter.

Noninterest expense totaled $59.7 million during the first six months of 2024, compared to $56.4 million during the first six months of 2023.

Provisions for credit losses of $1.1 million and $3.3 million were recorded during the third quarters of 2024 and 2023, respectively, and $5.9 million during both the first nine months of 2024 and 2023.

The provision expense recorded during the current-year third quarter primarily reflected an increase in environmental factor allocations and allocations necessitated by net loan growth, which were partially offset by reductions in the calculated allowance due primarily from the payoffs of two larger problem commercial lending relationships previously included in the collective evaluation.

The provision expense recorded during the first nine months of 2024 mainly reflected individual allocations assigned to two different nonperforming nonreal-estate-related commercial loan relationships and allocations necessitated by net loan growth, which were partly offset by the previously mentioned decrease in the calculated allowance.

The provision expense recorded during the third quarter of 2023 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 resulting 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 aforementioned higher reserve for residential mortgage loans.

Sustained strength in loan quality metrics, including low levels of loan charge-offs, during the 2024 and 2023 periods largely mitigated additional reserves associated with the above-mentioned factors.

Noninterest income totaled $9.7 million during the third quarter of 2024, up $0.4 million, or 4.6%, from the $9.3 million recorded during the third quarter of 2023.

The growth primarily resulted from increases in mortgage banking income, treasury management fees, and payroll service fees.

The higher level of mortgage banking income mainly resulted from increases in the percentage of loans originated with the intent to sell, which rose from approximately 64% during the third quarter of 2023 to approximately 80% during the third quarter of 2024, and total loan originations, which were up approximately 48% in the current-year third quarter compared to the respective 2023 period.

The increase in treasury management fees primarily stemmed from customers’ expanded use of cash management products.

Growth in bank owned life insurance income and credit and debit card income also contributed to the higher level of noninterest income.

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

Noninterest income totaled $30.2 million during the first nine months of 2024, compared to $23.8 million during the first nine months of 2023.

Noninterest income during the first nine months of 2024 included bank owned life insurance death benefit claims and gains on the sales of other real estate owned totaling $0.7 million and $0.4 million, respectively, while noninterest income during the respective 2023 period included a gain on the sale of other real estate owned of $0.4 million.

Excluding these transactions, noninterest income increased $5.6 million, or 24.0%, in the first nine months of 2024 compared to the first nine months of 2023.

The growth primarily stemmed from higher levels of mortgage banking income, mainly reflecting increases in the percentage of residential mortgage loans originated with the intent to sell and total loan production, and treasury management fees, in large part reflecting customers’ expanded use of cash management products.

The percentage of residential mortgage loans originated with the intent to sell increased from approximately 49% during the first nine months of 2023 to approximately 77% during the first nine months of 2024, and total loans originated were up nearly 22% during the respective periods.

Increases in payroll service fees, along with revenue associated with a private equity investment, also contributed to the growth in noninterest income.

Noninterest expense totaled $32.3 million during the third quarter of 2024, compared to $28.9 million during the prior-year third quarter.

Noninterest expense totaled $92.0 million during the first nine months of 2024, compared to $85.3 million during the first nine months of 2023.

The increases during the 2024 periods primarily resulted from larger salary costs, reflecting annual merit pay increases, market adjustments, higher residential mortgage lender commissions and incentives, and lower residential mortgage loan deferred salary costs;

Higher levels of data processing costs, mainly reflecting increased transaction volume and software support costs, and health insurance claims also contributed to the rises in noninterest expense.

Reduced credit reserves for unfunded loan commitments during both 2024 periods compared to the respective 2023 periods partially offset the increases in these cost categories.

Overhead costs during the first six 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 in the first quarter.

During the second quarter of 2024, we recorded income before federal income tax of $23.5 million and a federal income tax expense of $4.7 million.

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

During the first six months of 2024, we recorded income before federal income tax of $50.5 million and a federal income tax expense of $10.2 million.

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

The decrease in federal income tax expense in the second quarter of 2024 compared to the prior-year second quarter primarily resulted from a lower level of income before federal income tax.

Although income before federal income tax expense was $1.0 million lower in the first six months of 2024 compared to respective 2023 period, federal income tax expense was similar during the periods mainly due to our election to apply the proportional amortization method to our tax credit equity investments during the fourth quarter of 2023, which resulted in $0.2 million in tax expense being recorded during the year-to-date 2024 period.

Amortization costs related to tax credit equity investments were included in noninterest expense in the first six months of 2023.

Our effective tax rate was 20.1% during the second quarter and first six months of 2024, compared to 19.8% during the respective 2023 periods.

The tax credit equity investments-related tax election negatively impacted the effective tax rate in the 2024 periods, while the previously mentioned bank owned life insurance death benefit claims, substantially all of which were nontaxable, positively impacted the effective tax rate in the first six months of 2024.

an increased bonus accrual also contributed to the higher salary costs in the current-year third quarter compared to the prior-year third quarter.

Higher levels of data processing costs, mainly reflecting increased transaction volume and software support costs, and health insurance claims also contributed to the rises in noninterest expense during both 2024 periods.

A reduced credit reserve for unfunded loan commitments during the first nine months of 2024 compared to the first nine months of 2023 partially mitigated the increases in the overhead costs noted above in the respective periods.

Noninterest expense during the third quarter of 2023, first nine months of 2024, and first nine months of 2023 included contributions to the Foundation totaling $0.4 million, $0.7 million, and $0.4 million, respectively, while overhead costs during the first nine months of 2023 included a $0.4 million write-down of a former branch facility.

During the third quarter of 2024, we recorded income before federal income tax of $24.5 million and a federal income tax expense of $4.9 million.

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 first nine months of 2024, we recorded income before federal income tax of $75.1 million and a federal income tax expense of $15.1 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.

The decreases in federal income tax expense during the 2024 periods compared to the respective prior-year periods primarily resulted from a lower level of income before federal income tax.

Our election to apply the proportional amortization method to our tax credit equity investments during the fourth quarter of 2023 resulted in $0.1 million and $0.3 million in tax expense being recorded during the third quarter and first nine months of 2024, respectively.

Amortization costs related to tax credit equity investments were included in noninterest expense in the first nine months of 2023.

Our effective tax rate was 20.1% during the third quarter and first nine months of 2024, compared to 19.7% during the respective 2023 periods.

MERCANTILE BANK CORPORATION

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

What changed 10-Q

Item 1. Financial Statements