What changed in this filing

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Item 1. Financial Statements

2025-05-02 compared with 2024-11-01 · 361 added, 514 removed, 1444 unchanged (38% of the section changed)

1 unchanged sentence

CONSOLIDATED BALANCE SHEETS

September 30,

(Dollars in thousands)

47 unchanged sentences

40,000,000 shares authorized;

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

16,235,660 shares issued and outstanding at March 31, 2025 and 16,146,374 shares issued and outstanding at December 31, 2024

300,732 299,705

11 unchanged sentences

(Dollars in thousands except per share amounts)

September 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

March 31, 2025

March 31, 2024

Interest income

Loans, including fees

$ 71,992 $ 71,270

Securities, taxable

2 unchanged sentences

Total interest income

80,338 76,724

Interest expense

25,192 22,224

Short-term borrowings

2 unchanged sentences

Total interest expense

31,790 29,363

Net interest income

48,548 47,361

Provision for credit losses

Net interest income after provision for credit losses

46,448 46,061

Noninterest income

8 unchanged sentences

Salaries and benefits

19,557 18,237

Furniture and equipment depreciation, rent and maintenance

3 unchanged sentences

Total noninterest expense

31,104 29,944

Income before federal income tax expense

24,046 26,985

Federal income tax expense

$ 19,537 $ 21,562

Basic earnings per share

$ 1.21 $ 1.34

Diluted earnings per share

$ 1.21 $ 1.34

Average basic shares outstanding

16,197,978 16,118,858

Average diluted shares outstanding

16,197,978 16,118,858

See accompanying notes to consolidated financial statements.

2 unchanged sentences

(Dollars in thousands)

September 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

March 31, 2025

March 31, 2024

Other comprehensive income (loss):

11 unchanged sentences

Income (Loss)

Balances, June 30, 2024

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

Employee stock purchase plan ( 256 shares)

Dividend reinvestment plan ( 4,531 shares)

Stock-based compensation expense

Cash dividends ($ 0.36 per common share)

( 5,700 ) ( 5,700 )

Net income for the three months ended September 30, 2024

19,618 19,618

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

17,129 17,129

Balances, September 30, 2024

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

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY (Continued)

Comprehensive

Shareholders’

(Dollars in thousands except per share amounts)

Income (Loss)

Balances, January 1, 2025

6 unchanged sentences

( 5,902 ) ( 5,902 )

Net income for the nine months ended September 30, 2024

59,967 59,967

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

14,372 14,372

Balances, September 30, 2024

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

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY (Continued)

Comprehensive

Shareholders’

(Dollars in thousands except per share amounts)

Income (Loss)

Balances, June 30, 2023

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

Employee stock purchase plan ( 345 shares)

Dividend reinvestment plan ( 6,746 shares)

Stock-based compensation expense

Cash dividends ($ 0.34 per common share)

( 5,330 ) ( 5,330 )

Net income for the three months ended September 30, 2023

Net income for the three months ended March 31, 2025

19,537 19,537

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

( 12,071 ) ( 12,071 )

Balances, September 30, 2023

Balances, March 31, 2025

$ 0 $ 300,732 $ 348,281 $ ( 40,667 ) $ 608,346

15 unchanged sentences

( 5,534 ) ( 5,534 )

Net income for the nine months ended September 30, 2023

Net income for the three months ended March 31, 2024

21,562 21,562

1 unchanged sentence

( 2,488 ) ( 2,488 )

Balances, September 30, 2023

Balances, March 31, 2024

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

3 unchanged sentences

(Dollars in thousands)

September 30, 2024

September 30, 2023

March 31, 2025

March 31, 2024

Cash flows from operating activities

3 unchanged sentences

Stock-based compensation expense

Stock grants to directors for retainer fee

Stock grants to directors for retainer fees

Proceeds from sales of mortgage loans held for sale

2 unchanged sentences

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

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

Net loss from sales and write-downs of fixed assets

Earnings on bank owned life insurance

3 unchanged sentences

Accrued interest payable and other liabilities

Net cash from operating activities

Net cash from (for) operating activities

Cash flows from investing activities

3 unchanged sentences

Proceeds from sales of foreclosed assets

Proceeds from sales of former bank premises

Purchases of Federal Home Loan Bank stock

Proceeds from bank owned life insurance death benefits claim

Proceeds from bank owned life insurance claims

Net purchases of premises and equipment and lease activity

4 unchanged sentences

(Dollars in thousands)

September 30, 2024

September 30, 2023

March 31, 2025

March 31, 2024

Cash flows from financing activities

1 unchanged sentence

Net increase (decrease) in all other deposits

Net decrease in securities sold under agreements to repurchase

Maturities of Federal Home Loan Bank advances

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

Payoffs and paydowns of Federal Home Loan Bank advances

Proceeds from Federal Home Loan Bank advances

8 unchanged sentences

Cash paid during the period for:

Federal income tax

Noncash financing and investing activities:

Transfers from bank premises to other real estate owned

Transfers from loans to foreclosed assets

See accompanying notes to consolidated financial statements.

3 unchanged sentences

Basis of Presentation :

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

The unaudited financial statements for the three months ended March 31, 2025 include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries.

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

1 unchanged sentence

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

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

The results for the period ended March 31, 2025 should not be considered as indicative of results for a full year.

For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form 10 -K for the year ended December 31, 2024 .

2 unchanged sentences

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

Recently Issued Accounting Standards:

2003 - 07, Segment Reporting (Topic 323 ):

Improvements to Reportable Segment Disclosures.

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

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

Early adoption is permitted.

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

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

Improvements to Income Tax Disclosures.

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

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

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

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

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.

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

Earnings Per Share :

3 unchanged sentences

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

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

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

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Approximately 278,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three months ended March 31, 2025 .

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

Debt Securities :

11 unchanged sentences

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

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

At March 31, 2025 , and December 31, 2024 , there was no allowance related to the available for sale debt securities portfolio.

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

4 unchanged sentences

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, net of deferred loan fees and costs.

1 unchanged sentence

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

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

Net unamortized deferred loan costs amounted to $ 2.3 million and $ 2.2 million at March 31, 2025 , and December 31, 2024 , respectively.

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

6 unchanged sentences

Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans Held for Sale :

1 unchanged sentence

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

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

As of March 31, 2025 and December 31, 2024 , we determined that the fair value of our mortgage loans held for sale totaled $ 15.5 million and $ 16.0 million, respectively.

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

3 unchanged sentences

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Allowance for Credit Losses ( “a llowance ” ) :

16 unchanged sentences

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Our qualitative factors include:

8 unchanged sentences

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

While our methodology considers both the historical loss rates as well as the traditional qualitative factors, there may be instances or situations where additional qualitative factors need to be considered.

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

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

The provision for credit losses primarily reflected an individual allocation for a nonperforming commercial loan relationship, allocations necessitated by net loan growth, a change in the volume and severity of past due loans, nonaccrual loans and adversely classified loans for commercial and industrial loans and a change in the historical loss information qualitative factor for commercial loans, which more than offset the impacts of an improved economic forecast and changes to the loan portfolio composition.

Accrued interest receivable on loans totaling $ 17.5 million and $ 16.9 million as of September 30, 2024 and December 31, 2023 , respectively, is included in other assets on the Consolidated Balance Sheets.

Due to the relatively low level of loan losses during the look-back period, we have established a historical loss information factor that has been included in the qualitative factors that are included in the estimation of future credit losses in the periods presented.

We recorded a provision for credit losses of $ 2.1 million during the first three months of 2025 .

The provision for credit losses primarily reflected an increased allocation necessitated by changes to the economic forecast and loan growth.

Accrued interest receivable on loans totaling $ 17.2 million and $ 17.3 million as of March 31, 2025 and December 31, 2024 , respectively, is included in other assets on the Consolidated Balance Sheets.

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

5 unchanged sentences

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

10 unchanged sentences

The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Mortgage Banking Activities :

Mortgage loans serviced for others totaled $ 1.50 billion and $ 1.40 billion as of September 30, 2024 and December 31, 2023 , respectively.

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

Mortgage loans serviced for others totaled $ 1.56 billion and $ 1.55 billion as of March 31, 2025 and December 31, 2024 , respectively.

Mortgage loan servicing rights are recognized as assets based on the allocated value of retained servicing rights on mortgage loans sold and totaled $ 12.5 million as of both March 31, 2025 and December 31, 2024 .

Mortgage loan servicing rights are carried at the lower of amortized cost or fair value and are expensed in proportion to, and over the period of, estimated net servicing revenues.

1 unchanged sentence

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

The fair value of mortgage servicing rights totaled $ 21.6 million and $ 21.0 million as of March 31, 2025 and December 31, 2024 , respectively.

Servicing fee income is recorded for fees earned for servicing mortgage loans.

1 unchanged sentence

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Derivatives :

6 unchanged sentences

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

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

We had no derivative instruments designated as hedges as of March 31, 2025 , and December 31, 2024 .

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

3 unchanged sentences

Based on our annual impairment analysis of goodwill as of October 1, it was determined that the fair value was in excess of its respective carrying value as of October 1, 2024; therefore, goodwill is considered not impaired.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue from Contracts with Customers :

11 unchanged sentences

(Dollars in thousands)

September 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

March 31, 2025

March 31, 2024

Service charges on deposit and sweep accounts

1 unchanged sentence

Credit and debit card income

2,257 2,232 6,644 6,717

Interest rate swap fees

Payroll services income

713 591 2,295 1,908

Customer service fees

231 205 611 612

Service Charges on Deposit and Sweep Accounts:

7 unchanged sentences

Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Interest Rate Swap Fees:

We offer a loan swap program to certain commercial loan customers.

Through this program, we originate a variable rate loan with the customer.

We and the swap customer will then enter into a fixed interest rate swap.

Separately, an identical offsetting swap is entered into by the Company with a counterparty.

These “back-to-back” swap arrangements are intended to offset each other and allow us to book a variable rate loan, while providing the customer with a contract for fixed interest payments.

Through this program, we receive an upfront, non-refundable fee from the counterparty, dependent upon the pricing, which is recognized upon receipt from the counterparty.

Payroll Services Income:

12 unchanged sentences

Cost Gains Losses Value

September 30, 2024

March 31, 2025

Government agency debt obligations

19 unchanged sentences

$ 793,422 $ 737 $ ( 63,807 ) $ 730,352

Securities with unrealized losses at September 30, 2024 and December 31, 2023 , aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

Securities with unrealized losses at March 31, 2025 , aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

Less than 12 Months

2 unchanged sentences

Value Loss Value Loss Value Loss

September 30, 2024

March 31, 2025

Government agency debt obligations

11 unchanged sentences

SECURITIES (Continued)

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

Less than 12 Months

17 unchanged sentences

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

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

At March 31, 2025 , 799 debt securities with estimated fair values totaling $ 640 million had unrealized losses aggregating $ 53.5 million.

At December 31, 2024 , 843 debt securities with estimated fair values totaling $ 680 million had unrealized losses aggregating $ 63.8 million.

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

At March 31, 2025 , unrealized losses aggregating $ 43.4 million were attributable to bonds issued or guaranteed by agencies of the U.S.

Federal Government, while unrealized losses totaling $ 10.1 million were associated with bonds issued by state-based municipalities.

6 unchanged sentences

SECURITIES (Continued)

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

The amortized cost and fair value of debt securities at March 31, 2025 , by maturity, are shown in the following table.

The contractual maturity is utilized for U.S.

15 unchanged sentences

$ 839,060 $ 787,583

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

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

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

No securities were sold during the first three months of 2025 or the full-year 2024 .

Securities issued by the State of Michigan and all its political subdivisions had combined amortized costs of $ 224 million and $ 219 million as of March 31, 2025 , and December 31, 2024 , respectively, with estimated market values of $ 215 million and $ 209 million at the respective dates.

We had no securities issued by all other states and their political subdivisions as of March 31, 2025 , and December 31, 2024 .

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

1 unchanged sentence

The carrying value of U.S.

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

Government agency debt obligation securities that are pledged to secure repurchase agreements was $ 242 million and $ 122 million at March 31, 2025 , and December 31, 2024 , respectively.

The carrying value of U.S.

Government agency debt obligation securities that are pledged to secure specific customer deposits was $ 12.1 million and $ 11.7 million at March 31, 2025 , and December 31, 2024 , respectively.

MERCANTILE BANK CORPORATION

5 unchanged sentences

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

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

Our loan portfolio segments as of both March 31, 2025 and December 31, 2024 were as follows:

Commercial Loans

22 unchanged sentences

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

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

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

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

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

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

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

MERCANTILE BANK CORPORATION

1 unchanged sentence

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

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

September 30, 2024

Our total loans at March 31, 2025 were $ 4.64 billion compared to $ 4.60 billion at December 31, 2024 , an increase of $ 35.8 million, or 0.8 %.

The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at March 31, 2025 and December 31, 2024 , and the percentage change in loans from the end of 2024 to the end of the first quarter of 2025 , are as follows:

March 31, 2025

December 31, 2024

21 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

An age analysis of past due loans is as follows as of March 31, 2025 :

30 – 59 60 – 89 Than 89

49 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

Nonaccrual loans as of March 31, 2025 were as follows:

(Dollars in thousands)

27 unchanged sentences

Nonaccrual loans represent the entire balance of collateral dependent loans.

As of September 30, 2024 and December 31, 2023 , all collateral dependent loans were secured by real estate, with the exception of those classified as commercial and industrial, which were secured by accounts receivable, inventory, and equipment.

Interest income recognized on nonaccrual loans totaled $ 0.5 million and less than $ 0.1 million during the nine months ended September 30, 2024 and 2023 , respectively, reflecting the collection of interest at the time of principal pay-off.

As of March 31, 2025 and December 31, 2024 , 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 $ 0.3 million and $ 0.2 million during the three months ended March 31, 2025 and 2024 , respectively, reflecting the collection of interest at the time of principal pay-off.

MERCANTILE BANK CORPORATION

16 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

34 unchanged sentences

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

The following table reflects amortized cost basis of loans and year-to-date loan charge-offs as of March 31, 2025 based on year of origination:

(Dollars in thousands)

59 unchanged sentences

$ 0 $ 0 $ 2 $ 0 $ 61 $ 0 $ 63 $ 0 $ 63

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

There were lines of credit with principal balances of $ 0.3 million that were converted to term loans during the first three months of 2025 .

MERCANTILE BANK CORPORATION

1 unchanged sentence

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

The following table reflects amortized cost basis of loans as of December 31, 2024 and loan charge-offs during the three months ended March 31, 2024 based on year of origination:

(Dollars in thousands)

66 unchanged sentences

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

We determined that the look-back period commencing on January 1, 2011 through the current reporting date was reasonable and appropriate, which was used in the calculation of both the September 30, 2024 and December 31, 2023 allowance for credit losses.

We determined that the look-back period commencing on January 1, 2011 through the current reporting date was reasonable and appropriate, which was used in the calculation of both the March 31, 2025 , and December 31, 2024 allowance for credit losses.

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

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

For the commercial portfolio segments, we assumed a 2.0 % prepayment speed as of both September 30, 2024 and December 31, 2023 as we deemed there to be no considerable changes from historical experience.

For the retail 1 - 4 family mortgage and retail other consumer portfolios, we used a prepayment speed of 9.0 % as of September 30, 2024 and December 31, 2023 .

For the commercial portfolio segments, we assumed a 2.0 % prepayment speed as of both March 31, 2025 and December 31, 2024 as we deemed there to be no considerable changes from historical experience.

For the retail 1 - 4 family mortgage and retail other consumer portfolios, we used a prepayment speed of 7.8 % as of March 31, 2025 and December 31, 2024 .

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

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

As of September 30, 2024 and December 31, 2023 , we used a one -year reasonable and supportable economic forecast period, with a six -month straight-line reversion period for all loan segments.

The economic forecasts used for our September 30, 2024 allowance calculation reflected a $ 2.1 million allowance balance reduction.

As of March 31, 2025 and December 31, 2024 , we used a one -year reasonable and supportable economic forecast period, with a six -month straight-line reversion period for all loan segments.

The economic forecasts used for our March 31, 2025 allowance calculation reflected less than a $ 0.1 million allowance balance reduction.

The forecasts used for our December 31, 2024 allowance calculation reflected a $ 2.2 million allowance balance reduction.

Individual loans exhibiting unique risk characteristics, which differentiated the loans from other loans within the loan segments and were evaluated for expected credit losses on an individual basis, totaled $ 11.6 million and $ 5.4 million as of September 30, 2024 and December 31, 2023 , respectively.

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

Individual loans exhibiting unique risk characteristics, which differentiated the loans from other loans within the loan segments and were evaluated for expected credit losses on an individual basis, totaled $ 7.0 million and $ 7.4 million as of March 31, 2025 and December 31, 2024 , respectively.

Individual allowance allocations totaled $ 2.4 million and $ 2.2 million as of March 31, 2025 and December 31, 2024 , respectively.

MERCANTILE BANK CORPORATION

1 unchanged sentence

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

Activity in the allowance for credit losses during the three months ended March 31, 2025 is as follows:

(Dollars in thousands)

9 unchanged sentences

$ 11,798 $ 386 $ 7,679 $ 11,946 $ 3,878 $ 18,874 $ 2,102 $ 3 $ 56,666

Balance at 12-31-23

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

Provision for credit losses

7,147 ( 34 ) 181 748 28 ( 923 ) ( 1,300 ) 53 5,900

( 9 ) 0 0 0 0 0 ( 42 ) 0 ( 51 )

335 4 161 0 12 129 186 0 827

Ending balance

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

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

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

(Dollars in thousands)

14 unchanged sentences

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

Balance at 12-31-22

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

Provision for credit losses

( 1,123 ) ( 167 ) 495 11 426 6,317 ( 40 ) ( 19 ) 5,900

( 218 ) 0 ( 54 ) 0 0 ( 513 ) ( 25 ) 0 ( 810 )

136 34 79 0 18 353 52 0 672

Ending balance

$ 8,998 $ 357 $ 6,434 $ 9,253 $ 2,635 $ 20,184 $ 147 $ 0 $ 48,008

MERCANTILE BANK CORPORATION

1 unchanged sentence

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

Interest Rate

(Dollars in thousands)

Reduction Term Extension Forgiveness

Commercial and industrial

$ 0 $ 5,670 $ 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 $ 5,670 $ 0

1-4 family mortgages

Other consumer loans

$ 0 $ 5,670 $ 0

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

There were no loan modifications to borrowers experiencing financial difficulty during the three months ended March 31, 2025.

Interest Rate

13 unchanged sentences

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

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

Interest Rate

(Dollars in thousands)

Term Extension

Commercial and industrial

$ 0 $ 8,184 $ 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 $ 8,184 $ 0

1-4 family mortgages

Other consumer loans

$ 0 $ 8,184 $ 0

The following table presents the amortized cost basis of loans that have been modified in the past twelve months to borrowers experiencing financial difficulty by payment status and loan segment as of September 30, 2024 :

(Dollars in thousands)

4 unchanged sentences

Real estate – non-owner occupied

8,070 0 0 8,070

Real estate – multi-family and residential rental

9 unchanged sentences

Premises and equipment are comprised of the following:

September 30,

(Dollars in thousands)

9 unchanged sentences

$ 53,693 $ 53,427

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

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

Depreciation expense totaled $ 1.3 million and $ 1.6 million during the first quarters of 2025 and 2024 , respectively.

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

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

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

As of March 31, 2025 , we were under lease contracts for eleven of our banking facilities.

The leases have maturity dates ranging from November, 2025 through May, 2048, with a weighted average life of 9.3 years as of March 31, 2025 .

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

5 unchanged sentences

We use our incremental borrowing rate, on a collateralized basis, at lease commencement to calculate the present value of lease payments.

The weighted average discount rate for leases was 6.7 % as of September 30, 2024 .

The right-of-use assets, included in premises and equipment, net on our Consolidated Balance Sheets, and the lease liabilities, included in other liabilities on our Consolidated Balance Sheets, totaled $ 4.7 million and $ 3.7 million as of September 30, 2024 , and December 31, 2023 , respectively.

The weighted average discount rate for leases was 6.53 % as of March 31, 2025 .

The right-of-use assets, included in premises and equipment, net on our Consolidated Balance Sheets, and the lease liabilities, included in other liabilities on our Consolidated Balance Sheets, totaled $ 4.5 million and $ 4.4 million as of March 31, 2025 , and December 31, 2024 , respectively.

As permitted by applicable accounting standards, we have elected not to recognize short-term leases with original terms of twelve months or less on our Consolidated Balance Sheets.

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

Total operating lease expense associated with the leases aggregated $ 0.3 million during the first quarter of 2025 and $ 0.4 million during the first quarter of 2024 .

MERCANTILE BANK CORPORATION

1 unchanged sentence

PREMISES AND EQUIPMENT, NET (Continued)

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

Future lease payments were as follows as of March 31, 2025 :

(Dollars in thousands)

2 unchanged sentences

Present value of future lease payments (lease liability)

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

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

September 30, 2024

Our total deposits at March 31, 2025 totaled $ 4.68 billion, a decrease of $ 16.6 million, or 0.4 %, from December 31, 2024 .

The components of our outstanding balances at March 31, 2025 and December 31, 2024 , and percentage change in deposits from the end of 2024 to the end of the first quarter of 2025 , are as follows:

March 31, 2025

December 31, 2024

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Information relating to our repurchase agreements is as follows:

Nine Months Ended

Three Months Ended

Twelve Months Ended

(Dollars in thousands)

September 30, 2024

March 31, 2025

December 31, 2024

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FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES

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

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

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

FHLBI bullet advances totaled $ 340 million at March 31, 2025 , and were scheduled to mature at varying dates from April 2025 through January 2029 , with fixed rates of interest from 0.70 % to 4.54 % and averaging 3.18 %.

FHLBI bullet advances totaled $ 360 million at December 31, 2024 , and were scheduled 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 %.

Maturities of FHLBI bullet advances as of March 31, 2025 were as follows:

(Dollars in thousands)

FHLBI amortizing advances totaled $ 26.2 million as of March 31, 2025 , with an average rate of 2.52 % and with final maturities in 2042 .

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

FHLBI amortizing advances are obtained periodically to assist in managing interest rate risk associated with certain longer-term fixed rate commercial loans, with annual principal payments that closely align with the scheduled amortization of the underlying commercial loans.

MERCANTILE BANK CORPORATION

1 unchanged sentence

FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES (Continued)

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

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

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

Scheduled principal payments on FHLBI amortizing advances as of March 31, 2025 were as follows:

(Dollars in thousands)

1 unchanged sentence

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

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

Our borrowing line of credit as of March 31, 2025 totaled $ 1.06 billion, with remaining availability based on collateral of $ 674 million.

STOCK-BASED COMPENSATION

Stock-based compensation plans are used to provide directors and employees with an increased incentive to contribute to our long-term performance and growth, to align the interests of directors and employees with the interests of our shareholders through the opportunity for increased stock ownership and to attract and retain directors and employees.

Stock-based compensation expense, reported as noninterest expense in the Consolidated Statements of Income, totaled

$ 0.8 million and

$ 0.7 million during the

three months ended March 31, 2025 and 2024 , respectively.

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

Under 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.

Price, vesting and expiration date parameters are determined by Mercantile’s Compensation Committee on a grant-by-grant basis.

No payments are required from employees for restricted stock awards.

The restricted stock awards granted through the plan fully vest after

three years and, in the case of performance-based restricted stock issued to executive officers issued under the plan, are subject to the attainment of pre-determined performance goals.

no restricted stock grants during the

three months ended

March 31, 2024.

A summary of restricted stock activity during the three months ended March 31, 2025 , is as follows:

Nonvested at beginning of the period

228,646 $ 35.84

84,685 $ 50.34

( 34,053 ) 34.79

( 845 ) 34.42

Nonvested at end of the period

278,433 $ 40.38

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK-BASED COMPENSATION (Continued)

Of the restricted stock shares granted during the three months ended March 31, 2024 , 24,910 shares 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.

As of March 31, 2025 , there were approximately 298,000 shares authorized for future incentive awards, and as of December 31, 2024 , there were approximately 383,000 shares authorized for future incentive awards.

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:

Shares Granted

(in thousands)

Covered Period

June 1, 2023 - May 31, 2024

June 1, 2024 - May 31, 2025

COMMITMENTS AND OFF-BALANCE SHEET RISK

13 unchanged sentences

The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMITMENTS AND OFF-BALANCE SHEET RISK (Continued)

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

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

The calculated allowance aggregated $ 0.8 million and $ 1.3 million as of September 30, 2024 and December 31, 2023 , respectively.

The calculated allowance aggregated $ 0.3 million and $ 1.0 million as of March 31, 2025 and December 31, 2024 , respectively.

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

Letters of credit are rarely drawn.

At September 30, 2024 , and December 31, 2023 , the rates on existing off-balance sheet instruments were substantially equivalent to current market rates, considering the underlying credit standing of the counterparties.

A summary of the contractual amounts of our financial instruments with off-balance sheet risk at September 30, 2024 and December 31, 2023 is as follows:

September 30,

At March 31, 2025 , and December 31, 2024 , the rates on existing off-balance sheet instruments were substantially equivalent to current market rates, considering the underlying credit standing of the counterparties.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMITMENTS AND OFF-BALANCE SHEET RISK (Continued)

A summary of the contractual amounts of our financial instruments with off-balance sheet risk at March 31, 2025 and December 31, 2024 is as follows:

(Dollars in thousands)

22 unchanged sentences

Fees paid to us by the correspondent banks are recognized as noninterest income on our Consolidated Statements of Income on the settlement date.

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DERIVATIVES AND HEDGING ACTIVITIES (Continued)

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

The fair values of derivative instruments as of March 31, 2025 , are reflected in the following table.

Balance Sheet

7 unchanged sentences

888,917 Other Liabilities

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

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DERIVATIVES AND HEDGING ACTIVITIES (Continued)

The effect of interest rate swaps that are not designated as hedging instruments resulted in expense of $ 0.1 million during the three months ended March 31, 2025 that was recorded in other noninterest expense on our Consolidated Statements of Income.

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

1 unchanged sentence

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

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

The netting of derivative instruments as of March 31, 2025 is presented in the following table.

Gross Amounts Not Offset on the Consolidated Balance Sheet

19 unchanged sentences

864,130 Other Liabilities

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DERIVATIVES AND HEDGING ACTIVITIES (Continued)

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

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

The netting of derivative instruments as of December 31, 2024 is presented in the following table.

13 unchanged sentences

FAIR VALUES OF FINANCIAL INSTRUMENTS

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

September 30, 2024

The carrying amounts, estimated fair values and level within the fair value hierarchy of financial instruments were as follows as of March 31, 2025 and December 31, 2024 :

March 31, 2025

December 31, 2024

35 unchanged sentences

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

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

The fair values of subordinated debentures, subordinated notes, and FHLBI advances are based on current rates for similar financing.

33 unchanged sentences

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

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

There was no such impairment as of March 31, 2025 , or December 31, 2024 .

We have no Level 1 securities available for sale.

8 unchanged sentences

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

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

As of March 31, 2025 and December 31, 2024 , we determined the fair value of our mortgage loans held for sale to be $ 15.5 million and $ 16.0 million, respectively.

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

9 unchanged sentences

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

The balances of assets and liabilities measured at fair value on a recurring basis as of March 31, 2025 are as follows:

(Dollars in thousands)

20 unchanged sentences

FAIR VALUES (Continued)

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

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

There were no sales, purchases or transfers in or out of Level 3 during the three months ended March 31, 2025 .

The insignificant reduction in Level 3 municipal general obligation bonds during the three months ended March 31, 2025 reflects the scheduled maturities of such bonds.

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

18 unchanged sentences

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

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

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2025 are as follows:

(Dollars in thousands)

2 unchanged sentences

$ 1,642 $ 0 $ 0 $ 1,642

Foreclosed assets

$ 1,642 $ 0 $ 0 $ 1,642

7 unchanged sentences

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

Foreclosed assets

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

16 unchanged sentences

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

As of September 30, 2024 and December 31, 2023 , our bank was in the well capitalized category under the regulatory framework for prompt corrective action.

There are no conditions or events since September 30, 2024 , that we believe have changed our bank’s categorization.

As of March 31, 2025 and December 31, 2024 , our bank was in the well capitalized category under the regulatory framework for prompt corrective action.

There are no conditions or events since March 31, 2025 , that we believe have changed our bank’s categorization.

MERCANTILE BANK CORPORATION

9 unchanged sentences

(Dollars in thousands)

September 30, 2024

March 31, 2025

Total capital (to risk weighted assets)

26 unchanged sentences

REGULATORY MATTERS (Continued)

Our consolidated capital levels as of September 30, 2024 and December 31, 2023 include $ 48.1 million and $ 47.6 million, respectively, of trust preferred securities.

Our consolidated capital levels as of both March 31, 2025 and December 31, 2024 include $ 48.3 million of trust preferred securities.

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

1 unchanged sentence

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

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

As of both March 31, 2025 and December 31, 2024 , all $ 48.3 million of the trust preferred securities were included in our consolidated Tier 1 capital.

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

2 unchanged sentences

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

We believe that, as of September 30, 2024 , our bank meets all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

We believe that, as of March 31, 2025 , our bank meets all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

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

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

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

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

As of September 30, 2024 , we had the ability to repurchase up to $ 6.8 million in common stock shares from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations as part of a $ 20.0 million common stock repurchase program announced in May 2021.

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

As of March 31, 2025 , we had the ability to repurchase up to $ 6.8 million in common stock shares from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations as part of a $ 20.0 million common stock repurchase program announced in May 2021.

No shares were repurchased during the first three months of 2025 .

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

2 unchanged sentences

SUBSEQUENT EVENTS

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

On April 17, 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 June 18, 2025 , to shareholders of record as of June 6, 2025 .

MERCANTILE BANK CORPORATION

25 unchanged sentences

damage to our reputation resulting from adverse publicity, regulatory actions, litigation, operational failures, and the failure to meet client expectations and other facts;

the transition from Libor to SOFR;

changes in the national and local economies;

4 unchanged sentences

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

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

at March 31, 2025 and December 31, 2024 and the results of operations for the three months ended March 31, 2025 and 2024.

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

38 unchanged sentences

Financial Overview

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

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

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

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

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

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

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

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

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

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

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

We reported net income of $19.5 million, or $1.21 per diluted share, for the first quarter of 2025, compared with net income of $21.6 million, or $1.34 per diluted share, during the first quarter of 2024.

Although net interest income increased, net income was negatively impacted by lower noninterest income, increased noninterest costs and a higher provision expense.

Commercial loans increased $44.3 million during the first three months of 2025, providing for an annualized growth rate of about 5%.

Non-owner occupied commercial real estate (“CRE”) loans grew $55.3 million, commercial and industrial loans increased $27.1 million, multi-family and residential rental property loans were up $3.2 million and land development and construction loans expanded by $1.9 million, while owner occupied CRE loans declined $43.2 million.

As a percent of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 53.8% as of March 31, 2025, compared to 54.9% as of December 31, 2024.

While the “in discussion” segment of our commercial loan pipeline remains strong, the “committed and accepted” segment is relatively low, the latter generally reflecting customer reaction to the uncertain economic environment associated with United States tariff changes and negotiations.

As of March 31, 2025, we had $210 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase.

Residential mortgage loans decreased $10.4 million during the first three months of 2025, as aggregate payoffs and scheduled monthly payments exceeded new loans added to the portfolio during the first quarter.

Residential mortgage loan originations totaled $100 million during the first three months of 2025, of which about 80% were originated with the intent to sell.

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling only 0.12% of total loans as of March 31, 2025.

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

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

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

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

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

Gross loan charge-offs totaled $0.1 million during the first three months of 2025, while recoveries of prior period loan charge-offs aggregated $0.2 million, providing for a net loan recovery of $0.1 million.

We recorded a provision expense of $2.1 million during the first three months of 2025, primarily reflecting an increased allocation necessitated by changes to the economic forecast and loan growth.

MERCANTILE BANK CORPORATION

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

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

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

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

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

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

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

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

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

While we experienced rapid growth in our earning asset yield during the period of March of 2022 through July of 2023 when the Federal Open Market Committee (“FOMC”) raised the targeted federal funds rate by 525 basis points, meaningful increases in our cost of funds did not begin to materialize until the latter part of 2022 when competition for deposit balances increased deposit rates, and depositors began to move funds from no- and lower-costing deposit types to higher-costing deposit products.

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

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

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

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

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

Interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, averaged $267 million during the first three months of 2025, compared to $150 million during the first three months of 2024.

The higher average balance primarily reflects our strategy to reduce the loan-to-deposit ratio via local deposit growth exceeding loan and investment growth, as well as our desire to maintain higher levels of on-balance sheet liquidity.

Total deposits declined $16.6 million during the first three months of 2025.

Aggregate net growth in almost all interest-bearing deposit types offset a significant portion of the reduction in business noninterest-bearing checking accounts primarily reflecting the customary level of customers’ tax and bonus payments and partnership distributions during the early part of each first quarter.

Securities sold under agreements to repurchase (“sweep accounts”) increased $121 million during the first quarter of 2025, largely reflecting the return of funds that had been withdrawn during the fourth quarter of 2024.

Federal Home Loan Bank of Indianapolis (“FHLBI”) advances declined $20.9 million during the first three months of 2025.

Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $516 million, or about 10% of total funds, as of March 31, 2025.

Net interest income increased $1.2 million during the first three months of 2025 compared to the first quarter of 2024, reflecting the net impact of $3.6 million and $2.4 million increases in interest income and interest expense, respectively.

Our net interest margin during the first quarter of 2025 was 27 basis points lower than during the first quarter of 2024.

Our yield on earning assets declined 32 basis points while our cost of funds was down 5 basis points during that time period.

The lower yield on earning assets largely reflected the aggregate 100 basis point reduction in the federal funds rate during the last four months of 2024.

Despite the reduction in the net interest margin, net interest income increased primarily due to significant loan growth between the first quarters of 2024 and 2025.

Total loans averaged $4.63 billion and $4.30 billion during the first quarters of 2025 and 2024, respectively, reflecting growth of $330 million, or about 8%.

Noninterest income totaled $8.7 million during the first three months of 2025, compared to $10.9 million during the first quarter of 2024.

Growth in treasury management fees, mortgage banking income and payroll service fees was more than offset by lower levels of interest rate swap income, revenue generated from a private equity fund investment and bank owned life insurance income.

Noninterest expense totaled $31.1 million during the first three months of 2025, compared to $29.9 million during the first quarter of 2024.

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

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

MERCANTILE BANK CORPORATION

Financial Condition

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

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

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

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

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

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

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

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

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

Our total assets increased $89.0 million during the first three months of 2025, and totaled $6.14 billion as of March 31, 2025.

Securities available for sale grew $57.2 million and total loans increased $35.8 million, while interest-earning deposits declined $20.9 million during the first quarter of 2025.

Sweep accounts grew $121 million, while total deposits declined $16.6 million and FHLBI advances decreased $20.9 million during the first three months of 2025.

Commercial loans totaled $3.75 billion, or 80.9% of total loans, as of March 31, 2025.

Commercial loans increased $44.3 million during the first three months of 2025, providing for an annualized growth rate of about 5%.

Non-owner occupied CRE loans grew $55.3 million, commercial and industrial loans increased $27.1 million, multi-family and residential rental property loans were up $3.2 million and land development and construction loans expanded by $1.9 million, while owner occupied CRE loans declined $43.2 million.

As a percent of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 53.8% as of March 31, 2025, compared to 54.9% as of December 31, 2024.

As of March 31, 2025, we had $210 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase, which we expect to be drawn over the next 12 to 18 months.

Our current pipeline reports indicate approximately $234 million in new lending opportunities of which we expect a majority to be accepted and funded over the next 12 to 18 months.

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

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

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

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

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

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

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

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

Usage of existing commercial lines of credit averaged about 45% during the first three months of 2025, compared to approximately 42% during all of 2024.

Residential mortgage loans totaled $817 million, or 17.6% of total loans, as of March 31, 2025.

Residential mortgage loan originations totaled $100 million during the first three months of 2025, of which about 80% were originated with the intent to sell.

Other consumer-related loans totaled $67.7 million, or 1.5% of total loans, as of March 31, 2025, compared to $65.9 million, or 1.4% of total loans, as of December 31, 2024.

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

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

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

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

Nonperforming assets, comprised of nonaccrual loans, loans past due 90 days or more and accruing interest and foreclosed properties, totaled $5.4 million (0.1% of total assets) as of March 31, 2025, compared to $5.7 million (0.1% of total assets) as of December 31, 2024.

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

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

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

Loan charge-offs totaled $0.1 million, while recoveries of prior period loan charge-offs equaled $0.2 million, providing for a net loan recovery of $0.1 million during the first three months of 2025.

We continue our collection efforts on charged-off loans and 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.

We recorded a provision expense of $2.1 million during the first three months of 2025, primarily reflecting an increased allocation necessitated by changes to the economic forecast and loan growth.

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.

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MERCANTILE BANK CORPORATION

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

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

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

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

The allowance equaled $56.7 million, or 1.22% of total loans and 1,057% of nonperforming loans, as of March 31, 2025.

The allowance was comprised of $54.3 million in general reserves relating to performing loans and $2.4 million in specific reserves on other loans, primarily nonperforming loans, as of March 31, 2025.

Loans with an aggregate carrying value of $0.3 million as of March 31, 2025 had been subject to previous partial charge-offs aggregating $4.1 million over the past several years.

There were no specific reserves allocated to loans that had been subject to a previous partial charge-off as of March 31, 2025.

Although we believe the allowance is adequate to absorb loan losses in our loan portfolio as they arise, there can be no assurance that we will not sustain loan losses in any given period that could be substantial in relation to, or greater than, the size of the allowance.

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

The following table reflects the composition of our allowance for credit losses, nonaccrual loans, and net charge-offs as of and for the three months ended March 31, 2025.

(Dollars in thousands)

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MERCANTILE BANK CORPORATION

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

Securities available for sale increased $57.2 million during the first three months of 2025, totaling $788 million as of March 31, 2025.

Purchases of U.S.

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

Government agency bonds during the first three months of 2025 aggregated $46.0 million, while proceeds from maturities totaled $6.0 million.

There were no purchases of U.S.

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

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

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

Government agency guaranteed mortgage-backed securities during the first three months of 2025, while proceeds from principal paydowns aggregated $0.8 million.

Purchases of municipal bonds totaled $5.7 million during the first three months of 2025;

there were no maturities.

As of March 31, 2025, the portfolio was primarily comprised of U.S.

Government agency bonds (70%), municipal bonds (27%) and U.S.

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

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

The fair value of securities designated as available for sale as of March 31, 2025, totaled $788 million, including a net unrealized loss of $51.5 million.

The net unrealized loss equaled $63.1 million as of December 31, 2024.

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

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

FHLBI stock totaled $21.5 million as of March 31, 2025, unchanged from December 31, 2024.

Our investment in FHLBI stock is necessary to engage in the FHLBI’s advance and other financing programs.

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

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

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

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

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

Net premises and equipment equaled $53.7 million as of March 31, 2025, compared to $53.4 million as of December 31, 2024.

Depreciation expense totaled $1.3 million during the first three months of 2025, while investments associated with renovations of existing facilities and equipment purchases aggregated $1.6 million.

MERCANTILE BANK CORPORATION

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

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

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

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

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

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

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

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

Uninsured deposits totaled approximately $2.3 billion, or about 53% of total deposits, as of September 30, 2024, compared to approximately $1.9 billion, or 49% of total deposits, as of December 31, 2023.

Total deposits declined $16.6 million during the first three months of 2025.

Aggregate net growth in almost all interest-bearing deposit types offset a significant portion of the reduction in business noninterest-bearing checking accounts primarily reflecting the expected large withdrawal of funds that had been deposited in late 2024 and the customary level of customers’ tax and bonus payments and partnership distributions during the early part of each first quarter.

Out-of-area deposits were unchanged, while FHLBI advances declined $20.9 million during the first three months of 2025.

Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $516 million, or about 10% of total funds, as of March 31, 2025.

Uninsured deposits totaled approximately $2.5 billion, or about 53% of total deposits, as of March 31, 2025, compared to approximately $2.2 billion, or 46% of total deposits, as of December 31, 2024.

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

Securities sold under agreements to repurchase (“sweep accounts”) decreased $8.8 million during the first nine months of 2024, totaling $221 million as of September 30, 2024.

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

The average balance of sweep accounts equaled $226 million during the first nine months of 2024, with a high daily balance of $278 million and a low balance of $166 million.

Sweep accounts increased $121 million during the first quarter of 2025, largely reflecting the return of funds that had been withdrawn during the fourth quarter of 2024.

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

The average balance of sweep accounts equaled $221 million during the first three months of 2025, with a high daily balance of $284 million and a low daily balance of $115 million.

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

Such sweep accounts are not deposit accounts and are not afforded federal deposit insurance, and are accounted for as secured borrowings.

Such sweep accounts are not deposit accounts and are not afforded federal deposit insurance.

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

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

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

FHLBI advances declined $20.9 million during the first three months of 2025, totaling $366 million as of March 31, 2025.

Bullet advance maturities aggregated $20.0 million, while no new bullet advances were obtained, during the first three months of 2025.

Payments on amortizing FHLBI advances totaled $0.9 million.

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

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

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

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

Our borrowing line of credit totaled $1.06 billion, with remaining availability based on collateral equaling $674 million, as of March 31, 2025.

Shareholders’ equity increased $23.8 million during the first three months of 2025, equaling $608 million as of March 31, 2025.

Positively impacting shareholders’ equity during the first three months of 2025 was net income of $19.5 million, which was partially offset by the payment of cash dividends totaling $5.9 million.

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

A $14.4 million after-tax increase in the market value of our available for sale securities portfolio, reflecting a decline in market interest rates, positively impacted shareholders’ equity during the first nine months of 2024.

A $9.2 million after-tax increase in the market value of our available for sale securities portfolio, reflecting a decline in market interest rates, positively impacted shareholders’ equity during the first three months of 2025.

MERCANTILE BANK CORPORATION

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

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

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

The average balance of sweep accounts equaled $226 million during the first nine months of 2024, with a high daily balance of $278 million and a low balance of $166 million.

Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $516 million, or about 10% of total funds, as of March 31, 2025, compared to $537 million, or about 10% of total funds, as of December 31, 2024.

Sweep accounts increased $121 million during the first quarter of 2025, largely reflecting the return of funds that had been withdrawn during the fourth quarter of 2024.

The average balance of sweep accounts equaled $221 million during the first three months of 2025, with a high daily balance of $284 million and a low daily balance of $115 million.

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

Such sweep accounts are not deposit accounts and are not afforded federal deposit insurance, and are accounted for as secured borrowings.

Such sweep accounts are not deposit accounts and are not afforded federal deposit insurance.

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

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

Information regarding our repurchase agreements as of March 31, 2025 and during the first three months of 2025 is as follows:

(Dollars in thousands)

Outstanding balance at September 30, 2024

Weighted average interest rate at September 30, 2024

Maximum daily balance nine months ended September 30, 2024

Average daily balance for nine months ended September 30, 2024

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

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

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

Outstanding balance at March 31, 2025

Weighted average interest rate at March 31, 2025

Maximum daily balance three months ended March 31, 2025

Average daily balance for three months ended March 31, 2025

Weighted average interest rate for three months ended March 31, 2025

FHLBI advances declined $20.9 million during the first three months of 2025, totaling $366 million as of March 31, 2025.

Bullet advance maturities aggregated $20.0 million, while no new bullet advances were obtained, during the first three months of 2025.

Payments on amortizing FHLBI advances totaled $0.9 million.

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

Our borrowing line of credit totaled $1.06 billion, with remaining availability based on collateral equaling $674 million, as of March 31, 2025.

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

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

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

We did not access these lines of credit during the first three months of 2025.

In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged $248 million during the first three months of 2025.

We also have a line of credit through the Discount Window of the Federal Reserve Bank of Chicago.

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

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

Using certain municipal bonds as collateral, we could have borrowed up to $153 million as of March 31, 2025.

We did not utilize this line of credit during the first three months of 2025 or at any time during the previous 16 fiscal years, and do not plan to access this line of credit in future periods.

MERCANTILE BANK CORPORATION

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

The following table reflects, as of March 31, 2025, significant fixed and determinable contractual obligations to third parties by payment date, excluding accrued interest:

(Dollars in thousands)

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Premises and equipment leases

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

The balance of certificates of deposit exceeding the FDIC insured limit and their maturity profile as of March 31, 2025 and December 31, 2024 were as follows:

(Dollars in thousands)

September 30, 2024

March 31, 2025

December 31, 2024

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

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

As of March 31, 2025, we had a total of $2.01 billion in unfunded loan commitments and $27.2 million in unfunded standby letters of credit.

Of the total unfunded loan commitments, $1.78 billion were commitments available as lines of credit to be drawn at any time as customers’ cash needs vary, and $234 million were for loan commitments generally expected to close and become funded within the next 12 to 18 months.

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Capital Resources

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

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

Shareholders’ equity increased $23.8 million during the first three months of 2025, equaling $608 million as of March 31, 2025.

Positively impacting shareholders’ equity during the first three months of 2025 was net income of $19.5 million, which was partially offset by the payment of cash dividends totaling $5.9 million.

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

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

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

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

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

As of September 30, 2024, our bank’s total regulatory capital equaled $747 million, or $209 million in excess of the 10.0% minimum that is among the requirements to be categorized as “well capitalized.” Our and our bank’s capital ratios as of September 30, 2024 and December 31, 2023 are disclosed in Note 12 of the Notes to Consolidated Financial Statements.

As of March 31, 2025, our bank’s total risk-based capital ratio was 14.0%, compared to 13.9% as of December 31, 2024.

Our bank’s total regulatory capital increased $3.0 million during the first three months of 2025, in large part reflecting net income totaling $22.3 million, which was partially offset by cash dividends paid to us aggregating $20.8 million.

As of March 31, 2025, our bank’s total regulatory capital equaled $762 million, or $217 million in excess of the 10.0% minimum that is among the requirements to be categorized as “well capitalized.” Our and our bank’s capital ratios as of March 31, 2025 and December 31, 2024 are disclosed in Note 13 of the Notes to Consolidated Financial Statements.

MERCANTILE BANK CORPORATION

Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

The provision expense recorded during the prior-year third quarter mainly reflected the establishment of a specific reserve for a distressed commercial loan relationship, a qualitative factor assessment for local economic conditions, allocations necessitated by net loan growth, and a higher reserve for residential mortgage loans stemming from slower principal prepayment rates and the resulting extended average life of the portfolio.

The provision expense recorded during the first nine months of 2023 generally reflected allocations necessitated by net loan growth, adjustments to historical loss information to better represent our expectations for future credit losses, and the previously mentioned higher reserve for residential mortgage loans.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The FOMC increased the targeted federal funds rate by 100 basis points during the period of February 2023 through July 2023, during which time average variable-rate commercial loans represented approximately 65% of average total commercial loans.

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

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

We recorded net income of $19.5 million, or $1.21 per basic and diluted share, for the first quarter of 2025, compared with net income of $21.6 million, or $1.34 per basic and diluted share, for the first quarter of 2024.

Diluted earnings per share decreased $0.13, or 9.7%, during the first quarter of 2025, compared with the prior-year first quarter.

The decrease in net income during the first three months of 2025 compared to the respective 2024 period reflected lower noninterest income and higher levels of noninterest expense and provisions for credit losses, which more than offset increased net interest income.

Net interest income increased as earning asset expansion and a decrease in the cost of funds outpaced a lower yield on earning assets and growth in interest-bearing liabilities.

Noninterest income declined as increases in treasury management fees, mortgage banking income, and payroll service fees were outweighed by reductions in interest rate swap income, revenue generated from an investment in a private equity fund, and bank owned life insurance income.

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

The provision expense recorded during the current-year first quarter mainly reflected an increased allocation necessitated by changes to the economic forecast.

Interest income during the first quarter of 2025 was $80.3 million, an increase of $3.6 million, or 4.7%, from the $76.7 million earned during the first quarter of 2024.

The increase resulted from growth in average earning assets, which more than offset a lower yield on average earning assets.

Average earning assets equaled $5.68 billion during the first quarter of 2025, up $597 million, or 11.7%, from the level of $5.08 billion during the prior-year first quarter; average loans were up $330 million, average securities increased $150 million, and average interest-earning deposits grew $117 million.

The yield on average earning assets was 5.74% during the current-year first quarter, a decrease from 6.06% during the respective 2024 period.

The lower yield mainly resulted from a decreased yield on loans and a change in earning asset mix, which more than offset an enhanced yield on securities stemming from reinvestment and portfolio expansion activities in a higher interest rate environment.

The yield on loans was 6.31% during the first quarter of 2025, down from 6.65% during the first quarter of 2024 primarily due to lower interest rates on variable-rate commercial loans resulting from the Federal Open Market Committee (“FOMC”) lowering the targeted federal funds rate.

The FOMC decreased the targeted federal funds rate by 50 basis points in September of 2024 and 25 basis points in each of November and December of 2024, during which time average variable-rate commercial loans represented approximately 73% of average total commercial loans.

Signifying the success of a strategic initiative to reduce the loan-to-deposit ratio and increase on-balance sheet liquidity, higher-yielding loans represented a reduced percentage of earning assets and lower-yielding securities and interest-earning deposits accounted for increased percentages of earning assets in the first quarter of 2025 compared to the first quarter of 2024.

The yield on securities equaled 2.79% during the first three months of 2025, up from 2.20% during the first three months of 2024.

MERCANTILE BANK CORPORATION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Net interest income during the third quarter of 2024 was $48.3 million, a decrease of $0.7 million, or 1.4%, from the $49.0 million earned during the respective 2023 period.

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

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

The cost of funds equaled 2.56% in the third quarter of 2024, up from 1.80% in the third quarter of 2023 primarily due to higher costs of deposits and borrowed funds, reflecting the impact of the higher interest rate environment, and a change in funding mix, mainly consisting of a decrease in noninterest-bearing and lower-cost deposits and an increase in higher-cost money market accounts and time deposits stemming from deposit migration and new deposit relationships.

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

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

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

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

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

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

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

Interest expense during the first quarter of 2025 was $31.8 million, an increase of $2.4 million, or 8.3%, from the $29.4 million expensed during the first quarter of 2024.

The higher level of interest expense resulted from growth in average interest-bearing liabilities, which more than offset a decline in the weighted average cost of these funds.

Average interest-bearing liabilities totaled $4.18 billion during the first three months of 2025, compared to $3.61 billion during the respective 2024 period, representing an increase of $575 million, or 15.9%.

The average weighted cost of interest-bearing liabilities declined from 3.27% during the first quarter of 2024 to 3.08% during the first quarter of 2025 mainly due to lower rates paid on money market accounts, reflecting the decreased interest rate environment that began in September of 2024 in conjunction with the FOMC’s lowering of the targeted federal funds rate.

A change in funding mix, primarily consisting of a decrease in average noninterest-bearing checking accounts and growth in average higher-cost money market accounts and time deposits, negatively impacted the weighted average cost of interest-bearing liabilities during the first three months of 2025.

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

Net interest income during the first quarter of 2025 was $48.5 million, an increase of $1.2 million, or 2.5%, from the $47.3 million earned during the respective 2024 period.

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

The net interest margin was 3.47% in the first quarter of 2025, down from 3.74% in the prior-year first quarter due to a decreased yield on earning assets, which more than offset a decline in the cost of funds.

The lower yield on average earning assets mainly resulted from a decreased yield on commercial loans, largely reflecting the impact of the previously mentioned FOMC rate cuts.

The cost of funds equaled 2.27% in the first quarter of 2025, down from 2.32% in the first quarter of 2024 primarily due to lower costs of money market accounts, reflecting the decreasing interest rate environment over the last four months of 2024.

The following table sets forth certain information relating to our consolidated average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the first quarters of 2025 and 2024.

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

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

Securities interest income was increased by $60,000 in the third quarter of both 2024 and 2023 and $180,000 in the first nine months of both 2024 and 2023 for this non-GAAP, but industry standard, adjustment.

These adjustments equated to increases in our net interest margin of less than one basis point for each of the 2024 and 2023 periods.

MERCANTILE BANK CORPORATION

Quarters ended September 30,

(dollars in thousands)

Investment securities

Interest-earning deposits

Total interest - earning assets

Allowance for credit losses

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest-bearing deposits

Short-term borrowings

Federal Home Loan Bank advances

Other borrowings

Total interest-bearing liabilities

Noninterest-bearing deposits

Other liabilities

Shareholders’ equity

Total liabilities and shareholders’ equity

Net interest income

Net interest rate spread

Net interest spread on average assets

Net interest margin on earning assets

Tax-exempt securities interest income and yield for the first quarters of 2025 and 2024 have been computed on a tax equivalent basis using a marginal tax rate of 21.0%.

Securities interest income was increased by $60,000 in the first quarters of 2025 and 2024 for this non-GAAP, but industry standard, adjustment.

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

MERCANTILE BANK CORPORATION

Nine months ended September 30,

Quarters ended March 31,

(dollars in thousands)

18 unchanged sentences

MERCANTILE BANK CORPORATION

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

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

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

The provision expense recorded during the third quarter of 2023 mainly reflected the establishment of a specific reserve for a distressed commercial loan relationship, a qualitative factor assessment for local economic conditions, allocations necessitated by net loan growth, and a higher reserve for residential mortgage loans resulting from slower principal prepayment rates and the resulting extended average life of the portfolio.

The provision expense recorded during the first nine months of 2023 generally reflected allocations necessitated by net loan growth, adjustments to historical loss information to better represent our expectations for future credit losses, and the aforementioned higher reserve for residential mortgage loans.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Provisions for credit losses of $2.1 million and $1.3 million were recorded during the first quarters of 2025 and 2024, respectively.

The provision expense recorded during the first three months of 2025 mainly reflected an increased allocation dictated by changes to the economic forecast.

The provision expense recorded during the first three months of 2024 primarily reflected an individual allocation for a nonperforming commercial loan relationship, allocations necessitated by net loan growth, and a change in a commercial loan environmental factor, which more than offset the impacts of an improved economic forecast and changes to the loan portfolio composition.

Sustained strength in loan quality metrics and the recording of net loan recoveries during both periods largely mitigated additional reserves associated with loan growth.

Noninterest income totaled $8.7 million during the first quarter of 2025, down from $10.9 million during the respective 2024 period as growth in treasury management fees, mortgage banking income, and payroll service fees was more than offset by lower levels of interest rate swap income, revenue generated from an investment in a private equity fund, and bank owned life insurance income.

The increase in treasury management fees mainly reflected customers’ expanded use of products and services and the successful marketing of these offerings to existing and new clients.

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 80% during the current-year first quarter compared to approximately 74% during the first quarter of 2024, and total loan originations, which were up approximately 26% during the first quarter of 2025 compared to the corresponding 2024 period.

During the first quarter of 2025, interest rate swap income, which sometimes varies greatly from period to period due to the timing of closing transactions, was negatively impacted by the ongoing uncertainty surrounding economic and operating conditions and the associated reduction in commercial loan activity.

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

Noninterest expense totaled $31.1 million during the first quarter of 2025, compared to $29.9 million during the prior-year first quarter.

The increase primarily resulted from higher salary and benefit costs, largely reflecting annual merit pay increases and market adjustments.

A higher level of data processing costs, mainly reflecting increased software support costs, also contributed to the rise in noninterest expense.

Lower depreciation expense, largely reflecting facility expansion and leasehold improvement projects becoming fully depreciated during 2024, and a reduced reserve for commercial loan commitments positively impacted noninterest expense during the first three months of 2025.

Noninterest expense during the first quarter of 2024 included contributions to The Mercantile Bank Foundation totaling $0.7 million.

During the first quarter of 2025, we recorded income before federal income tax of $24.0 million and a federal income tax expense of $4.5 million.

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

The $0.9 million decrease in federal income tax expense in the first three months of 2025 compared to the respective 2024 period primarily resulted from the lower level of income before federal income tax.

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

MERCANTILE BANK CORPORATION

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

What changed 10-Q

Item 1. Financial Statements