What changed in this filing

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Item 9A. Controls and Procedures

2025-03-03 compared with 2024-03-01 · 430 added, 562 removed, 2661 unchanged (27% of the section changed)

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Refer to page F-27 for management’s report.

The Reports of the Independent Registered Public Accounting Firms included in this Annual Report are incorporated here by reference.

Other Information.

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Directors, Executive Officers and Corporate Governance.

The information presented under the captions “Election of Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance – Code of Ethics” in the definitive Proxy Statement of Mercantile Bank Corporation for our May 23, 2024 Annual Meeting of Shareholders (the “Proxy Statement”), a copy of which will be filed with the Securities and Exchange Commission before April 30, 2024, is incorporated here by reference.

The information presented under the captions “Information About Our Directors,” “Information About Our Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance”, “Corporate Governance – Code of Ethics and Insider Trading Policy”, and "Board Committees -- Audit Committee" in the definitive Proxy Statement of Mercantile Bank Corporation for our May 22, 2025 Annual Meeting of Shareholders (the “Proxy Statement”), a copy of which will be filed with the Securities and Exchange Commission before April 30, 2025, is incorporated here by reference.

Executive Compensation.

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Principal Accountant Fees and Services.

The information presented under the caption “Principal Accountant Fees and Services” in the Proxy Statement is incorporated here by reference.

The information presented under the caption “Audit Committee Matters -- Principal Accountant Fees and Services” in the Proxy Statement is incorporated here by reference.

Exhibits and Financial Statement Schedules

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The following discussion and other portions of this Annual Report contain forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates, and projections about the financial services industry, the economy, and our company.

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

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

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

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Unless the text clearly suggests otherwise, references to “us,” “we,” “our,” or “the company” include Mercantile Bank Corporation and its wholly-owned subsidiaries referred to above.

CORONAVIRUS PANDEMIC

Although virtually all related restrictions have been terminated, impacts remain across national and global economies due to the pandemic of coronavirus disease 2019 (“Covid-19”) caused by severe acute respiratory syndrome coronavirus 2 (the “Coronavirus Pandemic”).

Overall, the Coronavirus Pandemic has caused a sustained global economic slowdown of varying durations across different industries.

The Coronavirus Pandemic has had a significant impact on our financial condition and operating results since its onset in March, 2020.

Federal government stimulus programs resulted in a massive increase to the money supply, providing significant inflationary pressures that the Federal Reserve’s Federal Open Market Committee (“FOMC”) has been attempting to manage through substantial increases in the federal funds rate since March, 2022.

In addition, we experienced significant growth in liquidity during 2021 and 2022 as federal government stimulus monies were deposited by program recipients, providing for sizable impacts to our operating performance as well as our capital and liquidity positions during both years.

The Paycheck Protection Program (“PPP”) reflected a substantial expansion of the Small Business Administration’s 100% guaranteed 7(a) loan program.

The PPP provided 100% guaranteed loans to cover specific operating costs.

PPP loans were eligible to be forgiven based upon certain criteria.

Any remaining balance after forgiveness is maintained at the 100% guarantee for the duration of the loan.

The interest rate on the loan is fixed at 1.00%, with the financial institution receiving a loan origination fee from the Small Business Administration.

The loan origination fees, net of the direct origination costs, are accreted into interest income on loans using the level yield methodology.

The program ended on August 8, 2020.

We originated approximately 2,200 loans aggregating $554 million.

As of December 31, 2023, we recorded forgiveness transactions on all but four loans aggregating $0.1 million.

The Consolidated Appropriations Act, 2021 authorized an additional $284 billion in Second Draw PPP loans (“Second Draw”).

This program ended on May 31, 2021.

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

As of December 31, 2023, we recorded forgiveness transactions on all but five loans aggregating $0.2 million.

CLIMATE CHANGE

Increased public and investor concern about climate change will likely continue to (1) generate more regional and/or national requirements to reduce greenhouse gas emissions;

(2) increase energy efficiency and reduce carbon pollution;

and (3) cause a shift to cleaner and more sustainable sources of energy which may be more expensive than using fossil fuels as an energy source.

The potential impact of climate changes on our operations and the needs of our customers remains uncertain.

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These changes could be severe and vary by geographic location.

Climate change may also affect the occurrence of certain natural events, the incidence and severity of which are inherently unpredictable.

We could also face indirect financial risks passed through the supply chain that could result in higher prices for resources, such as energy.

Additionally, climate change may adversely impact the demand, prices, and availability of property and casualty insurance that insures our loan collateral.

Due to significant economic variability associated with potential future changing climate conditions, we are unable to predict the impact climate change will have on us.

Climate change may also affect the occurrence of certain natural events, the incidence and severity of which are inherently unpredictable, and may impact our borrowers or the value of our loan collateral.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE MATTERS

There has been an increased focus from regulators and stakeholders on environmental, social, and governance (“ESG”) matters, including greenhouse gas emissions, sustainability, and climate-related risks;

diversity, equity and inclusion;

responsible sourcing and supply chain;

human rights and social responsibility;

and corporate governance and oversight.

Given our commitment to ESG matters, we actively manage these issues and have established and publicly announced certain goals, commitments, and targets which we may refine or even expand further in the future.

These goals, commitments, and targets reflect our current plans and aspirations and are not guarantees that we will be able to achieve them.

Evolving stakeholder expectations and our efforts and ability to manage these issues, provide updates on them, and accomplish our goals, commitments, and targets present numerous operational, regulatory, reputational, financial, legal, and other risks, any of which may be outside of our control or could have a material adverse impact on our business, including on our reputation and stock price.

Further, there is uncertainty around the accounting standards and climate-related disclosures associated with emerging laws and reporting requirements and the related costs to comply with the emerging regulations.

Our failure or perceived failure to achieve our ESG goals, maintain ESG practices, or comply with emerging ESG regulations that meet evolving regulatory or stakeholder expectations could harm our reputation, adversely impact our ability to attract and retain customers and talent, and expose us to increased scrutiny from the investment community and regulatory authorities.

Our reputation also may be harmed by the perception that our stakeholders have about our action or inaction on ESG-related issues.

Our ESG Committee supports our ongoing commitment to environmental, health and safety, corporate social responsibility, corporate governance, sustainability, and other public policy matters relevant to our organization.

The ESG Committee is a cross-functional management committee, led by the Chief Risk Officer, that assists us in:

Our Sustainability Committee supports our ongoing commitment to environmental, health and safety, corporate social responsibility, corporate governance, sustainability, and other public policy matters relevant to our organization.

The Sustainability Committee is a cross-functional management committee, with oversight from the Governance and Nominating Committee and the Board of Directors, that assists us in:

(1) setting general strategies relating to ESG matters;

(2) developing, implementing, and monitoring initiatives and polices based on those strategies;

(2) developing, implementing, and monitoring initiatives and policies based on those strategies;

(3) recommending communications with employees, investors, and shareholders with respect to ESG matters;

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The committee met three times during 2024.

Highlights for 2023 included establishing Mercantile Community Partners LLC to facilitate low-income housing tax credits, hiring a fulltime Director of Learning to better develop our employees, engaging a new provider to improve our ESG data gathering and reporting, incorporating a member of our Bank’s Young Professional resource group as a member of the ESG Committee, and rolling out a new Green Mortgage Lending Program to support homeowners looking to make environmentally sustainable home improvements.

Our bank also developed a Clawback Policy;

Highlights for 2024 included expanding the impact of Mercantile Community Partners LLC to facilitate low-income housing tax credits, the completion and posting of the 2024 Corporate Sustainability Report, hiring a fulltime Director of Enterprise Excellence at the end of 2024 to oversee all ongoing ESG and sustainability efforts, implementation of a sustainability reporting platform, increased support of first-time home buyers mortgage programs, and over 27,500 hours of volunteering in the community completed by employees.

Our bank maintains a Clawback Policy;

an Insider Trading Policy;

Code of Ethics;

Corporate Governance Guidelines;

an Anti-Bribery and Anti-Corruption Policy;

and an Anti-Money Laundering, Bank Secrecy Act, Customer Identification and Due Diligence Programs Letter.

These and our other policies (including our Vendor and Supplier Code of Conduct, Environmental Policy, Diversity, Equity and Inclusion Policy, Human Rights Policy, and Supplier Diversity Program Policy) are reviewed and approved by our Board of Directors at least annually and can be found on our website.

an Anti-Money Laundering, Bank Secrecy Act, Customer Identification and Due Diligence Programs Letter;

Vendor and Supplier Code of Conduct;

Environmental Policy;

Human Rights Policy;

and Supplier Diversity Program Policy;

these policies are reviewed and approved by our Board of Directors at least annually and can be found on our website.

FINANCIAL OVERVIEW

We recorded net income of $79.6 million, or $4.93 per basic and diluted share, for 2024, compared with net income of $82.2 million, or $5.13 per basic and diluted share, for 2023.

Higher net interest income, stemming from an improved net interest margin and ongoing strong loan growth, combined with continued strength in asset quality metrics more than offset higher overhead costs.

While noninterest income increased during 2024, net income was negatively impacted by expected lower net interest income and higher noninterest expenses.

Commercial loans increased $292 million, or approximately 9%, during 2024.

Owner-occupied commercial real estate (“CRE”) loans grew $78.5 million, commercial and industrial loans increased $69.5 million, multi-family and residential rental property loans were up $66.1 million, nonowner-occupied CRE loans grew $56.5 million, and vacant land, land development, and residential construction loans increased $12.9 million.

Multi-family and residential rental property loans were up $143 million, nonowner-occupied commercial real estate (“CRE”) loans grew $92.7 million, commercial and industrial loans increased $32.7 million, and owner-occupied CRE loans were up $31.2 million, while vacant land, land development, and residential construction loans decreased $7.8 million.

As a percentage of total commercial loans, commercial and industrial loans and owner-occupied CRE loans combined equaled 54.9% at December 31, 2024, compared to 57.7% at year-end 2023.

The new commercial loan pipeline remains strong, and at December 31, 2024, we had $245 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase.

Residential mortgage loans increased $120 million, or approximately 17%, during 2023.

The higher residential mortgage loan interest rates during 2023 and 2022 resulted in borrowers primarily selecting adjustable rate residential mortgage loans compared to fixed rate residential mortgage loans in the prior two years.

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

Approximately 53% and 35% of our residential mortgage loan production was comprised of longer-term fixed rate loans during 2023 and 2022, respectively, compared to about 68% during 2021.

The shift in production mix resulted in residential mortgage loans comprising a larger percentage of total loans, increasing from about 13% at year-end 2021 to approximately 20% at December 31, 2023.

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

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

Residential mortgage loans decreased $9.8 million, or approximately 1%, during 2024.

Residential mortgage loan originations totaled $485 million during 2024, compared to $386 million in 2023.

Approximately 78% of the residential mortgage loans originated during 2024 were done so with the intent to sell, compared to about 53% in 2023.

The increases in volume of loans originated and percentage of loans sold had a positive impact on mortgage banking income.

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling 0.12% of total loans as of December 31, 2024.

Accruing loans past due 30 to 89 days remain very low, as did foreclosed property activity throughout 2023.

Loan charge-offs totaled $0.9 million during 2023, while recoveries of prior period loan charge-offs totaled $0.8 million, providing for net loan charge-offs of $0.1 million, or less than 0.01% of average total loans, for the year.

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

The average balance of these funds equaled $107 million, or 2.2% of average earning assets, during 2023, compared to $445 million, or 9.3% of average earning assets, during 2022.

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

The elevated level during 2022 primarily reflected increased local deposits stemming from Covid-19-related federal government stimulus programs and reduced business and consumer investing and spending during 2021 and into 2022.

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

We also experienced a decline in local deposits throughout 2022.

Total deposits increased $188 million during 2023, and totaled $3.90 billion at December 31, 2023.

Local deposits increased $19.7 million, and out-of-area deposits grew $168 million, during 2023.

FHLBI advances increased $160 million during 2023.

The combined $328 million increase in wholesale funds during 2023 was primarily used to fund loan growth.

Net interest income increased $35.3 million during 2023 compared to 2022.

Interest income was up $89.5 million, in large part resulting from the combined impact of a higher yield on earning assets reflecting a higher interest rate environment and ongoing loan growth.

Interest expense was up $54.2 million, in large part reflecting the higher interest rate environment, transfers of deposit balances from no- or low-cost deposit products to higher-costing deposit products and a higher level of wholesale funds.

Accruing loans past due 30 to 89 days remain low, with little foreclosed property activity throughout 2024.

Loan charge-offs totaled $3.8 million during 2024, while recoveries of prior period loan charge-offs totaled $0.9 million, providing for net loan charge-offs of $2.9 million, or 0.06% of average total loans, for the year.

Interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, are used to manage daily liquidity needs and interest rate risk sensitivity.

The average balance of these funds equaled $237 million during 2024, compared to $107 million in 2023.

The higher average balance primarily reflects an increase in deposits associated with our strategic initiative to lower the loan-to-deposit ratio.

Total deposits increased $797 million during 2024, providing for a growth rate of approximately 20%.

A majority of the growth was in money market and time deposit products.

Federal Home Loan Bank of Indianapolis (“FHLBI”) advances declined $80.8 million during 2024.

Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $537 million, or about 10% of total funds, as of December 31, 2024.

Net interest income decreased $2.5 million during 2024 compared to 2023.

Interest income was up $50.1 million, in large part reflecting $569 million of growth in average earning assets and a 34 basis point increase in the yield on average earning assets.

Interest expense was up $52.6 million, primarily reflecting $699 million growth in average interest-bearing liabilities and a 91 basis point increase in the cost of interest-bearing liabilities.

We recorded a credit loss provision expense of $7.4 million during 2024, compared to $7.7 million during 2023.

The provision expense recorded during 2023 was necessitated by the net increase in required reserve levels stemming from loan growth, slower residential mortgage loan prepayment speeds and a modification to the environmental factor grid, which were partially mitigated by the elimination of a specific reserve on a troubled commercial lending relationship that paid-off in full in early 2023 and a change in the segmentation of the home equity lines of credit and credit card portfolios.

Noninterest income was virtually the same during 2023 when compared to 2022.

We continued to record growth in treasury management-related fee income categories, such as credit and debit card income and payroll processing, along with increases in interest rate swap income, which mitigated a reduction in service charges on accounts due to increased earnings credit rates on noninterest-bearing checking accounts and lower mortgage banking income reflecting the higher interest rate environment.

The provision expense recorded during 2024 was generally necessitated by increased required reserve levels stemming from loan growth, slower residential mortgage loan prepayment speeds and specific allocations for two nonperforming nonreal-estate-related commercial loan relationships.

Noninterest income increased $8.2 million during 2024 compared to 2023, primarily reflecting higher mortgage banking income and service charges on deposit accounts, the latter stemming from growth in treasury management fees.

Growth in payroll service income and revenue associated with a private equity investment also benefited noninterest income during 2024, as well as benefit claims on bank owned life insurance policies.

Noninterest expense increased $10.5 million during 2024 compared to 2023.

Aggregate salary and benefit costs grew $3.7 million, with additional increases recorded for FDIC insurance premiums, swap collateral holding costs and allocations to the reserve for unfunded loan commitments.

Aggregate salary and benefit costs grew $9.1 million, primarily reflecting annual merit pay increases, market adjustments, higher bonus/incentive accruals and residential mortgage lender commissions, lower residential mortgage loan deferred salary costs and increased medical insurance expenses.

Increased data processing costs were also recorded during 2024, largely reflecting higher transaction volumes and software support costs, along with the introduction of new treasury management products and services.

FINANCIAL CONDITION

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Total loans increased $297 million, securities available for sale were up $113 million and interest-earning deposits grew $276 million.

Total deposits increased $188 million, FHLBI advances were up $160 million, and shareholders’ equity grew $80.7 million.

Total deposits increased $797 million and shareholders’ equity grew $62.4 million, while securities sold under agreements to repurchase (“sweep accounts) decreased $108 million and FHLBI advances declined $80.8 million.

Earning Assets

Average earning assets equaled 94.4% of average total assets during 2023, compared to 94.3% during 2022.

Average earning assets equaled 94.4% of average total assets during both 2024 and 2023.

The loan portfolio continued to comprise a majority of earning assets, followed by securities and interest-earning deposits.

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Commercial loans increased $292 million, or approximately 9%, during 2024.

Owner-occupied CRE loans grew $78.5 million, commercial and industrial loans increased $69.5 million, multi-family and residential rental property loans were up $66.1 million, nonowner-occupied CRE loans grew $56.5 million, and vacant land, land development, and residential construction loans increased $12.9 million.

Multi-family and residential rental property loans were up $143 million, nonowner-occupied CRE loans grew $92.7 million, commercial and industrial loans increased $32.7 million, and owner-occupied CRE loans were up $31.2 million, while vacant land, land development, and residential construction loans decreased $7.8 million.

As a percentage of total commercial loans, commercial and industrial loans and owner-occupied CRE loans combined equaled 54.9% at December 31, 2024, compared to 57.7% at year-end 2023.

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

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 was relatively stable during 2023 at approximately 40%, similar to that of 2022 but lower than our historical average of 47%.

Residential mortgage loans totaled $837 million, or 19.5% of total loans, at December 31, 2023, compared to $718 million, or 18.3% of total loans, as of December 31, 2022.

Residential mortgage loans increased $120 million, or approximately 17%, during 2023.

We originated $386 million in residential mortgage loans during 2023, compared to $614 million and $952 million in 2022 and 2021, respectively.

The decline over the past two years primarily reflected significantly higher residential mortgage loan interest rates, resulting in a substantial reduction of refinancing activity.

Production associated with refinancing activity totaled $59.8 million and $134 million in 2023 and 2022, respectively, compared to $458 million in 2021.

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

Approximately 53% and 35% of our residential mortgage loan production was comprised of longer-term fixed rate loans during 2023 and 2022, respectively, compared to about 68% during 2021.

The shift in production mix has resulted in residential mortgage loans comprising a larger percentage of total loans, increasing from about 13% at year-end 2021 to 19.5% at December 31, 2023.

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

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

Usage of existing commercial lines of credit was relatively stable during 2024 at approximately 42%, a small increase from 2023 but similar to our historical average.

Residential mortgage loans decreased $9.8 million, or approximately 1%, during 2024.

Residential mortgage loan originations totaled $485 million during 2024, compared to $386 million in 2023.

Approximately 78% of the residential mortgage loans originated during 2024 were done so with the intent to sell, compared to about 53% in 2023.

In mid-2023, we altered our residential mortgage loan pricing strategy to encourage borrowers to select fixed rate residential 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.

The increased volume of loans originated also benefited mortgage banking income.

Other consumer-related loans totaled $65.9 million, or 1.4% of total loans, at December 31, 2024.

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

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

The following table presents total loans outstanding as of December 31, 2024, according to scheduled repayments of principal on fixed rate loans and repricing frequency on variable rate loans.

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Nonperforming loans totaled $5.7 million, or 0.12% of total loans, as of December 31, 2024, compared to $3.4 million, or 0.08% 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 $3.6 million (0.1% of total assets) as of December 31, 2023, compared to $7.7 million (0.2% of total assets) as of December 31, 2022.

The volume of nonperforming assets has remained under 0.3% of total assets since year-end 2015, and has averaged 0.1% over the past five years.

Accruing loans past due 30 to 89 days remain low, with little foreclosed property activity throughout 2024.

The volume of nonperforming assets has remained under 0.3% of total assets since year-end 2015, and has averaged 0.1% over the past six years.

Given the low level 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 2022, loan charge-offs totaled $0.3 million, while recoveries of prior period loan charge-offs equaled $1.0 million, providing for net loan recoveries of $0.7 million, or 0.02% of average total loans.

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

however, given the nature of these efforts, it is not practical to forecast the dollar amount and timing of the recoveries.

The following table reflects the composition of our allowance for credit loss, nonaccrual loans, and net charge-offs as of and for the year ended December 31, 2023.

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

(Dollars in thousands)

Allowance for Credit Losses

Allowance for Credit Losses to Loan Totals

Allowance for Credit Losses to Total Loans

Nonaccrual Loans

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Other consumer

The following table reflects the composition of our allowance for credit loss, nonaccrual loans, and net charge-offs as of and for the year ended December 31, 2022.

The following table reflects the composition of our allowance for credit losses, nonaccrual loans, and net charge-offs as of and for the year ended December 31, 2023.

(Dollars in thousands)

Allowance for Credit Losses

Allowance for Credit Losses to Loan Totals

Allowance for Credit Losses to Total Loans

Nonaccrual Loans

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Other consumer

The following table reflects the composition of our allowance for loan loss, nonaccrual loans, and net charge-offs as of and for the year ended December 31, 2021.

The following table reflects the composition of our allowance for loan losses, nonaccrual loans, and net charge-offs as of and for the year ended December 31, 2022.

(Dollars in thousands)

Allowance for Credit Losses

Allowance for Credit Losses to Loan Totals

Allowance for Credit Losses to Total Loans

Nonaccrual Loans

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Ratio of allowance to nonperforming loans

The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of collateral, and timeliness of scheduled payments.

The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of collateral, and the timeliness of scheduled payments.

We have a policy of requesting and reviewing periodic financial statements from commercial loan customers, and we have a disciplined and formalized review of the existence of collateral and its value.

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The allowance equaled $54.5 million, or 1.18% of total loans, and over 900% of nonperforming loans, as of December 31, 2024.

As of December 31, 2023, the allowance was comprised of $49.4 million in general reserves relating to performing loans and $0.5 million in specific reserves on other loans, primarily nonperforming loans.

Loans with an aggregate carrying value of $0.4 million as of December 31, 2023 had been subject to previous partial charge-offs aggregating $0.4 million over the past several years.

The allowance was comprised of $52.3 million in general reserves relating to performing loans and $2.2 million in specific reserves on other loans, primarily nonperforming loans, at year-end 2024.

Loans with an aggregate carrying value of $1.1 million as of December 31, 2024 had been subject to previous partial charge-offs aggregating $4.0 million over the past several years, including $3.8 million during 2024.

As of December 31, 2024, there were no specific reserves allocated to loans that had been subject to a previous partial charge-off.

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Securities available for sale increased $113 million during 2024, totaling $730 million as of December 31, 2024.

There were no purchases of U.S.

Government agency bonds during 2023;

proceeds from matured U.S.

Purchases of U.S.

Government agency bonds during 2024 aggregated $143 million, while proceeds from matured U.S.

Government agency bonds totaled $44.0 million.

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

We expect upcoming purchases to generally consist of municipal bonds, with the securities portfolio maintained at about 10% to 12% of total assets.

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

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

Market values on our U.S.

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

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

The $3.8 million increase reflects additional stock purchased in association with an increase in outstanding advances during 2023.

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

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

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Other investments

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

The average balance of these funds equaled $107 million, or 2.2% of average earning assets, during 2023, compared to $445 million, or 9.3% of average earning assets, during 2022.

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

We also experienced a decline in local deposits throughout 2022.

The average balance of these funds equaled $237 million during 2024, compared to $107 million in 2023.

The higher average balance primarily reflects an increase in deposits associated with our strategic initiative to lower the loan-to-deposit ratio.

Non-Earning Assets

Cash and due from bank balances averaged 1.2% of total assets during 2023, similar to the average level during 2022, and no significant changes are expected in future periods.

Net premises and equipment equaled $50.9 million at December 31, 2023, representing a decrease of $0.5 million during 2023.

In large part, aggregate investments in new and existing offices approximated depreciation expense.

Other real estate owned as of December 31, 2023 equaled $0.2 million, and consisted of property associated with a former branch location.

Other assets equaled $126 million at December 31, 2023, reflecting an increase of $30.0 million during 2023.

The increase is primarily associated with an aggregate $22.5 million investment in low-income housing tax credits.

Cash and due from bank balances averaged 1.1% of total assets during 2024, similar to the average level during 2023, with no significant changes expected in future periods.

Net premises and equipment equaled $53.4 million at December 31, 2024, representing an increase of $2.5 million during 2024.

Aggregate investments in new and existing offices totaled $8.5 million, while depreciation expense aggregated $6.0 million.

We had no other real estate owned as of December 31, 2024.

Other assets equaled $148 million at December 31, 2024, reflecting an increase of $22.8 million from year-end 2023.

The growth is primarily associated with an aggregate $13.6 million increase in low-income housing and historical tax credit investments and a $7.0 million purchase of additional bank owned life insurance.

Source of Funds

Total deposits increased $188 million during 2023, and totaled $3.90 billion at December 31, 2023.

Local deposits increased $19.7 million, and out-of-area deposits grew $168 million, during 2023.

FHLBI advances increased $160 million during 2023.

The combined $328 million increase in wholesale funds during 2023 was primarily used to fund loan growth.

Noninterest-bearing checking accounts declined $357 million during 2023, in large part reflecting transfers to interest-bearing deposit accounts and withdrawals associated with the sales of businesses.

Interest-bearing checking accounts increased $60.8 million, generally resulting from transfers from noninterest-bearing checking accounts.

Savings deposits declined $119 million, primarily reflecting the transfers of funds to higher-paying money market deposit accounts and time deposits.

Money market deposit accounts increased $181 million, in large part reflecting growth in deposits from existing and new municipal depositors, as well as from transfers from no- and low-cost deposit products.

Local time deposits increased $254 million, primarily reflecting transfers of funds from no- and low-cost deposit products.

Out-of-area deposits during 2023 grew by, and totaled, $168 million as of December 31, 2023.

As of both December 31, 2023 and 2022, approximately $1.9 billion of our deposit portfolio was uninsured.

The uninsured amounts are estimates based on the methodologies and assumptions used by Mercantile Bank's regulatory reporting requirements.

Total deposits increased $797 million, or over 20%, during 2024, and totaled $4.70 billion at December 31, 2024.

Local deposits increased $816 million, while out-of-area deposits declined $18.7 million, during 2024.

Sweep accounts decreased $108 million, and FHLBI advances declined $80.8 million.

Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $537 million, or about 10% of total funds, as of December 31, 2024.

Money market, local time deposit and interest-bearing checking accounts increased $559 million, $178 million and $103 million, respectively, during 2024, largely 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.

Savings deposits declined $40.7 million, primarily reflecting transfers to higher-paying money market and time deposit products.

Noninterest-bearing checking accounts grew $16.9 million;

however, that includes a business deposit of approximately $90 million made near the end of 2024 that was withdrawn in early 2025.

On an average basis, noninterest-bearing checking accounts declined $199 million during 2024 compared to 2023, largely reflecting transfers to higher-paying deposit accounts.

Uninsured deposits totaled approximately $2.5 billion, or about 54% of total deposits, as of December 31, 2024, compared to approximately $1.9 billion, or about 48% of total deposits, as of December 31, 2023.

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

Our level of uninsured deposits, which has remained relatively stable as a percentage of total deposits, is generally higher than industry averages given our focus on commercial lending.

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

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Total certificates of deposit

Securities sold under agreements to repurchase (“sweep accounts”) increased $35.4 million during 2023, totaling $230 million as of December 31, 2023.

The aggregate balance of this funding type can be 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.

Sweep accounts declined $108 million during 2024, totaling $122 million as of December 31, 2024.

In addition, we had one customer withdraw a large amount of funds near the end of 2024 that were returned in early 2025.

The average balance of sweep accounts equaled $225 million during 2024 with a high balance of $278 million and a low balance of $118 million.

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All of our sweep accounts are accounted for as secured borrowings.

FHLBI advances increased $160 million during 2023, totaling $468 million as of December 31, 2023.

Bullet advances aggregating $240 million were obtained during 2023, consisting of $160 million to fund loan growth and $80.0 million to replace FHLBI bullet advance maturities.

Payments on amortizing FHLBI advances totaled $0.4 million during 2023.

FHLBI bullet advances are generally obtained to provide funds for loan growth and are used to assist in managing interest rate risk, while amortizing FHLBI advances are generally acquired to match-fund specific longer-term fixed rate commercial loans, with the dollar amount and amortization structure of the underlying advances reflective of the associated commercial loans.

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

Our borrowing line of credit at year-end 2023 totaled $903 million, with remaining availability based on collateral of $429 million.

FHLBI advances declined $80.8 million during 2024, totaling $387 million as of December 31, 2024.

Bullet advances aggregating $10.0 million were obtained during 2024, while bullet advance maturities aggregated $90.0 million.

Payments on amortizing advances totaled $0.8 million during 2024.

Bullet advances are generally obtained to provide funds for loan growth and are used to assist in managing interest rate risk, while amortizing advances are generally acquired to match-fund specific longer-term fixed rate commercial loans, with the dollar amount and amortization structure of the underlying advances reflective of the associated commercial loans.

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

Our borrowing line of credit at year-end 2024 totaled $1.0 billion, with remaining availability based on collateral of $634 million.

Shareholders’ equity increased $62.4 million during 2024, totaling $585 million as of December 31, 2024.

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We recorded net income of $79.6 million, or $4.93 per basic and diluted share, for 2024, compared to net income of $82.2 million, or $5.13 per basic and diluted share, for 2023.

Diluted earnings per share increased $1.28, or 33.2%, during 2023 compared to 2022.

The increase in net income during 2023 compared to 2022 primarily reflected improved net interest income, which more than offset higher levels of noninterest expense and provisions for credit losses.

The growth in net interest income mainly stemmed from an increased net interest margin and loan growth.

Overhead costs were up in 2023 primarily due to higher salary expense, reflecting annual merit pay increases and market adjustments, along with lower residential mortgage loan deferred salary costs.

The provision expense recorded during 2023 mainly reflected allocations necessitated by net loan growth, slower residential mortgage loan prepayment rates and the related extended average life of the portfolio, and changes in environmental factors depicting heightened inherent risk in the commercial construction loan portfolio.

The provision expense recorded during 2022 was necessitated by the net increase in required reserve levels stemming from changes to several environmental factors that largely reflected enhanced inherent risk within the commercial loan and residential mortgage loan portfolios, loan growth, and increased specific reserves for certain distressed loan relationships.

A higher reserve for residential mortgage loans reflecting slower principal prepayment rates also impacted provision expense during 2022.

Excluding nonrecurring transactions, noninterest income was up marginally during 2023 compared to the prior year as increases in credit and debit card income, interest rate swap income, payroll processing fees, and bank owned life insurance income, as well as the improved performance of an equity fund investment, were in large part offset by decreased mortgage banking income and service charges on accounts.

Diluted earnings per share decreased $0.20, or 3.9%, during 2024 compared to 2023.

The decrease in net income during 2024 compared to 2023 reflected increased noninterest expense and lower net interest income, which more than offset higher noninterest income and a reduced provision for credit losses.

Noninterest expense was up in 2024 primarily due to increased salary and benefit and data processing costs.

Net interest income declined during 2024 as growth in earning assets, most notably in loans, and a higher yield on earning assets were more than offset by growth in interest-bearing liabilities and an increased cost of funds.

The provision expense recorded during 2024 and 2023 included allocations necessitated by net loan growth, slower residential mortgage loan prepayment rates and the associated extended average life of the portfolio, and changes in environmental factors.

Individual allocations created for two deteriorated commercial loan relationships also contributed to the provision expense recorded during 2024.

Noninterest income increased significantly during 2024, largely reflecting growth in mortgage banking income, treasury management fees, bank owned life insurance income, and payroll services fees, along with revenue associated with an investment in a private equity fund.

Net Interest Income

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During 2023, interest income and interest expense equaled $272 million and $77.8 million, respectively, providing for net interest income of $194 million.

In comparing 2023 with 2022, interest income increased 49.2%, interest expense was up 230%, and net interest income increased 22.3%.

however, factors such as types and levels of assets and liabilities, the interest rate environment, interest rate risk, asset quality, liquidity, and customer behavior also impact net interest income as well as the net interest margin.

The $35.3 million increase in net interest income in 2023 compared to 2022 primarily resulted from an improved net interest margin and loan portfolio expansion.

During 2023, the net interest margin equaled 4.05%, up from 3.33% during 2022 due to a higher yield on average earning assets, which more than offset an increase in the cost of funds.

The yield on average earning assets was 5.68% during 2023, an increase from 3.82% during 2022.

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

The yield on loans was 6.25% during 2023, up from 4.50% during 2022 mainly due to higher interest rates on variable-rate commercial loans resulting from the FOMC substantially raising the targeted federal funds rate in an effort to reduce elevated inflation levels.

The FOMC increased the targeted federal funds rate by 525 basis points during the period of March 2022 through July 2023, during which time average variable-rate commercial loans represented approximately 64% of average total commercial loans.

Improved yields on other interest-earning assets and securities, reflecting the increased interest rate environment, and a change in earning asset mix, consisting of an increase in higher-yielding loans as a percentage of total earning assets, also contributed to the enhanced yield on earning assets.

During 2023, earning assets averaged $4.78 billion, up slightly from $4.77 billion during 2022.

Average loans increased $340 million, average other interest-earning assets declined $339 million, and average securities were up $13.5 million.

The cost of funds rose from 0.49% in 2022 to 1.63% in 2023 primarily due to higher costs of deposits and borrowings, stemming from the increased 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 time deposits, reflecting deposit migration and new deposit relationships.

In comparing 2024 with 2023, interest income increased 18.5%, interest expense was up 67.6%, and net interest income decreased 1.3%.

The level of net interest income is primarily a function of asset size, as the weighted average interest rate received on earning assets is greater than the weighted average interest cost of funding sources; however, factors such as types and levels of assets and liabilities, the interest rate environment, interest rate risk, asset quality, liquidity, and customer behavior also impact net interest income as well as the net interest margin.

The $2.5 million decline in net interest income in 2024 compared to 2023 resulted from a decreased net interest margin, which more than offset an increase in earning assets, particularly in loans.

During 2024, the net interest margin equaled 3.58%, down from 4.05% during 2023 due to a higher cost of funds, which more than offset an increase in the yield on average earning assets.

The cost of funds rose from 1.63% in 2023 to 2.44% in 2024 mainly due to higher costs of deposits and borrowed funds, largely reflecting the impact of a rising interest rate environment.

A change in funding mix, primarily consisting of a decrease in average noninterest-bearing and lower-cost deposits and an increase in average higher-cost money market accounts and time deposits, also contributed to the higher cost of funds.

The increases in money market accounts and time deposits stemmed from new deposit relationships, growth in existing deposit relationships, and deposit migration.

The yield on average earning assets was 6.02% during 2024, an increase from 5.68% during the prior year.

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

The yield on loans was 6.61% during 2024, up from 6.25% during 2023 mainly due to higher interest rates on variable-rate commercial loans stemming from the Federal Reserve’s Federal Open Market Committee (“FOMC”) raising the targeted federal funds rate in an effort to reduce elevated inflation levels and a significant level of commercial loans being originated over the past 24 months 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.

The positive impact of the rate hikes was partially mitigated by the FOMC’s lowering of the targeted federal funds rate by 100 basis points during the last four months of 2024.

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

During 2024, earning assets averaged $5.35 billion, up $569 million, or 11.9%, from $4.78 billion during 2023.

Average loans increased $386 million, average interest-earning deposits were up $131 million, and average securities grew $52.6 million.

The following table depicts the average balance, interest earned and paid, and weighted average rate of our assets, liabilities, and shareholders’ equity during 2024, 2023, and 2022.

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Total securities

Other interest-earning assets

Interest-earning deposits

Total earning assets

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Tax exempt securities

Other interest-earning assets

Interest-earning deposits

Net change in tax-equivalent interest income

Increase (decrease) in interest expense

Interest-bearing demand deposits

Interest-bearing checking deposits

Savings deposits

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Interest income, which is primarily generated from the loan portfolio, increased $50.1 million during 2024 from that earned in 2023, totaling $321 million in 2024 compared to $272 million in 2023.

The increase in interest income is mainly attributable to a higher yield on average earning assets and the positive impact of an increased level of average loans.

The increase in interest income is attributable to growth in, and a higher yield on, average earning assets.

During 2024 and 2023, earning assets had an average yield (tax equivalent-adjusted basis) of 6.02% and 5.68%, respectively.

The improved yield on average earning assets primarily resulted from an increased yield on loans, mainly reflecting higher interest rates on variable-rate commercial loans stemming from the previously mentioned FOMC rate hikes.

Enhanced yields on other interest-earning assets and securities, reflecting the increased interest rate environment, and a change in earning asset mix, consisting of an increase in higher-yielding loans as a percentage of total earning assets, also contributed to the improved yield on average earning assets.

Higher-yielding loans represented 84.7% of earning assets during 2023, up from 77.8% during 2022.

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

Interest income generated from the loan portfolio increased $40.1 million in 2024 compared to the level earned in 2023.

An upturn in loan yield from 4.50% in 2022 to 6.25% in 2023 resulted in a $69.8 million increase in interest income, while growth in the loan portfolio during 2023 resulted in a $16.5 million increase in interest income.

The improved yield on loans mainly resulted from a higher yield on commercial loans, which increased from 4.72% during 2022 to 6.84% during 2023 primarily due to the aforementioned FOMC rate increases.

Growth in the loan portfolio during 2024 resulted in a $25.0 million increase in interest income, while an upturn in loan yield from 6.25% in 2023 to 6.61% in 2024 resulted in a $15.1 million increase in interest income.

The higher yield on loans primarily resulted from an improved yield on commercial loans, which increased from 6.84% during 2023 to 7.13% during 2024 mainly due to the aforementioned FOMC rate increases and a significant level of commercial loans being originated in the past 24 months in the higher interest rate environment.

An improved yield on residential mortgage loans, reflecting the increasing interest rate environment, also contributed to the higher yield on loans.

Interest income generated from the securities portfolio increased $3.3 million in 2024 compared to the level earned in 2023.

A rise in the yield on securities from 2.06% during 2023 to 2.40% during 2024 resulted in a $2.2 million increase in interest income, while growth in the average balance of the securities portfolio during 2024 resulted in an increase in interest income of $1.1 million.

Interest income on other interest-earning assets increased $0.9 million in 2023 from the level earned in 2022;

a higher yield on these balances resulted in an increase in interest income of $6.7 million, while a reduction in the average balance of these balances resulted in a decrease in interest income of $5.8 million.

Reflecting a higher average balance, interest income on interest-earning deposits increased $6.8 million in 2024 from the level earned in 2023.

The growth in average securities and interest-earning deposits during 2024 compared to 2023 primarily reflected the success of our strategic initiatives to grow local deposits and decrease our loan-to-deposit ratio.

Interest expense is generated from interest-bearing deposits and borrowed funds.

Interest expense increased $52.6 million during 2024 from that expensed in 2023, totaling $130 million in 2024 compared to $77.8 million in 2023.

An increase in the cost of interest-bearing liabilities from 0.82% during 2022 to 2.47% during 2023 resulted in an increase in interest expense of $49.5 million, while growth in the average balance of these liabilities during 2023 resulted in a $4.7 million increase in interest expense.

During 2023, interest-bearing liabilities averaged $3.16 billion, representing an increase of $267 million, or 9.2%, from the $2.89 billion average during 2022;

average interest-bearing deposits and borrowings were up $188 million and $78.9 million, respectively.

During 2023 and 2022, interest-bearing liabilities had a weighted average rate of 2.47% and 0.82%, respectively.

Growth in the average balance of interest-bearing liabilities during 2024 compared to 2023 resulted in a $27.9 million increase in interest expense, while a rise in the cost of these liabilities from 2.47% during 2023 to 3.38% during 2024 resulted in an increase in interest expense of $24.7 million.

During 2024, interest-bearing liabilities averaged $3.85 billion, representing an increase of $699 million, or 22.1%, from the $3.16 billion average during 2023; average interest-bearing deposits and borrowings were up $674 million and $24.7 million, respectively.

The higher average cost of interest-bearing liabilities mainly resulted from increased costs of deposit accounts.

A higher cost of borrowings, along with a change in interest-bearing liability mix, also contributed to the increased average cost of interest-bearing liabilities.

The cost of interest-bearing non-time deposit accounts increased from 0.34% during 2022 to 1.94% during 2023, primarily reflecting higher interest rates paid on money market accounts;

the higher interest rates mainly reflected the increased interest rate environment.

The cost of time deposits rose from 1.02% during 2022 to 3.55% during 2023 due to higher rates paid on time deposits, reflecting the increased interest rate environment, and a change in mix, consisting of an increase in higher-cost out-of-area deposits.

During 2023, approximately $191 million in out-of-area time deposits were obtained to increase on-balance sheet liquidity and offset loan growth, seasonal deposit withdrawals, and wholesale fund maturities.

The cost of borrowed funds increased from 1.96% during 2022 to 2.90% during 2023, mainly reflecting higher costs of FHLBI advances, sweep accounts, and subordinated debentures stemming from the increased interest rate environment.

A higher average rate paid on interest-bearing non-time deposits during 2023 resulted in a $28.8 million increase in interest expense, while growth of $5.4 million in the average balance of these deposits equated to a $0.4 million increase in interest expense.

An increase in the average rate paid on time deposits during 2023 resulted in a $13.6 million increase in interest expense, while growth of $183 million in the average balance of these deposits resulted in a $2.6 million increase in interest expense.

The $2.6 million increase in interest expense on short-term borrowings during 2023 almost exclusively stemmed from higher rates paid on sweep accounts.

A higher average rate paid on FHLBI advances during 2023 resulted in a $2.6 million increase in interest expense, while growth of $71.2 million in the average balance of advances resulted in a $1.6 million increase in interest expense.

During 2023, FHLBI advances totaling $240 million were obtained to augment on-balance sheet liquidity and offset loan expansion, seasonal deposit withdrawals, and wholesale fund maturities.

The $2.0 million increase in interest expense on other borrowings almost completely resulted from an increased average rate paid on these borrowings.

An increased cost of borrowings, along with a change in interest-bearing liability mix, also contributed to the higher average cost of interest-bearing liabilities.

The cost of interest-bearing non-time deposit accounts increased from 1.94% during 2023 to 2.76% during 2024, primarily reflecting a change in mix, consisting of an increase in higher-paying money market accounts, and higher interest rates paid on business money market and checking accounts, reflecting the increased interest rate environment.

The cost of time deposits rose from 3.55% during 2023 to 4.72% during 2024 mainly due to higher rates paid on local time deposits, reflecting the increased interest rate environment.

The cost of borrowed funds increased from 2.90% during 2023 to 3.65% during 2024, primarily reflecting higher costs of sweep accounts and FHLBI advances stemming from the increased interest rate environment.

Average higher-cost money market accounts and time deposits represented an increased percentage of average interest-bearing liabilities during 2024 compared to 2023, with the growth in these deposits reflecting new deposit relationships, increases in existing deposit relationships, and deposit migration.

Growth in the average balance of interest-bearing non-time deposits during 2024 compared to 2023 resulted in a $14.6 million increase in interest expense, while a higher average rate paid on these deposits during 2024 equated to a $10.6 million increase in interest expense.

An increase in the average balance of time deposits during 2024 compared to 2023 resulted in a $12.8 million increase in interest expense, while a higher average rate paid on these deposits during 2024 resulted in an $8.0 million increase in interest expense.

A higher average rate paid on short-term borrowings during 2024 resulted in a $4.6 million increase in interest expense, while growth in the average balance of these borrowings equated to a $0.3 million increase in interest expense.

An increased average rate paid on FHLBI advances during 2024 resulted in a $1.5 million increase in interest expense, while growth in the average balance of advances resulted in a $0.2 million increase in interest expense.

The $0.1 million increase in interest expense on other borrowings resulted almost evenly from growth in, and a higher average rate paid on, these borrowings.

Provision for Credit Losses

Provisions for credit losses of $7.4 million and $7.7 million were recorded during 2024 and 2023, respectively.

The provision expense recorded during 2024 mainly reflected allocations necessitated by net loan growth, individual allocations made for two deteriorated commercial loan relationships, changes in qualitative factors, and an increased allocation stemming from slower prepayments speeds on residential mortgage loans, which were partially offset by lower loan loss rates.

The provision expense recorded during 2023 primarily reflected allocations necessitated by net loan growth, slower residential mortgage loan prepayment rates and the associated extended average life of the portfolio, and changes in environmental factors reflecting heightened inherent risk in the commercial construction loan portfolio.

The provision expense recorded during 2022 was necessitated by the net increase in required reserve levels stemming from changes to several environmental factors that largely reflected higher levels of inherent risk within the commercial loan and residential mortgage loan portfolios, loan growth, and increased specific reserves for certain distressed loan relationships.

A higher reserve for residential mortgage loans reflecting slower principal prepayment rates also impacted provision expense during 2022.

Sustained strength in loan quality metrics, including low levels of loan charge-offs, during 2024 and 2023 significantly mitigated the amount of additional reserves imposed by the previously mentioned factors.

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Noninterest Income

Noninterest income during 2023 was $32.1 million, representing a marginal increase from the amount recorded during 2022.

Gains on sales of other real estate owned totaling $0.4 million were included in noninterest income during 2023, while a bank owned life insurance claim of $0.5 million was included in noninterest income during 2022.

Excluding these transactions, noninterest income increased $0.2 million in 2023 compared to 2022.

The higher level of noninterest income during 2023 mainly reflected increased credit and debit card income, interest rate swap income, bank owned life insurance income, and payroll processing fees and the improved performance of an equity fund investment, which more than offset decreased mortgage banking income and service charges on accounts.

The growth in credit and debit card income and payroll servicing fees during 2023 primarily resulted from the successful marketing of products and services to existing and new customers.

The reduction in mortgage banking income mainly stemmed from lower production, the impact of which was partially offset by a higher loan sold percentage, which increased from approximately 35% during 2022 to nearly 53% during 2023.

The decline in service charges on accounts year over year reflected a higher earnings credit rate in response to the increasing interest rate environment.

Noninterest income totaled $40.4 million during 2024, compared to $32.1 million during 2023.

Noninterest income during 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, respectively, while noninterest income during 2023 included gains on the sales of other real estate owned totaling $0.4 million.

Excluding these transactions, noninterest income increased $7.5 million, or 23.8%, in 2024 compared to 2023.

The growth mainly reflected increases in mortgage banking income, treasury management fees, and payroll service fees, along with revenue generated from an investment in a private equity fund.

The higher level of mortgage banking income primarily resulted from increases in the percentage of loans originated with the intent to sell, which equaled approximately 78% in 2024 compared to approximately 53% in 2023, and total loan originations, which were up approximately 25% in 2024 compared to 2023.

The increase in treasury management fees in large part reflected customers’ expanded use of cash management products and services.

The growth in noninterest income related to these factors was partially offset by a decline in interest rate swap income mainly stemming from reduced borrower demand in light of shifting future interest rate expectations.

Credit and debit card income declined marginally in 2024 compared to 2023;

when adjusting for the receipt of a one-time payment from our vendor in association with a contract renewal in 2023, credit and debit card income was up slightly in 2024.

Noninterest Expense

Noninterest expense during 2024 was $126 million, compared to $115 million during 2023.

Overhead costs during 2023 included contributions to The Mercantile Bank Foundation (the “Foundation”), a loss on the sale of a former branch facility, and one-time employee benefit and facility-related costs totaling $1.8 million, while overhead costs during 2022 included contributions to the Foundation and a loss on the sale of a former branch facility totaling $1.8 million.

Excluding these transactions, the increase in noninterest expense during 2023 primarily resulted from higher salary and benefit costs, largely reflecting annual merit pay increases, market adjustments, lower residential mortgage loan deferred salary costs, an increased bonus accrual, and higher health insurance claims, which more than offset reduced residential mortgage lender commissions and incentives mainly stemming from decreased loan production.

The increase in overhead costs during 2023 also resulted from higher allocations to the reserve for unfunded loan commitments and increased levels of Federal Deposit Insurance Corporation (“FDIC”) deposit insurance premiums, interest rate swap collateral holding costs, and occupancy costs.

The increase in FDIC deposit insurance premiums primarily resulted from an increased industry-wide assessment rate, while the higher occupancy costs mainly stemmed from increased rent expense attributable to office openings.

Overhead costs during 2024 included contributions to The Mercantile Bank Foundation (the “Foundation”) totaling $1.7 million, while overhead costs during 2023 included contributions to the Foundation, a write-down of a former branch facility, and one-time employee benefit and facility-related costs totaling $1.8 million.

Excluding these transactions, the increase in noninterest expense during 2024 primarily resulted from larger salary and benefit costs, reflecting annual merit pay increases, market adjustments, higher residential mortgage lender commissions and incentives, lower residential mortgage loan deferred salary costs, an increased bonus accrual and associated payroll taxes, higher health insurance claims, and increased 401(k) matching contributions.

The increase in residential mortgage lender commissions and incentives mainly stemmed from a higher level of loan production.

Increased data processing costs, primarily reflecting higher transaction volume and software support costs, also contributed to the rise in noninterest expense during 2024.

A reduced credit reserve for unfunded loan commitments, along with lower levels of interest rate swap credit reserves and collateral holding costs, core deposit intangible asset amortization expense, and occupancy costs, during 2024 partially mitigated the increases in overhead costs noted above.

The decrease in occupancy costs mainly reflected lower building rent stemming from branch-related efficiency initiatives.

Federal Income Tax Expense

During 2024, we recorded income before federal income tax of $98.3 million and a federal income tax expense of $18.7 million, compared to income before federal income tax of $103 million and a federal income tax expense of $20.5 million during 2023.

The $5.8 million increase in federal income tax expense in 2023 compared to 2022 primarily resulted from the higher level of income before federal income tax.

In addition, our election to apply the proportional amortization method to our tax credit equity investments during 2023 resulted in $0.5 million in tax expense being recorded during the year.

Amortization costs related to tax credit equity investments were included in noninterest expense in prior years.

Our effective tax rate was 19.9% during 2023, compared to 19.4% during 2022.

The tax credit equity investments-related tax election negatively impacted the effective tax rate in 2023, while the aforementioned bank owned life insurance death benefit claim, substantially all of which was nontaxable, positively impacted the effective tax rate in 2022.

The $1.8 million decrease in federal income tax expense in 2024 compared to 2023 primarily resulted from the lower level of income before federal income tax.

We recorded net benefits from investments in tax credit structures of $0.2 million and $0.1 million during 2024 and 2023, respectively.

The aforementioned bank owned life insurance death benefit claims, substantially all of which were nontaxable, positively impacted the effective tax rate in 2024.

CAPITAL RESOURCES

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Liquidity is essential to our business.

An inability to maintain sufficient funds through deposits, borrowings, the sale of assets, and other sources could have a material adverse effect on our liquidity.

An inability to maintain sufficient funds through deposits, borrowings, the sales of assets, and other sources could have a material adverse effect on our liquidity.

Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general.

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Wholesale funds, comprised of deposits from customers outside of our market areas and advances from the FHLBI, totaled $537 million, or 10.3% of combined deposits and borrowed funds as of December 31, 2024, compared to $636 million, or 13.8% of combined deposits and borrowed funds, as of December 31, 2023.

We had $168 million in out-of-area deposits as of December 31, 2023, compared to none as of year-end 2022.

Sweep accounts increased $35.4 million during 2023, totaling $230 million as of December 31, 2023.

Sweep accounts declined $108 million during 2024, totaling $122 million as of December 31, 2024.

In addition, we had one customer withdraw a large amount of funds near the end of 2024 that were returned in early 2025.

The average balance of sweep accounts equaled $225 million during 2024, with a high balance of $278 million and a low balance of $118 million.

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Weighted average interest rate for twelve months ended December 31, 2024

FHLBI advances increased $160 million during 2023, totaling $468 million as of December 31, 2023.

Bullet advances aggregating $240 million were obtained during 2023, consisting of $160 million to fund loan growth and $80.0 million to replace FHLBI bullet advance maturities.

Payments on amortizing FHLBI advances totaled $0.4 million during 2023.

Our borrowing line of credit at year-end 2023 totaled $903 million, with remaining availability based on collateral of $429 million.

We also have the ability to borrow up to $70.0 million on a daily basis through correspondent banks using established unsecured federal funds purchased lines of credit, with an average balance of $2.4 million during 2023.

FHLBI advances declined $80.8 million during 2024, totaling $387 million as of December 31, 2024.

Bullet advances aggregating $10.0 million were obtained during 2024, while bullet advance maturities aggregated $90.0 million.

Payments on amortizing advances totaled $0.8 million during 2024.

Our borrowing line of credit at year-end 2024 totaled $1.0 billion, with remaining availability based on collateral of $634 million.

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

the average balance of these funds was less than $0.1 million during 2024.

In contrast, our interest-earning deposit account at the Federal Reserve Bank of Chicago averaged $221 million during 2024.

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Based on pledged municipal bonds, we could have borrowed up to $153 million at December 31, 2024.

We have not utilized this line of credit in over ten years, and we do not plan to access this line of credit in future periods.

We have not utilized this line of credit in over 15 years, and we do not plan to access this line of credit in future periods.

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

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Inflation risk is the risk that the values of assets or income from investments will be worth less in the future as inflation decreases the value of money.

During the past two years, there was a pronounced rise in inflation.

As a result, the FOMC significantly increased interest rates and indicated its intention to continue to do so in an effort to combat inflation.

As inflation increases, the value of our investment securities, particularly those with fixed rates and longer maturities, declines.

In addition, inflation increases salary and benefit costs, as well as the costs of goods and services we use in our business operations, such as electricity and other utilities, which increases our noninterest expenses.

Furthermore, our customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us.

During 2022 and 2023, there was a pronounced rise in inflation.

As a result, the FOMC significantly increased interest rates in an effort to combat inflation.

As inflation increased, the value of our investment securities, particularly those with fixed rates and longer maturities, declined.

In addition, inflation increased salary and benefit costs, as well as the costs of goods and services we use in our business operations, such as electricity and other utilities, which increased our noninterest expenses.

Furthermore, our customers were also affected by inflation and the rising costs of goods and services used in their households and businesses.

Inflationary pressures started to ease during 2024, prompting the FOMC to lower interest rates by an aggregate 100 basis points during the last four months of the year.

The lower interest rate environment positively impacted the value of our investment securities.

However, inflation levels remain above the FOMC’s stated goal and interest rates remain higher than they were prior to 2022.

Higher than traditional cost increases continue throughout the economy, but at lower levels than experienced in 2022 and 2023.

We derive our income primarily from the excess of interest collected on interest-earning assets over the interest paid on interest-bearing liabilities.

51 unchanged sentences

Interest rates down 200 basis points

Interest rates down 100 basis points

Interest rates up 100 basis points

2 unchanged sentences

In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including:

the growth, composition, and absolute levels of loans, deposits, and other earning assets and interest-bearing liabilities;

the growth, composition, and absolute levels of loans, deposits, and interest-earning deposits and interest-bearing liabilities;

level of nonperforming assets;

8 unchanged sentences

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Mercantile Bank Corporation (the “Company”) as of December 31, 2023, the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the year ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheets of Mercantile Bank Corporation (the “Company”) as of December 31, 2024 and December 31, 2023, the related statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2024, and the related notes (collectively referred to as the “ consolidated financial statements”).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and December 31, 2023, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 3, 2025 expressed an unqualified opinion thereon.

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Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matter

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Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting as of December 31, 2023 of Mercantile Bank Corporation (the "Company"), based on criteria establised in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”).

We have audited the internal control over financial reporting as of December 31, 2024 of Mercantile Bank Corporation (the "Company"), based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on the criteria established in the COSO framework.

We also have audited the consolidated balance sheets of the Company as of December 31, 2023, the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the year ended December 31, 2023, and the related notes (collectively referred to as the "consolidated financial statements"), in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB").

Our report dated March 1, 2024, expresses an unqualified opinion thereon.

We also have audited the accompanying consolidated balance sheets of the Company as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income (loss), stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2024, and the related notes (collectively referred to as the “consolidated financial statements”), in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB").

Our report dated March 3, 2025, expresses an unqualified opinion.

Basis for Opinion

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Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Mercantile Bank Corporation (the “Company”) as of December 31, 2022, the related consolidated statements of income and comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022 , in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying income and comprehensive income (loss), changes in shareholders’ equity, and cash flows for the year ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended December 31, 2022 , in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

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These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

We believe that our audit provides a reasonable basis for our opinion.

/s/ BDO USA, P.C.

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Mercantile Bank Corporation

/s/ Robert B.

Kaminski, Jr.

/s/ Raymond E.

President and Chief Executive Officer

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$ 56,991 $ 70,408

Other interest-earning assets

Interest-earning deposits

336,019 60,125

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15,824 18,607

4,600,781 4,303,758

Allowance for credit losses

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4,123 3,663 2,734

Other interest-earning assets

Interest-earning deposits

12,305 5,546 4,654

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191,086 193,545 158,244

Provision (benefit) for credit losses

Provision for credit losses

7,400 7,700 6,550

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2,555 1,500 1,678

Gain on sale of branch

3,602 2,725 1,901

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$ 0 $ 285,752 $ 174,536 $ ( 3,729 ) $ 456,559

Adoption of ASU 2016-13

Employee stock purchase plan ( 1,388 shares)

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Stock-based compensation expense

Share repurchase program ( 683,191 shares)

( 21,380 ) ( 21,380 )

Cash dividends ($ 1.26 per common share)

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

Adoption of ASU 2016-13

Employee stock purchase plan ( 1,410 shares)

Dividend reinvestment plan ( 27,306 shares)

Stock option exercises, net ( 1,355 shares)

Stock grants to directors for retainer fees ( 11,529 shares)

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

14,854 14,854

Balances, December 31, 2024

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10,505 11,496 12,945

Accretion of acquired loans

Provision for credit losses

7,400 7,700 6,550

Deferred income tax expense (benefit)

Deferred income tax benefit

( 397 ) ( 2,036 ) ( 1,353 )

1 unchanged sentence

3,316 3,384 3,377

Stock grants to directors for retainer fee

Stock grants to directors for retainer fees

Proceeds from sales of mortgage loans held for sale

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( 11,800 ) ( 6,532 ) ( 8,197 )

Loss from sale of mortgage loans

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

1 unchanged sentence

Net (gain) loss from sale and write-downs on former bank premises

2 275 ( 140 )

Net (gain) loss from sales and disposals of premises and equipment

2 unchanged sentences

( 2,555 ) ( 1,500 ) ( 1,678 )

Gain on sale of branch

0 0 ( 1,058 )

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

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( 309,834 ) ( 387,283 ) ( 462,427 )

Proceeds from sale of mortgage loans

Proceeds from Federal Home Loan Bank stock redemption

4 unchanged sentences

Proceeds from bank owned life insurance death benefits claim

Net cash transferred in branch sale

0 0 ( 2,679 )

Purchases of premises and equipment and lease activity

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Net proceeds from subordinated notes issuance

0 14,645 73,635

Proceeds from stock option exercises, net of cashless exercises

1 unchanged sentence

Dividend reinvestment plan

Repurchases of common stock

0 0 ( 21,380 )

Payment of cash dividends to common shareholders

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We completed the merger of Firstbank Corporation (“Firstbank”), a Michigan corporation with approximately $ 1.5 billion in total assets and 46 branch locations, into Mercantile as of June 1, 2014.

Mercantile is a financial holding company whose principal activity is the ownership and management of our bank and operates a single significant business segment.

Mercantile is a financial holding company whose principal activity is the ownership and management of our bank.

Our bank is a community-based financial institution.

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As an alternative source of funds, our bank has also issued certificates of deposit to depositors outside of its primary market areas.

Substantially all revenues are derived from banking products and services and investment securities.

While we monitor the revenue streams of the various products and services offered, we manage our business on the basis of one operating segment, banking.

Our insurance company acquired an existing shelf insurance agency effective April 15, 2002.

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We have evaluated subsequent events for potential recognition and/or disclosure through the date these financial statements were issued.

Use of Estimates :

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information.

These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

The allowance for credit losses and the fair values measurements are particularly subject to change.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Coronavirus Pandemic:

Although virtually all related restrictions have been terminated, impacts remain across national and global economies due to the pandemic of coronavirus disease 2019 (“Covid- 19” ) caused by severe acute respiratory syndrome coronavirus 2 (the “Coronavirus Pandemic”).

Overall, the Coronavirus Pandemic has caused a sustained global economic slowdown of varying durations across different industries.

The Coronavirus Pandemic has had a significant impact on our financial condition and operating results since its onset in March, 2020.

The Paycheck Protection Program (“PPP”) reflected a substantial expansion of the Small Business Administration’s

100% guaranteed

7 (a) loan program.

The PPP provided

100% guaranteed loans to cover specific operating costs.

PPP loans were eligible to be forgiven based upon certain criteria.

Any remaining balance after forgiveness is maintained at the

100% guarantee for the duration of the loan.

The interest rate on the loan is fixed at

1.00%, with the financial institution receiving a loan origination fee from the Small Business Administration.

The loan origination fees, net of the direct origination costs, are accreted into interest income on loans using the level yield methodology.

The program ended on

August 8, 2020.

We originated approximately

2,200 loans aggregating

$ 554 million.

December 31, 2023 , we recorded forgiveness transactions on all but

four loans aggregating

$ 0.1 million.

The Consolidated Appropriations Act,

2021 authorized an additional

$284 billion in Second Draw PPP loans (“Second Draw”).

This program ended on

May 31, 2021.

Under the Second Draw, we originated approximately

1,200 loans aggregating

$ 209 million.

December 31, 2023 , we recorded forgiveness transactions on all but

five loans aggregating

$ 0.2 million.

Operating Segments :

We conduct our operations through a single business segment, which derives interest and noninterest income through our banking products and services and investment securities.

All of our income relates to our operations in the United States.

Pursuant to Financial Accounting Standards Codification 280, Segment Reporting, operating segments represent components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision makers in determining how to allocate resources and assessing performance.

Our chief operating decision makers, which include our Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer, evaluate interest and noninterest income streams and credit losses from our various products and services, while expense activities, including interest expense and noninterest expense, are managed, and financial performance is evaluated, on a Company-wide basis.

As a result, detailed profitability information for each interest and noninterest income stream is not used by our chief operating decision makers to allocate resources or in assessing performance.

Rather, our chief operating decision makers use consolidated net income to assess performance by comparing it to and monitoring against budgeted and prior year results.

This information is used to manage resources to drive business and net income growth, including investment in key strategic priorities, as well as determine our ability to return capital to shareholders.

Segment assets represent total assets on our Consolidated Balance Sheets and segment net income represents net income on our Consolidated Statements of Income.

MERCANTILE BANK CORPORATION

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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Use of Estimates :

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information.

These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

The allowance for credit losses and the fair value measurements are particularly subject to change.

Cash and Cash Equivalents and Cash Flow Reporting :

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Management has made the accounting policy election to exclude accrued interest receivable on available for sale securities from the estimate of credit losses as accrued interest is written off in a timely manner when deemed uncollectible.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2024

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Federal Home Loan Bank Stock :

Our bank owns stock of the Federal Home Loan Bank of Indianapolis ("FHLBI").

FHLBI is a governmental sponsored entity that requires banks to invest in their nonmarketable stock as a condition of membership.

The FHLBI is a governmental sponsored entity that requires banks to invest in their nonmarketable stock as a condition of membership.

FHLBI members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts.

2 unchanged sentences

Dividends are recorded in income on the ex-dividend date.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

Interest income on loans is accrued over the term of the loans primarily using the simple interest method based on the principal balance outstanding.

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Commercial loan participations aggregated $ 48.6 million and $ 46.7 million as of December 31, 2024 and 2023 , respectively.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2024

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans Held for Sale :

11 unchanged sentences

$ 15,824 $ 18,607

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Mortgage Loan Derivatives :

2 unchanged sentences

The net gain or loss on derivatives is included in mortgage banking activities in the Consolidated Statements of Income.

The net balance of mortgage loan derivatives aggregated to a liability of less than $ 0.1 million at December 31, 2023 and an asset of less than $ 0.1 million as of December 31, 2022.

The net balance of mortgage loan derivatives aggregated to an asset of $ 0.1 million at December 31, 2024 and a liability of less than $ 0.1 million as of December 31, 2023 .

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2024

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Mortgage Banking Activities :

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Mortgage servicing rights amortization is determined by amortizing the mortgage servicing rights balance in proportion to, and over the period of, the estimated future net servicing income of the underlying mortgage loans.

Interest rate risk, prepayment risk and default risk are inherent in mortgage servicing rights valuation.

Interest rate risk, prepayment risk and default risk are inherent in mortgage servicing rights valuations.

Interest rate changes largely drive prepayment rates.

8 unchanged sentences

2022 - 02 eliminated troubled debt restructurings recognition and measurement guidance and, instead, requires that entities evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan.

See further discussion on ASU No.

2022 - 02 within "Recent Accounting Changes Adopted."

Prior to the adoption of ASU No.

2022 - 02, a loan was accounted for as a troubled debt restructuring if we, for economic or legal reasons, granted a concession to a borrower considered to be experiencing financial difficulties that we would not otherwise consider.

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

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

Nonaccrual troubled debt restructurings were included in nonperforming loans.

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

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

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

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

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

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

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

Our bank has chosen to continue to individually assess loans previously identified as troubled debt restructurings for allowance for credit losses purposes;

4 unchanged sentences

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Allowance for Credit Losses ( “ Allowance ” ) :

Allowance for Credit Losses ( “a llowance ” ) :

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

1 unchanged sentence

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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If fair value subsequently declines, a valuation allowance is recorded through noninterest expense, as are collection and operating costs after acquisition.

Foreclosed assets, included in other assets in the Consolidated Balance Sheets, totaled $ 0.2 million and $ 0 as of December 31, 2023 and 2022, respectively.

We had no foreclosed assets as of December 31, 2024.

Foreclosed assets, included in other assets in the Consolidated Balance Sheets, totaled $ 0.2 million as of December 31, 2023 .

Bank Owned Life Insurance:

2 unchanged sentences

Increases in the net cash surrender value of the policies, as well as insurance proceeds received, are recorded as noninterest income on the Consolidated Statements of Income and are not subject to income taxes.

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

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

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

17 unchanged sentences

Stock-Based Compensation :

Compensation cost for equity-based awards is measured on the grant date based on the fair value of the award at that date, and is recognized over the requisite service period, net of estimated forfeitures.

Compensation cost for equity-based awards is measured on the grant date based on the fair value of the award on that date and recognized over the requisite service period, net of estimated forfeitures.

Fair value of stock option awards is estimated using a closed option valuation (Black-Scholes) model.

21 unchanged sentences

Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month reflecting the period over which we satisfy the performance obligation.

Transaction-based fees, which includes services such as stop payment and returned item charges, are recognized at the time the transaction is executed as that is the point in time we fulfill the customer request.

Transaction-based fees, which include services such as stop payment and returned item charges, are recognized at the time the transaction is executed as that is the point in time we fulfill the customer request.

Service charges on deposit and sweep accounts are withdrawn from the customer account balance.

59 unchanged sentences

Recent Accounting Changes Adopted :

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

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

This standard replaced the “incurred loss” approach with an “expected loss” model.

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

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

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

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

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

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

2022 - 02, Troubled Debt Restructurings and Vintage Disclosures .

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

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

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

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

2023 - 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 took effect for annual reporting periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024.

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

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

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

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

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

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

Our proportionate share of losses in the underlying investments recorded in our Consolidated Statements of Income in other expense during the years ended December 31, 2022 and 2021 was $ 0.3 million and $ 0.2 million, respectively.

During the year ended December 31, 2023, we recognized $ 0.5 million of proportional amortization expense recorded in our Consolidated Statements of Income in federal income tax expense.

See Note 18, Variable Interest Entities, for further details on our investments in tax credit entities.

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

MERCANTILE BANK CORPORATION

90 unchanged sentences

Government agency debt obligations and mortgage-backed securities that are pledged to secure repurchase agreements was $ 122 million and $ 230 million at December 31, 2024 and 2023 , respectively.

The carrying value of U.S.

Government agency debt obligations that are pledged to secure specific customer deposits was $ 11.7 million as of December 31, 2024.

We had no U.S.

Government agency debt obligations pledged to specific customer deposits as of December 31, 2023.

Investments in FHLBI stock are restricted and may only be resold to, or redeemed by, the issuer.

65 unchanged sentences

$ 4,600,781 100.0 % $ 4,303,758 100.0 % 6.9 %

Credit cards to business customers were reclassified from other consumer loans to commercial and industrial during the year ended December 31, 2023.

Credit cards to business customers totaled $ 17.8 million and $ 16.6 million as of December 31, 2023 , and 2022 , respectively.

Home equity lines of credit were reclassified from 1 - 4 family mortgage loans to other consumer loans during the year ended December 31, 2023 .

Home equity lines of credit totaled $ 38.1 million and $ 37.4 million as of December 31, 2023 , and 2022 , respectively.

We have reclassified multi-family construction loans from real estate - non-owner occupied loans to real estate - multi-family and residential rental loans.

The table above reflects a classification change of $ 54.5 million as of December 31, 2022.

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

Concentrations within the loan portfolio were as follows at year end:

76 unchanged sentences

Commercial and industrial

$ 2,110 $ 1,732

Vacant land, land development and residential construction

8 unchanged sentences

Total nonaccrual loans:

$ 2,767 $ 1,732

Total nonaccrual loans

2 unchanged sentences

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

Interest income recognized on nonaccrual loans totaled $ 0.2 million in 2023, and less than $ 0.1 million in 2022 and 2021, reflecting the collection of interest at the time of principal pay-off.

Interest income recognized on nonaccrual loans totaled $ 0.3 million in 2024 , $ 0.2 million in 2023 and less than $ 0.1 million in 2022 , reflecting the collection of interest at the time of principal pay-off.

MERCANTILE BANK CORPORATION

16 unchanged sentences

Commercial and industrial

Vacant land, land development and residential construction

Real estate – owner occupied

Real estate – non-owner occupied

Real estate – multi-family and residential rental

Total commercial

1-4 family mortgages

Other consumer loans

Total with an allowance recorded

$ 1,073 $ 241

Total nonaccrual loans:

Total nonaccrual loans

$ 3,415 $ 241

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2024

NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Nonaccrual loans as of December 31, 2022 were as follows:

(Dollars in thousands)

With no allowance recorded:

Commercial and industrial

Vacant land, land development and residential construction

5 unchanged sentences

Other consumer loans

Total with no allowance recorded

With an allowance recorded:

Commercial and industrial

$ 5,775 $ 2,051

Vacant land, land development and residential construction

Real estate – owner occupied

Real estate – non-owner occupied

Real estate – multi-family and residential rental

Total commercial

1-4 family mortgages

Other consumer loans

Total with an allowance recorded

12 unchanged sentences

The rating system utilizes standardized grade paradigms that analyze several critical factors such as cash flow, operating performance, financial condition, collateral, industry condition and management.

All commercial loans are graded at inception and reviewed and, if appropriate, re-graded at various intervals thereafter.

All commercial loans are reviewed and graded at inception and, if appropriate, re-graded at various intervals thereafter.

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

30 unchanged sentences

Internal credit risk grade groupings:

Grades 1 – 4 (1)

$ 724,156 $ 34,944 $ 468,339 $ 451,019 $ 172,455

114 unchanged sentences

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

Current-period gross write-offs

$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 218 $ 218

Vacant Land, Land Development and Residential Construction:

3 unchanged sentences

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

Current-period gross write-offs

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

Real Estate – Owner Occupied:

3 unchanged sentences

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

Current-period gross write-offs

$ 0 $ 14 $ 0 $ 0 $ 0 $ 40 $ 54 $ 0 $ 54

Real Estate – Non-Owner Occupied:

3 unchanged sentences

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

Current-period gross write-offs

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

Real Estate – Multi-Family and Residential Rental:

3 unchanged sentences

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

Current-period gross write-offs

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

Total Commercial

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

Current-period gross write-offs

$ 0 $ 14 $ 0 $ 0 $ 0 $ 40 $ 54 $ 218 $ 272

1-4 Family Mortgages:

3 unchanged sentences

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

Current-period gross write-offs

$ 0 $ 174 $ 0 $ 0 $ 0 $ 240 $ 414 $ 0 $ 414

Other Consumer Loans:

3 unchanged sentences

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

Current-period gross write-offs

$ 3 $ 16 $ 0 $ 0 $ 0 $ 3 $ 22 $ 155 $ 177

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

There were lines of credit with principal balances of

$ 1.3 million as of

December 31, 2021 that were converted to term loans during

Current-period gross write-offs

$ 3 $ 190 $ 0 $ 0 $ 0 $ 243 $ 436 $ 155 $ 591

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

Current-period gross write-offs

$ 3 $ 204 $ 0 $ 0 $ 0 $ 283 $ 490 $ 373 $ 863

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

MERCANTILE BANK CORPORATION

5 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 December 31, 2023 and 2022 allowance for credit losses.

We determined that the look-back period commencing on January 1, 2011 through the reporting date was reasonable and appropriate for the calculation of historical loss rates for both December 31, 2024 and 2023 .

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 in which we believe to impact anticipated customer behavior including changes in interest rates, economic conditions, and underlying property valuations.

For the commercial portfolio segments, we assumed a 2 % prepayment speed as of both December 31, 2023 and 2022 as we deemed there to be no considerable changes from historical experience.

For the retail 1 - 4 family mortgage portfolio we decreased the prepayment speed from 16.1 % as of December 31, 2022 to 9.0 % as of December 31, 2023 over the course of the year.

This decrease extended the average lives of the portfolio in which the loss rates were applied, resulting in an increase to the allowance of $ 5.3 million, from December 31, 2022 to December 31, 2023.

This change in assumption was driven by the increasing interest rate environment and the composition of the underlying portfolio.

For the retail other consumer portfolio, we assumed a 9 % prepayment speed as of both December 31, 2023 and 2022 as we deemed there to be no considerable changes from historical experience.

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

For the commercial loan portfolio segments, we assumed a 2 % prepayment speed as of both December 31, 2024 and 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 decreased the prepayment speed from 9.0 % as of December 31, 2023 to 7.8 % as of December 31, 2024 .

This decrease extended the average lives of the portfolios in which the loss rates were applied, resulting in an increase to the allowance of $ 1.3 million.

This change in assumption was driven by higher long-term interest rates and the composition of the underlying portfolios.

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.

1 unchanged sentence

As of December 31, 2024 and 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 December 31, 2023 allowance calculation reflected a $ 2.0 million allowance balance reduction.

The forecasts used for our December 31, 2022 allowance calculation reflected a $ 1.7 million allowance balance reduction.

The economic forecasts used for our December 31, 2024 and 2023 allowance calculations reflected allowance balance reductions of $ 2.2 million and $ 2.0 million, respectively.

Individual loans exhibiting unique risk characteristics, which differentiate the loans from other loans within the loan segments and are evaluated for expected credit losses on an individual basis, totaled $ 7.4 million and $ 5.4 million as of December 31, 2024 and 2023 , respectively.

12 unchanged sentences

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

Credit risk reclassifications

90 0 0 0 0 ( 697 ) 607 0 0

Balances, December 31, 2022 after reclassifications

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

Provision for credit losses

13 unchanged sentences

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

Adoption of ASU 2016-13

Credit risk reclassifications

90 0 0 0 0 ( 697 ) 607 0 0

Balances, December 31, 2022 after reclassifications

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

Provision for credit losses

8 unchanged sentences

NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

The allowance for loan losses for the year ended December 31, 2021 is as follows:

The allowance for credit losses for the year ended December 31, 2022 is as follows:

land real estate –

1 unchanged sentence

(Dollars in thousands)

industrial construction occupied occupied rental and other mortgages Unallocated Total

Allowance for loan losses:

industrial construction occupied occupied rental mortgages and other Unallocated Total

Allowance for credit losses:

Beginning balance

$ 10,782 $ 420 $ 6,045 $ 12,990 $ 2,006 $ 2,449 $ 626 $ 45 $ 35,363

Provision for loan losses

Adoption of ASU 2016-13

( 1,571 ) ( 43 ) ( 560 ) ( 2,534 ) ( 621 ) 5,395 ( 411 ) ( 55 ) ( 400 )

Provision for credit losses

946 138 378 ( 1,214 ) 763 5,621 ( 111 ) 29 6,550

( 171 ) ( 29 ) ( 38 ) 0 0 ( 33 ) ( 21 ) 0 ( 292 )

217 4 89 0 43 595 77 0 1,025

Ending balance

4 unchanged sentences

NOTE 3 – 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 year ended December 31, 2023:

The following table presents the period-end amortized cost basis of modifications to borrowers experiencing financial difficulty by type of modification made during the year ended:

December 31, 2024

December 31, 2023

Interest Rate

(Dollars in thousands)

Term Extension

Commercial and industrial

$ 0 $ 17,919 $ 0

Vacant land, land development and residential construction

Real estate – owner occupied

Real estate – non-owner occupied

Real estate – multi-family and residential rental

Total commercial

$ 0 $ 28,813 $ 0

1-4 family mortgages

Other consumer loans

$ 0 $ 28,813 $ 0

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

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

(Dollars in thousands)

Term Extension

Commercial and industrial

11 unchanged sentences

$ 0 $ 6,616 $ 0 $ 0 $ 28,813 $ 0

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Loans modified as troubled debt restructurings generally reflect payment extensions and below market interest rates.

Loans modified as troubled debt restructurings during the year ended December 31, 2022 were as follows:

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

(Dollars in thousands)

Contracts Balance Balance

Commercial and industrial

6 unchanged sentences

$ 6,616 $ 0 $ 0 $ 6,616

Home equity and other

1-4 family mortgages

10 $ 7,351 $ 7,350

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

(Dollars in thousands)

Contracts Balance

Commercial and industrial

Vacant land, land development and residential construction

Real estate – owner occupied

Real estate – non-owner occupied

Real estate – multi-family and residential rental

Total commercial

Home equity and other

1-4 family mortgages

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Activity for loans categorized as troubled debt restructurings during the year ended December 31, 2022 is as follows:

Real Estate -

(Dollars in thousands)

Industrial Construction Occupied Occupied Rental

Commercial Loan Portfolio:

Beginning Balance

$ 4,973 $ 0 $ 10,435 $ 146 $ 91

( 95 ) 0 ( 39 ) 0 0

( 772 ) 0 ( 9,683 ) ( 16 ) ( 91 )

Transfers to ORE

Net Additions/Deletions

4,566 0 ( 669 ) 0 0

Ending Balance

$ 8,672 $ 0 $ 44 $ 130 $ 0

(Dollars in thousands)

and Other Mortgages

Retail Loan Portfolio:

Beginning Balance

$ 1,202 $ 627

Other consumer loans

$ 0 $ 0 $ 0 $ 0

Transfers to ORE

Net Additions/Deletions

$ 6,616 $ 0 $ 0 $ 6,616

Ending Balance

MERCANTILE BANK CORPORATION

14 unchanged sentences

$ 53,427 $ 50,928

Depreciation expense totaled $ 6.0 million in 2023 and 2022 , and $ 5.8 million in 2021 .

Depreciation expense totaled $ 6.0 million in 2024 , 2023 and 2022 .

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

As of December 31, 2024 , we were under lease contracts for eleven of our branch facilities.

The leases have maturity dates ranging from April, 2024 through May, 2048, with a weighted average life of 10.9 years as of December 31, 2023 .

The leases have maturity dates ranging from November, 2025 through May, 2048, with a weighted average life of 8.8 years as of December 31, 2024 .

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

28 unchanged sentences

$ 1,550,830 $ 1,404,388

Custodial escrow balances, which are reported as deposits on the Consolidated Balance Sheets, maintained in connection with serviced loans were $ 10.1 million and $ 11.6 million as of December 31, 2023 and December 31, 2022 , respectively.

Custodial escrow balances, which are reported as deposits on the Consolidated Balance Sheets, maintained in connection with serviced loans were $ 10.9 million and $ 10.1 million as of December 31, 2024 and 2023 , respectively.

Activity for capitalized mortgage loan servicing rights, which are reported as other assets on the Consolidated Balance Sheets, during 2024 and 2023 was as follows:

9 unchanged sentences

We determined that no valuation allowance was necessary as of December 31, 2024 or December 31, 2023 .

The estimated fair value of mortgage servicing rights was $ 19.3 million and $ 17.7 million as of December 31, 2023 and December 31, 2022 , respectively.

The estimated fair value of mortgage servicing rights was $ 21.0 million and $ 19.3 million as of December 31, 2024 and 2023 , respectively.

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

During 2023 , fair value was determined using a discount rate of 11.0 %, a weighted average constant prepayment rate of 7.44 %, depending on the stratification of the specific right, and a weighted average delinquency rate of 0.29 %.

During 2022 , fair value was determined using a discount rate of 11.25 %, a weighted average constant prepayment rate of 6.6 %, depending on the stratification of the specific right, and a weighted average delinquency rate of 0.28 %.

The weighted average amortization period was 8.6 years and 8.9 years as of December 31, 2023 and December 31, 2022 , respectively.

As of December 31, 2024 , fair value was determined using a discount rate of 10.50 %, a weighted average constant prepayment rate of 7.81 %, depending on the stratification of the specific right, and a weighted average delinquency rate of 0.68 %.

As of December 31, 2023 , fair value was determined using a discount rate of 11.00 %, a weighted average constant prepayment rate of 7.44 %, depending on the stratification of the specific right, and a weighted average delinquency rate of 0.29 %.

The weighted average amortization period was 8.7 years and 8.6 years as of December 31, 2024 and 2023 , respectively.

MERCANTILE BANK CORPORATION

31 unchanged sentences

In three to four years

54,486 30,761

In four to five years

17 unchanged sentences

$ 749,682 $ 621,747

Total time deposits of more than $250,000 totaled $ 477 million and $ 187 million at year-end 2023 and 2022 , respectively.

Deposit overdrafts, which are reported as loans on the Consolidated Balance Sheets, totaled $ 0.3 million and $ 0.9 million as of December 31, 2023 and December 31, 2022 , respectively.

Time deposits of more than $250,000 totaled $ 570 million and $ 477 million at year-end 2024 and 2023 , respectively.

Deposit overdrafts, which are reported as loans on the Consolidated Balance Sheets, totaled $ 1.0 million and $ 0.3 million as of December 31, 2024 and 2023 , respectively.

NOTE 7 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

17 unchanged sentences

NOTE 8 - FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES

FHLBI bullet advances totaled $ 360 million at December 31, 2024 , and were expected to mature at varying dates from January 2025 through January 2029, with fixed rates of interest from 0.70 % to 4.54 % and averaging 3.10 %.

FHLBI bullet advances totaled $ 440 million at December 31, 2023 , and were expected 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 %.

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

MERCANTILE BANK CORPORATION

10 unchanged sentences

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

Our borrowing line of credit as of December 31, 2023 totaled $ 903 million, with remaining availability based on collateral of $ 429 million.

Our borrowing line of credit as of December 31, 2024 totaled $ 1.0 billion, with remaining availability based on collateral of $ 634 million.

NOTE 9 - FEDERAL INCOME TAXES

The consolidated income tax expense is as follows:

The consolidated income tax expense was as follows:

(Dollars in thousands)

2 unchanged sentences

$ 19,090 $ 22,518 $ 16,080

Deferred (benefit) expense

Deferred benefit

( 397 ) ( 2,036 ) ( 1,353 )

4 unchanged sentences

NOTE 9 - FEDERAL INCOME TAXES (Continued)

A reconciliation of the differences between the federal income tax expense recorded and the amount computed by applying the federal statutory rate to income before income taxes is as follows:

A reconciliation of the differences between the federal income tax expense recorded and the amount computed by applying the federal statutory rate to income before income taxes were as follows:

(Dollars in thousands)

2023 2022 2021

Tax at statutory rate

5 unchanged sentences

( 529 ) ( 0.5 ) ( 303 ) ( 0.3 ) ( 334 ) ( 0.4 )

Non-deductible expenses

241 0.2 213 0.2 129 0.2

( 266 ) ( 0.3 ) 24 - ( 262 ) ( 0.3 )

( 366 ) ( 0.4 ) ( 157 ) ( 0.2 ) ( 26 ) -

$ 18,693 19.0 % $ 20,482 19.9 % $ 14,727 19.6 %

The statutory tax rate was 21 % for 2024 , 2023 and 2022 .

Significant components of deferred tax assets and liabilities, included in other assets on our Consolidated Balance Sheets, as of December 31, 2023 and 2022 are as follows:

Significant components of deferred tax assets and liabilities, included in other assets on our Consolidated Balance Sheets, as of December 31, 2024 and 2023 were as follows:

(Dollars in thousands)

12 unchanged sentences

Prepaid expenses

Core deposit intangible

Mortgage loan servicing rights

17 unchanged sentences

Stock-based compensation, reported as noninterest expense in the Consolidated Statements of Income, totaled $ 3.3 million, $ 3.4 million and $ 3.4 million in 2024, 2023 and 2022, respectively.

The Stock Incentive Plan of 2006 expired on January 18, 2016, and was effectively replaced with the Stock Incentive Plan of 2016 that was approved by shareholders in May, 2016.

The Stock Incentive Plan of 2016 was effectively replaced with the Stock Incentive Plan of 2020 that was approved by shareholders in May, 2020.

The Stock Incentive Plan of 2020 was effectively replaced with the Stock Incentive Plan of 2023 that was approved by shareholders in May, 2023.

The Stock Incentive Plan of 2020 was approved by shareholders in May, 2020, and was effectively replaced with the Stock Incentive Plan of 2023 that was approved by shareholders in May, 2023.

Grants included on the following tables were made under the various Stock Incentive Plans as follows:

Stock Incentive Plan of 2020

Stock option grants in 2015

Stock Incentive Plan of 2016

Stock option grants in 2016

Restricted stock grants in 2021 and 2022

Stock Incentive Plan of 2023

Restricted stock grants in 2020, 2021 and 2022

Stock Incentive Plan of 2023

Restricted stock grants in 2023

In addition, stock grants to directors as retainer payments during the years 2020 through 2022 were from the Stock Incentive Plan of 2020, while stock grants to directors as retainer payments during 2023 were from the Stock Incentive Plan of 2023.

Under the Stock Incentive Plan of 2006, the Stock Incentive Plan of 2016, the Stock Incentive Plan of 2020 and the Stock Incentive Plan of 2023, incentive awards may include, but are not limited to, stock options, restricted stock, stock appreciation rights and stock awards.

Under the Stock Incentive Plan of 2020 and the Stock Incentive Plan of 2023, incentive awards may include, but are not limited to, stock options, restricted stock, stock appreciation rights and stock awards.

Incentive awards that are stock options or stock appreciation rights are granted with an exercise price not less than the closing price of our common stock on the date of grant.

14 unchanged sentences

NOTE 10 – STOCK-BASED COMPENSATION (Continued)

Of the restricted stock shares granted in 2023 , 2022 and 2021 , a total of 25,239 shares, 26,112 shares and 22,703 shares, respectively, are performance-based awards made to our Named Executive Officers at the target level and are subject to the attainment of pre-determined performance goals.

Of the shares granted in 2022, a total of 11,350 , 2,778 and 690 shares reflect increases in performance-based grants to our Named Executive Officers that were awarded in 2021, 2020 and 2019, respectively.

Of the granted shares during 2021, a total of 11,454 , 23,053 and 22,836 shares reflect increases in performance-based grants to our Named Executive Officers that were awarded in 2020, 2019 and 2018, respectively.

These adjustments were based on an analysis of the pre-determined performance goals taking into account actual performance since the grant date and updated forecasts for the remainder of the three -year performance period.

There were no such adjustments made in 2023.

Shares issued as a result of the exercise of stock option grants have been authorized and were previously unissued shares.

A summary of stock option activity during the year ended December 31, 2023 is as follows:

Outstanding at beginning of year

5,000 $ 36.22

Forfeited or expired

( 5,000 ) 34.89

Outstanding at end of year

Options exercisable at year end

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

NOTE 10 – STOCK-BASED COMPENSATION (Continued)

Information related to options outstanding at year end 2022 and 2021 is as follows:

Minimum exercise price

$ 36.22 $ 27.66

Maximum Exercise Price

Average Remaining Option Term

Information related to options outstanding at year end 2022 and 2021 is as follows:

(Dollars in thousands)

Aggregate intrinsic value of stock options exercised

Cash received from stock option exercises

Tax benefit realized from stock option exercises

Weighted average per share fair value of stock options granted

Of the restricted stock shares granted in 2023 and 2022 , a total of 25,239 shares and 26,112 shares, respectively, are performance-based awards made to our Named Executive Officers at the target level and are subject to the attainment of pre-determined performance goals.

We periodically grant shares of common stock to our Corporate and Bank Board Directors for retainer payments with the related expense being recorded over the period of the Directors' service, as summarized below:

6 unchanged sentences

11,316 423 June 1, 2024 - May 31, 2025

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

NOTE 11 – RELATED PARTIES

6 unchanged sentences

Effect of changes in related parties

( 79,847 ) ( 964 )

Ending balance

1 unchanged sentence

Related party deposits and repurchase agreements totaled $ 17.9 million and $ 20.7 million at year-end 2024 and 2023 , respectively.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2024

NOTE 12 – COMMITMENTS AND OFF-BALANCE-SHEET RISK

10 unchanged sentences

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

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

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

2 unchanged sentences

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

The calculated allowance aggregated $ 1.3 million and $ 0.1 million as of December 31, 2023 and December 31, 2022, respectively.

The calculated allowance aggregated $ 1.0 million and $ 1.3 million as of December 31, 2024 and 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.

21 unchanged sentences

$ 2,101,302 $ 2,113,504

Commitments to make commercial loans generally reflect our binding obligations to existing and prospective customers to extend credit, including line of credit facilities secured by accounts receivable and inventory, and term debt secured by either real estate or equipment.

In most instances, commercial line of credit facilities have terms ranging from 12 to 24 months with floating rates tied to the Wall Street Journal Prime Rate or 30 -Day SOFR.

Commercial term debt secured by real estate are generally at a floating rates tied to the Wall Street Journal Prime Rate or 30 -Day SOFR.

Since the fourth quarter of 2020, a fixed rate option for commercial term debt loans secured by real estate is generally not offered for loans over $2.5 million;

Commercial term loans secured by real estate are generally at a floating rates tied to the Wall Street Journal Prime Rate or 30 -Day SOFR.

Since the fourth quarter of 2020, a fixed rate option for commercial term loans secured by real estate is generally not offered for loans over $2.5 million;

instead, customers are offered participation in our back-to-back interest rate swap program to achieve a desired fixed rate.

For loans under $2.5 million, we offer a rate primarily equal to the commensurate cost of funds using FHLBI advance rates as a proxy and a credit spread as indicated by the credit rating we assign.

Commercial term debt secured by real estate generally balloon within five years, with payments based on amortizations ranging from 10 to 25 years.

Commercial term debt secured by non-real estate collateral is generally at a floating rate tied to the Wall Street Journal Prime Rate or 30 -Day SOFR, or a fixed rate primarily equal to the commensurate cost of funds using FHLBI advance rates as a proxy and a credit spread as indicated by the credit rating we assign, and generally mature and fully amortize within three to seven years.

Commercial term loans secured by real estate generally balloon within five years, with payments based on amortizations ranging from 10 to 25 years.

Commercial term loans secured by non-real estate collateral are generally at a floating rate tied to the Wall Street Journal Prime Rate or 30 -Day SOFR, or a fixed rate primarily equal to the commensurate cost of funds using FHLBI advance rates as a proxy and a credit spread as indicated by the credit rating we assign, and generally mature and fully amortize within three to seven years.

Effective January 1, 2022, we replaced the 30 -Day Libor Rate with 30 -Day SOFR for all new and renewing floating rate commercial loans and commitments.

18 unchanged sentences

We also have a non-qualified deferred compensation program in which selected officers may defer all or portions of salary and bonus payments.

The deferred amounts, which totaled $ 1.1 million as of both December 31, 2023 and 2022, are categorized as other liabilities in the Consolidated Balance Sheets, and are paid interest at a rate equal to the Wall Street Journal Prime Rate.

The deferred amounts, which totaled $ 1.3 million and $ 1.1 million as of December 31, 2024 and 2023 , respectively, are categorized as other liabilities in the Consolidated Balance Sheets, and are paid interest at a rate equal to the Wall Street Journal Prime Rate.

Interest expense was less than $ 0.1 million during 2024 , 2023 , and 2022 .

29 unchanged sentences

864,130 Other Liabilities

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

The effect of interest rate swaps that are not designated as hedging instruments resulted in expense of $ 0.1 million during the year ended December 31, 2024 that was recorded in other noninterest expense on our Consolidated Statement of Income.

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

26 unchanged sentences

674,499 Other Liabilities

The effect of interest rate swaps that are not designated as hedging instruments resulted in income of less than $ 0.1 million during the year ended December 31, 2022 that was recognized 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 income of less than $ 0.1 million during the year ended December 31, 2023 that was recognized in other noninterest expense on our Consolidated Statement of Income.

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

171 unchanged sentences

$ 2,173 $ 0 $ 0 $ 2,173

Foreclosed assets

$ 2,173 $ 0 $ 0 $ 2,173

5 unchanged sentences

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

Foreclosed assets

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

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

13 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.

Stock options for approximately 5,000 and 7,000 shares of common stock were antidilutive and were not included in determining dilutive earnings per share in 2022 and 2021 , respectively.

Stock options for approximately 5,000 shares of common stock were antidilutive and were not included in determining dilutive earnings per share in 2022.

The factors used in the earnings per share computation follow:

27 unchanged sentences

The net proceeds from the issuance of the Floating Rate Notes were used for a variety of purposes, including contributions to our bank as capital to provide support for asset growth and the funding of stock repurchase programs and certain acquisitions.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

NOTE 18 – VARIABLE INTEREST ENTITIES (Continued)

The assets, liabilities, operations and cash flows of each trust are solely related to the issuance, administration and repayment of the preferred securities held by third -party investors.

2 unchanged sentences

As such, we do not have a controlling financial interest in the variable interest entities.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2024

NOTE 18 – VARIABLE INTEREST ENTITIES (Continued)

The only significant assets of our trusts are the Floating Rate Notes, and the only significant liabilities of our trusts are the Preferred Securities.

30 unchanged sentences

MCP, or our bank, could absorb losses that are significant to the underlying entities as it has a risk of loss for its capital contributions and funding commitments to each.

The general partners, or managing members, are considered the primary beneficiaries as managerial functions give them the power to direct the activities that most significantly impact the entities’ economic performance, and the managing members are exposed to all losses beyond MCP’s, or our bank’s, initial capital contributions and funding commitments.

Equity investments as a limited liability member in LIHTC and HTC investment entities, reported as other assets in the Consolidated Balance Sheets, totaled $ 25.7 million and $ 3.2 million as of December 31, 2023 and December 31, 2022, respectively.

Unfunded capital commitments, reported as other liabilities in the Consolidated Financial Statements, totaled $ 21.1 million and $ 1.4 million as of December 31, 2023 and December 31, 2022, respectively.

The general partners, or managing members, are considered the primary beneficiaries as managerial functions give them the power to direct the activities that most significantly impact the entities’ economic performances, and the managing members are exposed to all losses beyond MCP’s, or our bank’s, initial capital contributions and funding commitments.

Equity investments as a limited liability member in LIHTC and HTC investment entities, reported as other assets in the Consolidated Balance Sheets, totaled $ 38.9 million and $ 25.7 million as of December 31, 2024 and 2023 , respectively.

Unfunded capital commitments, reported as other liabilities in the Consolidated Financial Statements, totaled $ 34.4 million and $ 21.1 million as of December 31, 2024 and 2023 , respectively.

The following table summarizes quantitative information about our involvement in unconsolidated variable interest entities at year end:

13 unchanged sentences

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

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

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

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

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

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

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

Our unamortized debt issuance costs were $ 0.7 million and $ 1.0 million as of December 31, 2024 and 2023 , respectively.

24 unchanged sentences

Total capital (to risk weighted assets)

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

$ 777,857 14.2 % $ 439,031 8.0 % $

759,146 13.9 435,793 8.0 544,741 10.0

Tier 1 capital (to risk weighted assets)

8 unchanged sentences

Total capital (to risk weighted assets)

$ 634,729 14.0 % $ 362,675 8.0 % NA NA

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

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

Tier 1 capital (to risk weighted assets)

42 unchanged sentences

$ 17,420 $ 18,969

Investments in bank subsidiaries

Investments in subsidiaries

691,563 629,710

66 unchanged sentences

Net proceeds from subordinated notes issuance

0 14,645 73,635

Repurchase of common shares

0 0 ( 21,380 )

Cash dividends on common stock

( 22,473 ) ( 21,004 ) ( 19,602 )

Net cash (for) from financing activities

Net cash for financing activities

( 21,613 ) ( 20,068 ) ( 4,009 )

7 unchanged sentences

On January 16, 2025 , our Board of Directors declared a cash dividend on our common stock in the amount of $ 0.37 per share that will be paid on March 19, 2025 to shareholders of record as of March 7, 2025 .

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

EXHIBIT INDEX

EXHIBIT DESCRIPTION

Our Articles of Incorporation are incorporated by reference to exhibit 3.1 of our Form 10-Q for the quarter ended June 30, 2009

Articles of Incorporation of Mercantile Bank Corporation, including all amendments thereto, incorporated by reference to Exhibit 3.1 of our Form S-4 Registration Statement filed February 16, 2022

Our Amended and Restated By-laws dated as of February 26, 2015 are incorporated by reference to exhibit 3.1 to our Current Report on Form 8-K filed February 26, 2015

16 unchanged sentences

Amended and Restated Employment Agreement of Charles E.

Christmas dated November 29, 2018, effective December 31, 2018, incorporated by reference to exhibit 10.2 of our Form 8-K filed December 3, 2018*

Christmas dated December 19, 2024, effective January 1, 2025, incorporated by reference to exhibit 10.3 of our Form 8-K filed December 19, 2024*

Amended and Restated Employment Agreement of Raymond E.

Reitsma dated November 29, 2018, effective December 31, 2018, incorporated by reference to exhibit 10.3 of our Form 8-K filed December 3, 2018*

Reitsma dated December 19, 2024, effective January 1, 2025, incorporated by reference to exhibit 10.2 of our Form 8-K filed December 19, 2024*

Amended and Restated Employment Agreement of Robert T.

Worthington dated November 29, 2018, effective December 31, 2018, incorporated by reference to exhibit 10.4 of our Form 8-K filed December 3, 2018*

Worthington dated December 19, 2024, effective January 1, 2025, incorporated by reference to exhibit 10.5 of our Form 8-K filed December 19, 2024*

Amended and Restated Employment Agreement of Brett E.

Hoover dated December 19, 2024, effective January 1, 2025, incorporated by reference to exhibit 10.4 of our Form 8-K filed December 19, 2024*

Amended and Restated Change in Control Agreement of Robert B.

3 unchanged sentences

Christmas dated November 29, 2018, effective December 31, 2018, incorporated by reference to exhibit 10.7 of our Form 8-K filed December 3, 2018*

Amended and Restated Employment Agreement of Scott P.

Setlock effective January 1, 2024, incorporated by reference to exhibit 10.3 of our Form 8-K filed June 3, 2024*

First Amendment to Amended and Restated Employment Agreement of Scott P.

Setlock dated May 31, 2024, incorporated by reference to exhibit 10.4 of our Form 8-K filed June 3, 2024*

2023 Mercantile Executive Officer Bonus Plan, incorporated by reference to exhibit 10.1 of our Form 8-K filed June 22, 2023*

2024 Mercantile Executive Officer Bonus Plan, incorporated by reference to exhibit 10.1 of our Form 8-K filed July 11, 2024*

2024 Mercantile Bank Nonqualified Deferred Compensation Plan #2, incorporated by reference to exhibit 10.1 of our Form 8-K filed with the SEC on November 25, 2024*

Second Amendment to the Mercantile Bank Amended and Restated Deferred Compensation Plan, incorporated by reference to exhibit 10.2 of our Form 8-K filed with the SEC on November 25, 2024*

Mercantile Bank Rabbi Directed Trust Agreement, incorporated by reference to exhibit 10.3 of our Form 8-K filed with the SEC on November 25, 2024*

Mercantile Bank Corporation Stock Incentive Plan of 2020, incorporated by reference to Appendix A to Mercantile’s Definitive Proxy Statement on Schedule 14A filed April 9, 2020*

1 unchanged sentence

Form of Performance-Based Restricted Stock Award Agreement, in connection with the Mercantile Bank Corporation Stock Incentive Plan of 2020, incorporated by reference to exhibit 10.17 of our Form 10-K for the year ended December 31, 2020*

Form of Performance-Based Restricted Stock Award Agreement, in connection with the Mercantile Bank Corporation Stock Incentive Plan of 2023*

Form of Performance-Based Restricted Stock Award Agreement, in connection with the Mercantile Bank Corporation Stock Incentive Plan of 2023, incorporated by reference to exhibit 10.1 of our Form 8-K filed February 6, 2025*

Form of Standard Restricted Stock Award Agreement, in connection with the Mercantile Bank Corporation Stock Incentive Plan of 2023, incorporated by reference to exhibit 10.2 of our Form 8-K filed on February 6, 2025*

Director Fee Summary*

15 unchanged sentences

MERCANTILE BANK CORPORATION

/s/ Robert B.

Kaminski, Jr.

/s/ Raymond E.

President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 3, 2025.

Cassard, Director

/s/ Michael H.

Price, Chairman of the Board

/s/ Michael S.

Davenport, Director

/s/ Michael H.

Price, Chairman of the Board

/s/ Thomas D.

Dickinson, Director

Ramaker, Director

1 unchanged sentence

Eldridge, Director

/s/ Nelson F.

Sanchez, Director

/s/ Joseph D.

Jones, Director

Schmidt, Director

/s/ Robert B.

Kaminski, Jr.

Kaminski Jr., Director

Sparks, Director

/s/ Richard D.

MacDonald, Director

/s/ Shoran R.

Williams, Director

/s/ Raymond E.

Director, President and Chief Executive Officer

(principal executive officer)

/s/ Raymond E.

Reitsma, Director

Sparks, Director

/s/ Charles E.

3 unchanged sentences

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-K

Item 9A. Controls and Procedures