U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, ~~2020~~2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File No. 000-26719

MERCANTILE BANK CORPORATION

(Exact name of registrant as specified in its charter)

Michigan	38-3360865
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

310 Leonard Street, NW, Grand Rapids, MI 49504

(Address of principal executive offices) (Zip Code)

(616) 406-3000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☐
Emerging growth company ☐

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	MBWM	The Nasdaq Stock Market LLC

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Yes ☐ No ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

At July ~~31, 2020,~~30, 2021, there were ~~16,231,049~~15,892,819 shares of common stock outstanding.

Table of Contents

MERCANTILE BANK CORPORATION

INDEX

PART I.	Financial Information	Page No.

	Item 1. Financial Statements

	Consolidated Balance Sheets (Unaudited) – June 30, ~~2020~~2021 and December 31, ~~2019~~2020	1

	Consolidated Statements of Income (Unaudited) - Three and Six Months Ended June 30, ~~2020~~2021 and June 30, ~~2019~~2020	2

	Consolidated Statements of Comprehensive Income (Unaudited) - Three and Six Months Ended June 30, ~~2020~~2021 and June 30, ~~2019~~2020	3

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) – Three and Six Months Ended June 30, ~~2020~~2021 and June 30, ~~2019~~2020	4

	Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended June 30, ~~2020~~2021 and June 30, ~~2019~~2020	8

	Notes to Consolidated Financial Statements (Unaudited)	10

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	53 54

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	7776

	Item 4. Controls and Procedures	7978

PART II.	Other Information

	Item 1. Legal Proceedings	8079

	Item 1A. Risk Factors	8079

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	8079

	Item 3. Defaults Upon Senior Securities	80

	Item 4. Mine Safety Disclosures	80

	Item 5. Other Information	80

	Item 6. Exhibits	81

	Signatures	82

Table of Contents

MERCANTILE BANK CORPORATION

PART I --- FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30, 2020			December 31, 2019			June 30, 2021			December 31, 2020

ASSETS
Cash and due from banks	$	84,516,000		$	53,262,000		$	75,893,000		$	62,832,000
Interest-earning deposits		386,711,000			180,469,000			683,638,000			563,174,000
Total cash and cash equivalents		471,227,000			233,731,000			759,531,000			626,006,000

Securities available for sale		307,661,000			334,655,000			506,125,000			387,347,000
Federal Home Loan Bank stock		18,002,000			18,002,000			18,002,000			18,002,000

Loans		3,333,056,000			2,856,667,000			3,248,841,000			3,193,470,000
Allowance for loan losses		(32,246,000	)		(23,889,000	)		(35,913,000	)		(37,967,000	)
Loans, net		3,300,810,000			2,832,778,000			3,212,928,000			3,155,503,000

Premises and equipment, net		59,155,000			57,327,000			58,250,000			58,959,000
Bank owned life insurance		70,900,000			70,297,000			72,679,000			72,131,000
Goodwill		49,473,000			49,473,000			49,473,000			49,473,000
Core deposit intangible, net		3,072,000			3,840,000			1,827,000			2,436,000
Mortgage loans held for sale								27,720,000			22,888,000
Other assets		34,079,000			32,812,000			50,879,000			44,599,000

Total assets	$	4,314,379,000		$	3,632,915,000		$	4,757,414,000		$	4,437,344,000

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing	$	1,445,620,000		$	924,916,000		$	1,620,829,000		$	1,433,403,000
Interest-bearing		1,816,660,000			1,765,468,000			2,050,442,000			1,978,150,000
Total deposits		3,262,280,000			2,690,384,000			3,671,271,000			3,411,553,000

Securities sold under agreements to repurchase		167,527,000			102,675,000			169,737,000			118,365,000
Federal Home Loan Bank advances		394,000,000			354,000,000			394,000,000			394,000,000
Subordinated debentures		47,222,000			46,881,000			47,904,000			47,563,000
Accrued interest and other liabilities		18,129,000			22,414,000			22,614,000			24,309,000
Total liabilities		3,889,158,000			3,216,354,000			4,305,526,000			3,995,790,000

Commitments and contingent liabilities (Note 8)

Shareholders' equity
Preferred stock, no par value; 1,000,000 shares authorized; none issued		0			0			0			0
Common stock, no par value; 40,000,000 shares authorized; 16,230,649 shares issued and outstanding at June 30, 2020 and 16,425,136 shares issued and outstanding at December 31, 2019		300,897,000			305,035,000
Common stock, no par value; 40,000,000 shares authorized; 16,007,185 shares issued and outstanding at June 30, 2021 and 16,425,136 shares issued and outstanding at December 31, 2020								293,232,000			302,029,000
Retained earnings		118,239,000			107,831,000			157,150,000			134,039,000
Accumulated other comprehensive gain/(loss)		6,085,000			3,695,000			1,506,000			5,486,000
Total shareholders’ equity		425,221,000			416,561,000			451,888,000			441,554,000

Total liabilities and shareholders’ equity	$	4,314,379,000		$	3,632,915,000		$	4,757,414,000		$	4,437,344,000

See accompanying notes to consolidated financial statements.

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MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended June 30, 2020		Three Months Ended June 30, 2019		Six Months Ended June 30, 2020		Six Months Ended June 30, 2019		Three Months Ended June 30, 2021			Three Months Ended June 30, 2020		Six Months Ended June 30, 2021			Six Months Ended June 30, 2020

Interest income
Loans, including fees	$	34,322,000	$	36,765,000	$	67,764,000	$	72,555,000	$	33,789,000		$	34,322,000	$	66,774,000		$	67,764,000
Securities, taxable		2,187,000		1,945,000		5,628,000		3,825,000		1,204,000			2,187,000		2,239,000			5,628,000
Securities, tax-exempt		562,000		540,000		1,138,000		1,101,000		598,000			562,000		1,195,000			1,138,000
Other interest-earning assets		93,000		569,000		568,000		976,000		183,000			93,000		351,000			568,000
Total interest income		37,164,000		39,819,000		75,098,000		78,457,000		35,774,000			37,164,000		70,559,000			75,098,000

Interest expense
Deposits		3,700,000		5,529,000		8,342,000		10,334,000		2,346,000			3,700,000		5,063,000			8,342,000
Short-term borrowings		55,000		68,000		94,000		173,000		40,000			55,000		76,000			94,000
Federal Home Loan Bank advances		2,214,000		2,261,000		4,427,000		4,494,000		2,050,000			2,214,000		4,077,000			4,427,000
Subordinated debentures and other borrowings		624,000		845,000		1,348,000		1,695,000		467,000			624,000		939,000			1,348,000
Total interest expense		6,593,000		8,703,000		14,211,000		16,696,000		4,903,000			6,593,000		10,155,000			14,211,000

Net interest income		30,571,000		31,116,000		60,887,000		61,761,000		30,871,000			30,571,000		60,404,000			60,887,000

Provision for loan losses		7,600,000		900,000		8,350,000		1,750,000		(3,100,000	)		7,600,000		(2,800,000	)		8,350,000

Net interest income after provision for loan losses		22,971,000		30,216,000		52,537,000		60,011,000		33,971,000			22,971,000		63,204,000			52,537,000

Noninterest income
Services charges on deposit and sweep accounts		1,045,000		1,143,000		2,267,000		2,220,000
Service charges on deposit and sweep accounts										1,209,000			1,045,000		2,363,000			2,267,000
Mortgage banking income		7,640,000		1,345,000		10,267,000		2,402,000		7,695,000			7,640,000		16,495,000			10,267,000
Credit and debit card income		1,374,000		1,513,000		2,735,000		2,850,000		1,920,000			1,374,000		3,598,000			2,735,000
Interest rate swap fees										1,495,000			0		2,148,000			0
Payroll services income		370,000		355,000		947,000		860,000		405,000			370,000		962,000			947,000
Earnings on bank owned life insurance		307,000		1,608,000		643,000		3,238,000		297,000			307,000		574,000			643,000
Gain on sale of branch										1,058,000			0		1,058,000			0
Other income		248,000		370,000		675,000		1,397,000		477,000			248,000		821,000			675,000
Total noninterest income		10,984,000		6,334,000		17,534,000		12,967,000		14,556,000			10,984,000		28,019,000			17,534,000

Noninterest expense
Salaries and benefits		14,126,000		13,286,000		27,654,000		26,302,000		16,194,000			14,126,000		31,279,000			27,654,000
Occupancy		1,862,000		1,629,000		3,921,000		3,391,000		1,977,000			1,862,000		3,991,000			3,921,000
Furniture and equipment depreciation, rent and maintenance		851,000		621,000		1,629,000		1,257,000		902,000			851,000		1,791,000			1,629,000
Data processing costs		2,633,000		2,295,000		5,117,000		4,511,000		2,775,000			2,633,000		5,392,000			5,117,000
Other expense		3,744,000		4,256,000		7,835,000		8,456,000		4,344,000			3,744,000		8,856,000			7,835,000
Total noninterest expenses		23,216,000		22,087,000		46,156,000		43,917,000		26,192,000			23,216,000		51,309,000			46,156,000

Income before federal income tax expense		10,739,000		14,463,000		23,915,000		29,061,000		22,335,000			10,739,000		39,914,000			23,915,000

Federal income tax expense		2,041,000		2,748,000		4,545,000		5,522,000		4,244,000			2,041,000		7,583,000			4,545,000

Net income	$	8,698,000	$	11,715,000	$	19,370,000	$	23,539,000	$	18,091,000		$	8,698,000	$	32,331,000		$	19,370,000

Basic earnings per share	$	0.54	$	0.71	$	1.19	$	1.43	$	1.12		$	0.54	$	2.00		$	1.19
Diluted earnings per share	$	0.54	$	0.71	$	1.19	$	1.43	$	1.12		$	0.54	$	2.00		$	1.19
Cash dividends per share	$	0.28	$	0.26	$	0.56	$	0.52	$	0.29		$	0.28	$	0.58		$	0.56

Average basic shares outstanding		16,212,500		16,428,187		16,281,391		16,428,875		16,116,070			16,212,500		16,199,096			16,281,391
Average diluted shares outstanding		16,213,264		16,434,714		16,282,341		16,434,941		16,116,666			16,213,264		16,199,620			16,282,341

See accompanying notes to consolidated financial statements.

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MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended June 30, 2020			Three Months Ended June 30, 2019			Six Months Ended June 30, 2020			Six Months Ended June 30, 2019			Three Months Ended June 30, 2021			Three Months Ended June 30, 2020			Six Months Ended June 30, 2021			Six Months Ended June 30, 2020


Net income	$	8,698,000		$	11,715,000		$	19,370,000		$	23,539,000		$	18,091,000		$	8,698,000		$	32,331,000		$	19,370,000

Other comprehensive income/(loss):
Unrealized holding gains/(losses) on securities available for sale		1,636,000			9,562,000			3,027,000			14,011,000			4,130,000			1,636,000			(5,038,000	)		3,027,000
Tax effect of unrealized holding gains/(losses) on securities available for sale		(344,000	)		(2,008,000	)		(637,000	)		(2,942,000	)		(867,000	)		(344,000	)		1,058,000			(637,000	)
Other comprehensive income/(loss), net of tax		1,292,000			7,554,000			2,390,000			11,069,000			3,263,000			1,292,000			(3,980,000	)		2,390,000

Comprehensive income	$	9,990,000		$	19,269,000		$	21,760,000		$	34,608,000		$	21,354,000		$	9,990,000		$	28,351,000		$	21,760,000

See accompanying notes to consolidated financial statements.

Table of Contents

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

The following table depicts the change in shareholders’ equity for the three months ended June 30, ~~2020:~~2021:

($ in thousands except per share amounts)

Preferred
Stock

Common
Stock

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total
Shareholders’
Equity

Balances, March 31, 2020
$ 0 $ 299,584 $ 114,012 $ 4,793 $ 418,389

Employee stock purchase plan (487 shares)
11 11

Dividend reinvestment plan (9,307 shares)
212 212

Stock grants to directors for retainer fees (15,648 shares)
349 349

Stock-based compensation expense
741 741

Cash dividends ($0.28 per common share)
(4,471
)
(4,471
)

Net income for the three months ended June 30, 2020
8,698 8,698

Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect
1,292 1,292

Balances, June 30, 2020
$ 0 $ 300,897 $ 118,239 $ 6,085 $ 425,221

($ in thousands except per share amounts)	Preferred Stock		Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity

Balances, March 31, 2021	$	0	$	299,358		$	143,642		$	(1,757	)	$	441,243

Employee stock purchase plan (371 shares)		0		11			0			0			11

Dividend reinvestment plan (6,263 shares)		0		198			0			0			198

Stock grants to directors for retainer fees (10,489 shares)		0		344			0			0			344

Stock-based compensation expense		0		634			0			0			634

Share repurchase program (228,649 shares)		0		(7,313	)		0			0			(7,313	)

Cash dividends ($0.29 per common share)		0		0			(4,583	)		0			(4,583	)

Net income for the three months ended June 30, 2021		0		0			18,091			0			18,091

Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect		0		0			0			3,263			3,263
��
Balances, June 30, 2021	$	0	$	293,232		$	157,150		$	1,506		$	451,888

See accompanying notes to consolidated financial statements.

Table of Contents

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY (Continued)

(Unaudited)

The following table depicts the change in shareholders’ equity for the six months ended June 30, ~~2020:~~2021:

($ in thousands except per share amounts)

Preferred
Stock

Common
Stock

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total
Shareholders’
Equity

Balances, January 1, 2020
$ 0 $ 305,035 $ 107,831 $ 3,695 $ 416,561

Employee stock purchase plan (1,129 shares)
25 25

Dividend reinvestment plan (17,380 shares)
404 404

Stock grants to directors for retainer fees (15,648 shares)
349 349

Stock-based compensation expense
1,366 1,366

Share repurchase program (222,385 shares)
(6,282
)
(6,282
)

Cash dividends ($0.56 per common share)
(8,962
)
(8,962
)

Net income for the six months ended June 30, 2020
19,370 19,370

Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect
2,390 2,390

Balances, June 30, 2020
$ 0 $ 300,897 $ 118,239 $ 6,085 $ 425,221

($ in thousands except per share amounts)	Preferred Stock		Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity

Balances, January 1, 2021	$	0	$	302,029		$	134,039		$	5,486		$	441,554

Employee stock purchase plan (702 shares)		0		22			0			0			22

Dividend reinvestment plan (12,910 shares)		0		411			0			0			411

Stock grants to directors for retainer fees (10,489 shares)		0		344			0			0			344

Stock-based compensation expense		0		1,277			0			0			1,277

Share repurchase program (346,910 shares)		0		(10,851	)		0			0			(10,851	)

Cash dividends ($0.58 per common share)		0		0			(9,220	)		0			(9,220	)

Net income for the six months ended June 30, 2021		0		0			32,331			0			32,331

Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect		0		0			0			(3,980	)		(3,980	)

Balances, June 30, 2021	$	0	$	293,232		$	157,150		$	1,506		$	451,888

See accompanying notes to consolidated financial statements.

Table of Contents

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY (Continued)

(Unaudited)

The following table depicts the change in shareholders’ equity for the three months ended June 30, ~~2019:~~2020:

($ in thousands except per share amounts)

Preferred
Stock

Common
Stock

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total
Shareholders’
Equity

Balances, March 31, 2019
$ 0 $ 305,346 $ 83,107 $ (4,724
)
$ 383,729

Employee stock purchase plan (383 shares)
12 12

Dividend reinvestment plan (5,522 shares)
179 179

Stock option exercises (2,000 shares)
14 14

Stock grants to directors for retainer fees (11,905 shares)
374 374

Stock-based compensation expense
744 744

Cash dividends ($0.26 per common share)
(4,204
)
(4,204
)

Net income for the three months ended June 30, 2019
11,715 11,715

Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect
7,554 7,554

Balances, June 30, 2019
$ 0 $ 306,669 $ 90,618 $ 2,830 $ 400,117

($ in thousands except per share amounts)	Preferred Stock		Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity

Balances, March 31, 2020	$	0	$	299,584	$	114,012		$	4,793	$	418,389

Employee stock purchase plan (487 shares)		0		11		0			0		11

Dividend reinvestment plan (9,307 shares)		0		212		0			0		212

Stock grants to directors for retainer fees (15,648 shares)		0		349		0			0		349

Stock-based compensation expense		0		741		0			0		741

Cash dividends ($0.28 per common share)		0		0		(4,471	)		0		(4,471	)

Net income for the three months ended June 30, 2020		0		0		8,698			0		8,698

Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect		0		0		0			1,292		1,292

Balances, June 30, 2020	$	0	$	300,897	$	118,239		$	6,085	$	425,221

See accompanying notes to consolidated financial statements.

Table of Contents

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY (Continued)

(Unaudited)

The following table depicts the change in shareholders’ equity for the six months ended June 30, ~~2019:~~2020:

($ in thousands except per share amounts)

Preferred
Stock

Common
Stock

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total
Shareholders’
Equity

Balances, January 1, 2019
$ 0 $ 308,005 $ 75,483 $ (8,239
)
$ 375,249

Employee stock purchase plan (799 shares)
26 26

Dividend reinvestment plan (10,947 shares)
361 361

Stock option exercises (2,500 shares)
16 16

Stock grants to directors for retainer fees (11,905 shares)
374 374

Stock-based compensation expense
1,488 1,488

Share repurchase program (119,120 shares)
(3,601
)
(3,601
)

Cash dividends ($0.52 per common share)
(8,404
)
(8,404
)

Net income for the six months ended June 30, 2019
23,539 23,539

Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect
11,069 11,069

Balances, June 30, 2019
$ 0 $ 306,669 $ 90,618 $ 2,830 $ 400,117

($ in thousands except per share amounts)	Preferred Stock		Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity

Balances, January 1, 2020	$	0	$	305,035		$	107,831		$	3,695	$	416,561

Employee stock purchase plan (1,129 shares)		0		25			0			0		25

Dividend reinvestment plan (17,380 shares)		0		404			0			0		404

Stock grants to directors for retainer fees (15,648 shares)		0		349			0			0		349

Stock-based compensation expense		0		1,366			0			0		1,366

Share repurchase program (222,385 shares)		0		(6,282	)		0			0		(6,282	)

Cash dividends ($0.56 per common share)		0		0			(8,962	)		0		(8,962	)

Net income for the six months ended June 30, 2020		0		0			19,370			0		19,370

Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect		0		0			0			2,390		2,390

Balances, June 30, 2020	$	0	$	300,897		$	118,239		$	6,085	$	425,221

See accompanying notes to consolidated financial statements.

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MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30, 2020			Six Months Ended June 30, 2019			Six Months Ended June 30, 2021			Six Months Ended June 30, 2020

Cash flows from operating activities
Net income	$	19,370,000		$	23,539,000		$	32,331,000		$	19,370,000
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization		3,385,000			4,723,000			6,755,000			3,385,000
Accretion of acquired loans		(225,000	)		(314,000	)		(68,000	)		(225,000	)
Provision for loan losses		8,350,000			1,750,000			(2,800,000	)		8,350,000
Stock-based compensation expense		1,366,000			1,488,000			1,277,000			1,366,000
Stock grants to directors for retainer fee		349,000			374,000			344,000			349,000
Proceeds from sales of mortgage loans held for sale		291,485,000			67,859,000			352,740,000			291,485,000
Origination of mortgage loans held for sale		(317,417,000	)		(69,107,000	)		(340,680,000	)		(317,417,000	)
Net gain from sales of mortgage loans held for sale		(9,856,000	)		(2,129,000	)		(16,892,000	)		(9,856,000	)
Net gain from sales and valuation write-downs of foreclosed assets		(183,000	)		(31,000	)		(81,000	)		(183,000	)
Net gain from sales and valuation write-downs of former bank premises		(27,000	)		(558,000	)
Net (gain) loss from sales and valuation write-downs of former bank premises								245,000			(27,000	)
Net loss from sales and write-downs of fixed assets		54,000			1,000			246,000			54,000
Earnings on bank owned life insurance		(643,000	)		(3,238,000	)		(574,000	)		(643,000	)
Gain on sale of branch								(1,058,000	)		0
Net change in:
Accrued interest receivable		654,000			(534,000	)		1,188,000			654,000
Other assets		(4,766,000	)		(1,278,000	)		(9,099,000	)		(4,766,000	)
Accrued interest payable and other liabilities		(4,285,000	)		(8,628,000	)		(1,695,000	)		(4,285,000	)
Net cash (for) from operating activities		(12,389,000	)		13,917,000			22,179,000			(12,389,000	)

Cash flows from investing activities
Loan originations and payments, net		(440,380,000	)		(124,964,000	)		(64,298,000	)		(440,380,000	)
Purchases of securities available for sale		(188,630,000	)		(24,182,000	)		(168,906,000	)		(188,630,000	)
Proceeds from maturities, calls and repayments of securities available for sale		220,916,000			27,258,000			44,525,000			220,916,000
Proceeds from sales of foreclosed assets		313,000			270,000			158,000			313,000
Proceeds from sales of former bank premises		162,000			854,000			5,000			162,000
Purchases of Federal Home Loan Bank stock		0			(1,980,000	)
Purchases of bank owned life insurance		0			(2,500,000	)
Proceeds from bank owned life insurance cash value release and death benefits		0			7,708,000
Net purchases of premises and equipment		(4,429,000	)		(5,359,000	)
Net cash transferred in branch sale								(2,679,000	)		0
Net purchases of premises and equipment and lease activity								(3,555,000	)		(4,429,000	)
Net cash for investing activities		(412,048,000	)		(122,895,000	)		(194,750,000	)		(412,048,000	)

See accompanying notes to consolidated financial statements.

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MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

	Six Months Ended June 30, 2020			Six Months Ended June 30, 2019			Six Months Ended June 30, 2021			Six Months Ended June 30, 2020

Cash flows from financing activities
Net increase (decrease) in time deposits		(64,081,000	)		175,869,000
Net increase (decrease) in all other deposits		635,977,000			(20,368,000	)
Net decrease in time deposits								(92,581,000	)		(64,081,000	)
Net increase in all other deposits								366,943,000			635,977,000
Net increase in securities sold under agreements to repurchase		64,852,000			16,150,000			51,372,000			64,852,000
Maturities of Federal Home Loan Bank advances		(20,000,000	)		(20,000,000	)		0			(20,000,000	)
Proceeds from Federal Home Loan Bank advances		60,000,000			44,000,000			0			60,000,000
Proceeds from stock option exercises		0			16,000
Employee stock purchase plan		25,000			26,000			22,000			25,000
Dividend reinvestment plan		404,000			361,000			411,000			404,000
Repurchases of common stock shares		(6,282,000	)		(3,601,000	)		(10,851,000	)		(6,282,000	)
Payment of cash dividends to common shareholders		(8,962,000	)		(8,404,000	)		(9,220,000	)		(8,962,000	)
Net cash from financing activities		661,933,000			184,049,000			306,096,000			661,933,000

Net change in cash and cash equivalents		237,496,000			75,071,000			133,525,000			237,496,000
Cash and cash equivalents at beginning of period		233,731,000			75,354,000			626,006,000			233,731,000
Cash and cash equivalents at end of period	$	471,227,000		$	150,425,000		$	759,531,000		$	471,227,000

Supplemental disclosures of cash flows information
Cash paid during the period for:
Interest	$	15,149,000		$	14,956,000		$	10,583,000		$	15,149,000
Federal income tax		5,300,000			6,275,000			12,150,000			5,300,000
Noncash financing and investing activities:
Transfers from loans to foreclosed assets		11,000			170,000			30,000			11,000
Transfers from bank premises to other real estate owned		0			0

See accompanying notes to consolidated financial statements.

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MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The unaudited financial statements for the six months ended June 30, ~~2020~~2021 include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries. These subsidiaries include Mercantile Bank of Michigan (“our bank”) and our bank’s ~~two~~ ~~subsidiaries, Mercantile Bank Real Estate Co., LLC and~~subsidiary Mercantile Insurance Center, Inc. (“our insurance center”). These consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Item 303(b) of Regulation S-K and do not include all disclosures required by accounting principles generally accepted in the United States of America for a complete presentation of our financial condition and results of operations. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair presentation of the results of operations for such periods. The results for the period ended June 30, ~~2020~~2021 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, ~~2019.~~2020.

We have 5five separate business trusts that were formed to issue trust preferred securities. Subordinated debentures were issued to the trusts in return for the proceeds raised from the issuance of the trust preferred securities. The trusts are not consolidated, but instead we report the subordinated debentures issued to the trusts as a liability.

Coronavirus Pandemic: The U.S. economy deteriorated rapidly during the latter part of the first quarter and into the second quarter of 2020 due to the ongoing pandemic of coronavirus disease 2019 (“Covid-19”) caused by severe acute respiratory syndrome coronavirus 2 (the “Coronavirus Pandemic”). While the economic fallout has stabilized somewhat and the adult population in the United States is in the process of being vaccinated, there remains a significant amount of stress and uncertainty across national and global economies. This uncertainty is heightened as certain geographic areas continue to experience surges in Covid-19 cases and governments at all levels continue to react to changes in circumstances.

The Coronavirus Pandemic is a highly unusual, unprecedented and evolving public health and economic crisis and may have a material negative impact on our financial condition and results of operations. We continue to occupy an asset-sensitive position, whereby interest rate environments characterized by numerous and/or high magnitude interest rate reductions have a negative impact on our net interest income and net income. Additionally, the consequences of the unprecedented economic impact of the Coronavirus Pandemic may produce declining asset quality, reflected by a higher level of loan delinquencies and loan charge-offs, as well as downgrades of commercial lending relationships, which may necessitate additional provisions for our allowance and reduced net income.

The following section summarizes the primary measures that directly impact us and our customers.

●

Paycheck Protection Program

The Paycheck Protection Program (“PPP”) reflects a substantial expansion of the Small Business Administration’s 100% guaranteed 7(a) loan program. The CARES Act authorized up to $350 billion in loans to businesses with fewer than 500 employees, including non-profit organizations, tribal business concerns, self-employed and individual contractors. The PPP provides 100% guaranteed loans to cover specific operating costs. PPP loans are eligible to be forgiven based upon certain criteria. In general, the amount of the loan that is forgivable is the sum of the payroll costs, interest payments on mortgages, rent and utilities incurred or paid by the business during a prescribed period beginning on the loan origination date. Any remaining balance after forgiveness is maintained at the 100% guarantee for the duration of the loan. The interest rate on the loan is fixed at 1.00%, with the financial institution receiving a loan origination fee paid by the Small Business Administration. The loan origination fees, net of the direct origination costs, are accreted into interest income on loans using the level yield methodology. The program ended on August 8, 2020. We originated approximately 2,200 loans aggregating $553 million. As of June 30, 2021, we recorded forgiveness transactions on approximately 1,900 loans aggregating $487 million. Net loan origination fees of $3.5 million were recorded during the firstsix months of 2021.

(Continued)
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MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Consolidated Appropriations Act, 2021 authorized an additional $284 billion in Second Draw PPP loans (“Second Draw”). The program ended on May 31, 2021. Under the Second Draw, we originated approximately 1,200 loans aggregating $209 million. As of June 30, 2021, we recorded forgiveness transactions on approximately 200 loans aggregating $29.2 million. Net loan origination fees of $2.2 million were recorded during the firstsix months of 2021 under the Second Draw.
A PPP loan is assigned a risk weight of 0% under the risk-based capital rules of the federal banking agencies.
●
Individual Economic Impact Payments
The Internal Revenue Service has made three rounds of Individual Economic Impact Payments via direct deposit or mailed checks. In general, and subject to adjusted gross income limitations, qualifying individuals have received payments of $1,200 in April 2020, $600 in January 2021 and $1,400 in March 2021.
●
Troubled Debt Restructuring Relief
From March 1, 2020 through 60 days after the end of the National Emergency (or December 31, 2020 if earlier), a financial institution may elect to suspend GAAP principles and regulatory determinations with respect to loan modifications related to Covid-19 that would otherwise be categorized as troubled debt restructurings. Banking agencies must defer to the financial institution’s election. We elected to suspend GAAP principles and regulatory determinations as permitted. The Consolidated Appropriations Act, 2021 extended the suspension date to January 1, 2022.
●
Current Expected Credit Loss Methodology Delay
Financial institutions are not required to comply with the CECL methodology requirements from the enactment date of the CARES Act until the earlier of the end of the National Emergency or December 31, 2020. We elected to postpone CECL adoption as permitted. The Consolidated Appropriations Act, 2021 extended the adoption deferral date to January 1, 2022.
In early April 2020, in response to the early stages of the Coronavirus Pandemic and its pervasive impact across the economy and financial markets, we developed internal programs of loan payment deferments for commercial and retail borrowers. For commercial borrowers, we offered 90-day (three payments) interest only amendments as well as 90-day (three payments) principal and interest payment deferments. Under the latter program, borrowers were extended a 12-month single payment note at 0% interest in an amount equal to three payments, with loan proceeds used to make the scheduled payments. The single payment notes receive a loan grade equal to the loan grade of each respective borrowing relationship. Certain of our commercial loan borrowers subsequently requested and received an additional 90-day (three payments) interest only amendment or 90-day (three payments) principal and interest payment deferment. Under the latter program, the amount equal to the three payments was added to the original deferment note which has nine months remaining to maturity; however, the original 0% interest rate is modified to equal the rate associated with each borrower’s traditional lending relationship with us for the remainder of the term. At the peak of activity in mid-2020, nearly 750 borrowers with loan balances aggregating $719 million were participating in the commercial loan deferment program. As of June 30, 2021, we had 0 loans in the commercial loan deferment program.
For retail borrowers, we offered 90-day (three payments) principal and interest payment deferments, with deferred amounts added to the end of the loan. As of June 30, 2020, we had processed 260 principal and interest payment deferments with loan balances totaling $23.8 million. As of June 30, 2021, only six borrowers with loan balances aggregating $0.5 million remained in the retail loan payment deferment program.
(Continued)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share: Basic earnings per share is based on the weighted average number of common shares and participating securities outstanding during the period. Diluted earnings per share include the dilutive effect of additional potential common shares issuable under our stock-based compensation plans and are determined using the treasury stock method. Our unvested restricted shares, which contain non-forfeitable rights to dividends whether paid or accrued (i.e., participating securities), are included in the number of shares outstanding for both basic and diluted earnings per share calculations. 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 262,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and six months ended June 30, 2021. In addition, stock options for approximately 3,000 shares of common stock were included in determining diluted earnings per share for the three and six months ended June 30, 2021. Stock options for approximately 7,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three and six months ended June 30, 2021.
Approximately 256,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and six months ended June 30, 2020. In addition, stock options for approximately 2,000 shares of common stock were included in determining diluted earnings per share for the three and six months ended June 30, 2020. Stock options for approximately 9,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three and six months ended June 30, 2020.
~~Approximately 261,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2019.~~ ~~In addition, stock options for approximately 10,000 shares of common stock were included in determining diluted earnings per share for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2019.~~ ~~Stock options for approximately 7,000 shares of common stock were antidilutive and~~ ~~not~~ ~~included in determining diluted earnings per share for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2019.~~

Securities: Debt securities classified as held to maturity are carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold prior to maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Federal Home Loan Bank stock is carried at cost.

~~(Continued)~~
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~~MERCANTILE BANK CORPORATION~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

1.~~SIGNIFICANT ACCOUNTING POLICIES~~ ~~(Continued)~~
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums and discounts on securities are amortized or accreted on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Declines in the fair value of debt securities below their amortized cost that are other-than-temporary impairment (“OTTI”) are reflected in earnings or other comprehensive income, as appropriate. For those debt securities whose fair value is less than their amortized cost, we consider our intent to sell the security, whether it is more likely than not that we will be required to sell the security before recovery and whether we expect to recover the entire amortized cost of the security based on our assessment of the issuer’s financial condition. In analyzing an issuer’s financial condition, we consider whether the securities are issued by the federal government or its agencies, and whether downgrades by bond rating agencies have occurred. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement, and 2) OTTI related to other factors, such as liquidity conditions in the market or changes in market interest rates, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost.

Loans: 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 and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

(Continued)
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MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. Consumer and credit card loans are typically charged off no later than when they are 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal and interest is considered doubtful.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or ~~market,~~fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. As of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, we determined the fair value of our mortgage loans held for sale to be ~~$42.8~~$28.9 million and ~~$5.0~~$24.0 million, respectively. ~~Loans held for sale are reported as part of our total loans on the balance sheet.~~

Mortgage loans held for sale are generally sold with servicing rights retained. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold, which is reduced by the cost allocated to the servicing right. We generally lock in the sale price to the purchaser of the loan at the same time we make an interest rate commitment to the borrower. These mortgage banking activities are not designated as hedges and are carried at fair value. 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.~~loans and recorded as part of mortgage banking income. Mortgage loans serviced for others totaled approximately ~~$846 million~~$1.20 billion and ~~$727 million~~$1.04 billion as of June 30, ~~2020,~~2021, and December 31, ~~2019,~~2020, respectively.

~~(Continued)~~
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~~MERCANTILE BANK CORPORATION~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

1.~~SIGNIFICANT ACCOUNTING POLICIES~~ ~~(Continued)~~
Mortgage Banking Activities: Mortgage loan servicing rights ~~included in “other assets” on the consolidated balance sheet,~~ are recognized as assets based on the allocated value of retained servicing rights on mortgage loans sold. 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. Impairment is evaluated based on the fair value of the rights using groupings of the underlying mortgage loans as to interest rates. Any impairment of a grouping is reported as a valuation allowance.

Servicing fee income is recorded for fees earned for servicing mortgage loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. Amortization of mortgage loan servicing rights is netted against mortgage loan servicing income and recorded in mortgage banking activities in the income statement.

Troubled Debt Restructurings: A loan is accounted for as a troubled debt restructuring if we, for economic or legal reasons, grant a concession to a borrower considered to be experiencing financial difficulties that we would not otherwise consider. A troubled debt restructuring may involve the receipt of assets from the debtor in partial or full satisfaction of the loan, or a modification of terms such as a reduction of the stated interest rate or balance of the loan, a reduction of accrued interest, an extension of the maturity date or renewal of the loan at a stated interest rate lower than the current market rate for a new loan with similar risk, or some combination of these concessions. Troubled debt restructurings can be in either accrual or nonaccrual status. Nonaccrual troubled debt restructurings are included in nonperforming loans. Accruing troubled debt restructurings are generally excluded from nonperforming loans as it is considered probable that all contractual principal and interest due under the restructured terms will be collected.

(Continued)
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MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.SIGNIFICANT ACCOUNTING POLICIES (Continued)
In accordance with current accounting guidance, loans modified as troubled debt restructurings are, by definition, considered to be impaired loans. Impairment for these loans is measured on a loan-by-loan basis similar to other impaired loans as described below under “Allowance for Loan Losses.” Certain loans modified as troubled debt restructurings may have been previously measured for impairment under a general allowance methodology (i.e., pooling), thus at the time the loan is modified as a troubled debt restructuring the allowance will be impacted by the difference between the results of these two measurement methodologies. Loans modified as troubled debt restructurings that subsequently default are factored into the determination of the allowance in the same manner as other defaulted loans.

The federal banking agencies issued an “Interagency Statement on Loan Modifications and R~~eporting~~Reporting for Financial Institutions Working with Customers Affected by the ~~Coronavirus”~~Coronavirus” on March 22, 2020, which was subsequently revised on April 7, 2020. This guidance encourages financial institutions to work prudently with borrowers that are or may be unable to meet their contractual obligations because of the effects of the ~~Coronavirus.~~Coronavirus Pandemic. Pursuant to the guidance, the federal banking agencies ~~have~~ concluded, in consultation with FASB staff, that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current prior to any relief are not troubled debt restructurings. This guidance complements Section 4013 of the CARES Act, which specified that Coronavirus-related modifications made on loans that were current as of December 31, 2019 and that occur between March 1, 2020 and the earlier of 60 days after the date of termination of the National Emergency declared by President Trump on March 13, 2020 (the “National Emergency”) or December 31, 2020, as applicable, are not troubled debt restructurings.

~~(Continued)~~
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~~MERCANTILE BANK CORPORATION~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

1.~~SIGNIFICANT ACCOUNTING POLICIES~~ ~~(Continued)~~
~~In early~~ ~~April 2020,~~ ~~we developed internal programs of loan payment deferments for commercial and retail borrowers. For commercial borrowers, we offer 90-day (~~~~three~~ ~~payments) interest only amendments as well as 90-day (~~~~three~~ ~~payments) principal and interest payment deferments. Under the latter program, borrowers are extended a~~ 12~~-month single payment note at 0% interest in an amount equal to~~ ~~three~~ ~~payments, with loan proceeds used to make the scheduled payments.~~ As of ~~June 30, 2020,~~ we had processed 463 interest only amendments with loan balances aggregating $421 million and 242 principal and interest payment deferments with loan balances totaling $298 million and resulting single payment loans aggregating $8.1 million. The single payment notes receive a loan grade equal to the current loan grade of each respective borrowing relationship. For retail borrowers, we offer 90-day (~~three~~ ~~payments) principal and interest payment deferments, with deferred amounts added to the end~~part of the ~~loan. As of~~ ~~June 30, 2020,~~ ~~we had processed 260 principal and interest payment deferments with loan balances totaling $23.8 million. These payment deferral transactions largely applied to the borrowers’~~ ~~April,~~ ~~May~~ ~~and~~ ~~June~~ ofConsolidated Appropriations Act that was enacted in late 2020, ~~loan payments.~~
~~We have also had some instances where commercial borrowers have subsequently requested and received an additional~~this guidance was extended to 90~~-day (~~~~three~~ ~~payments) interest only amendment or~~ 90~~-day (~~~~three~~ ~~payments) principal and interest payment deferment. Under the latter program, the amount equal to the~~ ~~three~~ ~~payments is added to the original deferment note which has~~ ~~nine~~ ~~months remaining to maturity; however, the original~~ 0% ~~interest rate is modified to equal the rate associated with each borrower’s traditional lending relationship with us for the remainder of the term. As of~~ ~~July 31, 2020,~~ we had processed an additional 16 interest only amendments with loan balances aggregating $31.0 million and 21 principal and interest payment deferments with loan balances totaling $117 million and resulting single payment loans aggregating $4.2 million. Additional 90~~-day (~~~~three~~ ~~payments) principal and interest payment deferments for retail borrowers have been nominal with loan balances aggregating less than $2.0 million through~~ ~~July 31, 2020.~~January 1, 2022

Allowance for Loan Losses: The allowance for loan losses (“allowance”) is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when we believe the uncollectability of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance. We estimate the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. We estimate credit losses based on individual loans determined to be impaired and on all other loans grouped on similar risk characteristics. Our historical loss component is generally the most significant of the allowance components and is based on historical loss experience by credit risk grade for commercial loans and payment status for mortgage and consumer loans. Loans are pooled based on similar risk characteristics supported by observable data. The historical loss experience component of the allowance represents the results of migration analysis of historical net charge-offs for portfolios of loans, including groups of commercial loans within each credit risk grade. For measuring loss exposure in a pool of loans, the historical net charge-off or migration experience is utilized to estimate expected future losses to be realized from the pool of loans. These historical loss percentages are adjusted (both upwards and downwards) for certain qualitative environmental factors, including economic trends, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, competition, increasing interest rates, external factors, Coronavirus Pandemic environment, and other considerations. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.

(Continued)
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MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.SIGNIFICANT ACCOUNTING POLICIES (Continued)
A loan is considered to be impaired when, based on current information and events, it is probable we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of delay, the reasons for delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.

~~(Continued)~~
13

~~Table of Contents~~
~~MERCANTILE BANK CORPORATION~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

1.~~SIGNIFICANT ACCOUNTING POLICIES~~ ~~(Continued)~~
Financial institutions ~~are~~were not required to comply with the ~~Current Expected Credit Loss (“CECL”)~~CECL methodology requirements from the enactment date of the CARES Act until the earlier of the end of the President’s declaration of a National Emergency or December 31, 2020.The Consolidated Appropriations Act, 2021, that was enacted in December 2020, provided for a further extension of the required CECL adoption date to January 1, 2022. An economic forecast is a key component of the CECL methodology. As we continue to experience an unprecedented economic environment whereby a sizable portion of the economy has been significantly impacted by ~~shelter in place declarations~~government-imposed activity limitations and similar reactions by businesses and individuals, substantial government stimulus has been provided to businesses, individuals and state and local governments and financial institutions have offered businesses and individuals payment relief options, economic forecasts are regularly ~~revised and there continues to be~~ no ~~economic forecast consensus.~~revised. Given the high degree of uncertainty surrounding economic forecasting, we have elected to postpone the adoption of CECL, and will continue to use our incurred loan loss reserve model as permitted. Loans made under PPP are fully guaranteed by the Small Business Administration; therefore, such loans do not have an associated allowance.

Derivatives: Derivative financial instruments are recognized as assets or liabilities at fair value. The accounting for changes in the fair value of derivatives depends on the use of the derivatives and whether the derivatives qualify for hedge accounting. Used as part of our asset and liability management to help manage interest rate risk, our derivatives have generally consisted of interest rate swap agreements that qualified for hedge accounting. We do not use derivatives for trading purposes.

Changes in the fair value of derivatives that are designated, for accounting purposes, as a hedge of the variability of cash flows to be received on various assets and liabilities and are effective are reported in other comprehensive income. They are later reclassified into earnings in the same periods during which the hedged transaction affects earnings and are included in the line item in which the hedged cash flows are recorded. If hedge accounting does not apply, changes in the fair value of derivatives are recognized immediately in current earnings as interest income or expense.

If designated as a hedge, we formally document the relationship between the derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions. This documentation includes linking cash flow hedges to specific assets and liabilities on the balance sheet. If designated as a hedge, we also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in cash flows of the hedged items. Ineffective hedge gains and losses are recognized immediately in current earnings as noninterest income or expense. We discontinue hedge accounting when we determine the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative is settled or terminates, or treatment of the derivative as a hedge is no longer appropriate or intended.

(Continued)
15
Table of Contents
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.SIGNIFICANT ACCOUNTING POLICIES(Continued)
Goodwill and Core Deposit Intangible: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified. A more frequent assessment is performed should events or changes in circumstances indicate the carrying value of the goodwill may not be recoverable. We may elect to perform a qualitative assessment for the annual impairment test. If the qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we elect not to perform a qualitative assessment, then we would be required to perform a quantitative test for goodwill impairment. If the estimated fair value of the reporting unit is less than the carrying value, goodwill is impaired and is written down to its estimated fair value. In ~~2019,~~ ~~we elected to perform a qualitative assessment for our annual impairment test and concluded it was more likely than~~ ~~not~~ ~~our fair value was greater than its carrying amount; therefore,~~ no ~~further testing was required.~~

~~(Continued)~~
14

~~Table of Contents~~
~~MERCANTILE BANK CORPORATION~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

1.~~SIGNIFICANT ACCOUNTING POLICIES~~ ~~(Continued)~~
~~Due to current stressed economic and market conditions, we assessed goodwill for impairment as of~~ ~~March 31, 2020~~ ~~and~~ ~~June 30, 2020.~~ ~~For~~ ~~March 31, 2020,~~ we used a discounted income approach and a market valuation model, which compared the inherent value of our company to valuations of recent transactions in the market place to determine if our goodwill had been impaired. It was determined goodwill was ~~not~~ ~~impaired as of~~ ~~March 31, 2020.~~ ~~For~~ ~~June 30, 2020,~~ ~~we used the Step~~ 0 methodology for which we assessed the macro and microeconomic conditions, industry and market conditions, financial performance, and our underlying stock performance. We concluded it was more likely than ~~not~~ ~~our fair value was greater than its carrying amount; therefore,~~ no ~~further testing was required.~~

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

Revenue from Contracts with Customers: We record revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, ““Revenue from Contracts with ~~Customers”~~Customers” (“Topic 606”). Under Topic 606, we must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) we satisfy a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

Our primary sources of revenue are derived from interest and dividends earned on loans, securities and other financial instruments that are not within the scope of Topic 606. We have evaluated the nature of our contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. We generally satisfy our performance obligations on contracts with customers as services are rendered, and the transaction prices are typically fixed and charged either on a periodic basis (generally monthly) or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

~~Recent Events:~~ ~~The U.S. economy deteriorated rapidly during the latter part of the~~ ~~first~~ ~~quarter and into the~~ ~~second~~ ~~quarter of~~ ~~2020~~ ~~due to the ongoing pandemic of coronavirus disease~~ ~~2019~~ ~~(“COVID-~~~~19”~~~~) caused by severe acute respiratory syndrome coronavirus~~ 2 ~~(the “Coronavirus Pandemic”). COVID-~~19 ~~is primarily spread between people during close contact, often via small droplets produced by coughing, sneezing or talking. People~~ ~~may~~ ~~also become infected by touching a contaminated surface and then touching their eyes, nose or mouth. There is currently~~ no known vaccine or specific antiviral treatment, with the primary treatment being symptomatic and supportive therapies. Recommended preventive measures include hand washing, covering one’s mouth when coughing and maintaining distance from other people, as well as self-isolation for people who suspect they are infected.
~~The outbreak was initially identified in Wuhan, China in~~ ~~December 2019.~~ ~~The World Health Organization declared the outbreak to be a Public Health Emergency Concern on~~ ~~January 30, 2020,~~ ~~and then recognized it as a pandemic on~~ ~~March 11, 2020.~~ ~~The~~ ~~first~~ ~~known case in the United States was identified in the State of Washington on~~ ~~January 20, 2020.~~ ~~The White House Coronavirus Task Force was established on~~ ~~January 29, 2020.~~ ~~President Trump declared a Public Health Emergency on~~ ~~January 31, 2020,~~ ~~which was elevated by the President’s declaration of a National Emergency on~~ ~~March 13, 2020 (~~~~the “National Emergency”).~~

~~(Continued)~~
15

~~Table of Contents~~
~~MERCANTILE BANK CORPORATION~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

1.~~SIGNIFICANT ACCOUNTING POLICIES(Continued)~~
The Coronavirus Pandemic has caused severe global socioeconomic disruptions. It has led to the postponement or cancellation of sporting, religious, political and cultural events, as well as widespread supply shortages exacerbated by panic buying. Service industry businesses, such as restaurants, hotels, airlines, cruise lines and movie theaters, have been particularly negatively impacted by the restrictions and stay-at-home orders issued by authorities around a vast majority of the world. The health care industry has also been significantly impacted, from a combination of treating infected patients to the cancellation of medical appointments and elective surgeries. At the current time, it is highly uncertain as to when conditions will begin to return to normal. Most agree that a return to normal conditions will be accomplished in phases, taking into account factors such as regional rates and trends of infections, types of businesses and required social distancing measures. Human behavior will also likely play a significant role as people make individual choices to re-engage in permissible activities.
~~The~~ ~~first~~ ~~known case in the State of Michigan was identified on~~ ~~March 10, 2020,~~ ~~which triggered a State of Emergency response from Governor Whitmer. Soon thereafter, Governor Whitmer ordered the closure of all K-~~12 ~~school buildings until early~~ ~~April,~~ ~~which was later amended to suspend all face-to-face instruction for the remainder of the~~ ~~2019~~-~~2020~~ ~~school year. In mid-~~ ~~March,~~ ~~Governor Whitmer ordered all bars, restaurants, entertainment venues and other similar businesses to partially close for~~ ~~two~~ ~~weeks, and banned all gatherings of more than~~ 50 ~~people for the period of mid-~~ ~~March~~ ~~into early~~ ~~April.~~ On ~~March 24, 2020,~~ Governor Whitmer issued a state-wide stay-at-home order limiting all non-essential travel and discontinuing all non-essential business services and operations. The order was originally set to expire on ~~April 13, 2020;~~ ~~however, the order was extended, and expanded with additional restrictions, until~~ ~~April 30, 2020.~~ On ~~April 24, 2020,~~ ~~Governor Whitmer issued an amended stay-at-home order that was scheduled to expire on~~ ~~May 15, 2020~~ ~~to replace the stay-at-home order that was scheduled to expire on~~ ~~April 30, 2020.~~ On ~~May 7, 2020,~~ ~~Governor Whitmer issued an amended stay-at-home order that expired on~~ ~~May 28, 2020~~ ~~to replace the stay-at-home order that was scheduled to expire on~~ ~~May 15, 2020.~~ ~~The amended orders reduced some of the restrictions from the previous orders, permitting certain activities in limited or restricted capacities. The stay-at-home order was lifted effective~~ ~~June 5, 2020;~~ however, restrictions on indoor and outdoor gatherings remain, businesses are required to ensure CDC-recommended guidelines are followed and certain industries remain significantly impacted. An increase in COVID-19 ~~cases in Michigan near the end of the~~ ~~second~~ ~~quarter and into the~~ ~~third~~ ~~quarter has temporarily delayed further re-opening activities, and Governor Whitmer has indicated a willingness to reinstitute restrictions on activities of businesses and consumers.~~
~~Responding to the Coronavirus Pandemic and Governor Whitmer’s stay-at-home orders, by~~ ~~March 23, 2020,~~ ~~over 75% of our employees were working from home. In addition, beginning on~~ ~~March 18, 2020~~ ~~our branch lobbies were allowing face-to-face contact with customers by appointment only. On~~ ~~March 25, 2020,~~ we enhanced our social distancing response by closing our branch lobbies to all customers, with all banking transactions conducted via drive-thru, virtual banking machines, online banking and our call center. We have developed comprehensive social distancing guidelines and associated protocols using information provided by the CDC and other federal and state government agencies, and started to return our employees to their work locations in mid- ~~June.~~ On ~~June 26, 2020,~~ ~~we re-opened our branch lobbies, and virtually all of our employees were back to their physical work locations by~~ ~~July 1, 2020.~~
In response to the substantial negative impact of the Coronavirus Pandemic and the associated social distancing orders and measures on the United States and global economies, Congress passed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which was signed by President Trump on ~~March 27, 2020.~~ ~~The CARES Act is in large part a~~ ~~$1.8~~ ~~trillion spending bill that builds upon~~ ~~two~~ earlier and considerably smaller federal government support measures in the wake of the Coronavirus Pandemic and associated economic fallout. The CARES Act is comprehensive and touches on many facets of federal government assistance and banking regulatory requirements. In addition, the Federal Open Market Committee lowered the targeted federal funds rate by 50 ~~basis points on~~ ~~March 3, 2020~~ ~~and by another~~ ~~100~~ ~~basis points on~~ ~~March 15, 2020,~~ ~~and announced the resumption of quantitative easing.~~

~~(Continued)~~
16

~~Table of Contents~~
~~MERCANTILE BANK CORPORATION~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

1.~~SIGNIFICANT ACCOUNTING POLICIES~~ ~~(Continued)~~
~~The Coronavirus Pandemic is a highly unusual, unprecedented and evolving public health and economic crisis and~~ ~~may~~ have a negative material impact on our financial condition and results of operations. We are in an asset-sensitive position, whereby interest rate environments characterized by numerous and/or high magnitude interest rate reductions have a negative impact on our net interest income and net income. Additionally, the consequences of the unprecedented economic impact of the Coronavirus Pandemic are likely to result in declining asset quality, reflected by a higher level of loan delinquencies and loan charge-offs, as well as downgrades of commercial lending relationships, which will necessitate additional provisions for our allowance and reduced net income.
~~The Paycheck Protection Program (“PPP”) reflects a substantial expansion of the Small Business Administration’s~~ ~~100%~~ ~~guaranteed~~ 7~~(a) loan program. The CARES Act authorized up to~~ ~~$350~~ ~~billion in loans to businesses with fewer than~~ ~~500~~ ~~employees, including non-profit organizations, tribal business concerns, self-employed and individual contractors. The PPP provides~~ ~~100%~~ ~~guaranteed loans to cover specific operating costs, with the maximum loan size capped at the lesser of~~ ~~250%~~ ~~of the average monthly payroll costs or~~ ~~$10.0~~ million. PPP loans are eligible to be forgiven based upon certain criteria. In general, the amount of the loan that is forgivable is the sum of the payroll costs, interest payments on mortgages, rent and utilities incurred or paid by the business during a prescribed period beginning on the loan origination date. Any remaining balance after forgiveness is maintained at the ~~100%~~ ~~guarantee for the duration of the loan. The loan tenor is~~ 24 ~~months for loans originated prior to~~ ~~June 5, 2020~~ ~~and~~ 60 ~~months for loans originated on or after~~ ~~June 5, 2020.~~ ~~Loans originated prior to~~ ~~June 5, 2020~~ ~~can be modified to a tenor of~~ 60 ~~months upon the mutual agreement of the lender and borrower. To date, we have~~ ~~not~~ ~~modified the maturity date of any loans made prior to~~ ~~June 5, 2020.~~ ~~The interest rate on the loan is fixed at~~ ~~1.00%,~~ ~~with the financial institution receiving a loan origination fee ranging from~~ 1% to 5% ~~of the loan amount paid by the Small Business Administration. The loan origination fees, net of the direct origination costs, totaled $14.7 million during the~~ ~~second~~ ~~quarter of~~ ~~2020~~ ~~and are being accreted into interest income on loans using the level yield methodology. The program was originally scheduled to end on~~ ~~June 30, 2020,~~ ~~but was recently modified to now end effective~~ ~~August 8, 2020.~~ ~~Participation in the PPP has had a significant impact on the composition of our loan and deposit portfolios and our net interest income starting during the~~ ~~second~~ ~~quarter of~~ ~~2020,~~ ~~which is expected to remain for at least most of the remainder of~~ ~~2020.~~ ~~As of~~ ~~July 31, 2020,~~ ~~we had originated almost 2,200 loans aggregating $550 million under the PPP.~~
~~Congress passed, and on~~ ~~April 24, 2020~~ ~~President Trump signed, legislation which added~~ ~~$300~~ ~~billion to the PPP. Included in the legislation was a specific allocation of~~ ~~$30~~ ~~billion for financial institutions under~~ ~~$10~~ ~~billion.~~
~~Under the CARES Act, a PPP loan is assigned a risk weight of~~ 0% ~~under the risk-based capital rules of the federal banking agencies. On~~ ~~April 9, 2020,~~ the federal banking agencies issued an interim final rule allowing financial institutions to exclude PPP loans from the average asset calculation to the degree the PPP loans are financed through the Paycheck Protection Program Lending Facility (“PPPLF”) for the Tier 1 ~~Leverage Capital Ratio.~~
In ~~April, 2020,~~ the Federal Reserve initiated the PPPLF, which is designed to facilitate lending by financial institutions to small businesses under the PPP. Only PPP loans are eligible to serve as collateral for the PPPLF, with each dollar of PPP loans providing ~~one~~ dollar of advance availability. The maturity date of an extension of credit under the PPPLF will equal the maturity date of the pool of PPP loans pledged to secure the extension of credit. Any principal payments received by the financial institution on the PPP loans, such as PPP loan forgiveness payments from the Small Business Administration or principal payments from the borrower after the initial ~~six~~-month deferment period, must be used to pay down the PPPLF advance by the same dollar amount, maintaining the dollar-for-dollar advance amount and PPP aggregate loan balance relationship. The interest rate on PPPLF advances is fixed at ~~0.35%.~~No ~~PPPLF advances can be obtained after~~ ~~September 30, 2020.~~ ~~We obtained a PPPLF advance in the amount of $43.7 million in late~~ ~~April 2020~~ ~~and paid it off in full in early~~ ~~June 2020.~~ ~~As of~~ ~~June 30, 2020,~~ ~~we had 0 advances outstanding under the PPPLF. We~~ ~~may~~ ~~obtain additional PPPLF advances as our borrowers utilize PPP loan proceeds for permissible purposes.~~

~~(Continued)~~
17

~~Table of Contents~~
~~MERCANTILE BANK CORPORATION~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

1.~~SIGNIFICANT ACCOUNTING POLICIES~~ ~~(Continued)~~
Adoption of New Accounting Standards: In ~~February 2016,~~ ~~the FASB issued ASU~~ ~~2016~~-~~02,~~~~Leases~~~~. This ASU (as subsequently amended by ASU~~ ~~2018~~-~~01,~~ ~~ASU~~ ~~2018~~-~~10,~~ ~~ASU~~ ~~2018~~-11 ~~and ASU~~ ~~2018~~-20~~) establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than~~ 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The ASU was effective for annual and interim periods beginning after ~~December 15, 2018.~~ ~~The adoption of this new standard as of~~ ~~January 1, 2019~~ ~~resulted in the recording of a ROU asset and associated lease liability of approximately $1.3 million.~~
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU (as subsequently amended by ASU 2018-19) significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (i) financial assets subject to credit losses and measured at amortized cost, and (ii) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments and financial guarantees. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans, and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019.

(Continued)
16
Table of Contents
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial institutions ~~are~~were not required to comply with the CECL methodology requirements from the enactment date of the CARES Act until the earlier of the end of the President’s declaration of a National Emergency or December 31, 2020. ~~We elected to postpone~~The Consolidated Appropriations Act, 2021, that was enacted in December 2020, provided for a further extension of the required CECL adoption ~~as permitted.~~ date to January 1, 2022. An economic forecast is a key component of the CECL methodology. As we continue to experience an unprecedented economic environment whereby a sizable portion of the economy has been significantly impacted by ~~shelter in place declarations~~government-imposed activity limitations and similar reactions by businesses and individuals, substantial government stimulus has been provided to businesses, individuals and state and local governments and financial institutions have offered businesses and individuals payment relief options, economic forecasts are regularly ~~updated and there is~~ no ~~economic forecast consensus.~~revised. Given the high degree of uncertainty surrounding economic forecasting, we have elected to postpone the adoption of CECL, and will continue to use our incurred loan loss reserve model as permitted. ~~Had we adopted CECL on~~ ~~January 1, 2020,~~ ~~the allowance would have decreased by $1.0 million, resulting in an increase to retained earnings of $0.8 million.~~

Hastings Branch Sale: As previously disclosed in a Current Report on Form 8-K filed on October 26, 2020, we entered into a Purchase and Assumption Agreement (“Agreement”) on October 21, 2020 regarding the sale of our Hastings, Michigan branch office to Lake Trust Credit Union (“Lake Trust”). All regulatory approvals were received and the sale was consummated on May 14, 2021. Under the terms of the Agreement, as amended on April 20, 2021, Lake Trust: 1) purchased $9.7 million in primarily residential mortgage loans at book balance; 2) purchased the branch facility at a price of $1.5 million; and 3) assumed all deposit accounts aggregating $14.6 million at a premium price of 5.0% of the book balance. In conjunction with the sale closing, we recorded a $0.7 million deposit premium and a $0.3 million gain on the sale of the branch facility.
Out-of-Period Adjustment: During the second quarter of 2021, a formula error was identified in the spreadsheet used to calculate and record the present values of right-to-use assets consisting of several banking offices along with various printer and copy machines. As a result, Premises and Equipment, Net and Other Liabilities on our Consolidated Balance Sheets were understated by $2.8 million and $2.7 million as of December 31, 2020 and March 31, 2021, respectively. There was no impact to our Consolidated Statements of Income. We evaluated the impact, both individually and in the aggregate, and determined these out-of-period adjustments were not material to our Consolidated Balance Sheets in the respective impacted periods.
(Continued)

1817

Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2.SECURITIES

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

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

June 30, 2020

June 30, 2021

U.S. Government agency debt obligations
$ 161,575,000 $ 957,000 $ (35,000
)
$ 162,497,000
$
323,641,000

$
423,000

$
(3,923,000
)

$
320,141,000

Mortgage-backed securities
34,765,000 1,269,000 (1,000
)
36,033,000
36,803,000

813,000

(297,000
)

37,319,000

Municipal general obligation bonds
97,171,000 5,296,000 0 102,467,000
124,808,000

4,754,000

(127,000
)

129,435,000

Municipal revenue bonds
5,947,000 217,000 0 6,164,000
18,467,000

363,000

(100,000
)

18,730,000

Other investments
500,000 0 0 500,000
500,000

0

0

500,000

$ 299,958,000 $ 7,739,000 $ (36,000
)
$ 307,661,000
$
504,219,000

$
6,353,000

$
(4,447,000
)

$
506,125,000

December 31, 2019

December 31, 2020

U.S. Government agency debt obligations
$ 185,103,000 $ 2,449,000 $ (1,142,000
)
$ 186,410,000
$
242,522,000

$
516,000

$
(897,000
)

$
242,141,000

Mortgage-backed securities
41,998,000 554,000 (82,000
)
42,470,000
23,869,000

1,021,000

0

24,890,000

Municipal general obligation bonds
98,245,000 2,864,000 (30,000
)
101,079,000
101,991,000

5,833,000

0

107,824,000

Municipal revenue bonds
4,133,000 63,000 0 4,196,000
11,521,000

473,000

(2,000
)

11,992,000

Other investments
500,000 0 0 500,000
500,000

0

0

500,000

$ 329,979,000 $ 5,930,000 $ (1,254,000
)
$ 334,655,000
$
380,403,000

$
7,843,000

$
(899,000
)

$
387,347,000

Securities with unrealized losses at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

Less than 12 Months

12 Months or More

Total

Less than 12 Months

12 Months or More

Total

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

June 30, 2020

June 30, 2021

U.S. Government agency debt obligations
$ 16,370,000 $ 35,000 $ 0 $ 0 $ 16,370,000 $ 35,000 $ 252,288,000 $ 3,900,000 $ 3,977,000 $ 23,000 $ 256,265,000 $ 3,923,000
Mortgage-backed securities
0 0 26,000 1,000 26,000 1,000 13,972,000 297,000 0 0 13,972,000 297,000
Municipal general obligation bonds
0 0 0 0 0 0 19,301,000 127,000 0 0 19,301,000 127,000
Municipal revenue bonds
0 0 0 0 0 0 9,187,000 100,000 0 0 9,187,000 100,000

$ 16,370,000 $ 35,000 $ 26,000 $ 1,000 $ 16,396,000 $ 36,000 $ 294,748,000 $ 4,424,000 $ 3,977,000 $ 23,000 $ 298,725,000 $ 4,447,000

(Continued)

1918
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2.SECURITIES (Continued)

Less than 12 Months

12 Months or More

Total

Less than 12 Months

12 Months or More

Total

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

December 31, 2019

December 31, 2020

U.S. Government agency debt obligations
$ 25,650,000 $ 349,000 $ 73,913,000 $ 793,000 $ 99,563,000 $ 1,142,000
$
118,650,000

$
897,000

$
0

$
0

$
118,650,000

$
897,000

Mortgage-backed securities
2,838,000 28,000 10,423,000 54,000 13,261,000 82,000
0

0

0

0

0

0

Municipal general obligation bonds
3,755,000 18,000 994,000 12,000 4,749,000 30,000
0

0

0

0

0

0

Municipal revenue bonds
0 0 0 0 0 0
423,000

2,000

0

0

423,000

2,000

$ 32,243,000 $ 395,000 $ 85,330,000 $ 859,000 $ 117,573,000 $ 1,254,000
$
119,073,000

$
899,000

$
0

$
0

$
119,073,000

$
899,000

We evaluate securities for other-than-temporary impairment at least on a quarterly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability we have to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. For those securities whose fair value is less than their amortized cost basis, we also consider our intent to sell the security, whether it is more likely than not that we will be required to sell the security before recovery and if we do not expect to recover the entire amortized cost basis of the security. In analyzing an issuer’s financial condition, we may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition.

At June 30, ~~2020,~~2021, 10209 debt securities with fair values totaling ~~$16.4~~$299 million have unrealized losses aggregating ~~less than $0.1~~$4.4 million. After we considered whether the securities were issued by the federal government or its agencies and whether downgrades by bond rating agencies had occurred, we determined that the unrealized losses were due to changing interest rate environments. As we do not intend to sell our debt securities before recovery of their cost basis and we believe it is more likely than not that we will not be required to sell our debt securities before recovery of the cost basis, 0 unrealized losses are deemed to be other-than-temporary.

The amortized cost and fair value of debt securities at June 30, ~~2020,~~2021, by maturity, are shown in the following table. The contractual maturity is utilized for U.S. Government agency debt obligations and municipal bonds. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately. Weighted average yields are also reflected, with yields for municipal securities shown at their tax equivalent yield.
(Continued)

2019
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2.SECURITIES (Continued)

Weighted
Average
Yield

Amortized
Cost

Fair
Value

Due in 2020
4.11% $ 410,000 $ 412,000
Due in 2021 through 2025
1.97 60,097,000 61,369,000
Due in 2026 through 2030
2.13 133,632,000 137,347,000
Due in 2031 and beyond
2.64 70,554,000 72,000,000
Mortgage-backed securities
2.57 34,765,000 36,033,000
Other investments
4.50 500,000 500,000

Total available for sale securities
2.27% $ 299,958,000 $ 307,661,000

Weighted
Average
Yield

Amortized
Cost

Fair
Value

Due in 2021
3.29% $ 881,000 $ 886,000
Due in 2022 through 2026
1.06 172,553,000 173,442,000
Due in 2027 through 2031
1.60 234,940,000 235,320,000
Due in 2032 and beyond
2.03 58,542,000 58,658,000
Mortgage-backed securities
1.83 36,803,000 37,319,000
Other investments
3.75 500,000 500,000

Total available for sale securities
1.49% $ 504,219,000 $ 506,125,000

Securities issued by the State of Michigan and all its political subdivisions had a combined amortized cost of ~~$98.5~~$141 million and ~~$96.5~~$109 million at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, with estimated market values of ~~$104~~$145 million and ~~$99.4~~$116 million, respectively. Securities issued by all other states and their political subdivisions had a combined amortized cost of ~~$4.6~~$2.7 million and ~~$5.9~~$4.1 million at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, with estimated market values of ~~$4.6~~$2.8 million and ~~$5.9~~$4.2 million, respectively. Total securities of any other specific issuer, other than the U.S. Government and its agencies and the State of Michigan and all its political subdivisions, did not exceed 10% of shareholders’ equity.

The carrying value of U.S. Government agency debt obligations ~~and mortgage-backed securities~~ that are pledged to secure repurchase agreements was ~~$168~~$170 million and ~~$103~~$118 million at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Investments in Federal Home Loan Bank stock are restricted and may only be resold or redeemed by the issuer.

3.LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, the allowance, and net deferred loan fees and costs. Interest income on loans is accrued over the term of the loans primarily using the simple interest method based on the principal balance outstanding. Interest is not accrued on loans where collectability is uncertain. Accrued interest is presented separately in the consolidated balance sheet. Loan origination fees and certain direct costs incurred to extend credit are deferred and amortized over the term of the loan or loan commitment period as an adjustment to the related loan yield.

(Continued)
20

Table of Contents
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Our total loans at June 30, 2021 were $3.25 billion compared to $3.19 billion at December 31, 2020, an increase of $55.4 million, or 1.7%. The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at June 30, 2021 and December 31, 2020, and the percentage change in loans from the end of 2020 to the end of the second quarter of 2021, are as follows:

Percent

June 30, 2021

December 31, 2020

Increase

Balance

%

Balance

%

(Decrease)

Commercial:

Commercial and industrial (1)
$ 1,103,807,000 34.0
%
$ 1,145,423,000 35.9
%
(3.6
%)
Vacant land, land development, and residential construction
43,111,000 1.3 55,055,000 1.7 (21.7
)
Real estate – owner occupied
550,504,000 16.9 529,953,000 16.6 3.9
Real estate – non-owner occupied
950,993,000 29.3 917,436,000 28.7 3.7
Real estate – multi-family and residential rental
161,894,000 5.0 146,095,000 4.6 10.8
Total commercial
2,810,309,000 86.5 2,793,962,000 87.5 0.6

Retail:

Home equity and other
58,240,000 1.8 61,620,000 1.9 (5.5
)
1-4 family mortgages
380,292,000 11.7 337,888,000 10.6 12.5
Total retail
438,532,000 13.5 399,508,000 12.5 9.8

Total loans
$ 3,248,841,000 100.0
%
$ 3,193,470,000 100.0
%
1.7
%
(1)
Includes $246 million and $365 million in loans originated under the Paycheck Protection Program for June 30, 2021 and December 31, 2020, respectively.
Nonperforming loans as of June 30, 2021 and December 31, 2020 were as follows:

June 30,
2021

December 31,
2020

Loans past due 90 days or more still accruing interest
$ 0 $ 0
Nonaccrual loans
2,746,000 3,384,000

Total nonperforming loans
$ 2,746,000 $ 3,384,000
(Continued)

21
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

~~Our total~~The recorded principal balance of nonperforming loans at ~~June 30, 2020~~ ~~were $3.33 billion compared to $2.86 billion at~~ ~~December 31, 2019,~~ ~~an increase of $476 million, or 16.7%. The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at~~ ~~June 30, 2020~~ ~~and~~ ~~December 31, 2019,~~ ~~and the percentage change in loans from the end of~~ ~~2019~~ ~~to the end of the~~ ~~second~~ ~~quarter of~~ ~~2020,~~ ~~are~~was as follows:

Percent

June 30, 2020

December 31, 2019

Increase

Balance

%

Balance

%

(Decrease)

Commercial:

Commercial and industrial (1)
$ 1,307,455,000 39.2
%
$ 846,551,000 29.6
%
54.4
%
Vacant land, land development, and residential construction
52,984,000 1.6 56,119,000 2.0 (5.6
)
Real estate – owner occupied
567,621,000 17.0 579,003,000 20.3 (2.0
)
Real estate – non-owner occupied
841,145,000 25.2 835,346,000 29.2 0.7
Real estate – multi-family and residential rental
132,047,000 4.0 124,525,000 4.4 6.0
Total commercial
2,901,252,000 87.0 2,441,544,000 85.5 18.8

Retail:

Home equity and other
64,743,000 2.0 75,374,000 2.6 (14.1
)
1-4 family mortgages
367,061,000 11.0 339,749,000 11.9 8.0
Total retail
431,804,000 13.0 415,123,000 14.5 4.0

Total loans
$ 3,333,056,000 100.0
%
$ 2,856,667,000 100.0
%
16.7
%
(1)
~~For~~ ~~June 30, 2020,~~ ~~includes $549 million in loans originated under the Paycheck Protection Program.~~

June 30,
2021

December 31,
2020

Commercial:

Commercial and industrial
$ 606,000 $ 172,000
Vacant land, land development, and residential construction
0 0
Real estate – owner occupied
0 619,000
Real estate – non-owner occupied
0 22,000
Real estate – multi-family and residential rental
0 0
Total commercial
606,000 813,000

Retail:

Home equity and other
153,000 242,000
1-4 family mortgages
1,987,000 2,329,000
Total retail
2,140,000 2,571,000

Total nonperforming loans
$ 2,746,000 $ 3,384,000

~~Nonperforming~~
An age analysis of past due loans is as follows as of June 30, ~~2020~~ 2021:~~and~~ ~~December 31, 2019~~ ~~were as follows:~~

June 30,
2020

December 31,
2019

Loans past due 90 days or more still accruing interest
$ 0 $ 0
Nonaccrual loans
3,212,000 2,284,000

Total nonperforming loans
$ 3,212,000 $ 2,284,000

30 – 59
Days
Past Due

60 – 89
Days
Past Due

Greater
Than 89
Days
Past Due

Total
Past Due

Current

Total
Loans

Recorded
Balance
> 89
Days and
Accruing

Commercial:

Commercial and industrial
$ 0 $ 456,000 $ 606,000 $ 1,062,000 $ 1,102,745,000 $ 1,103,807,000 $ 0
Vacant land, land development, and residential construction
0 0 0 0 43,111,000 43,111,000 0
Real estate – owner occupied
0 431,000 0 431,000 550,073,000 550,504,000 0
Real estate – non-owner occupied
0 0 0 0 950,993,000 950,993,000 0
Real estate – multi-family and residential rental
0 0 0 0 161,894,000 161,894,000 0
Total commercial
0 887,000 606,000 1,493,000 2,808,816,000 2,810,309,000 0

Retail:

Home equity and other
50,000 0 35,000 85,000 58,155,000 58,240,000 0
1-4 family mortgages
200,000 55,000 101,000 356,000 379,936,000 380,292,000 0
Total retail
250,000 55,000 136,000 441,000 438,091,000 438,532,000 0

Total past due loans
$ 250,000 $ 942,000 $ 742,000 $ 1,934,000 $ 3,246,907,000 $ 3,248,841,000 $ 0

(Continued)

22
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

~~The recorded principal balance of nonperforming loans was as follows:~~

June 30,
2020

December 31,
2019

Commercial:

Commercial and industrial
$ 98,000 $ 0
Vacant land, land development, and residential construction
198,000 0
Real estate – owner occupied
275,000 134,000
Real estate – non-owner occupied
25,000 0
Real estate – multi-family and residential rental
0 2,000
Total commercial
596,000 136,000

Retail:

Home equity and other
250,000 255,000
1-4 family mortgages
2,366,000 1,893,000
Total retail
2,616,000 2,148,000

Total nonperforming loans
$ 3,212,000 $ 2,284,000
An age analysis of past due loans is as follows as of ~~June 30,~~December 31, 2020:

30 – 59
Days
Past Due

60 – 89
Days
Past Due

Greater
Than 89
Days
Past Due

Total
Past Due

Current

Total
Loans

Recorded
Balance
> 89
Days and
Accruing

30 – 59
Days
Past Due

60 – 89
Days
Past Due

Greater
Than 89
Days
Past Due

Total
Past Due

Current

Total
Loans

Recorded
Balance
> 89
Days and
Accruing

Commercial:

Commercial and industrial
$ 0 $ 0 $ 38,000 $ 38,000 $ 1,307,417,000 $ 1,307,455,000 $ 0 $ 261,000 $ 172,000 $ 0 $ 433,000 $ 1,144,990,000 $ 1,145,423,000 $ 0
Vacant land, land development, and residential construction
0 22,000 198,000 220,000 52,764,000 52,984,000 0 0 0 0 0 55,055,000 55,055,000 0
Real estate – owner occupied
0 0 181,000 181,000 567,440,000 567,621,000 0 0 197,000 421,000 618,000 529,335,000 529,953,000 0
Real estate – non-owner occupied
0 25,000 0 25,000 841,120,000 841,145,000 0 0 0 23,000 23,000 917,413,000 917,436,000 0
Real estate – multi-family and residential rental
0 0 0 0 132,047,000 132,047,000 0 0 0 0 0 146,095,000 146,095,000 0
Total commercial
0 47,000 417,000 464,000 2,900,788,000 2,901,252,000 0 261,000 369,000 444,000 1,074,000 2,792,888,000 2,793,962,000 0

Retail:

Home equity and other
49,000 39,000 90,000 178,000 64,565,000 64,743,000 0 112,000 65,000 54,000 231,000 61,389,000 61,620,000 0
1-4 family mortgages
238,000 96,000 429,000 763,000 366,298,000 367,061,000 0 1,147,000 247,000 342,000 1,736,000 336,152,000 337,888,000 0
Total retail
287,000 135,000 519,000 941,000 430,863,000 431,804,000 0 1,259,000 312,000 396,000 1,967,000 397,541,000 399,508,000 0

Total past due loans
$ 287,000 $ 182,000 $ 936,000 $ 1,405,000 $ 3,331,651,000 $ 3,333,056,000 $ 0 $ 1,520,000 $ 681,000 $ 840,000 $ 3,041,000 $ 3,190,429,000 $ 3,193,470,000 $ 0

(Continued)

23
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

~~An age analysis of past due~~Impaired loans ~~is as follows~~ as of ~~December 31, 2019:~~June 30, 2021, and average impaired loans for the three and six months ended June 30, 2021, were as follows:

30 – 59
Days
Past Due

60 – 89
Days
Past Due

Greater
Than 89
Days
Past Due

Total
Past Due

Current

Total
Loans

Recorded
Balance
> 89
Days and
Accruing

Unpaid
Contractual
Principal
Balance

Recorded
Principal
Balance

Related
Allowance

Second Quarter
Average
Recorded
Principal
Balance

Year-To-Date
Average
Recorded
Principal
Balance

With no related allowance recorded

Commercial:

Commercial and industrial
$ 0 $ 0 $ 0 $ 0 $ 846,551,000 $ 846,551,000 $ 0 $ 2,732,000 $ 2,675,000 $ 3,129,000 $ 4,167,000
Vacant land, land development, and residential construction
191,000 0 0 191,000 55,928,000 56,119,000 0
Vacant land, land development and residential construction
0 0 0 0
Real estate – owner occupied
0 0 134,000 134,000 578,869,000 579,003,000 0 12,674,000 12,674,000 13,114,000 13,607,000
Real estate – non-owner occupied
0 0 0 0 835,346,000 835,346,000 0 0 0 156,000 218,000
Real estate – multi-family and residential rental
0 0 0 0 124,525,000 124,525,000 0 0 0 0 0
Total commercial
191,000 0 134,000 325,000 2,441,219,000 2,441,544,000 0 15,406,000 15,349,000 16,399,000 17,992,000

Retail:

Home equity and other
171,000 65,000 20,000 256,000 75,118,000 75,374,000 0 1,317,000 1,237,000 1,088,000 1,054,000
1-4 family mortgages
745,000 29,000 529,000 1,303,000 338,446,000 339,749,000 0 3,899,000 2,227,000 2,376,000 2,442,000
Total retail
916,000 94,000 549,000 1,559,000 413,564,000 415,123,000 0 5,216,000 3,464,000 3,464,000 3,496,000

Total past due loans
$ 1,107,000 $ 94,000 $ 683,000 $ 1,884,000 $ 2,854,783,000 $ 2,856,667,000 $ 0
Total with no related allowance recorded
$ 20,622,000 $ 18,813,000 $ 19,863,000 $ 21,488,000

(Continued)

24
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Unpaid
Contractual
Principal
Balance

Recorded
Principal
Balance

Related
Allowance

Second Quarter
Average
Recorded
Principal
Balance

Year-To-Date
Average
Recorded
Principal
Balance

With an allowance recorded

Commercial:

Commercial and industrial
$ 2,975,000 $ 2,975,000 $ 355,000 $ 1,661,000 $ 1,222,000
Vacant land, land development and residential construction
0 0 0 0 0
Real estate – owner occupied
1,214,000 1,214,000 117,000 872,000 826,000
Real estate – non-owner occupied
153,000 153,000 5,000 156,000 158,000
Real estate – multi-family and residential rental
0 0 0 0 0
Total commercial
4,342,000 4,342,000 477,000 2,689,000 2,206,000
Retail:

Home equity and other
250,000 232,000 207,000 242,000 256,000
1-4 family mortgages
528,000 528,000 103,000 581,000 620,000
Total retail
778,000 760,000 310,000 823,000 876,000

Total with an allowance recorded
$ 5,120,000 $ 5,102,000 $ 787,000 $ 3,512,000 $ 3,082,000

Total impaired loans:

Commercial
$ 19,748,000 $ 19,691,000 $ 477,000 $ 19,088,000 $ 20,198,000
Retail
5,994,000 4,224,000 310,000 4,287,000 4,372,000
Total impaired loans
$ 25,742,000 $ 23,915,000 $ 787,000 $ 23,375,000 $ 24,570,000

~~Impaired loans as of~~ ~~June 30, 2020,~~ ~~and average impaired loans for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2020,~~ ~~were as follows:~~

Unpaid
Contractual
Principal
Balance

Recorded
Principal
Balance

Related
Allowance

Second
Quarter
Average
Recorded
Principal
Balance

Year-To-Date
Average
Recorded
Principal
Balance

With no related allowance recorded

Commercial:

Commercial and industrial
$ 8,784,000 $ 8,753,000 $ 9,460,000 $ 9,016,000
Vacant land, land development and residential construction
538,000 453,000 326,000 246,000
Real estate – owner occupied
4,434,000 4,375,000 4,316,000 3,100,000
Real estate – non-owner occupied
25,000 25,000 12,000 67,000
Real estate – multi-family and residential rental
21,000 0 2,000 4,000
Total commercial
13,802,000 13,606,000 14,116,000 12,433,000
Retail:

Home equity and other
1,359,000 1,274,000 1,273,000 1,252,000
1-4 family mortgages
4,561,000 2,571,000 2,627,000 2,407,000
Total retail
5,920,000 3,845,000 3,900,000 3,659,000

Total with no related allowance recorded
$ 19,722,000 $ 17,451,000 $ 18,016,000 $ 16,092,000
(Continued)

25
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired loans as of December 31, 2020, and average impaired loans for the three and six months ended June 30, 2020, were as follows:

Unpaid
Contractual
Principal
Balance

Recorded
Principal
Balance

Related
Allowance

Second
Quarter
Average
Recorded
Principal
Balance

Year-To-Date
Average
Recorded
Principal
Balance

Unpaid
Contractual
Principal
Balance

Recorded
Principal
Balance

Related
Allowance

Second Quarter
Average
Recorded
Principal
Balance

Year-To-Date
Average
Recorded
Principal
Balance

With an allowance recorded

With no related allowance recorded

Commercial:

Commercial and industrial
$ 1,331,000 $ 1,330,000 $ 1,006,000 $ 1,751,000 $ 1,320,000 $ 6,242,000 $ 6,242,000 $ 9,460,000 $ 9,016,000
Vacant land, land development and residential construction
0 0 0 192,000 128,000 0 0 326,000 246,000
Real estate – owner occupied
49,000 49,000 2,000 126,000 443,000 14,782,000 14,593,000 4,316,000 3,100,000
Real estate – non-owner occupied
170,000 170,000 3,000 85,000 57,000 341,000 341,000 12,000 67,000
Real estate – multi-family and residential rental
1,000 1,000 0 0 0 0 0 2,000 4,000
Total commercial
1,551,000 1,550,000 1,011,000 2,154,000 1,948,000 21,365,000 21,176,000 14,116,000 12,433,000
Retail:

Home equity and other
596,000 577,000 339,000 486,000 486,000 1,072,000 987,000 1,273,000 1,252,000
1-4 family mortgages
662,000 662,000 162,000 638,000 544,000 4,455,000 2,575,000 2,627,000 2,407,000
Total retail
1,258,000 1,239,000 501,000 1,124,000 1,030,000 5,527,000 3,562,000 3,900,000 3,659,000

Total with an allowance recorded
$ 2,809,000 $ 2,789,000 $ 1,512,000 $ 3,278,000 $ 2,978,000

Total impaired loans:

Commercial
$ 15,353,000 $ 15,156,000 $ 1,011,000 $ 16,270,000 $ 14,381,000
Retail
7,178,000 5,084,000 501,000 5,024,000 4,689,000
Total impaired loans
$ 22,531,000 $ 20,240,000 $ 1,512,000 $ 21,294,000 $ 19,070,000
Total with no related allowance recorded
$ 26,892,000 $ 24,738,000 $ 18,016,000 �� $ 16,092,000

(Continued)

26
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES ~~(Continued)~~
~~Impaired loans as of~~ ~~December 31, 2019,~~ ~~and average impaired loans for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2019,~~ ~~were as follows:~~

Unpaid
Contractual
Principal
Balance

Recorded
Principal
Balance

Related
Allowance

Second
Quarter
Average
Recorded
Principal
Balance

Year-To-Date
Average
Recorded
Principal
Balance

With no related allowance recorded

Commercial:

Commercial and industrial
$ 8,129,000 $ 8,129,000 $ 10,214,000 $ 9,810,000
Vacant land, land development and residential construction
85,000 85,000 90,000 91,000
Real estate – owner occupied
715,000 667,000 2,083,000 1,996,000
Real estate – non-owner occupied
178,000 178,000 175,000 117,000
Real estate – multi-family and residential rental
29,000 9,000 89,000 68,000
Total commercial
9,136,000 9,068,000 12,651,000 12,082,000
Retail:

Home equity and other
1,279,000 1,209,000 1,360,000 1,222,000
1-4 family mortgages
3,272,000 1,968,000 2,201,000 2,214,000
Total retail
4,551,000 3,177,000 3,561,000 3,436,000

Total with no related allowance recorded
$ 13,687,000 $ 12,245,000 $ 16,212,000 $ 15,518,000

~~(Continued)~~
27

~~Table of Contents~~
~~MERCANTILE BANK CORPORATION~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

3.~~LOANS AND ALLOWANCE FOR LOAN LOSSES~~ (Continued)

Unpaid
Contractual
Principal
Balance

Recorded
Principal
Balance

Related
Allowance

Second
Quarter
Average
Recorded
Principal
Balance

Year-To-Date
Average
Recorded
Principal
Balance

Unpaid
Contractual
Principal
Balance

Recorded
Principal
Balance

Related
Allowance

Second Quarter
Average
Recorded
Principal
Balance

Year-To-Date
Average
Recorded
Principal
Balance

With an allowance recorded

Commercial:

Commercial and industrial
$ 460,000 $ 458,000 $ 202,000 $ 9,687,000 $ 8,184,000 $ 343,000 $ 343,000 $ 53,000 $ 1,751,000 $ 1,320,000
Vacant land, land development and residential construction
0 0 0 0 0 0 0 0 192,000 128,000
Real estate – owner occupied
1,078,000 1,078,000 982,000 1,384,000 1,858,000 763,000 734,000 77,000 126,000 443,000
Real estate – non-owner occupied
0 0 0 47,000 101,000 162,000 162,000 8,000 85,000 57,000
Real estate – multi-family and residential rental
0 0 0 65,000 90,000 0 0 0 0 0
Total commercial
1,538,000 1,536,000 1,184,000 11,183,000 10,233,000 1,268,000 1,239,000 138,000 2,154,000 1,948,000
Retail:

Home equity and other
502,000 485,000 356,000 572,000 672,000 300,000 283,000 241,000 486,000 486,000
1-4 family mortgages
358,000 356,000 83,000 639,000 663,000 698,000 698,000 172,000 638,000 544,000
Total retail
860,000 841,000 439,000 1,211,000 1,335,000 998,000 981,000 413,000 1,124,000 1,030,000

Total with an allowance recorded
$ 2,398,000 $ 2,377,000 $ 1,623,000 $ 12,394,000 $ 11,568,000 $ 2,266,000 $ 2,220,000 $ 551,000 $ 3,278,000 $ 2,978,000

Total impaired loans:

Commercial
$ 10,674,000 $ 10,604,000 $ 1,184,000 $ 23,834,000 $ 22,315,000 $ 22,633,000 $ 22,415,000 $ 138,000 $ 16,270,000 $ 14,381,000
Retail
5,411,000 4,018,000 439,000 4,772,000 4,771,000 6,525,000 4,543,000 413,000 5,024,000 4,689,000
Total impaired loans
$ 16,085,000 $ 14,622,000 $ 1,623,000 $ 28,606,000 $ 27,086,000 $ 29,158,000 $ 26,958,000 $ 551,000 $ 21,294,000 $ 19,070,000

Impaired loans for which no allocation of the allowance for loan losses has been made generally reflect situations whereby the loans have been charged-down to estimated fair value. Interest income recognized on accruing troubled debt restructurings totaled $0.4 million ~~and $0.2 million~~ during the second quarters of 2021 and 2020, and ~~2019,~~ ~~respectively,~~$0.8 million and $0.6 ~~million and $0.5~~ million during the first six months of ~~2020~~2021 and ~~2019,~~2020, respectively. NoNaN interest income was recognized on nonaccrual loans during the second quarter and first six months of ~~2020~~2021 or during the respective ~~2019~~2020 periods. Lost interest income on nonaccrual loans totaled less than $0.1 million during the second quarters of ~~2020~~2021 and ~~2019,~~2020, and ~~$0.1 million and less than~~ $0.1 million during the first six months of ~~2020~~2021 and ~~2019,~~2020. ~~respectively.~~

(Continued)

2827
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Credit Quality Indicators. We utilize a comprehensive grading system for our commercial loans. All commercial loans are graded on a ten grade rating system. The rating system utilizes standardized grade paradigms that analyze several critical factors such as cash flow, operating performance, financial condition, collateral, industry condition and management. All commercial loans are graded at inception and reviewed and, if appropriate, re-graded at various intervals thereafter. The risk assessment for retail loans is primarily based on the type of collateral.

Credit quality indicators were as follows as of June 30, ~~2020:~~2021:

Commercial credit exposure – credit risk profiled by internal credit risk grades:

Commercial
and
Industrial

Commercial
Vacant Land,
Land
Development,
and
Residential
Construction

Commercial
Real Estate -
Owner
Occupied

Commercial
Real Estate -
Non-Owner
Occupied

Commercial
Real Estate -
Multi-Family
and
Residential
Rental

Commercial
and
Industrial

Commercial
Vacant Land,
Land Development,
and
Residential
Construction

Commercial
Real Estate -
Owner
Occupied

Commercial
Real Estate -
Non-Owner
Occupied

Commercial
Real Estate -
Multi-Family
and
Residential
Rental

Internal credit risk grade groupings:

Grades 1 – 4 ⁽¹⁾
$ 1,008,010,000 $ 21,500,000 $ 309,221,000 $ 545,764,000 $ 73,394,000 $ 767,987,000 $ 23,647,000 $ 311,512,000 $ 417,311,000 $ 109,220,000
Grades 5 – 7
289,342,000 30,914,000 253,695,000 294,423,000 58,461,000 330,408,000 19,358,000 211,916,000 533,682,000 52,412,000
Grades 8 – 9
10,103,000 570,000 4,705,000 958,000 192,000 5,412,000 106,000 27,076,000 0 262,000
Total commercial
$ 1,307,455,000 $ 52,984,000 $ 567,621,000 $ 841,145,000 $ 132,047,000 $ 1,103,807,000 $ 43,111,000 $ 550,504,000 $ 950,993,000 $ 161,894,000

Retail credit exposure – credit risk profiled by collateral type:

Retail
Home Equity
and Other

Retail
1-4 Family
Mortgages

Retail
Home Equity
and Other

Retail
1-4 Family
Mortgages

Performing
64,493,000 364,695,000 $ 58,087,000 $ 378,305,000
Nonperforming
250,000 2,366,000 153,000 1,987,000
Total retail
$ 64,743,000 $ 367,061,000 $ 58,240,000 $ 380,292,000

(1)
Included in Commercial and Industrial Loans Grades 1 – 4 are ~~$549~~$246 million of loans originated under the Paycheck Protection Program.

(Continued)
28
Table of Contents
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Credit quality indicators were as follows as of December 31, 2020:
Commercial credit exposure – credit risk profiled by internal credit risk grades:

Commercial
and
Industrial

Commercial
Vacant Land,
Land Development,
and
Residential
Construction

Commercial
Real Estate -
Owner
Occupied

Commercial
Real Estate -
Non-Owner
Occupied

Commercial
Real Estate -
Multi-Family
and
Residential
Rental

Internal credit risk grade groupings:

Grades 1 – 4 (1)
$ 828,706,000 $ 22,547,000 $ 315,134,000 $ 396,700,000 $ 91,711,000
Grades 5 – 7
306,614,000 32,398,000 185,541,000 520,395,000 54,111,000
Grades 8 – 9
10,103,000 110,000 29,278,000 341,000 273,000
Total commercial
$ 1,145,423,000 $ 55,055,000 $ 529,953,000 $ 917,436,000 $ 146,095,000
Retail credit exposure – credit risk profiled by collateral type:

Retail
Home Equity
and Other

Retail
1-4 Family
Mortgages

Performing
$ 61,378,000 $ 335,559,000
Nonperforming
242,000 2,329,000
Total retail
$ 61,620,000 $ 337,888,000
(1)
Included in Commercial and Industrial Loans Grades 1 – 4 are $365 million of loans originated under the Paycheck Protection Program.
(Continued)

29
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES ~~(Continued)~~
~~Credit quality indicators were as follows as of~~ ~~December 30, 2019:~~
~~Commercial credit exposure – credit risk profiled by internal credit risk grades:~~

Commercial
and
Industrial

Commercial
Vacant Land,
Land
Development,
and
Residential
Construction

Commercial
Real Estate -
Owner
Occupied

Commercial
Real Estate -
Non-Owner
Occupied

Commercial
Real Estate -
Multi-Family
and
Residential
Rental

Internal credit risk grade groupings:

Grades 1 – 4
$ 521,920,000 $ 26,065,000 $ 351,671,000 $ 563,087,000 $ 85,152,000
Grades 5 – 7
309,824,000 29,716,000 220,980,000 272,124,000 39,203,000
Grades 8 – 9
14,807,000 338,000 6,352,000 135,000 170,000
Total commercial
$ 846,551,000 $ 56,119,000 $ 579,003,000 $ 835,346,000 $ 124,525,000
~~Retail credit exposure – credit risk profiled by collateral type:~~

Retail
Home Equity
and Other

Retail
1-4 Family
Mortgages

Performing
75,119,000 337,856,000
Nonperforming
255,000 1,893,000
Total retail
$ 75,374,000 $ 339,749,000

~~(Continued)~~
30

~~Table of Contents~~
~~MERCANTILE BANK CORPORATION~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

3.~~LOANS AND ALLOWANCE FOR LOAN LOSSES~~ (Continued)

All commercial loans are graded using the following criteria:

Grade 1.
“Exceptional”  Loans with this rating contain very little, if any, risk.

Grade 2.
“Outstanding”  Loans with this rating have excellent and stable sources of repayment and conform to bank policy and regulatory requirements.

Grade 3.
“Very Good”  Loans with this rating have strong sources of repayment and conform to bank policy and regulatory requirements. These are loans for which repayment risks are acceptable.

Grade 4.
“Good”  Loans with this rating have solid sources of repayment and conform to bank policy and regulatory requirements. These are loans for which repayment risks are modest.

Grade 5.
“Acceptable”  Loans with this rating exhibit acceptable sources of repayment and conform with most bank policies and all regulatory requirements. These are loans for which repayment risks are satisfactory.

Grade 6.
“Monitor”  Loans with this rating are considered to have emerging weaknesses which may include negative current cash flow, high leverage, or operating losses. Generally, if further deterioration is observed, these credits will be downgraded to the criticized asset report.

Grade 7.
“Special Mention”  Loans with this rating have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at some future date.

Grade 8.
“Substandard”  Loans with this rating are inadequately protected by current sound net worth, paying capacity of the obligor, or of the pledged collateral, if any. A Substandard loan normally has one or more well-defined weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Grade 9.
“Doubtful”  Loans with this rating exhibit all the weaknesses inherent in the Substandard classification and where collection or liquidation in full is highly questionable and improbable.

Grade 10.
“Loss”  Loans with this rating are considered uncollectable, and of such little value that continuance as an active asset is not warranted.

The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of collateral, and timeliness of scheduled payments. We have a policy of requesting and reviewing periodic financial statements from commercial loan customers and employ a disciplined and formalized review of the existence of collateral and its value. The primary risk element with respect to each residential real estate loan and consumer loan is the timeliness of scheduled payments. We have a reporting system that monitors past due loans and have adopted policies to pursue creditors’ rights in order to preserve our collateral position.

(Continued)
30
Table of Contents
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity in the allowance for loan losses and the recorded investments in loans as of and during the three and six months ended June 30, 2021 are as follows:

Commercial
Loans

Retail
Loans

Unallocated

Total

Allowance for loan losses:

Balance at March 31, 2021
$ 34,711,000 $ 3,794,000 $ 190,000 $ 38,695,000
Provision for loan losses
(2,712,000
)
(383,000
)
(5,000
)
(3,100,000
)
Charge-offs
(66,000
)
(2,000
)
0 (68,000
)
Recoveries
159,000 227,000 0 386,000
Ending balance
$ 32,092,000 $ 3,636,000 $ 185,000 $ 35,913,000

Allowance for loan losses:

Balance at December 31, 2020
$ 33,779,000 $ 4,129,000 $ 59,000 $ 37,967,000
Provision for loan losses
(2,130,000
)
(796,000
)
126,000 (2,800,000
)
Charge-offs
(81,000
)
(40,000
)
0 (121,000
)
Recoveries
524,000 343,000 0 867,000
Ending balance
$ 32,092,000 $ 3,636,000 $ 185,000 $ 35,913,000

Ending balance: individually evaluated for impairment
$ 477,000 $ 310,000 $ 0 $ 787,000

Ending balance: collectively evaluated for impairment
$ 31,615,000 $ 3,326,000 $ 185,000 $ 35,126,000

Total loans (*):

Ending balance
$ 2,564,526,000 $ 438,532,000 $ 3,003,058,000

Ending balance: individually evaluated for impairment
$ 19,691,000 $ 4,224,000 $ 23,915,000

Ending balance: collectively evaluated for impairment
$ 2,544,835,000 $ 434,308,000 $ 2,979,143,000
(*) Excludes $246 million in loans originated under the Paycheck Protection Program.
(Continued)

31
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Activity in the allowance for loan losses ~~and the recorded investments in~~for loans ~~as of and~~ during the three and six months ended June 30, 2020 and the recorded investments in loans as of December 31, 2020 are as follows:

Commercial
Loans

Retail
Loans

Unallocated

Total

Commercial
Loans

Retail
Loans

Unallocated

Total

Allowance for loan losses:

Balance at March 31, 2020
$ 21,750,000 $ 3,078,000 $ 0 $ 24,828,000 $ 21,750,000 $ 3,078,000 $ 0 $ 24,828,000
Provision for loan losses
6,466,000 1,074,000 60,000 7,600,000 6,466,000 1,074,000 60,000 7,600,000
Charge-offs
(301,000
)
(34,000
)
0 (335,000
)
(301,000
)
(34,000
)
0 (335,000
)
Recoveries
47,000 106,000 0 153,000 47,000 106,000 0 153,000
Ending balance
$ 27,962,000 $ 4,224,000 $ 60,000 $ 32,246,000 $ 27,962,000 $ 4,224,000 $ 60,000 $ 32,246,000

Allowance for loan losses:

Balance at December 31, 2019
$ 21,070,000 $ 2,749,000 $ 70,000 $ 23,889,000 $ 21,070,000 $ 2,749,000 $ 70,000 $ 23,889,000
Provision for loan losses
7,039,000 1,321,000 (10,000
)
8,350,000 7,039,000 1,321,000 (10,000
)
8,350,000
Charge-offs
(314,000
)
(61,000
)
0 (375,000
)
(314,000
)
(61,000
)
0 (375,000
)
Recoveries
167,000 215,000 0 382,000 167,000 215,000 0 382,000
Ending balance
$ 27,962,000 $ 4,224,000 $ 60,000 $ 32,246,000 $ 27,962,000 $ 4,224,000 $ 60,000 $ 32,246,000

Ending balance: individually evaluated for impairment
$ 1,011,000 $ 501,000 $ 0 $ 1,512,000 $ 1,011,000 $ 501,000 $ 0 $ 1,512,000

Ending balance: collectively evaluated for impairment
$ 26,951,000 $ 3,723,000 $ 60,000 $ 30,734,000 $ 26,951,000 $ 3,723,000 $ 60,000 $ 30,734,000

Total loans:

Total loans (*):

Ending balance
$ 2,901,252,000 $ 431,804,000 $ 3,333,056,000 $ 2,428,703,000 $ 399,508,000 $ 2,828,211,000

Ending balance: individually evaluated for impairment
$ 15,156,000 $ 5,084,000 $ 20,240,000 $ 22,415,000 $ 4,543,000 $ 26,958,000

Ending balance: collectively evaluated for impairment
$ 2,886,096,000 $ 426,720,000 $ 3,312,816,000 $ 2,406,288,000 $ 394,965,000 $ 2,801,253,000
(*) Excludes $365 million in loans originated under the Paycheck Protection Program.

(Continued)

32
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

~~Activity in the allowance for loan losses for loans~~Loans modified as troubled debt restructurings during the three ~~and~~months ended June 30, 2021 were as follows:

Number of
Contracts

Pre-
Modification
Recorded
Principal
Balance

Post-
Modification
Recorded
Principal
Balance

Commercial:

Commercial and industrial
8 $ 2,831,000 $ 2,831,000
Vacant land, land development and residential construction
0 0 0
Real estate – owner occupied
1 692,000 692,000
Real estate – non-owner occupied
0 0 0
Real estate – multi-family and residential rental
0 0 0
Total commercial
9 3,523,000 3,523,000

Retail:

Home equity and other
3 414,000 412,000
1-4 family mortgages
1 10,000 10,000
Total retail
4 424,000 422,000

Total loans
13 $ 3,947,000 $ 3,945,000
Loans modified as troubled debt restructurings during the six months ended June 30, ~~2019~~2021 ~~and the recorded investments in loans as of~~ ~~December 31, 2019~~ ~~are~~were as follows:

Commercial
Loans

Retail
Loans

Unallocated

Total

Allowance for loan losses:

Balance at March 31, 2019
$ 20,211,000 $ 2,696,000 $ 228,000 $ 23,135,000
Provision for loan losses
1,015,000 16,000 (131,000
)
900,000
Charge-offs
(2,000
)
(75,000
)
0 (77,000
)
Recoveries
47,000 48,000 0 95,000
Ending balance
$ 21,271,000 $ 2,685,000 $ 97,000 $ 24,053,000

Allowance for loan losses:

Balance at December 31, 2018
$ 19,619,000 $ 2,717,000 $ 44,000 $ 22,380,000
Provision for loan losses
1,579,000 118,000 53,000 1,750,000
Charge-offs
(2,000
)
(250,000
)
0 (252,000
)
Recoveries
75,000 100,000 0 175,000
Ending balance
$ 21,271,000 $ 2,685,000 $ 97,000 $ 24,053,000

Ending balance: individually evaluated for impairment
$ 2,149,000 $ 387,000 $ 0 $ 2,536,000

Ending balance: collectively evaluated for impairment
$ 19,122,000 $ 2,298,000 $ 97,000 $ 21,517,000

Total loans:

Ending balance
$ 2,441,544,000 $ 415,123,000 $ 2,856,667,000

Ending balance: individually evaluated for impairment
$ 10,986,000 $ 4,070,000 $ 15,056,000

Ending balance: collectively evaluated for impairment
$ 2,430,558,000 $ 411,053,000 $
2,841,611,000

Number of
Contracts

Pre-
Modification
Recorded
Principal
Balance

Post-
Modification
Recorded
Principal
Balance

Commercial:

Commercial and industrial
9 $ 2,854,000 $ 2,853,000
Vacant land, land development and residential construction
0 0 0
Real estate – owner occupied
1 692,000 692,000
Real estate – non-owner occupied
0 0 0
Real estate – multi-family and residential rental
0 0 0
Total commercial
10 3,546,000 3,545,000

Retail:

Home equity and other
4 485,000 482,000
1-4 family mortgages
2 46,000 46,000
Total retail
6 531,000 528,000

Total loans
16 $ 4,077,000 $ 4,073,000

(Continued)

33
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Loans modified as troubled debt restructurings during the three months ended June 30, 2020 were as follows:

Number of
Contracts

Pre-
Modification
Recorded
Principal
Balance

Post-
Modification
Recorded
Principal
Balance

Commercial:

Commercial and industrial
2 $ 6,000 $ 6,000
Vacant land, land development and residential construction
0 0 0
Real estate – owner occupied
0 0 0
Real estate – non-owner occupied
0 0 0
Real estate – multi-family and residential rental
0 0 0
Total commercial
2 6,000 6,000

Retail:

Home equity and other
7 438,000 439,000
1-4 family mortgages
1 20,000 20,000
Total retail
8 458,000 459,000

Total loans
10 $ 464,000 $ 465,000

Loans modified as troubled debt restructurings during the six months ended June 30, 2020 were as follows:

Number of
Contracts

Pre-
Modification
Recorded
Principal
Balance

Post-
Modification
Recorded
Principal
Balance

Commercial:

Commercial and industrial
8 $ 6,545,000 $ 6,542,000
Vacant land, land development and residential construction
0 0 0
Real estate – owner occupied
8 4,261,000 3,659,000
Real estate – non-owner occupied
0 0 0
Real estate – multi-family and residential rental
0 0 0
Total commercial
16 10,806,000 10,201,000

Retail:

Home equity and other
10 503,000 505,000
1-4 family mortgages
1 20,000 20,000
Total retail
11 523,000 525,000

Total loans
27 $ 11,329,000 $ 10,726,000

(Continued)

34
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

~~Loans~~The following loans, modified as troubled debt restructurings ~~during~~within the previous twelve months, became over 30 days past due within the three months ended June 30, ~~2019~~ 2021 (~~were~~amounts as ~~follows:~~of period end):

Number of
Contracts

Pre-
Modification
Recorded
Principal
Balance

Post-
Modification
Recorded
Principal
Balance

Number of
Contracts

Recorded
Principal
Balance

Commercial:

Commercial and industrial
3 $ 14,040,000 $ 14,337,000 0 $ 0
Vacant land, land development and residential construction
0 0 0 0 0
Real estate – owner occupied
1 1,567,000 1,567,000 1 431,000
Real estate – non-owner occupied
0 0 0 0 0
Real estate – multi-family and residential rental
0 0 0 0 0
Total commercial
4 15,607,000 15,904,000 1 431,000

Retail:

Home equity and other
4 93,000 94,000 0 0
1-4 family mortgages
3 122,000 122,000 0 0
Total retail
7 215,000 216,000 0 0

Total loans
11 $ 15,822,000 $ 16,120,000
Total
1 $ 431,000

~~Loans~~The following loans, modified as troubled debt restructurings ~~during~~within the previous twelve months, became over 30 days past due within the six months ended June 30, ~~2019~~ 2021 (~~were~~amounts as ~~follows:~~of period end):

Number of
Contracts

Pre-
Modification
Recorded
Principal
Balance

Post-
Modification
Recorded
Principal
Balance

Number of
Contracts

Recorded
Principal
Balance

Commercial:

Commercial and industrial
6 $ 14,429,000 $ 14,726,000 2 $ 522,000
Vacant land, land development and residential construction
0 0 0 0 0
Real estate – owner occupied
2 2,257,000 2,246,000 1 431,000
Real estate – non-owner occupied
0 0 0 0 0
Real estate – multi-family and residential rental
0 0 0 0 0
Total commercial
8 16,686,000 16,972,000 3 953,000

Retail:

Home equity and other
8 163,000 164,000 0 0
1-4 family mortgages
4 154,000 154,000 0 0
Total retail
12 317,000 318,000 0 0

Total loans
20 $ 17,003,000 $ 17,290,000
Total
3 $ 953,000

(Continued)

35
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended June 30, 2020 (amounts as of period end):

Number of
Contracts

Recorded
Principal
Balance

Commercial:

Commercial and industrial
0 $ 0
Vacant land, land development and residential construction
0 0
Real estate – owner occupied
0 0
Real estate – non-owner occupied
0 0
Real estate – multi-family and residential rental
0 0
Total commercial
0 0

Retail:

Home equity and other
0 0
1-4 family mortgages
0 0
Total retail
0 0

Total
0 $ 0

The following loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the six months ended June 30, 2020 (amounts as of period end):

Number of
Contracts

Recorded
Principal
Balance

Commercial:

Commercial and industrial
0 $ 0
Vacant land, land development and residential construction
0 0
Real estate – owner occupied
0 0
Real estate – non-owner occupied
0 0
Real estate – multi-family and residential rental
0 0
Total commercial
0 0

Retail:

Home equity and other
0 0
1-4 family mortgages
1 32,000
Total retail
1 32,000

Total
1 $ 32,000

(Continued)

36
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

~~The following~~Activity for loans ~~modified~~categorized as troubled debt restructurings ~~within the previous~~ ~~twelve~~ ~~months, became over~~ 30 ~~days past due within~~during the three months ended June 30, ~~2019 (~~2021 ~~amounts~~is as ~~of period end):~~follows:

Number of
Contracts

Recorded
Principal
Balance

Commercial:

Commercial and industrial
0 $ 0
Vacant land, land development and residential construction
0 0
Real estate – owner occupied
0 0
Real estate – non-owner occupied
0 0
Real estate – multi-family and residential rental
0 0
Total commercial
0 0

Retail:

Home equity and other
0 0
1-4 family mortgages
0 0
Total retail
0 0

Total
0 $ 0

Commercial
and
Industrial

Commercial
Vacant Land,
Land Development,
and
Residential
Construction

Commercial
Real Estate -
Owner
Occupied

Commercial
Real Estate -
Non-Owner
Occupied

Commercial
Real Estate -
Multi-Family
and
Residential
Rental

Commercial Loan Portfolio:

Beginning Balance
$ 3,760,000 $ 0 $ 13,887,000 $ 471,000 $ 0
Charge-Offs
0 0 0 0 0
Payments
(845,000
)
0 (685,000
)
(318,000
)
0
Transfers to ORE
0 0 0 0 0
Net Additions/Deletions
2,648,000 0 686,000 0 0
Ending Balance
$ 5,563,000 $ 0 $ 13,888,000 $ 153,000 $ 0

~~The following loans, modified as troubled debt restructurings within the previous~~ ~~twelve~~ ~~months, became over~~ 30 ~~days past due within the~~ ~~six~~ ~~months ended~~ ~~June 30, 2019 (~~~~amounts as of period end):~~

Retail
Home Equity
and Other

Retail
1-4 Family
Mortgages

Retail Loan Portfolio:

Beginning Balance
$ 1,099,000 $ 820,000
Charge-Offs
0 0
Payments
(115,000
)
(131,000
)
Transfers to ORE
0 0
Net Additions/Deletions
412,000 10,000
Ending Balance
$ 1,396,000 $ 699,000

Number of
Contracts

Recorded
Principal
Balance

Commercial:

Commercial and industrial
0 $ 0
Vacant land, land development and residential construction
0 0
Real estate – owner occupied
0 0
Real estate – non-owner occupied
0 0
Real estate – multi-family and residential rental
0 0
Total commercial
0 0

Retail:

Home equity and other
0 0
1-4 family mortgages
0 0
Total retail
0 0

Total
0 $ 0

(Continued)

37
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Activity for loans categorized as troubled debt restructurings during the ~~three~~six months ended June 30, ~~2020~~2021 is as follows:

Commercial
and
Industrial

Commercial
Vacant Land,
Land
Development,
and
Residential
Construction

Commercial
Real Estate -
Owner
Occupied

Commercial
Real Estate -
Non-Owner
Occupied

Commercial
Real Estate -
Multi-Family
and
Residential
Rental

Commercial
and
Industrial

Commercial
Vacant Land,
Land Development,
and
Residential
Construction

Commercial
Real Estate -
Owner
Occupied

Commercial
Real Estate -
Non-Owner
Occupied

Commercial
Real Estate -
Multi-Family
and
Residential
Rental

Commercial Loan Portfolio:

Beginning Balance
$ 12,204,000 $ 82,000 $ 3,811,000 $ 174,000 $ 3,000 $ 6,414,000 $ 0 $ 14,797,000 $ 480,000 $ 0
Charge-Offs
0 0 0 0 0 0 0 0 0 0
Payments
(2,143,000
)
(2,000
)
(20,000
)
(4,000
)
(2,000
)
(3,521,000
)
0 (1,595,000
)
(327,000
)
0
Transfers to ORE
0 0 0 0 0 0 0 0 0 0
Net Additions/Deletions
6,000 0 0 0 0 2,670,000 0 686,000 0 0
Ending Balance
$ 10,067,000 $ 80,000 $ 3,791,000 $ 170,000 $ 1,000 $ 5,563,000 $ 0 $ 13,888,000 $ 153,000 $ 0

Retail
Home Equity
and Other

Retail
1-4 Family
Mortgages

Retail Loan Portfolio:

Beginning Balance
$ 1,452,000 $ 715,000
Charge-Offs
0 0
Payments
(175,000
)
(20,000
)
Transfers to ORE
0 0
Net Additions/Deletions
438,000 20,000
Ending Balance
$ 1,715,000 $ 715,000

Retail
Home Equity
and Other

Retail
1-4 Family
Mortgages

Retail Loan Portfolio:

Beginning Balance
$ 1,146,000 $ 806,000
Charge-Offs
0 0
Payments
(232,000
)
(153,000
)
Transfers to ORE
0 0
Net Additions/Deletions
482,000 46,000
Ending Balance
$ 1,396,000 $ 699,000
(Continued)

38
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Activity for loans categorized as troubled debt restructurings during the ~~six~~three months ended June 30, 2020 is as follows:

Commercial
and
Industrial

Commercial
Vacant Land,
Land
Development,
and
Residential
Construction

Commercial
Real Estate -
Owner
Occupied

Commercial
Real Estate -
Non-Owner
Occupied

Commercial
Real Estate -
Multi-Family
and
Residential
Rental

Commercial
and
Industrial

Commercial
Vacant Land,
Land Development,
and
Residential
Construction

Commercial
Real Estate -
Owner
Occupied

Commercial
Real Estate -
Non-Owner
Occupied

Commercial
Real Estate -
Multi-Family
and
Residential
Rental

Commercial Loan Portfolio:

Beginning Balance
$ 8,587,000 $ 85,000 $ 1,145,000 $ 178,000 $ 7,000 $ 12,204,000 $ 82,000 $ 3,811,000 $ 174,000 $ 3,000
Charge-Offs
0 0 0 0 0 0 0 0 0 0
Payments
(4,975,000
)
(5,000
)
(1,008,000
)
(8,000
)
(6,000
)
(2,143,000
)
(2,000
)
(20,000
)
(4,000
)
(2,000
)
Transfers to ORE
0 0 0 0 0 0 0 0 0 0
Net Additions/Deletions
6,455,000 0 3,654,000 0 0 6,000 0 0 0 0
Ending Balance
$ 10,067,000 $ 80,000 $ 3,791,000 $ 170,000 $ 1,000 $ 10,067,000 $ 80,000 $ 3,791,000 $ 170,000 $ 1,000

Retail
Home Equity
and Other

Retail
1-4 Family
Mortgages

Retail Loan Portfolio:

Beginning Balance
$ 1,415,000 $ 724,000
Charge-Offs
0 0
Payments
(203,000
)
(29,000
)
Transfers to ORE
0 0
Net Additions/Deletions
503,000 20,000
Ending Balance
$ 1,715,000 $ 715,000

Retail
Home Equity
and Other

Retail
1-4 Family
Mortgages

Retail Loan Portfolio:

Beginning Balance
$ 1,452,000 $ 715,000
Charge-Offs
0 0
Payments
(175,000
)
(20,000
)
Transfers to ORE
0 0
Net Additions/Deletions
438,000 20,000
Ending Balance
$ 1,715,000 $ 715,000
(Continued)

39
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

Activity for loans categorized as troubled debt restructurings during the ~~three~~six months ended June 30, ~~2019~~2020 is as follows:

Commercial
and
Industrial

Commercial
Vacant Land,
Land
Development,
and
Residential
Construction

Commercial
Real Estate -
Owner
Occupied

Commercial
Real Estate -
Non-Owner
Occupied

Commercial
Real Estate -
Multi-Family
and
Residential
Rental

Commercial
and
Industrial

Commercial
Vacant Land,
Land Development,
and
Residential
Construction

Commercial
Real Estate -
Owner
Occupied

Commercial
Real Estate -
Non-Owner
Occupied

Commercial
Real Estate -
Multi-Family
and
Residential
Rental

Commercial Loan Portfolio:

Beginning Balance
$ 15,610,000 $ 0 $ 3,695,000 $ 189,000 $ 21,000 $ 8,587,000 $ 85,000 $ 1,145,000 $ 178,000 $ 7,000
Charge-Offs
0 0 0 0 0 0 0 0 0 0
Payments
(3,148,000
)
0 (2,377,000
)
(4,000
)
(4,000
)
(4,975,000
)
(5,000
)
(1,008,000
)
(8,000
)
(6,000
)
Transfers to ORE
0 0 0 0 0 0 0 0 0 0
Net Additions/Deletions
11,672,000 0 1,180,000 0 0 6,455,000 0 3,654,000 0 0
Ending Balance
$ 24,134,000 $ 0 $ 2,498,000 $ 185,000 $ 17,000 $ 10,067,000 $ 80,000 $ 3,791,000 $ 170,000 $ 1,000

Retail
Home Equity
and Other

Retail
1-4 Family
Mortgages

Retail Loan Portfolio:

Beginning Balance
$ 1,444,000 $ 600,000
Charge-Offs
(18,000
)
0
Payments
(62,000
)
(14,000
)
Transfers to ORE
0 0
Net Additions/Deletions
102,000 120,000
Ending Balance
$ 1,466,000 $ 706,000

Retail
Home Equity
and Other

Retail
1-4 Family
Mortgages

Retail Loan Portfolio:

Beginning Balance
$ 1,415,000 $ 724,000
Charge-Offs
0 0
Payments
(203,000
)
(29,000
)
Transfers to ORE
0 0
Net Additions/Deletions
503,000 20,000
Ending Balance
$ 1,715,000 $ 715,000

(Continued)

40
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.LOANS AND ALLOWANCE FOR LOAN LOSSES ~~(Continued)~~
~~Activity for loans categorized as troubled debt restructurings during the~~ ~~six~~ ~~months ended~~ ~~June 30, 2019~~ ~~is as follows:~~

Commercial
and
Industrial

Commercial
Vacant Land,
Land
Development,
and
Residential
Construction

Commercial
Real Estate -
Owner
Occupied

Commercial
Real Estate -
Non-Owner
Occupied

Commercial
Real Estate -
Multi-Family
and
Residential
Rental

Commercial Loan Portfolio:

Beginning Balance
$ 14,138,000 $ 0 $ 3,100,000 $ 210,000 $ 24,000
Charge-Offs
0 0 0 0 0
Payments
(4,814,000
)
0 (2,425,000
)
(25,000
)
(7,000
)
Transfers to ORE
0 0 (97,000
)
0 0
Net Additions/Deletions
14,810,000 0 1,920,000 0 0
Ending Balance
$ 24,134,000 $ 0 $ 2,498,000 $ 185,000 $ 17,000

Retail
Home Equity
and Other

Retail
1-4 Family
Mortgages

Retail Loan Portfolio:

Beginning Balance
$ 1,402,000 $ 578,000
Charge-Offs
(18,000
)
0
Payments
(90,000
)
(24,000
)
Transfers to ORE
0 0
Net Additions/Deletions
172,000 152,000
Ending Balance
$ 1,466,000 $ 706,000

~~(Continued)~~
41

~~Table of Contents~~
~~MERCANTILE BANK CORPORATION~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

3.~~LOANS AND ALLOWANCE FOR LOAN LOSSES~~ (Continued)

The allowance related to loans categorized as troubled debt restructurings was as follows:

June 30,
2020

December 31,
2019

June 30,
2021

December 31,
2020

Commercial:

Commercial and industrial
$ 946,000 $ 202,000 $ 355,000 $ 53,000
Vacant land, land development, and residential construction
0 0 0 0
Real estate – owner occupied
2,000 982,000 117,000 59,000
Real estate – non-owner occupied
3,000 0 5,000 8,000
Real estate – multi-family and residential rental
0 0 0 0
Total commercial
951,000 1,184,000 477,000 120,000

Retail:

Home equity and other
288,000 311,000 175,000 202,000
1-4 family mortgages
154,000 83,000 103,000 145,000
Total retail
442,000 394,000 278,000 347,000

Total related allowance
$ 1,393,000 $ 1,578,000 $ 755,000 $ 467,000

In general, our policy dictates that a renewal or modification of an 8- or 9-rated commercial loan meets the criteria of a troubled debt restructuring, although we review and consider all renewed and modified loans as part of our troubled debt restructuring assessment procedures. Loan relationships rated 8 contain significant financial weaknesses, resulting in a distinct possibility of loss, while relationships rated 9 reflect vital financial weaknesses, resulting in a highly questionable ability on our part to collect principal. We believe borrowers warranting such ratings would have difficulty obtaining financing from other market participants. Thus, due to the lack of comparable market rates for loans with similar risk characteristics, we believe 8- or 9-rated loans renewed or modified were done so at below market rates. Loans that are identified as troubled debt restructurings are considered impaired and are individually evaluated for impairment when assessing these credits in our allowance for loan losses calculation.

(Continued)

4241

Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4.    PREMISES AND EQUIPMENT, NET

Premises and equipment are comprised of the following:

June 30,
2020

December 31,
2019

June 30,
2021

December 31,
2020

Land and improvements
$ 17,218,000 $ 17,039,000 $ 14,553,000 $ 16,533,000
Buildings
55,580,000 52,847,000 55,718,000 56,114,000
Furniture and equipment
21,790,000 22,712,000 22,467,000 21,522,000
94,588,000 92,598,000 92,738,000 94,169,000
Less: accumulated depreciation
35,433,000 35,271,000 34,488,000 35,210,000

Premises and equipment, net
$ 59,155,000 $ 57,327,000 $ 58,250,000 $ 58,959,000

Depreciation expense totaled ~~$1.3~~$1.4 million and ~~$0.9~~$1.3 million during the second quarters of ~~2020~~2021 and ~~2019,~~2020, respectively. Depreciation expense totaled $2.8 million during the firstsix months of 2021, compared to $2.5 million during the first six months of ~~2020,~~ ~~compared to $1.9 million during the~~ ~~first~~~~six~~ ~~months of~~ ~~2019.~~2020.

5.    DEPOSITS

Our total deposits at June 30, ~~2020~~2021 totaled ~~$3.26~~$3.67 billion, an increase of ~~$572~~$260 million, or ~~21.3%~~7.6%, from December 31, ~~2019.~~2020. The components of our outstanding balances at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, and percentage change in deposits from the end of ~~2019~~2020 to the end of the second quarter of ~~2020,~~2021, are as follows:

June 30, 2020

December 31, 2019

Percent
Increase

June 30, 2021

December 31, 2020

Percent
Increase

Balance

%

Balance

%

(Decrease)

Balance

%

Balance

%

(Decrease)

Noninterest-bearing demand
$ 1,445,620,000 44.3
%
$ 924,916,000 34.4
%
56.3
%
$ 1,620,829,000 44.1
%
$ 1,433,403,000 42.0
%
13.1
%
Interest-bearing checking
382,522,000 11.7 332,373,000 12.3 15.1 477,151,000 13.0 473,053,000 13.9 0.9
Money market
541,929,000 16.6 509,368,000 18.9 6.4 725,681,000 19.8 611,912,000 17.9 18.6
Savings
301,881,000 9.2 269,318,000 10.0 12.1 387,783,000 10.6 338,070,000 9.9 14.7
Time, under $100,000
178,838,000 5.5 198,123,000 7.4 (9.7
)
142,531,000 3.9 165,548,000 4.9 (13.9
)
Time, $100,000 and over
334,781,000 10.3 322,827,000 12.0 3.7 286,383,000 7.8 342,633,000 10.0 (16.4
)
Total local deposits
3,185,571,000 97.6 2,556,925,000 95.0 24.6 3,640,358,000 99.2 3,364,619,000 98.6 8.2

Out-of-area time, under $100,000
0
NA
0
NA

NA

Out-of-area time, $100,000 and over
76,709,000 2.4 133,459,000 5.0 (42.5
)
30,913,000 0.8 46,934,000 1.4 (34.1
)
Total out-of-area deposits
76,709,000 2.4 133,459,000 5.0 (42.5
)

Total deposits
$ 3,262,280,000 100.0
%
$ 2,690,384,000 100.0
%
21.3
%
$ 3,671,271,000 100.0
%
$ 3,411,553,000 100.0
%
7.6
%

Total time deposits of more than $250,000 totaled ~~$289~~$219 million and ~~$320~~$272 million at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

(Continued)

4342

Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6.SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase (“repurchase agreements”) are offered principally to certain large deposit customers. Information relating to our repurchase agreements follows:

Six Months
Ended
June 30,
2020

Twelve Months
Ended
December 31,
2019

Six Months
Ended
June 30, 2021

Twelve Months
Ended
December 31, 2020

Outstanding balance at end of period
$ 167,527,000 $ 102,675,000 $ 169,737,000 $ 118,365,000
Average interest rate at end of period
0.10
%
0.17
%
0.11
%
0.12
%

Average daily balance during the period
$ 123,486,000 $ 105,234,000 $ 141,861,000 $ 132,880,000
Average interest rate during the period
0.13
%
0.24
%
0.11
%
0.12
%
Maximum daily balance during the period
$ 167,527,000 $ 133,411,000 $ 180,719,000 $ 173,186,000

Repurchase agreements generally have original maturities of less than one ~~business day.~~year. Repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as liabilities. Securities involved with the agreements are recorded as assets of our bank and are held in safekeeping by a correspondent bank. Repurchase agreements are secured by securities with an aggregate market value equal to the aggregate outstanding balance.

7.FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES

Federal Home Loan Bank of Indianapolis (“FHLBI”) advances totaled $394 million at June 30, 2021 and December 31, 2020, and were expected to mature at varying dates from November 2021 through June 2027, with fixed rates of interest from 0.55% to 3.18% and averaging 2.06%~~. FHLBI advances totaled $354 million at~~ ~~December 31, 2019,~~ ~~and were scheduled to mature at varying dates from~~ ~~April 2020~~ ~~through~~ ~~June 2025,~~ ~~with fixed rates~~ as of ~~interest from 1.36% to 3.18% and averaging 2.45%. In~~ ~~June 2020,~~ ~~we executed a blend and extend transaction with the FHLBI to extend the duration of the FHLBI advance portfolio as part our interest rate risk management program. We prepaid~~ ~~seven~~ ~~advances aggregating $70.0 million with maturities ranging from~~ ~~August 2020~~ ~~through~~ ~~October 2021~~ ~~and fixed interest rates from 1.36% to 2.84% and averaging 1.97%, using the proceeds from~~ ~~seven~~ ~~new advances aggregating $70.0 million with maturities ranging from~~ ~~June 2024~~ ~~through~~ ~~June 2027~~ ~~and fixed interest rates from 0.55% to 1.18% and averaging 0.84%. Prepayment fees totaling $0.9 million were embedded into the fixed rates on the newly obtained advances, equating to 0.22% of the~~ ~~0.84%~~ ~~average rate of the new advances.~~both dates.

Each advance is payable at its maturity date and is subject to a prepayment fee if paid prior to the maturity date. The advances are collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on commercial real estate property loans, and substantially all other assets of our bank, under a blanket lien arrangement. Our borrowing line of credit as of June 30, ~~2020~~2021 totaled ~~about $775~~$807 million, with remaining availability based on collateral ~~approximating $375~~equaling $407 million.

Maturities of currently outstanding FHLBI advances are as follows:

2020
$ 0
2021
20,000,000 $ 20,000,000
2022
94,000,000 94,000,000
2023
80,000,000 80,000,000
2024
80,000,000 80,000,000
2025
50,000,000
Thereafter
120,000,000 70,000,000

(Continued)

4443

Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8.COMMITMENTS AND OFF-BALANCE SHEET RISK

Our bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued by our bank to guarantee the performance of a customer to a third party. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized, if any, in the balance sheet. Our bank’s maximum exposure to loan loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. Our bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Collateral, such as accounts receivable, securities, inventory, and property and equipment, is generally obtained based on our credit assessment of the borrower. If required, estimated loss exposure resulting from these instruments is expensed and recorded as a liability. There was 0 liability balance for these instruments as of June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

A summary of the contractual amounts of our financial instruments with off-balance sheet risk at June 30, ~~2020~~2021 and December 31, ~~2019~~2020 follows:

June 30,
2020

December 31,
2019

June 30,
2021

December 31,
2020

Commercial unused lines of credit
$ 862,725,000 $ 776,493,000 $ 1,112,887,000 $ 1,019,496,000
Unused lines of credit secured by 1 – 4 family residential properties
60,196,000 60,858,000 60,021,000 59,396,000
Credit card unused lines of credit
63,951,000 58,199,000 81,190,000 72,495,000
Other consumer unused lines of credit
23,080,000 18,135,000 54,540,000 30,707,000
Commitments to make loans
175,951,000 101,961,000 161,227,000 227,558,000
Standby letters of credit
21,427,000 22,798,000 26,234,000 20,543,000
$ 1,207,330,000 $ 1,038,444,000 $ 1,496,099,000 $ 1,430,195,000

(Continued)

4544

Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9.DERIVATIVES AND HEDGING ACTIVITIES
We are exposed to certain risks arising from both business operations and economic conditions. We principally manage the exposure to a wide variety of operational risks through core business activities. Economic risks, including interest rate, liquidity and credit risk, are primarily administered via the amount, sources and duration of assets and liabilities. Derivative financial instruments may also be used to assist in managing economic risks.
Derivatives not designated as hedges are not speculative and result from a service provided to certain commercial loan borrowers. We execute interest rate swaps with commercial banking customers desiring longer-term fixed rate loans, while simultaneously entering into interest rate swaps with a correspondent bank to offset the impact of the interest rate swaps with the commercial banking customers. The net result is the desired floating rate loans and a minimization of the risk exposure of the interest rate swap transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the commercial banking customer interest rate swaps and the offsetting interest rate swaps with the correspondent bank are recognized directly to earnings.
The estimated fair values of derivative instruments as of June 30, 2021 are reflected in the following table.

Notional Amount

Balance Sheet
Location

Fair Value

Derivative Assets
Interest rate swaps
$ 118,326,000
Other Assets
$ 2,573,000

Derivative Liabilities
Interest rate swaps
118,326,000
Other Liabilities
2,665,000
The effect of interest rate swaps that are not designated as hedging instruments resulted in noninterest expense of less than $0.1 million during the firstsix months of 2021.
The estimated fair value of interest rate swaps in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $2.7 million as of June 30, 2021. Cash collateral totaling $2.3 million was provided to the counterparty correspondent bank as of June 30, 2021.
Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $118.3 million as of June 30, 2021. Associated credit exposure is generally mitigated by securing the interest rates swaps with the underlying collateral of the loan instrument that has been hedged.
The estimated fair values of derivative instruments as of December 31, 2020 are reflected in the following table.

Notional Amount

Balance Sheet Location

Fair Value

Derivative Assets
Interest rate swaps
$ 33,731,000
Other Assets
$ 1,003,000

Derivative Liabilities
Interest rate swaps
33,731,000
Other Liabilities
1,027,000
(Continued)
45
Table of Contents
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9.DERIVATIVES AND HEDGING ACTIVITIES (Continued)
The effect of interest rate swaps that are not designated as hedging instruments resulted in noninterest expense of less than $0.1 million during the year-ended December 31, 2020.
The estimated fair value of interest rate swaps in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $1.0 million as of December 31, 2020. Cash collateral totaling $1.1 million was provided to the counterparty correspondent bank as of December 31, 2020.
Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $33.7 million as of December 31, 2020. Associated credit exposure is generally mitigated by securing the interest rates swaps with the underlying collateral of the loan instrument that has been hedged.
10.FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying amounts, estimated fair values and level within the fair value hierarchy of financial instruments were as follows as of June 30, ~~2020~~2021 and December 31, ~~2019~~2020 (dollars in thousands):

Level in

June 30, 2020

December 31, 2019

Level in

June 30, 2021

December 31, 2020

Fair Value
Hierarchy

Carrying
Values

Fair
Values

Carrying
Values

Fair
Values

Fair Value
Hierarchy

Carrying
Values

Fair
Values

Carrying
Values

Fair
Values

Financial assets:

Cash

Level 1
$ 18,930 $ 18,930 $ 16,430 $ 16,430
Level 1
$ 17,782 $ 17,782 $ 16,953 $ 16,953
Cash equivalents

Level 2
452,297 452,297 217,301 217,301
Level 2
741,749 741,749 609,053 609,053
Securities available for sale
(1) 307,661 307,661 334,655 334,655 (1) 506,125 506,125 387,347 387,347
FHLBI stock
(2) 18,002 18,002 18,002 18,002 (2) 18,002 18,002 18,002 18,002
Loans, net

Level 3
3,259,673 3,346,702 2,827,800 2,887,168
Level 3
3,212,928 3,297,771 3,155,503 3,294,522
Loans held for sale

Level 2
41,137 42,806 4,978 4,978
Mortgage loans held for sale

Level 2
27,720 28,915 22,888 24,029
Mortgage servicing rights

Level 2
5,636 8,418 4,652 7,375
Level 2
10,168 13,769 8,189 10,006
Accrued interest receivable

Level 2
9,290 9,290 9,944 9,944
Level 2
9,651 9,651 10,861 10,861

Financial liabilities:

Deposits

Level 2
3,262,280 3,237,888 2,690,384 2,600,452
Level 2
3,671,271 3,656,246 3,411,553 3,397,768
Repurchase agreements

Level 2
167,527 167,527 102,675 102,675
Level 2
169,737 169,737 118,365 118,365
FHLBI advances

Level 2
394,000 413,915 354,000 361,887
Level 2
394,000 407,972 394,000 410,881
Subordinated debentures

Level 2
47,222 46,172 46,881 46,140
Level 2
47,904 47,859 47,563 47,574
Accrued interest payable

Level 2
3,011 3,011 3,949 3,949
Level 2
1,885 1,885 2,313 2,313

(1)
See Note 1011 for a description of the fair value hierarchy as well as a disclosure of levels for classes of financial assets and liabilities.

(2)
It is not practical to determine the fair value of FHLBI stock due to transferability restrictions; therefore, fair value is estimated at carrying amount.

(Continued)
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MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10.FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Carrying amount is the estimated fair value for cash and cash equivalents, FHLBI stock, accrued interest receivable and payable, noninterest-bearing checking accounts and securities sold under agreements to repurchase. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. Fair value for loans is based on an exit price model as required by ASU 2016-01, taking into account inputs such as discounted cash flows, probability of default and loss given default assumptions. Fair value for ~~deposits~~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 and FHLBI advances are based on current rates for similar financing. The fair value of off-balance sheet items is estimated to be nominal.

~~(Continued)~~
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~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

111.0.  FAIR VALUES

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability, or in the absence of a principal market, the most advantageous market for the asset or liability. The price of the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

We are required to use valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources, or unobservable, meaning those that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. In that regard, we utilize a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that we have the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be derived from or corroborated by observable market data by correlation or other means.

Level 3: Significant unobservable inputs that reflect our own conclusions about the assumptions that market participants would use in pricing an asset or liability.

(Continued)
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MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11.FAIR VALUES(Continued)
The following is a description of our valuation methodologies used to measure and disclose the fair values of our financial assets and liabilities that are recorded at fair value on a recurring or nonrecurring basis:
Securities available for sale. Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based on quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models. Level 2 securities include U.S. Government agency bonds, mortgage-backed securities issued or guaranteed by U.S. Government agencies, and municipal general obligation and revenue bonds. Level 3 securities include bonds issued by certain relatively small municipalities located within our markets that have very limited marketability due to their size and lack of ratings from a recognized rating service. 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 0 such impairment as of June 30, ~~2020~~2021 or December 31, ~~2019.~~2020. We have 0 Level 1 securities available for sale.

~~(Continued)~~
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~~MERCANTILE BANK CORPORATION~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

10.  ~~FAIR VALUES~~~~(Continued)~~
Derivatives. We measure fair value utilizing models that use primarily market observable inputs, such as forecasted yield curves.

Mortgage loans held for sale. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or ~~market,~~fair value, as determined by outstanding commitments from investors, and are measured on a nonrecurring basis. Fair value is based on independent quoted market prices, where applicable, or the prices for other mortgage whole loans with similar characteristics. As of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, we determined the fair value of our mortgage loans held for sale to be ~~$42.8~~$28.9 million and ~~$5.0~~$24.0 million, respectively.

Loans. We do not record loans at fair value on a recurring basis. However, from time to time, we record nonrecurring fair value adjustments to collateral dependent loans to reflect partial write-downs or specific reserves that are based on the observable market price or current estimated value of the collateral. These loans are reported in the nonrecurring table below at initial recognition of impairment and on an ongoing basis until recovery or charge-off. The fair values of impaired loans are determined using either the sales comparison approach or income approach; respective unobservable inputs for the approaches consist of adjustments for differences between comparable sales and the utilization of appropriate capitalization rates.

Foreclosed Assets. At time of foreclosure or repossession, foreclosed and repossessed assets are adjusted to fair value less costs to sell upon transfer of the loans to foreclosed and repossessed assets, establishing a new cost basis. We subsequently adjust estimated fair value of foreclosed assets on a nonrecurring basis to reflect write-downs based on revised fair value estimates. The fair values of parcels of other real estate owned are determined using either the sales comparison approach or income approach; respective unobservable inputs for the approaches consist of adjustments for differences between comparable sales and the utilization of appropriate capitalization rates.

(Continued)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11.FAIR VALUES (Continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis

The balances of assets and liabilities measured at fair value on a recurring basis as of June 30, ~~2020~~2021 are as follows:

Total

Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total

Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Available for sale securities

U.S. Government agency debt obligations
$ 162,497,000 $ 0 $ 162,497,000 $ 0 $ 320,141,000 $ 0 $ 320,141,000 $ 0
Mortgage-backed securities
36,033,000 0 36,033,000 0 37,319,000 0 37,319,000 0
Municipal general obligation bonds
102,467,000 0 101,661,000 806,000 129,435,000 0 128,718,000 717,000
Municipal revenue bonds
6,164,000 0 6,164,000 0 18,730,000 0 18,730,000 0
Other investments
500,000 0 500,000 0 500,000 0 500,000 0
Total
$ 307,661,000 $ 0 $ 306,855,000 $ 806,000 $ 506,125,000 $ 0 $ 505,408,000 $ 717,000

There were no transfers in or out of Level 1, Level 2 or Level 3 during the first six months of ~~2020.~~2021. The ~~$1.2~~less than $0.1 million reduction in Level 3 municipal general obligation bonds during the first six months of ~~2020~~2021 reflects the scheduled maturities of such bonds.

~~(Continued)~~
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~~MERCANTILE BANK CORPORATION~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

10.  ~~FAIR VALUES~~ ~~(Continued)~~
The balances of assets and liabilities measured at fair value on a recurring basis as of December 31, ~~2019~~2020 are as follows:

Total

Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total

Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Available for sale securities

U.S. Government agency debt obligations
$ 186,410,000 $ 0 $ 186,410,000 $ 0 $ 242,141,000 $ 0 $ 242,141,000 $ 0
Mortgage-backed securities
42,470,000 0 42,470,000 0 24,890,000 0 24,890,000 0
Municipal general obligation bonds
101,079,000 0 99,029,000 2,050,000 107,824,000 0 107,058,000 766,000
Municipal revenue bonds
4,196,000 0 4,196,000 0 11,992,000 0 11,992,000 0
Other investments
500,000 0 500,000 0 500,000 0 500,000 0
Total
$ 334,655,000 $ 0 $ 332,605,000 $ 2,050,000 $ 387,347,000 $ 0 $ 386,581,000 $ 766,000

There were no transfers in or out of Level 1, Level 2 or Level 3 during ~~2019.~~2020. ~~The $1.7 million reduction in Level~~ 3 ~~municipal general obligation bonds during~~ ~~2019~~ ~~reflects the scheduled maturities of such bonds.~~

~~Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis~~
~~The balances of assets and liabilities measured at fair value on a nonrecurring basis as of~~ ~~June 30, 2020~~ ~~are as follows:~~

Total

Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Impaired loans
$ 3,082,000 $ 0 $ 0 $ 3,082,000
Foreclosed assets
198,000 0 0 198,000
Total
$ 3,280,000 $ 0 $ 0 $ 3,280,000

(Continued)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

111.0.  FAIR VALUES (Continued)

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The balances of assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2021 are as follows:

Total

Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant Unobservable
Inputs
(Level 3)

Impaired loans
$ 4,999,000 $ 0 $ 0 $ 4,999,000
Foreclosed assets
404,000 0 0 404,000
Total
$ 5,403,000 $ 0 $ 0 $ 5,403,000
The balances of assets and liabilities measured at fair value on a nonrecurring basis as of December 31, ~~2019~~2020 are as follows:

Total

Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total

Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant Unobservable
Inputs
(Level 3)

Impaired loans
$ 1,107,000 $ 0 $ 0 $ 1,107,000 $ 2,880,000 $ 0 $ 0 $ 2,880,000
Foreclosed assets
452,000 0 0 452,000 701,000 0 0 701,000
Total
$ 1,559,000 $ 0 $ 0 $ 1,559,000 $ 3,581,000 $ 0 $ 0 $ 3,581,000

The carrying values are based on the estimated value of the property or other assets. Fair value estimates of collateral on impaired loans and foreclosed assets are reviewed periodically. Our credit policies establish criteria for obtaining appraisals and determining internal value estimates. We may also adjust outside appraisals and internal evaluations based on identifiable trends within our markets, such as sales of similar properties or assets, listing prices and offers received. In addition, we may discount certain appraised and internal value estimates to address current distressed market conditions. For real estate dependent loans and foreclosed assets, we generally assign a 15% to 25% discount factor for commercial-related properties, and a 25% to 50% discount factor for residential-related properties. In a vast majority of cases, we assign a 10% discount factor for estimated selling costs.

(Continued)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

112.1.  REGULATORY MATTERS

We are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on our financial statements.

The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If an institution is not well capitalized, regulatory approval is required to accept brokered deposits. Subject to limited exceptions, no institution may make a capital distribution if, after making the distribution, it would be undercapitalized. If an institution is undercapitalized, it is subject to close monitoring by its principal federal regulator, its asset growth and expansion are restricted, and plans for capital restoration are required. In addition, further specific types of restrictions may be imposed on the institution at the discretion of the federal regulator. At June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, our bank was in the well capitalized category under the regulatory framework for prompt corrective action. There are no conditions or events since June 30, ~~2020~~2021 that we believe have changed our bank’s categorization.

~~(Continued)~~
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~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

11.  ~~REGULATORY MATTERS~~ ~~(Continued)~~
Our actual capital levels (dollars in thousands) and the minimum levels required to be categorized as adequately and well capitalized were:

Actual

Minimum Required
for Capital
Adequacy Purposes

Minimum Required
to be Well
Capitalized Under
Prompt Corrective
Action Regulations

Actual

Minimum Required
for Capital
Adequacy Purposes

Minimum Required
to be Well
Capitalized Under
Prompt Corrective
Action Regulations

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

June 30, 2020

June 30, 2021

Total capital (to risk weighted assets)

Consolidated
$ 444,772 13.7 % $ 259,076 8.0 % $ NA NA $ 481,324 13.1 % $ 294,175 8.0 %
NA

NA

Bank
436,832 13.5 259,017 8.0 323,771 10.0 % 477,684 13.0 293,957 8.0 367,447 10.0 %
Tier 1 capital (to risk weighted assets)

Consolidated
412,526 12.7 194,307 6.0 NA NA 445,410 12.1 220,631 6.0
NA

NA

Bank
404,587 12.5 194,263 6.0 259,017 8.0 441,770 12.0 220,468 6.0 293,957 8.0
Common equity tier 1 (to risk weighted assets)

Consolidated
367,379 11.3 145,730 4.5 NA NA 399,581 10.9 165,474 4.5
NA

NA

Bank
404,587 12.5 145,697 4.5 210,452 6.5 441,770 12.0 165,351 4.5 238,841 6.5
Tier 1 capital (to average assets)

Consolidated
412,526 10.2 161,668 4.0 NA NA 445,410 9.5 188,065 4.0
NA

NA

Bank
404,587 10.0 161,639 4.0 202,048 5.0 441,770 9.4 187,971 4.0 234,964 5.0

December 31, 2019

Total capital (to risk weighted assets)

Consolidated
$ 429,038 13.1 % $ 262,141 8.0 % $ NA NA
Bank
424,917 13.0 262,088 8.0 327,610 10.0 %
Tier 1 capital (to risk weighted assets)

Consolidated
405,148 12.4 196,606 6.0 NA NA
Bank
401,027 12.2 196,566 6.0 262,088 8.0
Common equity tier 1 (to risk weighted assets)

Consolidated
360,342 11.0 147,454 4.5 NA NA
Bank
401,027 12.2 147,425 4.5 212,947 6.5
Tier 1 capital (to average assets)

Consolidated
405,148 11.3 143,689 4.0 NA NA
Bank
401,027 11.2 143,670 4.0 179,588 5.0

(Continued)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

112.1.  REGULATORY MATTERS (Continued)

December 31, 2020

Total capital (to risk weighted assets)

Consolidated
$ 468,113 13.8 % $ 271,325 8.0 %
NA

NA

Bank
457,203 13.5 271,196 8.0 338,995 10.0 %
Tier 1 capital (to risk weighted assets)

Consolidated
430,146 12.7 203,494 6.0
NA

NA

Bank
419,236 12.4 203,397 6.0 271,196 8.0
Common equity tier 1 (to risk weighted assets)

Consolidated
384,658 11.3 152,621 4.5
NA

NA

Bank
419,236 12.4 152,548 4.5 220,347 6.5
Tier 1 capital (to average assets)

Consolidated
430,146 9.8 176,053 4.0
NA

NA

Bank
419,236 9.5 175,999 4.0 219,999 5.0
Our consolidated capital levels as of June 30, ~~2020~~2021 and December 31, ~~2019~~2020 include ~~$45.1~~$45.8 million and ~~$44.8~~$45.5 million, respectively, of trust preferred securities. Under applicable Federal Reserve guidelines, the trust preferred securities constitute a restricted core capital element. The guidelines provide that the aggregate amount of restricted core elements that may be included in our Tier 1 capital must not exceed 25% of the sum of all core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability. Our ability to include the trust preferred securities in Tier 1 capital in accordance with the guidelines is not affected by the provision of the Dodd-Frank Act generally restricting such treatment, because (i) the trust preferred securities were issued before May 19, 2010, and (ii) our total consolidated assets as of December 31, 2009 were less than $15.0 billion. As of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, all ~~$45.1~~$45.8 million and ~~$44.8~~$45.5 million, respectively, of the trust preferred securities were included in our consolidated Tier 1 capital.

Under the final BASEL III capital rules that became effective on January 1, 2015, there is a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not meet this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in cash dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement was phased in over three years beginning in 2016. The capital buffer requirement raised the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5% and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019. We believe that, as of June 30, ~~2020,~~2021, 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, 2020,~~14, 2021, our Board of Directors declared a cash dividend on our common stock in the amount of ~~$0.28~~$0.29 per share that was paid on March ~~18, 2020~~17, 2021 to shareholders of record as of March ~~6, 2020.~~5, 2021. On April ~~16, 2020,~~15, 2021, our Board of Directors declared a cash dividend on our common stock in the amount of ~~$0.28~~$0.29 per share that was paid on June ~~17, 2020~~16, 2021 to shareholders of record as of June ~~5, 2020.~~4, 2021. On July ~~16, 2020,~~15, 2021, our Board of Directors declared a cash dividend on our common stock in the amount of ~~$0.28~~$0.30 per share that will be paid on September ~~16, 2020~~15, 2021 to shareholders of record as of September ~~4, 2020.~~3, 2021.

(Continued)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12.REGULATORY MATTERS (Continued)
In May ~~2019,~~2021, we announced that our Board of Directors had authorized a program to repurchase up to $20.0 million of our common stock from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations. This ~~stock repurchase plan was instituted in conjunction with the completion of our existing~~program replaces a similar $20.0 million program that ~~was introduced~~had been announced in ~~January 2015~~May 2019 ~~and later expanded in~~ ~~April 2016.~~ that was nearing exhaustion. During the first six months of ~~2020,~~2021, we repurchased a total of ~~222,385~~approximately 347,000 shares at a total price of ~~$6.3~~$10.9 million, at an average price per share of ~~$28.25. During the period of~~ ~~January 2015~~ ~~through~~ ~~March 31, 2020,~~ ~~we repurchased a total of about 1.6 million shares at a total price of $38.9 million, at an average price per share of $24.13.~~$31.28. Availability under ~~our current~~the repurchase plan ~~totals $10.1 million.~~ totaled $17.3 million as of June 30, 2021. The stock buybacks have been funded from cash dividends paid to us from our bank. Additional repurchases may be made in future periods under the authorized plan or a new plan, which would also likely be funded from cash dividends paid to us from our bank.

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Item 2.  ~~Management’s~~Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements
This report contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and our company. Words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “is likely,” “plans,” “projects,” “indicates,” “strategy,” “future,” “likely,” “may,” “should,” “will,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. We undertake no obligation to update, amend, or clarify forward looking-statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise.

Future Factors include, among others, adverse changes in interest rates and interest rate relationships; increasing rates of inflation and slower growth rates; significant declines in the value of commercial real estate; market volatility; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation or actions by bank regulators; changes in the method of determining Libor orand the ~~replacement~~phase out of ~~Libor with an alternative reference rate;~~Libor; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; risks associated with cyber-attacks on our computer systems; governmental and regulatory policy changes; our participation in the Paycheck Protection Program administered by the Small Business Administration; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; changes in local real estate values; damage to our reputation resulting from adverse publicity, regulatory actions, litigation, operational failures, the failure to meet client expectations and other facts; changes in the national and local economies, including the significant disruption to financial market and other economic activity caused by the outbreak and continuance of ~~COVID-19;~~the Coronavirus Pandemic; and risk factors described in our annual report on Form 10-K for the year ended December 31, ~~2019~~2020, our March 31, 2021 Form 10-Q or in this report. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a forward-looking statement.

Introduction
The following discussion compares the financial condition of Mercantile Bank Corporation and its consolidated subsidiaries, including Mercantile Bank of Michigan (“our bank”) and our bank’s ~~two subsidiaries, Mercantile Bank Real Estate Co., LLC and~~subsidiary, Mercantile Insurance Center, Inc. (“our insurance company”), at June 30, ~~2020~~2021 and December 31, ~~2019~~2020 and the results of operations for the three months and six months ended June 30, ~~2020~~2021 and June 30, ~~2019.~~2020. This discussion should be read in conjunction with the interim consolidated financial statements and footnotes included in this report. Unless the text clearly suggests otherwise, references in this report to “us,” “we,” “our” or “the company” include Mercantile Bank Corporation and its consolidated subsidiaries referred to above.

Critical Accounting Policies
GAAP is complex and requires us to apply significant judgment to various accounting, reporting and disclosure matters. We must use assumptions and estimates to apply these principles where actual measurements are not possible or practical. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited financial statements included in this report. For a discussion of our significant accounting policies, see Note 1 of the Notes to our Consolidated Financial Statements included in our Form 10-K for the fiscal year ended December 31, ~~2019~~2020 (Commission file number 000-26719). Our critical accounting policies are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements, and actual results may differ from those estimates. We have reviewed the application of these policies with the Audit Committee of our Board of Directors.

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Allowance for Loan Losses: The allowance for loan losses (“allowance”) is maintained at a level we believe is adequate to absorb probable incurred losses identified and inherent in the loan portfolio. Our evaluation of the adequacy of the allowance is an estimate based on past loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, guidance from bank regulatory agencies, and assessments of the impact of current and anticipated economic conditions on the loan portfolio. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off. Loan losses are charged against the allowance when we believe the uncollectability of a loan is likely. The balance of the allowance represents our best estimate, but significant downturns in circumstances relating to loan quality or economic conditions could result in a requirement for an increased allowance in the future. Likewise, an upturn in loan quality or improved economic conditions may result in a decline in the required allowance in the future. In either instance, unanticipated changes could have a significant impact on the allowance and operating results. Loans made under the Payment Protection Program are fully guaranteed by the Small Business Administration; therefore, such loans do not have an associated allowance.

The allowance is increased through a provision charged to operating expense. Uncollectable loans are charged-off through the allowance. Recoveries of loans previously charged-off are added to the allowance. A loan is considered impaired when it is probable that contractual interest and principal payments will not be collected either for the amounts or by the dates as scheduled in the loan agreement. Impairment is evaluated on an individual loan basis. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. The timing of obtaining outside appraisals varies, generally depending on the nature and complexity of the property being evaluated, general breadth of activity within the marketplace and the age of the most recent appraisal. For collateral dependent impaired loans, in most cases we obtain and use the “as is” value as indicated in the appraisal report, adjusting for any expected selling costs. In certain circumstances, we may internally update outside appraisals based on recent information impacting a particular or similar property, or due to identifiable trends (e.g., recent sales of similar properties) within our markets. The expected future cash flows exclude potential cash flows from certain guarantors. To the extent these guarantors provide repayments, a recovery would be recorded upon receipt. Loans are evaluated for impairment when payments are delayed, typically 30 days or more, or when serious deficiencies are identified within the credit relationship. Our policy for recognizing income on impaired loans is to accrue interest unless a loan is placed on nonaccrual status. We put loans into nonaccrual status when the full collection of principal and interest is not expected.

Financial institutions ~~are~~were not required to comply with the Current Expected Credit Loss (“CECL”) methodology requirements from the enactment date of the Coronavirus Aid, Relief and Economic Security Act (“CARES ~~Act~~Act”) until the earlier of the end of the President’s declaration of a National Emergency or December 31, 2020. The Consolidated Appropriations Act, 2021, that was enacted in December 2020, provided for an extension of the required CECL adoption date to January 1, 2022, which is the date we expect to adopt. An economic forecast is a key component of the CECL methodology. As we continue to experience an unprecedented economic environment whereby a sizable portion of the economy has been significantly impacted by ~~shelter in place declarations~~government-imposed activity limitations and similar reactions by businesses and individuals, substantial government stimulus has been provided to businesses, individuals and state and local governments and financial institutions have offered businesses and individuals payment relief options, economic forecasts are regularly ~~revised and there continues to be no economic forecast consensus.~~revised. Given the high degree of uncertainty surrounding economic forecasting, we have elected to postpone the adoption of CECL, and will continue to use our incurred loan loss reserve model as permitted.
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Income Tax Accounting: Current income tax assets and liabilities are established for the amount of taxes payable or refundable for the current year. In the preparation of income tax returns, tax positions are taken based on interpretation of federal and state income tax laws for which the outcome may be uncertain. We periodically review and evaluate the status of our tax positions and make adjustments as necessary. Deferred income tax assets and liabilities are also established for the future tax consequences of events that have been recognized in our financial statements or tax returns. A deferred income tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences that can be carried forward (used) in future years. The valuation of our net deferred income tax asset is considered critical as it requires us to make estimates based on provisions of the enacted tax laws. The assessment of the realizability of the net deferred income tax asset involves the use of estimates, assumptions, interpretations and judgments concerning accounting pronouncements, federal and state tax codes and the extent of future taxable income. There can be no assurance that future events, such as court decisions, positions of federal and state tax authorities, and the extent of future taxable income will not differ from our current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings.

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Accounting guidance requires that we assess whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, we consider both positive and negative evidence and analyze changes in near-term market conditions as well as other factors which may impact future operating results. Significant weight is given to evidence that can be objectively verified.

Securities and Other Financial Instruments: Securities available for sale consist of bonds and notes which might be sold prior to maturity due to changes in interest rates, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as available for sale are reported at their fair value. Declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than carrying value; (2) the financial condition and near term prospects of the issuer; and (3) the Company’s ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Fair values for securities available for sale are obtained from outside sources and applied to individual securities within the portfolio. The difference between the amortized cost and the current fair value of securities is recorded as a valuation adjustment and reported in other comprehensive income.

Mortgage Servicing Rights: Mortgage servicing rights are recognized as assets based on the allocated fair value of retained servicing rights on loans sold. 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 income. We utilize a discounted cash flow model to determine the value of our servicing rights. The valuation model utilizes mortgage prepayment speeds, the remaining life of the mortgage pool, delinquency rates, our cost to service loans, and other factors to determine the cash flow that we will receive from serving each grouping of loans. These cash flows are then discounted based on current interest rate assumptions to arrive at the fair value of the right to service those loans. Impairment is evaluated quarterly based on the fair value of the servicing rights, using groupings of the underlying loans classified by interest rates. Any impairment of a grouping is reported as a valuation allowance.

Goodwill: GAAP requires us to determine the fair value of all of the assets and liabilities of an acquired entity, and record their fair value on the date of acquisition. We employ a variety of means in determination of the fair value, including the use of discounted cash flow analysis, market comparisons, and projected future revenue streams. For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to use our own calculation of the value. In other cases, where the value is not easily determined, we consult with outside parties to determine the fair value of the asset or liability. Once valuations have been adjusted, the net difference between the price paid for the acquired company and the value of its balance sheet is recorded as goodwill.

Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified. A more frequent assessment is performed if conditions in the market place or changes in the company’s organizational structure occur. Due to current stressed economic and market conditions, we assessed goodwill for impairment as of March 31, 2020 and June 30, 2020. For March 31, 2020, we used a discounted income approach and a market valuation model, which compared the inherent value of our company to valuations of recent transactions in the market place to determine if our goodwill had been impaired. It was determined goodwill was not impaired as of March 31, 2020. For June 30, 2020, we used the Step 0 methodology for which we assessed the macro and microeconomic conditions, industry and market conditions, financial performance, and our underlying stock performance. We concluded it was more likely than not our fair value was greater than its carrying amount; therefore, no further testing was required.

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Coronavirus Pandemic
The U.S. economy deteriorated rapidly during the latter part of the first quarter and into the second quarter of 2020 due to the ongoing pandemic of coronavirus disease 2019 (“~~COVID-19”~~Covid-19”) caused by severe acute respiratory syndrome coronavirus 2 (the “Coronavirus Pandemic”). ~~COVID-19 is primarily spread between people during close contact, often via small droplets produced by coughing, sneezing or talking. People may also become infected by touching a contaminated surface~~While the economic fallout has stabilized somewhat and ~~then touching their eyes, nose or mouth. There is currently no known vaccine or specific antiviral treatment, with~~ the primary treatment being symptomatic and supportive therapies. Recommended preventive measures include hand washing, covering one’s mouth when coughing and maintaining distance from other people, as well as self-isolation for people who suspect they are infected.
The outbreak was initially identified in Wuhan, China in December 2019. The World Health Organization declared the outbreak to be a Public Health Emergency Concern on January 30, 2020, and then recognized it as a pandemic on March 11, 2020. The first known caseadult population in the United States ~~was identified~~is in the ~~State~~process of Washington on January 20, 2020. The White House Coronavirus Task Force was established on January 29, 2020. President Trump declared a Public Health Emergency on January 31, 2020, which was elevated by the President’s declaration of a National Emergency on March 13, 2020 (the “National Emergency”).
The Coronavirus Pandemic has caused severe global socioeconomic disruptions. It has led to the postponement or cancellation of sporting, religious, political and cultural events, as well as widespread supply shortages exacerbated by panic buying. Service industry businesses, such as restaurants, hotels, airlines, cruise lines and movie theaters, have been particularly negatively impacted by the restrictions and stay-at-home orders issued by authorities around a vast majority of the world. The health care industry has also been significantly impacted, from a combination of treating infected patients to the cancellation of medical appointments and elective surgeries. At the current time, it is highly uncertain as to when conditions will begin to return to normal. Most agree that a return to normal conditions will be accomplished in phases, taking into account factors such as regional rates and trends of infections, types of businesses and required social distancing measures. Human behavior will also likely playbeing vaccinated, there remains a significant ~~role as people make individual choices to re-engage in permissible activities.~~
~~The first known case in the State~~amount of Michigan was identified on March 10, 2020, which triggered a State of Emergency response from Governor Whitmer. Soon thereafter, Governor Whitmer ordered the closure of all K-12 school buildings until early April, which was later amended to suspend all face-to-face instruction for the remainder of the 2019-2020 school year. In mid-March, Governor Whitmer ordered all bars, restaurants, entertainment venuesstress and other similar businesses to partially close for two weeks, and banned all gatherings of more than 50 people for the period of mid-March into early April. On March 24, 2020, Governor Whitmer issued a state-wide stay-at-home order limiting all non-essential travel and discontinuing all non-essential business services and operations. The order was originally set to expire on April 13, 2020; however, the order was extended, and expanded with additional restrictions, until April 30, 2020. On April 24, 2020, Governor Whitmer issued an amended stay-at-home order that was scheduled to expire on May 15, 2020 to replace the stay-at-home order that was scheduled to expire on April 30, 2020. On May 7, 2020, Governor Whitmer issued an amended stay-at-home order that expired on May 28, 2020 to replace the stay-at-home order that was scheduled to expire on May 15, 2020. The amended orders reduced some of the restrictions from the previous orders, permitting certain activities in limited or restricted capacities. The stay-at-home order was lifted effective June 5, 2020; however, restrictions on indoor and outdoor gatherings remain, businesses are required to ensure CDC-recommended guidelines are followed and certain industries remain significantly impacted. An increase in COVID-19 cases in Michigan near the end of the second quarter and into the third quarter has temporarily delayed further re-opening activities, and Governor Whitmer has indicated a willingness to reinstitute restrictions on activities of businesses and consumers.

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Responding to the Coronavirus Pandemic and Governor Whitmer’s stay-at-home orders, by March 23, 2020, over 75% of our employees were working from home. In addition, beginning on March 18, 2020 our branch lobbies were allowing face-to-face contact with customers by appointment only. On March 25, 2020, we enhanced our social distancing response by closing our branch lobbies to all customers, with all banking transactions conducted via drive-thru, virtual banking machines, online banking and our call center. We have developed comprehensive social distancing guidelines and associated protocols using information provided by the CDC and other federal and state government agencies, and started to return our employees to their work locations in mid-June. On June 26, 2020, we re-opened our branch lobbies, and virtually all of our employees were back to their physical work locations by July 1, 2020.
~~In response to the substantial negative impact of the Coronavirus Pandemic and the associated social distancing orders and measures on the United States~~uncertainty across national and global ~~economies, Congress passed the Coronavirus Aid, Relief~~economies. This uncertainty is heightened as certain geographic areas continue to experience surges in Covid-19 cases and ~~Economic Security Act (“CARES Act”), which was signed by President Trump on March 27, 2020. The CARES Act is~~governments at all levels continue to react to changes in large part a $1.8 trillion spending bill that builds upon two earlier and considerably smaller federal government support measures in the wake of the Coronavirus Pandemic and associated economic fallout. The CARES Act is comprehensive and touches on many facets of federal government assistance and banking regulatory requirements. In addition, the Federal Open Market Committee lowered the targeted federal funds rate by 50 basis points on March 3, 2020 and by another 100 basis points on March 15, 2020, and announced the resumption of quantitative easing.circumstances.

The Coronavirus Pandemic is a highly unusual, unprecedented and evolving public health and economic crisis and may have a material negative impact on our financial condition and results of operations. We ~~are in~~continue to occupy an asset-sensitive position, whereby interest rate environments characterized by numerous and/or high magnitude interest rate reductions have a negative impact on our net interest income and net income. Additionally, the consequences of the unprecedented economic impact of the Coronavirus Pandemic ~~are likely to result in~~may produce declining asset quality, reflected by a higher level of loan delinquencies and loan charge-offs, as well as downgrades of commercial lending relationships, which ~~would~~may necessitate additional provisions for our allowance and reduced net income.

The following section summarizes the primary measures that directly impact us and our customers.

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Paycheck Protection Program
The Paycheck Protection Program (“PPP”) reflects a substantial expansion of the Small Business Administration’s 100% guaranteed 7(a) loan program. The CARES Act authorized up to $350 billion in loans to businesses with fewer than 500 employees, including non-profit organizations, tribal business concerns, self-employed and individual contractors. The PPP provides 100% guaranteed loans to cover specific operating ~~costs, with the maximum loan size capped at the lesser of 250% of the average monthly payroll costs or $10.0 million.~~costs. PPP loans are eligible to be forgiven based upon certain criteria. In general, the amount of the loan that is forgivable is the sum of the payroll costs, interest payments on mortgages, rent and utilities incurred or paid by the business during a prescribed period beginning on the loan origination date. Any remaining balance after forgiveness is maintained at the 100% guarantee for the duration of the loan. The loan tenor is 24 months for loans originated prior to June 5, 2020 and 60 months for loans originated on or after June 5, 2020. Loans originated prior to June 5, 2020 can be modified to a tenor of 60 months upon the mutual agreement of the lender and borrower. To date, we have not modified the maturity date of any loans made prior to June 5, 2020. The interest rate on the loan is fixed at 1.00%, with the financial institution receiving a loan origination fee ~~ranging from 1% to 5% of the loan amount~~ paid by the Small Business Administration. The loan origination fees, net of the direct origination costs, ~~totaled $14.7 million during the second quarter of 2020 and~~ are ~~being~~ accreted into interest income on loans using the level yield methodology. The program ~~was originally scheduled to end~~ended on ~~June 30, 2020, but was recently modified to now end effective~~ August 8, 2020. Participation in the PPP has had a significant impact on the composition of our loan and deposit portfolios and our net interest income starting during the second quarter of 2020, which is expected to remain for at least most of the remainder of 2020. As of July 31, 2020, we hadWe originated ~~almost~~approximately 2,200 loans aggregating ~~$550~~$553 million. As of June 30, 2021, we recorded forgiveness transactions on approximately 1,900 loans aggregating $487 million. Net loan origination fees of $3.5 million were recorded during the first six months of 2021.
The Consolidated Appropriations Act, 2021 authorized an additional $284 billion in Second Draw PPP loans (“Second Draw”). The program ended on May 31, 2021. Under the Second Draw, we originated approximately 1,200 loans aggregating $209 million. As of June 30, 2021, we recorded forgiveness transactions on approximately 200 loans aggregating $29.2 million. Net loan origination fees of $2.2 million were recorded during the first six months of 2021 under the ~~PPP.~~

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Congress passed, and on April 24, 2020 President Trump signed, legislation which added $300 billion to the PPP. Included in the legislation was a specific allocation of $30 billion for financial institutions under $10 billion.Second Draw.

~~Under the CARES Act, a~~A PPP loan is assigned a risk weight of 0% under the risk-based capital rules of the federal banking agencies. On April 9, 2020, the federal banking agencies issued an interim final rule allowing financial institutions to exclude PPP loans from the average asset calculation to the degree the PPP loans are financed through the Paycheck Protection Program Lending Facility (“PPPLF”) for the Tier 1 Leverage Capital Ratio.

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Individual Economic Impact Payments
The Internal Revenue Service ~~began making~~has made three rounds of Individual Economic Impact Payments ~~in mid-April~~ via direct deposit or mailed checks. ~~Individuals with~~In general, and subject to adjusted gross income ~~of $75,000 or less~~limitations, qualifying individuals have received payments of $1,200 ~~with a reduction formula for those individuals with adjusted gross income over $75,000 but less than $99,000. Individuals with adjusted gross income~~in April 2020, $600 in January 2021 and $1,400 in March 2021.
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Troubled Debt Restructuring Relief
From March 1, 2020 through 60 days after the end of the National Emergency (or December 31, 2020 if earlier), a financial institution may elect to suspend GAAP principles and regulatory determinations with respect to loan modifications related to ~~COVID-19~~Covid-19 that would otherwise be categorized as troubled debt restructurings. Banking agencies must defer to the financial institution’s election. We elected to suspend GAAP principles and regulatory determinations as permitted. The Consolidated Appropriations Act, 2021 extended the suspension date to January 1, 2022.

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Current Expected Credit Loss Methodology Delay
Financial institutions are not required to comply with the ~~Current Expected Credit Loss (“CECL”)~~CECL methodology requirements from the enactment date of the CARES Act until the earlier of the end of the National Emergency or December 31, 2020. We elected to postpone CECL adoption as permitted. The Consolidated Appropriations Act, 2021 extended the adoption deferral date to January 1, 2022.

In early April 2020, in response to the early stages of the Coronavirus Pandemic and its pervasive impact across the economy and financial markets, we developed internal programs of loan payment deferments for commercial and retail borrowers. For commercial borrowers, we ~~offer~~offered 90-day (three payments) interest only amendments as well as 90-day (three payments) principal and interest payment deferments. Under the latter program, borrowers ~~are~~were extended a 12-month single payment note at 0% interest in an amount equal to three payments, with loan proceeds used to make the scheduled payments. As of June 30, 2020, we had processed 463 interest only amendments with loan balances aggregating $421 million and 242 principal and interest payment deferments with loan balances totaling $298 million and resulting single payment loans aggregating $8.1 million. The single payment notes receive a loan grade equal to the ~~current~~ loan grade of each respective borrowing relationship. ~~For retail~~Certain of our commercial loan borrowers we offer 90-day (three payments) principal and interest payment deferments, with deferred amounts added to the end of the loan. As of June 30, 2020, we had processed 260 principal and interest payment deferments with loan balances totaling $23.8 million. These payment deferral transactions largely applied to the borrowers’ April, May and June of 2020 loan payments.

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~~We have also had some instances where commercial borrowers have~~ subsequently requested and received an additional 90-day (three payments) interest only amendment or 90-day (three payments) principal and interest payment deferment. Under the latter program, the amount equal to the three payments iswas added to the original deferment note which has nine months remaining to maturity; however, the original 0% interest rate is modified to equal the rate associated with each borrower’s traditional lending relationship with us for the remainder of the term. At the peak of activity in mid-2020, nearly 750 borrowers with loan balances aggregating $719 million were participating in the commercial loan payment deferment program. As of ~~July 31,~~June 30, 2021, we had no loans in the commercial loan payment deferment program.
For retail borrowers, we offered 90-day (three payments) principal and interest payment deferments, with deferred amounts added to the end of the loan. As of June 30, 2020, we had processed ~~an additional 16 interest only amendments with loan balances aggregating $31.0 million and 21~~260 principal and interest payment deferments with loan balances totaling ~~$117 million and resulting single payment loans aggregating $4.2~~$23.8 million. ~~Additional 90-day (three payments) principal and interest payment deferments for retail~~As of June 30, 2021, only six borrowers ~~have been nominal~~ with loan balances aggregating ~~less than $2.0~~$0.5 million ~~through July 31, 2020.~~remained in the retail loan payment deferment program.

In April, 2020, the Federal Reserve initiated the PPPLF, which is designed to facilitate lending by financial institutions to small businesses under the PPP. Only PPP loans are eligible to serve as collateralFinancial Overview
We reported net income of $18.1 million, or $1.12 per diluted share, for the ~~PPPLF, with each dollar~~second quarter of ~~PPP loans providing one dollar of advance availability. The maturity date of an extension of credit under the PPPLF will equal the maturity date of the pool of PPP loans pledged~~2021, compared to secure the extension of credit. Any principal payments received by the financial institution on the PPP loans, such as PPP loan forgiveness payments from the Small Business Administration or principal payments from the borrower after the initial six-month deferment period, must be used to pay down the PPPLF advance by the same dollar amount, maintaining the dollar-for-dollar advance amount and PPP aggregate loan balance relationship. The interest rate on PPPLF advances is fixed at 0.35%. No PPPLF advances can be obtained after September 30, 2020. We obtained a PPPLF advance in the amount of $43.7 million in late April 2020; however, the PPPLF advance was paid-off in full in early June 2020. As of June 30, 2020, we had no advances outstanding under the PPPLF. We may obtain additional PPPLF advances as our borrowers utilize PPP loan proceeds for permissible purposes.
~~Financial Overview~~
~~We reported~~ net income of $8.7 million, or $0.54 per diluted share, ~~for the second quarter of 2020, compared to net income of $11.7 million, or $0.71 per diluted share,~~ during the second quarter of ~~2019.~~2020. Net income for the first six months of ~~2020~~2021 totaled ~~$19.4~~$32.3 million, or ~~$1.19~~$2.00 per diluted share, compared to ~~$23.5~~$19.4 million, or ~~$1.43~~$1.19 per diluted share, during the first six months of ~~2019.~~2020.
Proceeds from a bank owned life insurance claim during the second quarter of 2019 increased net income by $1.3 million, or $0.08 per diluted share. Excluding the impact of this transaction, diluted earnings per share decreased $0.09, or 14.3%, during the second quarter of 2020 compared to the second quarter of 2019. Proceeds from bank owned life insurance claims and a gain on the sale of a former branch facility during the first six months of 2019 increased reported net income by $3.1 million, or $0.19 per diluted share. Excluding the impacts of these transactions, diluted earnings per share decreased $0.05, or 4.0%, during the first six months of 2020 compared to the first six months of 2019.
We believe the overall quality of our loan portfolio remains strong, with nonperforming loans equaling only 0.10% of total loans as of June 30, 2020. Gross loan charge-offs totaled $0.3 million during the second quarter of 2020, and totaled $0.4 million for the first six months of the year, while recoveries of prior period loan charge-offs equaled $0.2 million and $0.4 million during the respective time periods. Net loan charge-offs, as a percentage of average total loans, equaled an annualized 0.02% during the second quarter, while a net loan recovery equaled an annualized less than 0.01% during the first six months of 2020. 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.

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Commercial loans increased ~~$460~~$16.3 million during the first six months of ~~2020,~~2021, reflecting the combined net growth of core commercial loans and ~~at June 30, 2020 totaled $2.90 billion,~~net activity under the PPP. Core commercial loans increased $135 million, or ~~87.0% of our loan portfolio. As of December 31, 2019, the commercial loan portfolio comprised 85.5% of total loans. The increase in commercial loans~~approximately 11% on an annualized basis, during the first six months of ~~2020 primarily reflects PPP loan originations totaling $549 million, partially offset by a $109 million reduction in lines of credit balances. Commercial and industrial loans, which include~~2021. Net PPP loans ~~were up $461~~declined $119 million ~~non-owner occupied commercial real estate (“CRE”)~~during the first six months of 2021, comprised of $209 in million PPP loans ~~increased $5.8~~extended and $328 million and multi-family and residential rental loans grew $7.5 million, while owner occupied CRE loans decreased $11.4 million and vacant land, land development and residential construction loans were down $3.1 million. We believe our loan portfolio remains well diversified.in forgiveness transactions. As a percentage of total commercial loans, commercial and industrial loans (excluding PPP loans) and owner occupied ~~CRE~~commercial real estate (“CRE”) loans combined equaled ~~56.3%~~54.9% as of June 30, ~~2020,~~2021, compared to ~~58.4%~~53.9% at December 31, ~~2019.~~2020. The new commercial loan pipeline remains strong, and at June 30, ~~2020,~~2021, we had ~~$78~~$167 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase.

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The overall quality of our loan portfolio remains strong, with nonperforming loans equaling only 0.08% of total loans as of June 30, 2021. Accruing loans past due 30 to 89 days remain very low. Gross loan charge-offs totaled less than $0.1 million during the second quarter of 2021, and aggregated $0.1 million for the first six months of the year, while recoveries of prior period loan charge-offs equaled $0.4 million and $0.9 million during the respective time periods. A net loan recovery, as a percentage of average total loans, equaled an annualized 0.04% and 0.05% during the second quarter and first six months of 2021, respectively.
We recorded a negative loan loss provision expense of $3.1 million during the second quarter of 2021, compared to a provision expense of $7.6 million during the second quarter of ~~2020, compared to $0.9~~2020. We recorded a negative loan loss provision expense of $2.8 million during the ~~second quarter~~first six months of ~~2019. We recorded~~2021, compared to a ~~loan loss~~ provision expense of $8.4 million during the first six months of ~~2020, compared to $1.8 million during~~2020. The negative provision expense recorded in the ~~first six months~~2021 periods was mainly comprised of ~~2019.~~a reduced reserve allocation associated with the economic and business conditions environmental factor, reflecting improvement in both current and forecasted economic conditions. The provision expense recorded during the 2020 periods ~~primarily reflected~~mainly consisted of an allocation associated with a ~~newly-created~~newly created Coronavirus Pandemic environmental factor (“~~COVID-19~~Covid-19 factor”) and an increased allocation related to the existing economic and business conditions environmental factor. The ~~COVID-19~~Covid-19 factor was added to address the unique challenges and economic uncertainty resulting from the Coronavirus Pandemic and its potential impact on the collectability of the loan portfolio.

Interest-earning balances, primarily consisting of funds deposited at the Federal Reserve Bank of Chicago, are used to manage daily liquidity needs and interest rate risk sensitivity. During the first six months of 2021, the average balance of these funds equaled $606 million, or 13.8% of average earning assets, compared to $203 million, or 5.6% of average earning assets, during the first six months of 2020, and a more typical $81.3 million, or 2.5% of average earning assets, during the first six months of 2019. The elevated level during 2020 and into the first half of 2021 primarily reflects increased local deposits stemming from federal government stimulus payments and reduced business and consumer investing and spending. The excess level of funds on deposit with the Federal Reserve Bank of Chicago had a negative impact of 35 to 40 basis points on our net interest margin during the second quarter and first six months of 2021.
Total local deposits increased $276 million during the first six months of 2021, and are up $1.1 billion since year-end 2019, equating to growth rates of about 8% and 42%, respectively. Approximately two-thirds of the deposit increase during the first six months of 2021 and the last 18 months is comprised of increased noninterest-bearing checking account balances.
Net interest income increased $0.3 million during the second quarter of 2021 compared to the second quarter of 2020, while decreasing $0.5 million during the first six months of 2021 compared to the first six months of 2020. Interest income and interest expense declined during the 2021 periods compared to the prior-year periods primarily due to Federal Open Market Committee’s (“FOMC”) federal funds rate cuts totaling 150 basis points in March of 2020 and a low interest rate environment since that time. Interest income declined by $1.4 million during the second quarter of 2021 from the second quarter of 2020, and was down $4.5 million during the first six months of 2021 compared to the first six months of 2020. During the same time periods, interest expense was down $1.7 million and $4.1 million, respectively.
Noninterest income during the second quarter of ~~2020~~2021 was ~~$11.0~~$14.6 million, compared to ~~$6.3~~$11.0 million during the prior-year second quarter. Noninterest income during the second quarter of 2019 included a bank owned life insurance claim of $1.3 million. Excluding the impact of this transaction, noninterest income increased $5.9 million, or nearly 118%, during the current-year second quarter compared to the respective 2019 period. Noninterest income during the first six months of ~~2020~~2021 was ~~$17.5~~$28.0 million, compared to ~~$13.0~~$17.5 million during the same time period in ~~2019. Noninterest~~2020. The improved level mainly resulted from increased mortgage banking income ~~during~~and fee income generated from a commercial lending interest rate swap program that was introduced in the ~~first six months~~latter part of ~~2019 included bank owned life insurance claims aggregating $2.6 million and~~2020. In addition, a gain on the sale of a ~~former~~ branch ~~facility~~totaling $1.1 million was recorded during the second quarter of ~~$0.6 million. Excluding~~2021.
Noninterest expense during the ~~impacts~~second quarter of ~~these transactions, noninterest income increased $7.7~~2021 was $26.2 million, ~~or 79.2%, in the first six months of 2020~~ compared to $23.2 million during the ~~respective 2019 period. The higher level of noninterest income in both 2020 periods primarily reflected increased mortgage banking income. We originated $408 million in residential mortgage loans~~prior-year second quarter. Noninterest expense during the first six months of ~~2020, which~~2021 was about 225% higher than originations during the first six months of 2019. The increase is primarily attributable to significant refinance activity stemming from the decreased interest rate environment coupled with the ongoing success of strategic initiatives that were designed to expand market penetration, enhance gain activities and operate more efficiently. Almost 75% of the residential mortgage loans originated during the first six months of 2020 consisted of refinance transactions,$51.3 million, compared to about 43% during the first six months of 2019. Residential mortgage loans originated for sale, generally consisting of longer-term fixed rate residential mortgage loans, during the first six months of 2020 totaled $321 million, or about 79% of total mortgage loans originated. During the first six months of 2019, residential mortgage loans originated for sale totaled $70.9 million, or about 57% of total mortgage loans originated.
~~Financial Condition~~
~~Our total assets increased $681~~$46.2 million during the ~~first six months~~same time period in 2020. A majority of ~~2020,~~the increase is in salary and ~~totaled $4.31 billion as~~benefit costs, in large part reflecting increased health insurance costs, annual employee merit pay increases, and a lower level of ~~June 30, 2020. Total loans increased $476 million and interest-earning deposits grew by $206 million, while securities available~~deferred salary costs associated with PPP loan originations. In addition, we accrued for ~~sale decreased $27.0 million. Total deposits increased $572 million, sweep accounts were up $64.9 million and FHLBI advances increased $40.0 million~~our bonus programs during the ~~first six months~~2021 periods, which we did not do during the 2020 periods due to the onset of ~~2020.~~the Coronavirus Pandemic.

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~~Commercial loans~~Financial Condition
Our total assets increased ~~$460~~$320 million during the first six months of ~~2020,~~2021, and totaled $4.76 billion as of June 30, 2021. Total loans increased $55.4 million, securities available for sale were up $119 million and interest-earning deposits grew by $120 million, while total deposits increased $260 million and sweep accounts were up $51.4 million, during the first six months of 2021.
Commercial loans increased $16.3 million during the first six months of 2021, and at June 30, ~~2020~~2021 totaled ~~$2.90~~$2.81 billion, or ~~87.0%~~86.5% of the loan portfolio. As of December 31, ~~2019,~~2020, the commercial loan portfolio comprised ~~85.5%~~87.5% of total loans. The increase in commercial loans reflects the combined net growth of core commercial loans and net activity under the PPP. Core commercial loans increased $135 million, or approximately 11% on an annualized basis, while PPP loans declined $119 million, comprised of $209 million in PPP loans extended and $328 million in forgiveness transactions, during the first six months of ~~2020 primarily reflects PPP loan originations totaling $549 million, partially offset by a $109 million reduction in lines of credit balances. Commercial~~2021. Core commercial and industrial loans ~~which include PPP loans, were up $461~~increased $135 million, non-owner occupied CRE loans ~~increased $5.8~~grew $33.6 million, owner occupied CRE loans were up $20.6 million and multi-family and residential rental property loans ~~grew $7.5~~increased $15.8 million, while ~~owner occupied CRE loans decreased $11.4 million and~~ vacant land, land development and residential construction loans ~~were down $3.1~~declined $11.9 million. As a percentage of total commercial loans, commercial and industrial loans (excluding PPP loans) and owner occupied CRE loans combined equaled ~~56.3%~~54.9% as of June 30, ~~2020,~~2021, compared to ~~58.4%~~53.9% at December 31, ~~2019.~~2020.

As of June 30, ~~2020,~~2021, availability on existing construction and development loans totaled ~~approximately $78~~$167 million, with most of those funds expected to be drawn over the next 12 to 18 months. Our current pipeline reports indicate continued strong commercial loan funding opportunities in future periods, including ~~$176~~$161 million in new lending commitments, a majority of which we expect to be accepted and funded over the next 12 to 18 months. Our commercial lenders also report ongoing additional opportunities they are currently discussing with existing and potential new borrowers. We remain committed to prudent underwriting standards that provide for an appropriate yield and risk relationship, as well as concentration limits we have established within our commercial loan portfolio. ~~Usage of existing commercial lines of credit declined during the second quarter of 2020, largely reflecting the Coronavirus Pandemic and associated weakened economic conditions.~~

Residential mortgage loans increased ~~$27.3~~$42.4 million during the first six months of ~~2020,~~2021, totaling ~~$367~~$380 million, or ~~11.0%~~11.7% of total loans, as of June 30, ~~2020.~~2021. Activity within the residential mortgage loan function was very active during the first half of 2021, primarily reflecting refinance transactions spurred by low residential mortgage loan interest rates, strength in home purchase activity, and the continuing success of strategic initiatives that have been implemented over the past several years to gain market share and increase production. We originated ~~$408~~$482 million in residential mortgage loans during the first six months of ~~2020, which was about 225% higher than~~2021, an increase of over 18% compared to originations during the first six months of ~~2019.~~2020. The increase was primarily attributable to significant refinance activity stemming from the decreased interest rate environment coupled with the ongoing success of strategic initiatives that were designed to expand market penetration, enhance gain activities and operate more efficiently. Almost 75% of the residential mortgage loans originatedproduction composition during the first six months of ~~2020 consisted~~2021 was almost equal between purchase and refinance residential mortgage loans; however, the mix changed significantly between the first and second quarters. Refinance residential mortgage loans comprised approximately 67% of ~~refinance transactions, compared to approximately 43%~~production during the first ~~six~~three months of ~~2019.~~2021, but dropped to about 39% during the second quarter. Residential mortgage loans originated for sale, generally consisting of longer-term fixed rate residential mortgage loans, during the first six months of ~~2020~~2021 totaled ~~$321~~$336 million, or approximately ~~79%~~70% of total residential mortgage loans originated. During the first six months of ~~2019,~~2020, residential mortgage loans originated for sale totaled ~~$70.9~~$321 million, or ~~approximately 57%~~about 79% of total mortgage loans originated. Residential mortgage loans originated not sold are generally comprised of adjustable rate residential mortgage loans. We are pleased with the results of our strategic initiatives associated with the growth of our residential mortgage banking operation over the past few years, and remain optimistic that origination volumes will ~~continue to be~~remain solid in future periods. We experienced an increase in the origination of purchase residential mortgage loans during the latter part of the second quarter, and as of June 30, 2020, the pipeline for purchase residential mortgage loan applications was at a record level.

Other consumer-related loans declined ~~$10.6~~$3.4 million during the first six months of ~~2020,~~2021, and at June 30, ~~2020~~2021 totaled ~~$64.7~~$58.2 million, or ~~2.0%~~1.8% of total loans. Other consumer-related loans comprised ~~2.6%~~1.9% of total loans as of December 31, ~~2019.~~2020. We expect this loan portfolio segment to decline in future periods as scheduled principal payments exceed anticipated new loan origination volumes.

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The following table summarizes our loan portfolio over the past twelve months:

6/30/20

3/31/20

12/31/19

9/30/19

6/30/19

6/30/21

3/31/21

12/31/20

9/30/20

6/30/20

Commercial:

Commercial & Industrial
$ 1,307,455,000 $ 873,679,000 846,551,000 882,748,000 $ 881,196,000 $ 1,103,807,000 $ 1,284,507,000 $ 1,145,423,000 $ 1,321,419,000 $ 1,307,455,000
Land Development & Construction
52,984,000 62,908,000 56,119,000 48,417,000 45,158,000 43,111,000 58,738,000 55,055,000 50,941,000 52,984,000
Owner Occupied Commercial RE
567,621,000 579,229,000 579,003,000 567,267,000 556,868,000 550,504,000 544,342,000 529,953,000 549,364,000 567,621,000
Non-Owner Occupied Commercial RE
841,145,000 823,366,000 835,346,000 883,080,000 852,844,000 950,993,000 932,334,000 917,436,000 878,897,000 841,145,000
Multi-Family & Residential Rental
132,047,000 133,148,000 124,525,000 126,855,000 128,489,000 161,894,000 147,294,000 146,095,000 137,740,000 132,047,000
Total Commercial
2,901,252,000 2,472,330,000 2,441,544,000 2,508,367,000 2,464,555,000 2,810,309,000 2,967,215,000 2,793,962,000 2,938,361,000 2,901,252,000

Retail:

1-4 Family Mortgages
367,061,000 356,338,000 339,749,000 346,094,000 335,618,000 380,292,000 337,844,000 337,888,000 348,460,000 367,061,000
Home Equity & Other Consumer Loans
64,743,000 72,875,000 75,374,000 78,552,000 81,320,000 58,240,000 59,311,000 61,620,000 63,723,000 64,743,000
Total Retail
431,804,000 429,213,000 415,123,000 424,646,000 416,938,000 438,532,000 397,155,000 399,508,000 412,183,000 431,804,000

Total
$ 3,333,056,000 $ 2,901,543,000 2,856,667,000 2,933,013,000 $ 2,881,493,000 $ 3,248,841,000 $ 3,364,370,000 $ 3,193,470,000 $ 3,350,544,000 $ 3,333,056,000
(*) Includes $246 million, $455 million, $365 million, $555 million and $549 million in loans originated under the Paycheck Protection Program for June 30, 2021, March 31, 2021, December 31, 2020, September 30, 2020, and June 30, 2020, respectively.

Our credit policies establish guidelines to manage credit risk and asset quality. These guidelines include loan review and early identification of problem loans to provide effective loan portfolio administration. The credit policies and procedures are meant to minimize the risk and uncertainties inherent in lending. In following these policies and procedures, we must rely on estimates, appraisals and evaluations of loans and the possibility that changes in these could occur quickly because of changing economic conditions. Identified problem loans, which exhibit characteristics (financial or otherwise) that could cause the loans to become nonperforming or require restructuring in the future, are included on an internal watch list. Senior management and the Board of Directors review this list regularly. Market value estimates of collateral on impaired loans, as well as on foreclosed and repossessed assets, are reviewed ~~periodically; however, we~~periodically. We also have a process in place to monitor whether value estimates at each quarter-end are reflective of current market conditions. Our credit policies establish criteria for obtaining appraisals and determining internal value estimates. We may also adjust outside and internal valuations based on identifiable trends within our markets, such as recent sales of similar properties or assets, listing prices and offers received. In addition, we may discount certain appraised and internal value estimates to address distressed market conditions.

Nonperforming assets, comprised of nonaccrual loans, loans past due 90 days or more and accruing interest and foreclosed properties, totaled ~~$3.4~~$3.2 million (0.1% of total assets) as of June 30, ~~2020,~~2021, compared to ~~$2.7~~$4.1 million (0.1% of total assets) as of December 31, ~~2019.~~2020. Given the low level of nonperforming loans and accruing loans 30 to 89 days delinquent, combined with the manageable and steady level of watch list credits and what we believe are strong credit administration practices, we remain pleased with the overall quality of the loan ~~portfolio at the initial stages of the Coronavirus Pandemic.~~portfolio.

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The following tables provide a breakdown of nonperforming assets by collateral type:

NONPERFORMING LOANS

6/30/20

3/31/20

12/31/19

9/30/19

6/30/19

Residential Real Estate:

Land Development
$ 36,000 $ 37,000 $ 34,000 $ 32,000 $ 33,000
Construction
198,000 283,000 0 0 0
Owner Occupied / Rental
2,552,000 2,651,000 2,104,000 2,390,000 2,779,000
2,786,000 2,971,000 2,138,000 2,422,000 2,812,000

Commercial Real Estate:

Land Development
0 43,000 0 0 0
Construction
0 0 0 0 0
Owner Occupied
275,000 287,000 134,000 183,000 642,000
Non-Owner Occupied
25,000 0 0 26,000 26,000
300,000 330,000 134,000 209,000 668,000

Non-Real Estate:

Commercial Assets
98,000 156,000 0 0 2,000
Consumer Assets
28,000 12,000 12,000 13,000 23,000
126,000 168,000 12,000 13,000 25,000

Total
$ 3,212,000 $ 3,469,000 $ 2,284,000 $ 2,644,000 $ 3,505,000
NONPERFORMING LOANS

OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS

6/30/20

3/31/20

12/31/19

9/30/19

6/30/19

6/30/21

3/31/21

12/31/20

9/30/20

6/30/20

Residential Real Estate:

Land Development
$ 0 $ 0 $ 0 $ 0 $ 0 $ 34,000 $ 34,000 $ 35,000 $ 36,000 $ 36,000
Construction
0 0 0 0 0 0 0 0 198,000 198,000
Owner Occupied / Rental
198,000 271,000 260,000 186,000 446,000 2,096,000 2,294,000 2,519,000 2,399,000 2,552,000
198,000 271,000 260,000 186,000 446,000 2,130,000 2,328,000 2,554,000 2,633,000 2,786,000

Commercial Real Estate:

Land Development
0 0 0 0 0 0 0 0 0 0
Construction
0 0 0 0 0 0 0 0 0 0
Owner Occupied
0 0 192,000 57,000 0 0 283,000 619,000 1,262,000 275,000
Non-Owner Occupied
0 0 0 0 0 0 0 22,000 23,000 25,000
0 0 192,000 57,000 0 0 283,000 641,000 1,285,000 300,000

Non-Real Estate:

Commercial Assets
0 0 0 0 0 606,000 169,000 172,000 198,000 98,000
Consumer Assets
0 0 0 0 0 10,000 13,000 17,000 25,000 28,000
0 0 0 0 0 616,000 182,000 189,000 223,000 126,000

Total
$ 198,000 $ 271,000 $ 452,000 $ 243,000 $ 446,000 $ 2,746,000 $ 2,793,000 $ 3,384,000 $ 4,141,000 $ 3,212,000

OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS

6/30/21

3/31/21

12/31/20

9/30/20

6/30/20

Residential Real Estate:

Land Development
$ 0 $ 0 $ 0 $ 0 $ 0
Construction
0 0 0 0 0
Owner Occupied / Rental
41,000 11,000 88,000 198,000 198,000
41,000 11,000 88,000 198,000 198,000

Commercial Real Estate:

Land Development
0 0 0 0 0
Construction
0 0 0 0 0
Owner Occupied
363,000 363,000 613,000 314,000 0
Non-Owner Occupied
0 0 0 0 0
363,000 363,000 613,000 314,000 0

Non-Real Estate:

Commercial Assets
0 0 0 0 0
Consumer Assets
0 0 0 0 0
0 0 0 0 0

Total
$ 404,000 $ 374,000 $ 701,000 $ 512,000 $ 198,000

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The following tables provide a reconciliation of nonperforming assets:

NONPERFORMING LOANS RECONCILIATION

2nd Qtr

1st Qtr

4th Qtr

3rd Qtr

2nd Qtr

2020

2020

2019

2019

2019

Beginning balance
$ 3,469,000 $ 2,284,000 $ 2,644,000 $ 3,505,000 $ 4,138,000
Additions, net of transfers to ORE
220,000 1,302,000 (80,000
)
338,000 (85,000
)
Returns to performing status
(26,000
)
(7,000
)
0 (126,000
)
0
Principal payments
(278,000
)
(110,000
)
(232,000
)
(1,014,000
)
(512,000
)
Loan charge-offs
(173,000
)
0 (48,000
)
(59,000
)
(36,000
)

Total
$ 3,212,000 $ 3,469,000 $ 2,284,000 $ 2,644,000 $ 3,505,000
NONPERFORMING LOANS RECONCILIATION

OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS RECONCILIATION

2nd Qtr

1st Qtr

4th Qtr

3rd Qtr

2nd Qtr

2020

2020

2019

2019

2019

Beginning balance
$ 271,000 $ 452,000 $ 243,000 $ 446,000 $ 396,000
Additions
0 11,000 245,000 57,000 145,000
Sale proceeds
(49,000
)
(192,000
)
(36,000
)
(252,000
)
(74,000
)
Valuation write-downs
(24,000
)
0 0 (8,000
)
(21,000
)

Total
$ 198,000 $ 271,000 $ 452,000 $ 243,000 $ 446,000

2nd Qtr

1st Qtr

4th Qtr

3rd Qtr

2nd Qtr

2021

2021

2020

2020

2020

Beginning balance
$ 2,793,000 $ 3,384,000 $ 4,141,000 $ 3,212,000 $ 3,469,000
Additions, net of transfers to ORE
492,000 116,000 538,000 1,301,000 220,000
Returns to performing status
0 (115,000
)
0 (72,000
)
(26,000
)
Principal payments
(484,000
)
(559,000
)
(1,064,000
)
(249,000
)
(278,000
)
Loan charge-offs
(55,000
)
(33,000
)
(231,000
)
(51,000
)
(173,000
)

Total
$ 2,746,000 $ 2,793,000 $ 3,384,000 $ 4,141,000 $ 3,212,000
OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS RECONCILIATION

2nd Qtr

1st Qtr

4th Qtr

3rd Qtr

2nd Qtr

2021

2021

2020

2020

2020

Beginning balance
$ 374,000 $ 701,000 $ 512,000 $ 198,000 $ 271,000
Additions
30,000 0 434,000 314,000 0
Sale proceeds
0 (77,000
)
(245,000
)
0 (49,000 )
Valuation write-downs
0 (250,000
)
0 0 (24,000 )

Total
$ 404,000 $ 374,000 $ 701,000 $ 512,000 $ 198,000

Gross loan charge-offs ~~equaled $0.3~~totaled less than $0.1 million during the second quarter of ~~2020,~~2021, and ~~totaled $0.4~~aggregated $0.1 million for the first six months of the year, while recoveries of prior period loan charge-offs equaled ~~$0.2~~$0.4 million and ~~$0.4~~$0.9 million during the respective time periods. ~~Net~~A net loan ~~charge-offs,~~recovery, as a percentage of average total loans, equaled an annualized ~~0.02%~~0.04% and 0.05% during the second quarter ~~of 2020. A nominal net loan recovery was recorded during the~~and first six months of ~~2020.~~2021, respectively. 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. The allowance equaled ~~$32.2~~$35.9 million, or ~~1.16%~~1.11% of total loans ~~(excluding~~(1.20% of total loans excluding PPP loans), and over ~~1,000%~~1,300% of nonperforming loans as of June 30, ~~2020.~~2021.

In each accounting period, we adjust the allowance to the amount we believe is necessary to maintain the allowance at an adequate level. Through the loan review and credit departments, we establish portions of the allowance based on specifically identifiable problem loans. The evaluation of the allowance is further based on, but not limited to, consideration of the internally prepared allowance analysis, loan loss migration analysis, composition of the loan portfolio, third party analysis of the loan administration processes and portfolio, and general economic conditions.

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Financial institutions ~~are~~were not required to comply with the ~~Current Expected Credit Loss (“CECL”)~~CECL methodology requirements from the enactment date of the CARES Act until the earlier of the end of the President’s declaration of a National Emergency or December 31, 2020. The Consolidated Appropriations Act, 2021, that was enacted in December 2020, provided for an extension of the required CECL adoption date to January 1, 2022, which is the date we plan to adopt. An economic forecast is a key component of the CECL methodology. As we continue to experience an unprecedented economic environment whereby a sizable portion of the economy has been significantly impacted by ~~shelter in place declarations~~government-imposed activity limitations and similar reactions by businesses and individuals, substantial government stimulus has been provided to businesses, individuals and state and local governments and financial institutions have offered businesses and individuals payment relief options, economic forecasts are regularly ~~revised and there continues to be no economic forecast consensus.~~revised. Given the high degree of uncertainty surrounding economic forecasting, we have elected to postpone the adoption of CECL, and will continue to use our incurred loan loss reserve model as permitted.

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The allowance analysis applies reserve allocation factors to non-impaired outstanding loan balances, the result of which is combined with specific reserves to calculate an overall allowance dollar amount. For non-impaired commercial loans, reserve allocation factors are based on the loan ratings as determined by our standardized grade paradigms and by loan purpose. Our commercial loan portfolio is segregated into five classes: 1) commercial and industrial loans; 2) vacant land, land development and residential construction loans; 3) owner occupied real estate loans; 4) non-owner occupied real estate loans; and 5) multi-family and residential rental property loans. The reserve allocation factors are primarily based on the historical trends of net loan charge-offs through a migration analysis whereby net loan losses are tracked via assigned grades over various time periods, with adjustments made for environmental factors reflecting the current status of, or recent changes in, items such as: lending policies and procedures; economic conditions; nature and volume of the loan portfolio; experience, ability and depth of management and lending staff; volume and severity of past due, nonaccrual and adversely classified loans; effectiveness of the loan review program; value of underlying collateral; loan concentrations; and other external factors such as competition and regulatory environment.
We established a Covid-19 reserve allocation factor to address the Coronavirus Pandemic and its potential impact on the collectability of the loan portfolio during the second quarter of 2020. The creation of this factor reflected our belief that the traditional nine environmental factors did not sufficiently capture and address the unique circumstances, challenges and uncertainties associated with the Coronavirus Pandemic, which include unprecedented federal government stimulus and interventions, statewide mandatory closures on nonessential businesses and periodic changes to such, and our ability to provide payment deferral programs to commercial and retail borrowers without the interjection of troubled debt restructuring accounting rules. We review a myriad of items assessing this new environmental factor, including virus infection rates, vaccine inoculation trends, economic outlooks, employment data, business closures, foreclosures, payment deferments and government-sponsored stimulus programs.
We recorded a negative loan loss provision expense of $3.1 million during the second quarter of 2021, compared to a provision expense of $7.6 million during the second quarter of 2020. We recorded a negative loan loss provision expense of $2.8 million during the first six months of 2021, compared to a provision expense of $8.4 million during the first six months of 2020. The negative provision expense recorded in the 2021 periods was mainly comprised of a reduced reserve allocation associated with the economic and business conditions environmental factor, reflecting improvement in both current and forecasted economic conditions. This change resulted in a reduced required allowance balance of $3.6 million. The provision expense recorded during the 2020 periods mainly consisted of an allocation associated with a newly created Covid-19 factor and an increased allocation related to the existing economic and business conditions environmental factor. The Covid-19 factor was added to address the unique challenges and economic uncertainty resulting from the Coronavirus Pandemic and its potential impact on the collectability of the loan portfolio.
Adjustments for specific lending relationships, particularly impaired loans, are made on a case-by-case basis. Non-impaired retail loan reserve allocations are determined in a similar fashion as those for non-impaired commercial loans, except that retail loans are segmented by type of credit and not a grading system. We regularly review the allowance analysis and make needed adjustments based upon identifiable trends and experience.

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A migration analysis is completed quarterly to assist us in determining appropriate reserve allocation factors for non-impaired commercial loans. Our migration analysis takes into account various time periods, with most weight placed on the time frame from December 31, 2010 through June 30, ~~2020.~~2021. We believe this time period represents an appropriate range of economic conditions, and that it provides for an appropriate basis in determining reserve allocation factors given current economic conditions and the general consensus of economic conditions in the near future. We are actively monitoring our loan portfolio and assessing reserve allocation factors in light of the Coronavirus Pandemic and its impact on the U.S. economic environment and our customers in particular.

Although the migration analysis provides a historical accounting of our net loan losses, it is not able to fully account for environmental factors that will also very likely impact the collectability of our commercial loans as of any quarter-end date. Therefore, we incorporate the environmental factors as adjustments to the historical data. Environmental factors include both internal and external items. We believe the most significant internal environmental factor is our credit culture and the relative aggressiveness in assigning and revising commercial loan risk ratings, with the most significant external environmental factor being the assessment of the current economic environment and the resulting implications on our commercial loan portfolio.

During the second quarter of 2020, we changed the impact rating of the economic and business conditions environmental factor from moderate to high due to the ongoing and expected stressed economic environment resulting from the Coronavirus Pandemic. This modification impacted all loan portfolio segments, adding almost $4.0 million to the required reserve level. During the first quarter of 2020, we changed the trend rating on the economic and business conditions environmental factor from slightly deteriorating to severely deteriorating due to the initial and expected stressed economic environment resulting from the Coronavirus Pandemic. This modification impacted all loan portfolio segments, adding approximately $4.0 million to the required allowance during the quarter. Also during the first quarter of 2020, we improved the trend rating on the lending policies environmental factor from slightly deteriorating to relatively stable to reflect the duration since the Firstbank merger in 2014 and recent loan policy enhancements. This modification impacted all loan portfolio segments, subtracting $2.6 million from the required allowance level. We also, during the first quarter of 2020, improved the trend rating on the changes in the experience, ability and depth of lending management and staff environmental factor from slightly deteriorating to relatively stable to reflect the duration since personnel changes were made as part of the Firstbank merger and personnel changes necessitated by the retirement of our former CEO two years ago. This modification impacted the commercial loan portfolio segment, subtracting $1.7 million from the required allowance.

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During the second quarter of 2020, we also established a COVID-19 pandemic environmental factor to address the Coronavirus Pandemic and its potential impact on the collectability of the loan portfolio. The creation of this factor reflects our belief that the traditional nine qualitative factors did not sufficiently capture and address the unique circumstances, challenges and uncertainties associated with the Coronavirus Pandemic, which include unprecedented federal government stimulus and interventions, statewide mandatory closures of nonessential businesses and periodic changes to such and our ability to provide payment deferral programs to commercial and retail borrowers without the interjection of troubled debt restructuring accounting rules. We review a myriad of items when assessing this new environmental factor, including virus infection rates, economic outlooks, unemployment, business closures, foreclosures, payment deferments and government-sponsored stimulus programs. Impacting all loan portfolio segments, the establishment of the COVID-19 pandemic environmental factor added almost $4.0 million to the required reserve level.
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. We have a policy of requesting and reviewing periodic financial statements from commercial loan customers, and we have a disciplined and formalized review of the existence of collateral and its value. The primary risk element with respect to each residential real estate loan and consumer loan is the timeliness of scheduled payments. We have a reporting system that monitors past due loans and have adopted policies to pursue creditors’ rights in order to preserve our collateral position.

As of June 30, ~~2020,~~2021, the allowance was comprised of ~~$30.7~~$35.1 million in general reserves relating to non-impaired loans ~~$0.1 million in specific reserve allocations relating to nonaccrual loans,~~ and ~~$1.4~~$0.8 million in specific reserves on other loans, primarily accruing loans designated as troubled debt restructurings. Troubled debt restructurings totaled ~~$16.5~~$21.7 million at June 30, ~~2020,~~2021, consisting of ~~$0.5~~$0.9 million that are on nonaccrual status and ~~$16.0~~$20.8 million that are on accrual status. The latter, while considered and accounted for as impaired loans in accordance with accounting guidelines, are not included in our nonperforming loan totals. Impaired loans with an aggregate carrying value of ~~$1.3~~$0.7 million as of June 30, ~~2020~~2021 had been subject to previous partial charge-offs aggregating ~~$1.3 million. Those partial charge-offs were recorded as follows: $0.1~~$1.0 million ~~in 2020, 2019, 2018, 2017, $0.2 million in 2016, $0.1 million in 2015, 2014, 2013 and 2012, and $0.3 million in 2011.~~over the past ten years. As of June 30, ~~2020,~~2021, there were no specific reserves allocated to impaired loans that had been subject to a previous partial charge-off.

The following table provides a breakdown of our loans categorized as troubled debt restructurings:

6/30/20

3/31/20

12/31/19

9/30/19

6/30/19

6/30/21

3/31/21

12/31/20

9/30/20

6/30/20

Performing
$ 16,018,000 $ 17,975,000 $ 11,788,000 $ 28,102,000 $ 28,129,000 $ 20,840,000 $ 19,606,000 $ 23,133,000 $ 11,522,000 $ 16,018,000
Nonperforming
521,000 466,000 353,000 225,000 877,000 859,000 431,000 510,000 1,113,000 521,000

Total
$ 16,539,000 $ 18,441,000 $ 12,141,000 $ 28,327,000 $ 29,006,000 $ 21,699,000 $ 20,037,000 $ 23,643,000 $ 12,635,000 $ 16,539,000

Although we believe the allowance is adequate to absorb loan losses in our originated loan portfolio as they arise, there can be no assurance, especially given the current uncertainties related to the Coronavirus Pandemic and its impact on the U.S. economic environment, 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. Further, our analysis does not utilize the CECL model for the measurement of credit losses. For more information on CECL, please refer to Note 1 – “Significant Accounting Policies” in the Notes to Consolidated Financial Statements and to the risk factor titled “We have elected to postpone adoption of the CECL methodology…” under the heading “Risk Factors” in Part II, Item 1A of our Quarterly Report on Form 10-Q dated March 31, 2020.

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Securities available for sale increased ~~$27.0~~$119 million during the first six months of ~~2020,~~2021, totaling ~~$308~~$506 million as of June 30, ~~2020.~~2021. Purchases of U.S. Government agency bonds totaled $114 million during the first six months of ~~2020, consisting~~2021, in part reflecting the reinvestment of ~~U.S. Government agency bonds ($176 million) and municipal bonds ($13.3 million), totaled $189 million. Proceeds~~proceeds from ~~matured and~~ called U.S. Government agency bonds ~~and municipal bonds~~that totaled $33.4 million. Purchases of U.S. Government agency guaranteed mortgage-backed securities totaled $18.7 million during the first six months of ~~2020 totaled $202 million and $12.2 million, respectively, with another $7.0~~2021, consisting of investments in CRA-qualified securities, in part reflecting the reinvestment of $5.7 million from principal paydowns on U.S. Government agency guaranteed mortgage-backed securities. Purchases of municipal bonds totaled $35.7 million during the first six months of 2021; proceeds from matured municipal bonds totaled $5.5 million. At June 30, ~~2020,~~2021, the portfolio was primarily comprised of U.S. Government agency bonds ~~(53%~~(63%), municipal bonds ~~(35%~~(29%) and U.S. Government agency issued or guaranteed mortgage-backed securities ~~(12%~~(8%). All of our securities are currently designated as available for sale, and are therefore stated at fair value. The fair value of securities designated as available for sale at June 30, ~~2020~~2021 totaled ~~$308~~$506 million, including a net unrealized gain of ~~$7.7~~$1.9 million. We maintain the securities portfolio at levels to provide adequate pledging and secondary liquidity for our daily operations. In addition, the securities portfolio serves a primary interest rate risk management function. We expect purchases during the remainder of ~~2020~~2021 to generally consist of U.S. Government agency bonds and municipal bonds, with the securities portfolio maintained at about ~~10%~~12% of total assets.

FHLBI stock totaled $18.0 million as of June 30, ~~2020,~~2021, unchanged from the balance at December 31, ~~2019.~~2020. Our investment in FHLBI stock is necessary to engage in their advance and other financing programs. We have regularly received quarterly cash dividends, and we expect a cash dividend will continue to be paid in future quarterly periods.

Market values on our U.S. Government agency bonds, mortgage-backed securities issued or guaranteed by U.S. Government agencies and municipal bonds are generally determined on a monthly basis with the assistance of a third party vendor. Evaluated pricing models that vary by type of security and incorporate available market data are utilized. Standard inputs include issuer and type of security, benchmark yields, reported trades, broker/dealer quotes and issuer spreads. The market value of certain non-rated securities issued by relatively small municipalities generally located within our markets is estimated at carrying value. We believe our valuation methodology provides for a reasonable estimation of market value, and that it is consistent with the requirements of accounting guidelines.

Interest-earning ~~deposit~~ balances, primarily consisting of ~~excess~~ funds deposited at the Federal Reserve Bank of Chicago, ~~and a correspondent bank,~~ are used to manage daily liquidity needs and interest rate sensitivity. During the first six months of ~~2020,~~2021, the average balance of these funds equaled $606 million, or 13.8% of average earning assets, compared to $203 million, or 5.6% of average earning assets, ~~compared to~~during the first six months of 2020, and a ~~more-typical~~more typical $81.3 million, or 2.5% of average earning assets, during the first six months of 2019. The ~~higher~~elevated level during 2020 ~~over 2019 largely~~and into the first half of 2021 primarily reflects increased local ~~deposit balances, primarily a product of~~deposits stemming from federal government stimulus ~~programs as well as lower~~payments and reduced business and consumer investing and spending. The excess level of funds on deposit with the Federal Reserve Bank of Chicago had a negative impact of 35 to 40 basis points on our net interest margin during the second quarter and first six months of 2021. We expect the level of interest-earning deposit balances to remain elevated through the remainder of ~~2020 given the conditions associated with the Coronavirus Pandemic.~~2021 and into 2022.

Net premises and equipment equaled ~~$59.2~~$58.3 million at June 30, ~~2020, an increase~~2021, representing a decrease of ~~$1.8~~$0.7 million during the first six months of ~~2020. The~~2021. An aggregate increase of $5.6 million stems from facility remodeling and new lease activities, while a decline of $3.5 million was ~~primarily attributable~~recorded from the sale of a branch facility (along with the associated loans and deposits) to ~~net purchases~~another financial institution and the sale of ~~$4.4 million, in large part associated with~~ a ~~new regional banking center in Mt. Pleasant, Michigan.~~former branch facility. Depreciation expense totaled ~~$2.5~~$2.8 million during the first six months of ~~2020.~~2021. Foreclosed and repossessed assets equaled ~~$0.2~~$0.4 million as of June 30, ~~2020, compared to $0.5~~2021, a reduction of $0.3 million ~~as of~~from December 31, ~~2019.~~2020.

Total deposits increased ~~$572~~$260 million during the first six months of ~~2020,~~2021, totaling ~~$3.26~~$3.67 billion at June 30, ~~2020.~~2021. Local deposits increased ~~$629~~$276 million, while out-of-area deposits decreased ~~$56.8 million during the first six months of 2020.~~$16.0 million. As a percentage of total deposits, out-of-area deposits equaled ~~2.4%~~0.8% as of June 30, ~~2020,~~2021, compared to ~~5.0%~~1.4% as of December 31, ~~2019.~~ 2020.
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Noninterest-bearing checking accounts increased ~~$521~~$187 million during the first six months of ~~2020,~~2021, while interest-bearing checking accounts and money market deposit accounts grew ~~$50.1~~$4.1 million and ~~$32.6~~$114 million, ~~respectively, during the same time period.~~respectively. The increases in these transactional deposit products largely reflect federal government stimulus, especially the PPP, as well as lower business investing and spending. Savings deposits were up ~~$32.6~~$49.7 million, primarily reflecting the impact of federal government stimulus programs and lower consumer investing and spending. Local time deposits decreased ~~$7.3~~$79.3 million during the first six months of ~~2020,~~2021, primarily reflecting the maturity and withdrawal of funds from certain public unit time deposits ~~that were not renewed as we did not aggressively seek to renew these~~and time deposits ~~which~~that were opened as part of a special time deposit campaign we ran during ~~February, March and~~ early ~~April of 2019, that was not fully mitigated by new time deposits from one municipal deposit customer.~~2019. The reduction in out-of-area deposits during the first six months of ~~2020~~2021 reflects maturities during the period that were not replaced as the funds were no longer needed.

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~~Table~~Total local deposits have increased $1.08 billion since December 31, 2019. Noninterest-bearing checking accounts have grown $696 million during this time period, while interest-bearing checking accounts and money market deposit accounts are up $145 million and $216 million, respectively. The increases in these transactional deposit products largely reflect federal government stimulus, especially the PPP, as well as lower business investing and spending. Savings deposits are up $118 million, primarily reflecting the impact of ~~Contents~~
federal government stimulus programs and lower consumer investing and spending.
~~MERCANTILE BANK CORPORATION~~

Sweep accounts increased ~~$64.9~~$51.4 million during the first six months of ~~2020,~~2021, totaling ~~$168~~$170 million as of June 30, ~~2020.~~2021. The aggregate balance of this funding type can be subject to relatively large fluctuations given the nature of the customers utilizing this product and the sizable balances of many of the customers. The average balance ~~at June 30, 2020 was the maximum balance~~of sweep accounts equaled $142 million during the first six months of ~~2020, compared to an average~~2021, with a high balance of ~~$123~~$181 million ~~during the period.~~and low balance of $113 million. Our sweep account program entails transferring collected funds from certain business noninterest-bearing checking accounts and savings deposits into over-night 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.

FHLBI advances ~~increased $40.0~~aggregated $394 million ~~during the first six months of 2020, reflecting new advances obtained primarily to replace maturities and manage interest rate risk. As~~as of June 30, 2021, unchanged from the year-end 2020 FHLBI advances totaled $394 million. In June 2020, we executed a blend and extend transaction with the FHLBI to extend the duration of the FHLBI advance portfolio as part our interest rate risk management program. We prepaid seven advances aggregating $70.0 million with maturities ranging from August 2020 through October 2021 and fixed interest rates from 1.36% to 2.84% and averaging 1.97%, using the proceeds from seven new advances aggregating $70.0 million with maturities ranging from June 2024 through June 2027 and fixed interest rates from 0.55% to 1.18% and averaging 0.84%. Prepayment fees totaling $0.9 million were embedded into the fixed rates on the newly obtained advances, equating to 0.22% of the 0.84% average rate of the new advances.balance. The ~~FHLBI~~ advances are ~~generally~~ collateralized by residential mortgage loans, first mortgage liens on multi-family property loans, first mortgage liens on commercial real estate loans, and substantially all other assets of our bank, under a blanket lien ~~on our residential mortgage loan portfolio and certain commercial real estate loans.~~arrangement. Our borrowing line of credit as of June 30, ~~2020~~2021 totaled ~~$775~~$807 million, with remaining availability ~~of $375~~based on collateral equaling $407 million.

Shareholders’ equity was ~~$425~~$452 million at June 30, ~~2020,~~2021, compared to ~~$417~~$442 million at December 31, ~~2019.~~2020. The ~~$8.7~~$10.3 million increase during the first six months of ~~2020~~2021 primarily reflects the positive impact of net income totaling ~~$19.4~~$32.3 million, ~~compared to~~partially offset by the negative impact of cash dividends and common stock repurchases totaling ~~$9.0~~$9.2 million and ~~$6.3~~$10.9 million, respectively. Reflecting ~~a decline~~an increase in market interest rates, the change in net unrealized holding gain/loss on securities available for sale, net of tax effect, had a ~~$2.4~~$4.0 million ~~positive~~negative impact on shareholders’ equity during the first six months of ~~2020.~~2021.

Liquidity
Liquidity is measured by our ability to raise funds through deposits, borrowed funds, and capital, or cash flow from the repayment of loans and securities. These funds are used to fund loans, meet deposit withdrawals, maintain reserve requirements and operate our company. Liquidity is primarily achieved through local and out-of-area deposits and liquid assets such as securities available for sale, matured and called securities, federal funds sold and interest-earning deposit balances. Asset and liability management is the process of managing our balance sheet to achieve a mix of earning assets and liabilities that maximizes profitability, while providing adequate liquidity.

To assist in providing needed funds, we have regularly obtained monies from wholesale funding sources. Wholesale funds, primarily comprised of deposits from customers outside of our market areas and advances from the FHLBI, totaled ~~$471~~$425 million, or ~~12.3%~~10.0% of combined deposits and borrowed funds, as of June 30, ~~2020,~~2021, compared to ~~$487~~$441 million, or ~~15.5%~~11.2% of combined deposits and borrowed funds, as of December 31, ~~2019.~~2020.

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Sweep accounts increased ~~$64.9~~$51.4 million during the first six months of ~~2020,~~2021, totaling ~~$168~~$170 million as of June 30, ~~2020.~~2021. The aggregate balance of this funding type can be subject to relatively large fluctuations given the nature of the customers utilizing this product and the sizable balances of many of the customers. The average balance ~~at June 30, 2020 was the maximum balance~~of sweep accounts equaled $142 million during the first six months of ~~2020, compared to an average~~2021, with a high balance of ~~$123~~$181 million ~~during the period.~~and low balance of $113 million. Our sweep account program entails transferring collected funds from certain business noninterest-bearing checking accounts and savings deposits into over-night 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.

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~~MERCANTILE BANK CORPORATION~~

Information regarding ~~our~~ repurchase agreements as of June 30, ~~2020~~2021 and during the first six months of ~~2020~~2021 is as follows:

Outstanding balance at June 30, 2020
$ 167,527,000
Weighted average interest rate at June 30, 2020
0.10
%
Maximum daily balance six months ended June 30, 2020
$ 167,527,000
Average daily balance for six months ended June 30, 2020
$ 123,486,000
Weighted average interest rate for six months ended June 30, 2020
0.13
%
Outstanding balance at June 30, 2021
$ 169,737,000
Weighted average interest rate at June 30, 2021
0.11
%
Maximum daily balance six months ended June 30, 2021
$ 180,719,000
Average daily balance for six months ended June 30, 2021
$ 141,861,000
Weighted average interest rate for six months ended June 30, 2021
0.11
%

FHLBI advances ~~increased $40.0~~aggregated $394 million ~~during the first six months of 2020, reflecting new advances obtained primarily to replace maturities and manage interest rate risk. As~~as of June 30, 2021, unchanged from the year-end 2020 FHLBI advances totaled $394 million. In June 2020, we executed a blend and extend transaction with the FHLBI to extend the duration of the FHLBI advance portfolio as part our interest rate risk management program. We prepaid seven advances aggregating $70.0 million with maturities ranging from August 2020 through October 2021 and fixed interest rates from 1.36% to 2.84% and averaging 1.97%, using the proceeds from seven new advances aggregating $70.0 million with maturities ranging from June 2024 through June 2027 and fixed interest rates from 0.55% to 1.18% and averaging 0.84%. Prepayment fees totaling $0.9 million were embedded into the fixed rates on the newly obtained advances, equating to 0.22% of the 0.84% average rate of the new advances.balance. The ~~FHLBI~~ advances are ~~generally~~ collateralized by residential mortgage loans, first mortgage liens on multi-family property loans, first mortgage liens on commercial real estate loans, and substantially all other assets of our bank, under a blanket lien ~~on our residential mortgage loan portfolio and certain commercial real estate loans.~~arrangement. Our borrowing line of credit as of June 30, ~~2020~~2021 totaled ~~$775~~$807 million, with remaining availability ~~of $375~~based on collateral equaling $407 million.

We also have the ability to borrow up to $70.0 million on a daily basis through correspondent banks using established unsecured federal funds purchased lines of credit. We did not access the lines of credit during the first six months of ~~2020. Conversely,~~2021. In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged ~~$175~~$564 million during the first six months of ~~2020.~~2021. 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 ~~$33.3~~$35.2 million as of June 30, ~~2020.~~2021. We did not utilize this line of credit during the first six months of ~~2020~~2021 or at any time during the previous ~~eleven~~twelve fiscal years, and do not plan to access this line of credit in future periods.

The following table reflects, as of June 30, ~~2020,~~2021, significant fixed and determinable contractual obligations to third parties by payment date, excluding accrued interest:

One Year

One to

Three to

Over

One Year

One to

Three to

Over

or Less

Three Years

Five Years

Five Years

Total

or Less

Three Years

Five Years

Five Years

Total

Deposits without a stated maturity
$ 2,671,952,000 $ 0 $ 0 $ 0 $ 2,671,952,000 $ 3,211,444,000 $ 0 $ 0 $ 0 $ 3,211,444,000
Time deposits
348,542,000 207,563,000 34,223,000 0 590,328,000 271,352,000 136,357,000 52,118,000 0 459,827,000
Short-term borrowings
167,527,000 0 0 0 167,527,000 169,737,000 0 0 0 169,737,000
Federal Home Loan Bank advances
0 154,000,000 160,000,000 80,000,000 394,000,000 60,000,000 174,000,000 110,000,000 50,000,000 394,000,000
Subordinated debentures
0 0 0 47,222,000 47,222,000 0 0 0 47,904,000 47,904,000
Other borrowed money
0 0 0 2,550,000 2,550,000 0 0 0 1,565,000 1,565,000
Property leases
658,000 1,153,000 747,000 1,221,000 3,779,000 777,000 1,521,000 481,000 1,173,000 3,952,000

In addition to normal loan funding and deposit flow, we must maintain liquidity to meet the demands of certain unfunded loan commitments and standby letters of credit. As of June 30, ~~2020,~~2021, we had a total of ~~$1.19~~$1.47 billion in unfunded loan commitments and ~~$21.4~~$26.2 million in unfunded standby letters of credit. Of the total unfunded loan commitments, ~~$1.01~~$1.31 billion were commitments available as lines of credit to be drawn at any time as customers’ cash needs vary, and ~~$176~~$161 million were for loan commitments generally expected to close and become funded within the next 12 to 18 months. We regularly monitor fluctuations in loan balances and commitment levels, and include such data in our overall liquidity management.

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We monitor our liquidity position and funding strategies on an ongoing basis, but recognize that unexpected events, changes in economic or market conditions, a reduction in earnings performance, declining capital levels or situations beyond our control could cause liquidity challenges. While we believe it is unlikely that a funding crisis of any significant degree is likely to materialize, we have developed a comprehensive contingency funding plan that provides a framework for meeting liquidity disruptions.

Capital Resources
Shareholders’ equity was ~~$425~~$452 million at June 30, ~~2020,~~2021, compared to ~~$417~~$442 million at December 31, ~~2019.~~2020. The ~~$8.7~~$10.3 million increase during the first six months of ~~2020~~2021 primarily reflects the positive impact of net income totaling ~~$19.4~~$32.3 million, ~~compared to~~partially offset by the negative impact of cash dividends and common stock repurchases totaling ~~$9.0~~$9.2 million and ~~$6.3~~$10.9 million, respectively. Reflecting ~~a decline~~an increase in market interest rates, the change in net unrealized holding gain/loss on securities available for sale, net of tax effect, had a ~~$2.4~~$4.0 million ~~positive~~negative impact on shareholders’ equity during the first six months of ~~2020.~~2021.

~~As part~~In May 2021, we announced that our Board of Directors had authorized a ~~$20~~program to repurchase up to $20.0 million of our common stock ~~repurchase~~from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations. This program replaces a similar $20.0 million program that had been announced in May 2019 ~~and instituted in conjunction with the completion of our existing program~~ that was ~~introduced in January 2015 and later expanded in April 2016,~~nearing exhaustion. During the first six months of 2021, we repurchased a total of approximately ~~222,000~~347,000 shares ~~for $6.3~~at a total price of $10.9 million, ~~or a weighted~~at an average ~~all-in cost~~price per share of $28.25, during the first quarter of 2020. No shares were repurchased during the second quarter of 2020. During the period of January 2015 through March 2020, we repurchased approximately 1,612,000 shares for $38.9 million, or a weighted average all-in cost per share of $24.13,$31.28. Availability under the ~~original and new programs on a combined basis. In March 2020, we elected to suspend stock repurchases to preserve capital for lending and other purposes while we assess the potential impacts~~repurchase plan totaled $17.3 million as of ~~the Coronavirus Pandemic. We have the ability to reinstate the repurchase program as circumstances warrant.~~June 30, 2021. The stock buybacks have been funded from cash dividends paid to us from our bank. Additional repurchases may be made ~~during~~ in future periods under the authorized plan or a new plan, which would also likely be funded from cash dividends paid to us from our bank.

We and our bank are subject to regulatory capital requirements administered by state and federal banking agencies. Failure to meet the various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. Under the final BASEL III capital rules that became effective on January 1, 2015, there is a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not meet this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in cash dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement was phased in over three years beginning in 2016. The capital buffer requirement raised the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5% and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019. We believe that, as of June 30, ~~2020,~~2021, our bank met all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

As of June 30, ~~2020,~~2021, our bank’s total risk-based capital ratio was ~~13.5%~~13.0%, compared to ~~13.0%~~13.5% at December 31, ~~2019.~~2020. Our bank’s total regulatory capital increased ~~$11.9~~$20.5 million during the first six months of ~~2020,~~2021, in large part reflecting the net impact of net income totaling ~~$22.3~~$34.9 million and cash dividends paid to us aggregating ~~$19.5~~$13.0 million. Our bank’s total risk-based capital ratio was also impacted by a ~~$38.4~~$285 million ~~decrease~~increase in total risk-weighted assets, primarily resulting from ~~a reduction~~growth in core commercial ~~line of credit balances.~~loans and securities available for sale. As of June 30, ~~2020,~~2021, our bank’s total regulatory capital equaled ~~$437~~$478 million, or ~~$113~~$110 million in excess of the 10.0% minimum which is among the requirements to be categorized as “well capitalized.” Our and our bank’s capital ratios as of June 30, ~~2020~~2021 and December 31, ~~2019~~2020 are disclosed in Note 1112 of the Notes to Consolidated Financial Statements.

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Results of Operations
We recorded net income of $18.1 million, or $1.12 per basic and diluted share, for the second quarter of 2021, compared to net income of $8.7 million, or $0.54 per basic and diluted share, for the second quarter of ~~2020, compared to~~2020. We recorded net income of ~~$11.7~~$32.3 million, or ~~$0.71~~$2.00 per basic and diluted share, for the ~~second quarter~~first six months of ~~2019. We recorded~~2021, compared to net income of $19.4 million, or $1.19 per basic and diluted share, for the first six months of ~~2020, compared to net income of $23.5 million, or $1.43 per basic and diluted share, for the first six months of 2019.~~2020.

~~Proceeds from a bank owned life insurance claim increased net income during the second quarter~~
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Table of 2019 by approximately $1.3 million, or $0.08 per diluted share. Excluding the impact of this transaction, diluted earnings per share decreased $0.09, or 14.3%, during the second quarter of 2020 compared to the prior-year second quarter. Proceeds from bank owned life insurance claims and a gain on the sale of a former branch facility increased net income during the first six months of 2019 by approximately $3.1 million, or $0.19 per diluted share. Excluding the impacts of these transactions, diluted earnings per share decreased $0.05, or 4.0%, during the first six months of 2020 compared to the respective prior-year period.Contents
MERCANTILE BANK CORPORATION

The ~~lower~~improved levels of net income during the second quarter and first six months of ~~2020~~2021 compared to the respective prior-year periods primarily resulted from ~~higher~~lower provision expense and increased noninterest ~~expense and decreased net interest~~ income, which more than offset ~~increased~~higher noninterest ~~income. The~~expense. Negative loan loss ~~reserve build~~provisions were recorded during the second quarter and first six months of 2021, primarily reflecting a reduced allocation associated with the economic and business conditions environmental factor. Growth in noninterest income during the current-year second quarter mainly resulted from fee income generated from an interest rate swap program that was ~~viewed as~~introduced during the fourth quarter of 2020, a ~~precautionary measure to guard against any potential deterioration~~gain on the sale of a branch, and increased credit and debit card income, while growth in noninterest income during the first six months of 2021 primarily reflected improved mortgage banking income, along with increases in the ~~loan portfolio stemming from the Coronavirus Pandemic and associated weakened economic conditions.~~aforementioned revenue streams. The higher levels of noninterest expense mainly reflected increased compensation occupancy, furniture and equipment, and data processing costs, and the declines in net interest income depicted lower yields on earning assets, which more than offset growth in earning assets. The improved noninterest income primarily reflected increased mortgage banking income.costs.

Interest income during the second quarter of ~~2020~~2021 was ~~$37.2~~$35.8 million, a decrease of ~~$2.6~~$1.4 million, or ~~6.7%~~3.7%, from the ~~$39.8~~$37.2 million earned during the second quarter of ~~2019.~~2020. The decrease resulted from a lower yield on average earning assets, which more than offset the impact of growth in average earning assets. The yield on average earning assets was 3.20% during the second quarter of 2021, compared to 3.85% during the second quarter of ~~2020, compared to 4.85%~~2020. The decline primarily resulted from a change in earning asset mix. On average, lower-yielding interest-earning deposits represented 13.9% of earning assets during the second quarter of ~~2019. The decreased yield on average earning assets primarily resulted~~2021, up from ~~a lower yield on loans, which declined from 5.18%~~6.6% during the second quarter of ~~2019 to 4.18%~~2020, while higher-yielding loans represented 75.3% of earning assets during the current-year second quarter, down from 84.8% during the prior-year second quarter. ~~The decrease was mainly due to a lower yield on commercial loans,~~A significant volume of excess on-balance sheet liquidity, which ~~equaled 4.20%~~initially surfaced in the second quarter of 2020 ~~compared to 5.27% in~~as a result of the ~~prior-year second quarter. The lower~~Covid-19 environment and persisted during the remainder of 2020 and the first six months of 2021, negatively impacted the yield ~~primarily reflected reduced interest rates~~ on ~~variable-rate commercial loans resulting from the Federal Open Market Committee (“FOMC”) significantly decreasing the targeted federal funds rate~~average earning assets by ~~225~~42 basis points during the second ~~half~~quarter of ~~2019~~2021. The excess funds, consisting primarily of low-yielding deposits with the Federal Reserve Bank of Chicago, are mainly a product of federal government stimulus programs, lower business and ~~first three months of 2020.~~consumer spending and investing, and PPP loan forgiveness activities.

~~The negative impact of~~Decreased yields on securities and loans also contributed to the ~~decreased~~lower yield on ~~commercial loans was partially mitigated by an improved~~average earning assets in the current-year second quarter compared to the respective 2020 period. The yield on securities ~~which equaled 3.37% and 2.85%~~was 1.54% during the second ~~quarters~~quarter of ~~2020 and 2019, respectively. The increased yield on securities~~2021, down from 3.37% during the prior-year second quarter mainly ~~reflected the recording of $0.9 million in~~due to decreased accelerated discount accretion on called U.S. Government agency bonds asand lower yields on newly purchased bonds, reflecting the declining interest ~~income~~rate environment. Accelerated discount accretion totaled $0.9 million during the second quarter of ~~2020. No~~2020; no accelerated discount accretion was recorded during the ~~prior-year~~ second ~~quarter.~~quarter of 2021. As part of our interest rate risk management program, U.S. Government agency bonds are periodically purchased at discounts during rising interest rate environments; if these bonds are called during decreasing interest rate environments, the remaining unaccreted discount amounts are immediately recognized as interest income.
A decreased yield on interest-earning deposits and a change in earning asset mix also contributed to the lower yield on average earning assets in the current-year second quarter compared to the respective 2019 period. The yield on ~~interest-earning deposits~~loans was 0.15% during the second quarter of 2020, down from 2.38% during the second quarter of 2019, primarily reflecting the decreased interest rate environment. On average, lower-yielding interest-earning deposits represented 6.5% of earning assets during the second quarter of 2020, up from 2.9% during the second quarter of 2019, while higher-yielding loans represented 84.9% of earning assets3.99% during the current-year second quarter, down from ~~86.3%~~4.18% during the ~~respective 2019 period.~~second quarter of 2020 primarily due to a decreased yield on commercial loans. The lower yield on commercial loans, which declined from 4.20% during the prior-year second quarter to 4.04% during the second quarter of 2021, mainly stemmed from the origination of new loans and renewal of maturing loans in the decreased interest rate environment. Average earning assets equaled ~~$3.88~~$4.47 billion during the current-year second quarter, up ~~$580~~$628 million, or ~~17.6%~~16.4%, from the level of ~~$3.30~~$3.84 billion during the ~~prior-year second quarter; average loans were up $447 million,~~respective 2020 period; average interest-earning deposits were up ~~$157~~$367 million, average securities increased $150 million, and average ~~securities~~loans were ~~down $23.9~~up $111 million.

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Interest income during the first six months of ~~2020~~2021 was ~~$75.1~~$70.6 million, a decrease of ~~$3.4~~$4.5 million, or ~~4.3%~~6.0%, from the ~~$78.5~~$75.1 million earned during the first six months of ~~2019.~~2020. The decrease resulted from a lower yield on average earning assets, which more than offset the impact of growth in average earning assets. The yield on average earning assets was 3.23% during the first six months of 2021, compared to 4.17% during the respective 2020 period. The decline primarily resulted from a change in earning asset mix and lower yields on loans and securities. On average, lower-yielding interest-earning deposits represented 13.8% of earning assets during the first six months of 2021, up from 5.6% during the first six months of 2020, ~~compared to 4.87%~~while higher-yielding loans represented 75.9% and 84.9% of earning assets during the respective ~~2019 period.~~periods. The ~~decreased~~previously mentioned significant volume of excess on-balance sheet liquidity negatively impacted the yield on average earning assets ~~primarily resulted from a lower yield on loans, which declined from 5.19%~~by 43 basis points during the first six months of ~~2019 to~~2021. The yield on loans declined from 4.42% during the first six months of ~~2020. The decrease was~~2020 to 4.01% during the first six months of 2021 mainly due to a lower yield on commercial loans, which equaled 4.46% ~~in the first six months of 2020 compared to 5.30% in~~and 4.06% during the respective ~~2019 period.~~periods. The ~~lower~~decreased yield on commercial loans primarily reflected reduced interest rates on variable-rate commercial loans ~~stemming~~resulting from the ~~previously-mentioned~~ FOMC significantly decreasing the targeted federal funds rate ~~reductions.~~
~~The negative impact~~by a total of 150 basis points in March of 2020, along with the ~~decreased yield on commercial~~origination of new loans ~~was partially mitigated by an improved~~and renewal of maturing loans in the lower interest rate environment. The yield on securities ~~which equaled 4.06% and 2.83%~~was 1.57% during the first six months of 2021, down from 4.06% during the respective 2020 ~~and 2019, respectively. The increased yield on securities~~period mainly ~~reflected the recording of $2.7 million in~~due to decreased accelerated discount accretion on called U.S. Government agency bonds asand lower yields on newly purchased bonds, reflecting the declining interest ~~income~~rate environment. Accelerated discount accretion totaled $2.7 million during the first six months of ~~2020. No~~2020; accelerated discount accretion of less than $0.1 million was recorded during the ~~respective 2019 period.~~
first six months of 2021. A ~~change in earning asset mix and a~~ decreased yield on interest-earning deposits also contributed to the lower yield on average earning assets during the first six months of ~~2020~~2021 compared to the first six months of ~~2019.~~2020. The yield on interest-earning deposits was ~~0.55%~~0.12% during the first six months of ~~2020,~~2021, down from ~~2.42%~~0.55% during the respective ~~2019~~2020 period, mainly reflecting the decreased interest rate environment. On average, lower-yielding interest-earning deposits represented 5.6% of earning assets during the first six months of 2020, up from 2.5% during the first six months of 2019, while higher-yielding loans represented 85.0% of earning assets during the first six months of 2020, down from 86.6% during the respective 2019 period. Average earning assets equaled ~~$3.62~~$4.38 billion during the first six months of ~~2020,~~2021, up ~~$365~~$787 million, or ~~11.2%~~21.9%, from the level of ~~$3.26~~$3.59 billion during the first six months of ~~2019; average loans were up $260 million,~~2020; average interest-earning deposits were up ~~$121~~$403 million, average loans increased $272 million, and average securities were ~~down $16.7~~up $112 million.

Interest expense during the second quarter of ~~2020~~2021 was ~~$6.6~~$4.9 million, a decrease of ~~$2.1~~$1.7 million, or ~~24.2%~~25.6%, from the ~~$8.7~~$6.6 million expensed during the second quarter of ~~2019.~~2020. The decrease ~~in interest expense~~ is attributable to a lower weighted average cost of interest-bearing liabilities, which equaled ~~1.11%~~0.74% in the current-year second quarter compared to ~~1.55%~~1.11% in the prior-year second quarter. The ~~decrease in the weighted average cost of interest-bearing liabilities~~decline mainly reflected lower costs of non-time deposit accounts, borrowed funds, and time deposits. The cost of interest-bearing non-time deposit accounts decreased from 0.65% during the second quarter of 2019 to 0.23% during the second quarter of 2020, primarily reflecting lower interest rates paid on money market accounts; the reduced interest rates mainly reflect the decreasing interest rate environment. The cost of borrowed funds decreased from 2.40% during the second quarter of 2019 to 1.91% during the current-year second quarter, mainly reflecting a change in borrowing mix and lower costs of subordinated debentures and FHLBI advances. Average lower-cost sweep accounts represented 23.7% and 20.2% of average total borrowings during the second quarters of 2020 and 2019, respectively, while average higher-cost FHLBI advances represented 64.9% and 70.5% of average total borrowings during the current-year second quarter and prior-year second quarter, respectively. The cost of subordinated debentures was 5.10% during the second quarter of 2020, down from 6.94% during the respective 2019 period due to decreases in the 90-Day Libor Rate. The cost oflocal time deposits ~~declined from 2.31% during the second quarter of 2019 to 2.04% during the current-year second quarter due to the lower interest rate environment~~ and a ~~change in composition, primarily reflecting a decrease in higher-cost brokered funds. A~~ change in funding mix, consisting of an increase in average lower-cost interest-bearing non-time deposits and a decrease in average higher-cost time deposits as a percentage of average total interest-bearing ~~liabilities, also contributed~~liabilities. The cost of time deposits declined from 2.04% during the second quarter of 2020 to 1.24% during the current-year second quarter due to lower ~~weighted~~interest rates paid on local time deposits, reflecting the decreasing interest rate environment, and a change in composition, primarily reflecting a decrease in higher-cost brokered funds. On average, ~~cost~~lower-cost non-time deposits represented 60.0% of total interest-bearing liabilities during the second quarter of 2021, up from 49.4% during the second quarter of 2020, while higher-cost time deposits represented 17.7% and 25.0% of total interest-bearing liabilities during the respective periods. A lower cost of borrowed funds also contributed to the decreased weighted average cost of interest-bearing liabilities in the second quarter of 2021 compared to the prior-year second quarter. The cost of borrowed funds decreased from 1.91% during the second quarter of 2020 to 1.73% during the second quarter of 2021, mainly reflecting lower costs of FHLBI advances and subordinated debentures. The cost of FHLBI advances was 2.06% during the second quarter of 2021, down from 2.22% during the prior-year second quarter, primarily reflecting the impact of a blend and extend transaction that was executed in June 2020 with the FHLBI to extend the duration of our advance portfolio as part of our interest rate risk management program and the declining interest rate environment. The cost of subordinated debentures was 3.79% during the second quarter of 2021, down from 5.10% during the respective ~~2019 period.~~2020 period due to decreases in the 90-Day Libor Rate. Average interest-bearing liabilities were ~~$2.38~~$2.67 billion during the second quarter of ~~2020,~~2021, up ~~$125~~$294 million, or ~~5.5%~~12.4%, from the ~~$2.25~~$2.38 billion average during the second quarter of ~~2019.~~2020.

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Interest expense during the first six months of ~~2020~~2021 was ~~$14.2~~$10.1 million, a decrease of ~~$2.5~~$4.1 million, or ~~14.9%~~28.5%, from the ~~$16.7~~$14.2 million expensed during the first six months of ~~2019.~~2020. The decrease ~~in interest expense~~ is attributable to a lower weighted average cost of interest-bearing liabilities, which equaled ~~1.23%~~0.78% in the first six months of ~~2020~~2021 compared to ~~1.51%~~1.23% in the respective ~~2019~~2020 period. The decrease in the weighted average cost of interest-bearing liabilities ~~primarily~~ reflected lower costs of time deposits, non-time deposit accounts, and borrowed funds and time deposits. The cost of interest-bearing non-time deposit accounts decreased from 0.65% during the first six months of 2019 to 0.34% during the first six months of 2020, primarily reflecting lower interest rates paid on money market accounts; the reduced interest rates mainly reflect the decreasing interest rate environment. The cost of borrowed funds decreased from 2.41% during the first six months of 2019 to 2.09% during the respective 2020 period, mainly reflecting a lower cost of subordinated debentures and change in borrowing mix. The cost of subordinated debentures was 5.50% during the first six months of 2020, down from 7.02% during the respective 2019 period due to decreases in the 90-Day Libor Rate. Average lower-cost sweep accounts represented 21.9% and 19.4% of average total borrowings during the first six months of 2020 and 2019, respectively, while average higher-cost FHLBI advances represented 67.5% and 70.8% of average total borrowings during the respective time periods. The cost of time deposits declined from 2.24% during the first six months of 2019 to 2.13% during the respective 2020 period due to the lower interest rate environment and a change in composition, mainly reflecting a decrease in higher-cost brokered funds. A change in funding mix, consisting of an increase in average lower-cost interest-bearing non-time deposits and a decrease in average higher-cost time deposits as a percentage of average total interest-bearing ~~liabilities, also contributed~~liabilities. The cost of time deposits declined from 2.13% during the first six months of 2020 to 1.37% during the respective 2021 period due to lower rates paid on local time deposits, reflecting the decreased interest rate environment, and a change in composition, primarily reflecting a decline in higher-cost brokered funds. The cost of interest-bearing non-time deposit accounts decreased from 0.34% during the first six months of 2020 to 0.21% during the first six months of 2021, primarily reflecting lower interest rates paid on money market accounts; the reduced interest rates mainly reflect the decreasing interest rate environment. The cost of borrowed funds decreased from 2.09% during the first six months of 2020 to 1.75% during the respective 2021 period, primarily reflecting lower costs of FHLBI advances and subordinated debentures. The cost of FHLBI advances was 2.06% during the first six months of 2021, down from 2.31% during the first six months of 2020, primarily reflecting the impact of the aforementioned blend and extend transaction that was executed in June 2020 with the FHLBI and the lower ~~weighted~~interest rate environment. The cost of subordinated debentures was 3.82% during the first six months of 2021, down from 5.50% during the respective 2020 period due to decreases in the 90-Day Libor Rate. On average, ~~cost~~lower-cost non-time deposits represented 58.8% of total interest-bearing liabilities during the first six months of ~~2020 compared to~~2021, up from 49.5% during the first six months of ~~2019.~~2020, while higher-cost time deposits represented 19.0% and 26.1% of total interest-bearing liabilities during the respective periods. Average interest-bearing liabilities were ~~$2.31~~$2.64 billion during the first six months of ~~2020,~~2021, up ~~$82.6~~$328 million, or ~~3.7%~~14.2%, from the ~~$2.23~~$2.31 billion average during the ~~respective 2019 period.~~first six months of 2020.

Net interest income during the second quarter of ~~2020~~2021 was ~~$30.6~~$30.9 million, ~~a decrease~~an increase of ~~$0.5~~$0.3 million, or ~~1.8%~~1.0%, from the ~~$31.1~~$30.6 million earned during the ~~second quarter of 2019.~~respective 2020 period. The ~~decline in net interest income~~increase resulted from ~~a decreased net interest margin, which more than offset~~ the positive impact of an increase in average earning ~~assets.~~assets, which more than offset a lower net interest margin. The net interest margin decreased from ~~3.79%~~3.17% in the second quarter of ~~2019~~2020 to ~~3.17%~~2.76% in the current-year second quarter due to a lower yield on average earning assets, which more than offset a reduction in the cost of funds. The decreased yield on average earning assets primarily reflected a change in earning asset mix, along with lower ~~interest rates~~yields on ~~variable-rate~~securities and commercial loans, ~~stemming from the aforementioned FOMC rate cuts,~~ while the decreased cost of funds mainly reflected lower ~~costs~~rates paid on local time deposits and a change in funding mix. The previously discussed significant level of non-time deposit accounts, borrowed funds, and time deposits. As previously mentioned, the recording of accelerated discount accretion on called U.S. Government agency bonds partially mitigated the negative impact of the decreased yield on commercial loans on the yield on average earning assets during the second quarter of 2020. The accelerated discount accretion recorded during the second quarter of 2020 positivelyexcess on-balance sheet liquidity negatively impacted the net interest margin by ~~ten~~37 basis ~~points.~~points during the second quarter of 2021.

Net interest income during the first six months of ~~2020~~2021 was ~~$60.9~~$60.4 million, a decrease of ~~$0.9~~$0.5 million, or ~~1.4%~~0.8%, from the ~~$61.8~~$60.9 million earned during the first six months of ~~2019.~~2020. The decrease ~~in net interest income~~ resulted from a lower net interest margin, which more than offset the positive impact of an increase in average earning assets. The net interest margin decreased from ~~3.83%~~3.38% in the first six months of ~~2019~~2020 to ~~3.38%~~2.76% in the respective ~~2020~~2021 period due to a lower yield on average earning assets, which more than offset a reduction in the cost of funds. The decreased yield on average earning assets primarily reflected a change in earning asset mix and lower ~~interest rates~~yields on ~~variable-rate~~ commercial loans ~~stemming from the previously-mentioned FOMC rate cuts,~~and securities, while the decreased cost of funds mainly reflected lower costs of ~~non-time deposit accounts,~~deposits and borrowed funds and ~~time deposits. As previously mentioned,~~a change in funding mix. The aforementioned significant level of excess on-balance sheet liquidity negatively impacted the recording of accelerated discount accretion on called U.S. Government agency bonds partially mitigated the negative impact of the decreased yield on commercial loans on the yield on average earning assetsnet interest margin by 37 basis points during the first six months of ~~2020. The accelerated discount accretion recorded during the first six months of 2020 positively impacted the net interest margin by 15 basis points.~~2021.

The following tables set forth certain information relating to our consolidated average interest-earning assets and interest-bearing liabilities and reflect the average yield on assets and average cost of liabilities for the second quarters and first six months of ~~2020~~2021 and ~~2019.~~2020. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the period presented. Tax-exempt securities interest income and yield for the second quarters and first six months of ~~2020~~2021 and ~~2019~~2020 have been computed on a tax equivalent basis using a marginal tax rate of 21.0%. Securities interest income was increased by $60,000 in the second quarter of both ~~2020~~2021 and ~~2019~~2020 and $120,000 in the first six months of both ~~2020~~2021 and ~~2019~~2020 for this non-GAAP, but industry standard, adjustment. These adjustments equated to one basis point increases in our net interest margin for each of the ~~2020~~2021 and ~~2019~~2020 periods.

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Quarters ended June 30,

Quarters ended June 30,

2 0 2 0

2 0 1 9

2 0 2 1

2 0 2 0

Average

Average

Average

Average

Average

Average

Average

Average

Balance

Interest

Rate

Balance

Interest

Rate

Balance

Interest

Rate

Balance

Interest

Rate

(dollars in thousands)

(dollars in thousands)

ASSETS

Loans
$ 3,294,883 $ 34,322 4.18 % $ 2,848,343 $ 36,765 5.18 % $ 3,365,686 $ 33,789 3.99 % $ 3,254,985 $ 34,322 4.18 %
Investment securities
333,843 2,809 3.37 357,718 2,545 2.85 483,805 1,862 1.54 333,843 2,809 3.37
Other interest-earning assets
251,833 93 0.15 94,616 569 2.38 619,358 183 0.12 251,833 93 0.15
Total interest - earning assets
3,880,559 37,224 3.85 3,300,677 39,879 4.85 4,468,849 35,834 3.20 3,840,661 37,224 3.85

Allowance for loan losses
(26,538
)
(23,549
)
(39,406
)
(26,538
)

Other assets
265,552 252,470 323,415 305,450

Total assets
$ 4,119,573 $ 3,529,598 $ 4,752,858 $ 4,119,573

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest-bearing deposits
$ 1,767,986 $ 3,700 0.84 % $ 1,719,433 $ 5,529 1.29 % $ 2,074,759 $ 2,346 0.45 % $ 1,767,986 $ 3,700 0.84 %
Short-term borrowings
163,339 55 0.14 107,423 68 0.26 150,778 40 0.11 163,339 55 0.14
Federal Home Loan Bank advances
394,000 2,214 2.22 374,000 2,261 2.39 394,000 2,050 2.06 394,000 2,214 2.22
Other borrowings
49,735 624 4.96 49,379 845 6.77 49,421 467 3.74 49,735 624 4.96
Total interest-bearing liabilities
2,375,060 6,593 1.11 2,250,235 8,703 1.55 2,668,958 4,903 0.74 2,375,060 6,593 1.11

Noninterest-bearing deposits
1,304,986 875,645 1,619,976 1,304,986
Other liabilities
17,297 14,586 17,995 17,297
Shareholders’ equity
422,230 389,132 445,929 422,230

Total liabilities and shareholders’ equity
$ 4,119,573 $ 3,529,598 $ 4,752,858 $ 4,119,573

Net interest income
$ 30,631 $ 31,176 $ 30,931 $ 30,631

Net interest rate spread
2.74 % 3.30 % 2.46 % 2.74 %
Net interest spread on average assets
2.98 % 3.54 % 2.61 % 2.98 %
Net interest margin on earning assets
3.17 % 3.79 % 2.76 % 3.17 %

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Six months ended June 30,

Six months ended June 30,

2 0 2 0

2 0 1 9

2 0 2 1

2 0 2 0

Average

Average

Average

Average

Average

Average

Average

Average

Balance

Interest

Rate

Balance

Interest

Rate

Balance

Interest

Rate

Balance

Interest

Rate

(dollars in thousands)

(dollars in thousands)

ASSETS

Loans
$ 3,077,965 $ 67,764 4.42 % $ 2,818,055 $ 72,555 5.19 % $ 3,324,006 $ 66,774 4.01 % $ 3,052,441 $ 67,764 4.42 %
Investment securities
339,374 6,886 4.06 356,098 5,046 2.83 451,837 3,554 1.57 339,374 6,886 4.06
Other interest-earning assets
202,735 568 0.55 81,339 976 2.42 605,564 351 0.12 202,735 568 0.55
Total interest - earning assets
3,620,074 75,218 4.17 3,255,492 78,577 4.87 4,381,407 70,679 3.23 3,594,550 75,218 4.17

Allowance for loan losses
(25,124
)
(23,140
)
(38,794
)
(25,124
)

Other assets
266,229 253,577 323,759 291,753

Total assets
$ 3,861,179 $ 3,485,929 $ 4,666,372 $ 3,861,179

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest-bearing deposits
$ 1,746,008 $ 8,342 0.96 % $ 1,694,138 $ 10,334 1.23 % $ 2,050,959 $ 5,063 0.50 % $ 1,746,008 $ 8,342 0.96 %
Short-term borrowings
133,095 94 0.14 105,987 173 0.33 141,861 76 0.11 133,095 94 0.14
Federal Home Loan Bank advances
379,714 4,427 2.31 376,519 4,494 2.37 394,000 4,077 2.06 379,714 4,427 2.31
Other borrowings
49,709 1,348 5.36 49,321 1,695 6.84 49,610 939 3.76 49,709 1,348 5.36
Total interest-bearing liabilities
2,308,526 14,211 1.23 2,225,965 16,696 1.51 2,636,430 10,155 0.78 2,308,526 14,211 1.23

Noninterest-bearing deposits
1,114,406 864,011 1,565,458 1,114,406
Other liabilities
17,326 13,299 19,723 17,326
Shareholders’ equity
420,921 382,654 444,761 420,921

Total liabilities and shareholders’ equity
$ 3,861,179 $ 3,485,929 $ 4,666,372 $ 3,861,179

Net interest income
$ 61,007 $ 61,881 $ 60,524 $ 61,007

Net interest rate spread
2.94 % 3.36 % 2.45 % 2.94 %
Net interest spread on average assets
3.17 % 3.58 % 2.62 % 3.17 %
Net interest margin on earning assets
3.38 % 3.83 % 2.76 % 3.38 %

A negative loan loss provision expense of ~~$7.6~~$3.1 million was recorded during the second quarter of ~~2020,~~2021, compared to ~~$0.9~~a provision expense of $7.6 million during the second quarter of ~~2019.~~2020. A negative loan loss provision expense of ~~$8.4~~$2.8 million was recorded during the first six months of ~~2020,~~2021, compared to ~~$1.8~~a provision expense of $8.4 million during the first six months of ~~2019.~~2020. The negative provision expense recorded during the 2021 periods was mainly comprised of a reduced allocation associated with the economic and business conditions environmental factor, reflecting improvement in both current and forecasted economic conditions. The provision expense recorded during the 2020 periods primarily reflected an allocation associated with a ~~newly-created Coronavirus Pandemic environmental~~newly created Covid-19 factor ~~(“COVID-19 factor”)~~ and an increased allocation related to the existing economic and business conditions environmental factor. The ~~COVID-19~~Covid-19 factor was added to address the unique challenges and economic uncertainty resulting from the pandemic and its potential impact on the collectability of the loan portfolio. ~~The provision expense recorded during the 2019 periods mainly reflected ongoing net loan growth.~~

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MERCANTILE BANK CORPORATION

During the second quarter of 2021, loan charge-offs totaled $0.1 million, while recoveries of prior period loan charge-offs equaled $0.4 million, providing for net loan recoveries of $0.3 million, or an annualized 0.04% of average total loans. During the second quarter of 2020, loan charge-offs totaled $0.3 million, while recoveries of prior period loan charge-offs equaled $0.1 million, providing for net loan charge-offs of $0.2 million, or an annualized 0.02% of average total loans. During the ~~second quarter~~first six months of ~~2019,~~2021, loan charge-offs ~~and~~totaled $0.1 million, while recoveries of prior period loan charge-offs ~~were both less than $0.1~~equaled $0.8 million, providing for ~~a nominal~~ net loan ~~recovery.~~recoveries of $0.7 million, or an annualized 0.05% of average total loans. During the first six months of 2020, loan charge-offs and recoveries of prior period loan charge-offs both approximated $0.4 million, providing for a nominal level of net loan recovery. During the first six months of 2019, loan charge-offs totaled $0.3 million, while recoveries of prior period loan charge-offs equaled $0.2 million, providing for net loan charge-offs of $0.1 million, or an annualized 0.01% of average total loans.recoveries. The allowance for loans, as a percentage of total loans, was 1.1% as of June 30, 2021, 1.2% as of December 31, 2020, and 1.0% as of June 30, ~~2020, and 0.9% as of December 31, 2019, and June 30, 2019.~~2020. Excluding PPP loans, the allowance for loans, ~~represented 1.2%~~as a percentage of total loans, equaled 1.2% as of June 30, 2021 and June 30, 2020, and 1.3% as of December 31, 2020.

Noninterest income during the second quarter of ~~2020~~2021 was ~~$11.0~~$14.6 million, compared to ~~$6.3~~$11.0 million during the prior-year second quarter. Noninterest income during the first six months of 2021 was $28.0 million, compared to $17.5 million during the respective 2020 period. Noninterest income during the second quarter and first six months of ~~2019~~2021 included a ~~bank owned life insurance claim~~$1.1 million gain on the sale of ~~$1.3 million.~~a branch facility. Excluding the impact of this transaction, noninterest income increased ~~$5.9~~$2.5 million, or ~~nearly 118%~~22.9%, during the second quarter of 2021 and $9.4 million, or 53.8%, during the first six months of 2021 compared to the respective 2020 periods. The higher level of noninterest income in the second quarter of 2021 mainly reflected fee income generated from an interest rate swap program that was introduced during the fourth quarter of 2020 and increased credit and debit card income. The interest rate swap program provides certain commercial borrowers with a longer-term fixed-rate option and assists Mercantile in managing associated longer-term interest rate risk. Growth in service charges on accounts and payroll service fees also contributed to the increased level of noninterest income during the second quarter of 2021. Mortgage banking income remained solid during the second quarter of 2021, slightly exceeding the amount recorded during the prior-year second quarter as an increase in purchase mortgage loans and a higher gain on sale rate offset a decline in refinance mortgage loans. Purchase transactions totaled $144 million during the second quarter of 2021 compared to $58.0 million during the prior-year second quarter. Refinance transactions totaled $92.8 million during the current-year second quarter, compared to $217 million during the second quarter of 2020.
The higher level of noninterest income in the first six months of 2021 primarily resulted from increased mortgage banking income, mainly reflecting increased production and a higher gain on sale rate. Residential mortgage loan originations totaled $482 million during the first six months of 2021, approximately 18% higher than originations during the first six months of 2020. Purchase transactions totaled $226 million during the first six months of 2021, compared to $105 million during the respective ~~2019 period. Noninterest~~2020 period, representing an increase of $121 million, or approximately 116%. Refinance transactions totaled $256 million during the first six months of 2021, compared to $304 million during the first six months of 2020, representing a decrease of $47.3 million, or approximately 16%. Residential mortgage loans originated for sale, generally consisting of longer-term fixed rate residential mortgage loans, totaled $336 million, or approximately 70% of total mortgage loans originated, during the first six months of 2021. During the first six months of 2020, residential mortgage loans originated for sale totaled $321 million, or nearly 79% of total mortgage loans originated. Fee income generated from the interest rate swap program and growth in credit and debit card income, service charges on accounts, and payroll service fees also contributed to the higher level of noninterest income during the first six months of 2020 was $17.5 million, compared to $13.0 million during the same time period in 2019. Noninterest income during the first six months of 2019 included bank owned life insurance claims aggregating $2.6 million and a gain on the sale of a former branch facility of $0.6 million. Excluding the impacts of these transactions, noninterest income increased $7.7 million, or 79.2%, in the first six months of 2020 compared to the respective 2019 period. The higher level of noninterest income in both 2020 periods primarily reflected increased mortgage banking income. The improved mortgage banking income mainly reflected a significant increase in refinance activity spurred by a decrease in residential mortgage loan interest rates, the continuing success of strategic initiatives that were implemented to increase market share, and an increase in the percentage of originated loans being sold. Service charges on accounts declined in the current-year second quarter compared to the prior-year second quarter, primarily reflecting reduced transaction volume in business accounts, and credit and debit card income was down in both 2020 periods compared to the respective 2019 periods, mainly depicting lower card usage. Both of these revenue streams were negatively impacted by Coronavirus Pandemic-related events, including business shutdowns and stay-at-home orders.2021.

Noninterest expense totaled ~~$23.2~~$26.2 million during the second quarter of ~~2020,~~2021, up ~~$1.1~~$3.0 million, or ~~5.1%~~12.8%, from the prior-year second quarter. Noninterest expense during the first six months of ~~2020~~2021 was ~~$46.1~~$51.3 million, an increase of ~~$2.2~~$5.2 million, or ~~5.1%~~11.2%, from the ~~$43.9~~$46.1 million expensed during the first six months of ~~2019.~~2020. The higher level of expense in both periods primarily resulted from increased compensation costs, mainly reflecting a bonus accrual, increased health insurance costs, and annual employee merit pay increases. A lower level of deferred salary expense related to PPP loan originations also contributed to the increased noninterest expense during the second quarter of 2021, while higher residential mortgage loan originator commissions and associated incentives. Higher occupancy and furniture costs, mainly reflecting increased depreciation expense associated with an expansion of our main office, and data processing costs, primarily depicting growth in transaction volume and new product offerings, alsoincentives contributed to the increased ~~level of~~ noninterest expense ~~during both periods. As part~~in the first six months of ~~a branch network efficiency plan, we announced~~2021. Federal Deposit Insurance Corporation deposit insurance premiums were up $0.1 million in ~~June~~the current-year second quarter and $0.3 million in the first six months of 2021 compared to the respective 2020 ~~that we are planning on closing three branches~~periods, reflecting an increased assessment base and rate. Noninterest expense during the ~~fourth quarter~~first six months of ~~2020. As a result~~2021 includes $0.5 million in net losses on sales and write-downs of ~~these~~former branch ~~network efficiency actions, we recorded a pre-tax charge~~facilities.
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Table of ~~approximately $0.3 million during~~Contents
MERCANTILE BANK CORPORATION
During the second quarter of ~~2020 for severance-related payments~~2021, we recorded income before federal income tax of $22.3 million and ~~expect to record approximately $1.5 million in valuation adjustment costs on the branch facilities during the fourth quarter~~a federal income tax expense of ~~2020. Annual pre-tax savings of approximately $0.7 million are anticipated as a result of these actions.~~
$4.2 million. During the second quarter of 2020, we recorded income before federal income tax of $10.7 million and a federal income tax expense of $2.0 million. During the ~~second quarter~~first six months of ~~2019,~~2021, we recorded income before federal income tax of ~~$14.5~~$39.9 million and a federal income tax expense of ~~$2.8~~$7.6 million. During the first six months of 2020, we recorded income before federal income tax of $23.9 million and a federal income tax expense of $4.5 million. ~~During the first six months of 2019, we recorded income before federal income tax of $29.0 million and a federal income tax expense of $5.5 million.~~ The ~~decreased~~increased federal income tax expense in both ~~2020~~2021 periods resulted from ~~lower~~higher levels of income before federal income tax. Our effective tax rate was 19.0% during both the second quarter and first six months of ~~2020~~2021 and the respective ~~2019~~2020 periods.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. All of our transactions are denominated in U.S. dollars with no specific foreign exchange exposure. We have only limited agricultural-related loan assets and therefore have no significant exposure to changes in commodity prices. Any impact that changes in foreign exchange rates and commodity prices would have on interest rates is assumed to be insignificant. Interest rate risk is the exposure of our financial condition to adverse movements in interest rates. We derive our income primarily from the excess of interest collected on our interest-earning assets over the interest paid on our interest-bearing liabilities. The rates of interest we earn on our assets and owe on our liabilities generally are established contractually for a period of time. Since market interest rates change over time, we are exposed to lower profitability if we cannot adapt to interest rate changes. Accepting interest rate risk can be an important source of profitability and shareholder value; however, excessive levels of interest rate risk could pose a significant threat to our earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to our safety and soundness.

Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control interest rate risk and the quantitative level of exposure. Our interest rate risk management process seeks to ensure that appropriate policies, procedures, management information systems and internal control procedures are in place to maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest rate risk, we assess the existing and potential future effects of changes in interest rates on our financial condition, including capital adequacy, earnings, liquidity and asset quality.

We use two interest rate risk measurement techniques. The first, which is commonly referred to as GAP analysis, measures the difference between the dollar amounts of interest sensitive assets and liabilities that will be refinanced or repriced during a given time period. A significant repricing gap could result in a negative impact to our net interest margin during periods of changing market interest rates.

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The following table depicts our GAP position as of June 30, ~~2020:~~2021:

Within

Three to

One to

After

Within

Three to

One to

After

Three

Twelve

Five

Five

Three

Twelve

Five

Five

Months

Months

Years

Years

Total

Months

Months

Years

Years

Total

Assets:

Commercial loans ⁽¹⁾
$ 590,203,000 $ 205,130,000 $ 1,718,204,000 $ 373,560,000 $ 2,887,097,000 $ 560,871,000 $ 328,578,000 $ 1,474,207,000 $ 453,988,000 $ 2,817,644,000
Residential real estate loans
13,462,000 19,389,000 156,892,000 237,082,000 426,825,000 23,072,000 22,630,000 126,949,000 243,646,000 416,297,000
Consumer loans
1,263,000 590,000 16,121,000 1,160,000 19,134,000 855,000 901,000 12,485,000 659,000 14,900,000
Securities ⁽²⁾
18,502,000 6,992,000 87,307,000 212,862,000 325,663,000 18,839,000 9,543,000 162,202,000 333,543,000 524,127,000
Other interest-earning assets
382,961,000 1,500,000 2,250,000 0 386,711,000 680,888,000 1,500,000 1,250,000 0 683,638,000
Allowance for loan losses
0 0 0 0 (32,246,000
)
0 0 0 0 (35,913,000
)
Other assets
0 0 0 0 301,195,000 0 0 0 0 336,721,000
Total assets
1,006,391,000 233,601,000 1,980,774,000 824,664,000 $ 4,314,379,000 1,284,525,000 363,152,000 1,777,093,000 1,031,836,000 $ 4,757,414,000

Liabilities:

Interest-bearing checking
382,522,000 0 0 0 382,522,000 477,151,000 0 0 0 477,151,000
Savings deposits
301,881,000 0 0 0 301,881,000 387,783,000 0 0 0 387,783,000
Money market accounts
541,929,000 0 0 0 541,929,000 725,681,000 0 0 0 725,681,000
Time deposits under $100,000
24,289,000 78,096,000 76,453,000 0 178,838,000 17,455,000 61,903,000 63,173,000 0 142,531,000
Time deposits $100,000 & over
66,001,000 180,157,000 165,332,000 0 411,490,000 47,293,000 144,701,000 125,302,000 0 317,296,000
Short-term borrowings
167,527,000 0 0 0 167,527,000 169,737,000 0 0 0 169,737,000
Federal Home Loan Bank advances
0 0 314,000,000 80,000,000 394,000,000 0 60,000,000 284,000,000 50,000,000 394,000,000
Other borrowed money
49,771,000 0 0 0 49,771,000 49,468,000 0 0 0 49,468,000
Noninterest-bearing checking
0 0 0 0 1,445,620,000 0 0 0 0 1,620,829,000
Other liabilities
0 0 0 0 15,580,000 0 0 0 0 21,050,000
Total liabilities
1,533,920,000 258,253,000 555,785,000 80,000,000 3,889,158,000 1,874,568,000 266,604,000 472,475,000 50,000,000 4,305,526,000
Shareholders' equity
0 0 0 0 425,221,000 0 0 0 0 451,888,000
Total liabilities & shareholders' equity
1,533,920,000 258,253,000 555,785,000 80,000,000 $ 4,314,379,000 1,874,568,000 266,604,000 472,475,000 50,000,000 $ 4,757,414,000

Net asset (liability) GAP
$ (527,529,000
)
$ (24,652,000
)
$ 1,424,989,000 $ 744,664,000 $ (590,043,000
)
$ 96,548,000 $ 1,304,618,000 $ 981,836,000

Cumulative GAP
$ (527,529,000
)
$ (552,181,000
)
$ 872,808,000 $ 1,617,472,000 $ (590,043,000
)
$ (493,495,000
)
$ 811,123,000 $ 1,792,959,000

Percent of cumulative GAP to total assets
(12.2
%)
(12.8
%)
20.2 % 37.5 % (12.4
%)
(10.4
%)
17.0 % 37.7 %

⁽¹⁾
Floating rate loans that are currently at interest rate floors are treated as fixed rate loans and are reflected using maturity date and not repricing frequency.
⁽²⁾
Mortgage-backed securities are categorized by average life calculations based upon prepayment trends as of June 30, ~~2020.~~2021.

The second interest rate risk measurement we use is commonly referred to as net interest income simulation analysis. We believe that this methodology provides a more accurate measurement of interest rate risk than the GAP analysis, and therefore, it serves as our primary interest rate risk measurement technique. The simulation model assesses the direction and magnitude of variations in net interest income resulting from potential changes in market interest rates.

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Key assumptions in the model include prepayment speeds on various loan and investment assets; cash flows and maturities of interest sensitive assets and liabilities; and changes in market conditions impacting loan and deposit volume and pricing. These assumptions are inherently uncertain, subject to fluctuation and revision in a dynamic environment; therefore, the model cannot precisely estimate net interest income or exactly predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes and changes in market conditions and our strategies, among other factors.

We conducted multiple simulations as of June 30, ~~2020,~~2021, in which it was assumed that changes in market interest rates occurred ranging from up 300 basis points to down 100 basis points in equal quarterly instalments over the next twelve months. The following table reflects the suggested dollar and percentage changes in net interest income over the next twelve months in comparison to the ~~$121~~$119 million in net interest income projected using our balance sheet amounts and anticipated replacement rates as of June 30, ~~2020.~~2021. The resulting estimates are generally within our policy parameters established to manage and monitor interest rate risk.

Dollar Change

Percent Change

Dollar Change

Percent Change

In Net

In Net

In Net

In Net

Interest Rate Scenario

Interest Income

Interest Income

Interest Income

Interest Income

Interest rates down 100 basis points
$ (710,000
)
(0.6 %) $ (500,000
)
(0.4 %)
Interest rates up 100 basis points
4,940,000 4.1 6,800,000 5.7
Interest rates up 200 basis points
9,440,000 7.8 12,500,000 10.5
Interest rates up 300 basis points
13,880,000 11.5 18,100,000 15.2

The resulting estimates have been significantly impacted by the current interest rate and economic environments, as adjustments have been made to critical model inputs with regards to traditional interest rate relationships. This is especially important as it relates to floating rate commercial loans, which comprise a sizable portion of our balance sheet.

In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including: the growth, composition and absolute levels of loans, deposits, and other earning assets and interest-bearing liabilities; level of nonperforming assets; economic and competitive conditions; potential changes in lending, investing, and deposit gathering strategies; client preferences; and other factors.

Item 4. Controls and Procedures

As of June 30, ~~2020,~~2021, an evaluation was performed under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of June 30, ~~2020.~~2021.

There have been no changes in our internal control over financial reporting during the quarter ended June 30, ~~2020~~2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.
From time to time, we may be involved in various legal proceedings that are incidental to our business. In our opinion, we are not a party to any current legal proceedings that are material to our financial condition, either individually or in the aggregate.

Item 1A. Risk Factors.
There have been no material changes in our risk factors from those previously disclosed in our annual report on Form 10-K for the year ended December 31, ~~2019~~2020 and our March 31, ~~2020~~2021 Form ~~10-Q.~~10-Q, except as set forth below.
Changes in the method of determining Libor, or the replacement of Libor with an alternative reference rate, may adversely affect interest income or expense.
Many of the commercial loans we make bear interest at a floating rate based on Libor, the London inter-bank offered rate. We pay interest on certain subordinated notes related to our trust preferred securities at rates based on Libor.
On July 27, 2017, the United Kingdom Financial Conduct Authority, which oversees Libor, along with various other regulatory bodies, formally announced that it could not assure the continued existence of Libor in its current form beyond the end of 2021, and that an orderly transition process to one or more alternative benchmarks should begin. There is currently no consensus on what rate or rates may become accepted alternatives to Libor, however, the Alternative Reference Rates Committee, a steering committee comprised of U.S. financial market participants, selected by the Federal Reserve Bank of New York, started in May 2018 to publish the Secured Overnight Financing Rate (“SOFR”) as an alternative to Libor. SOFR is a broad measure of the cost of overnight borrowings collateralized by Treasury securities that was selected by the Alternative Reference Rate Committee due to the depth and robustness of the U.S. Treasury repurchase market. At this time, there are certain developments that indicate SOFR is gaining market acceptance, however, it remains impossible to predict whether SOFR will become an accepted alternative to Libor or whether another alternative will become an accepted benchmark.
Any transition to SOFR or an alternative benchmark will require careful consideration and implementation so as not to disrupt the stability of financial markets. We may need to take a variety of actions, including negotiating certain of our agreements based on an alternative benchmark that may be established, if any. The Bank’s Libor Transition Committee meets periodically to assess our situation and to discuss industry evolution. All associated loan and swap documents have been formally reviewed in preparation for the transition to a different index once sufficient market consensus exists. However, the manner and impact of this transition, as well as the effect of these developments on our funding costs, loan and investment portfolios, asset-liability management, and business, remains uncertain. There is no guarantee that a transition from Libor to an alternative benchmark will not result in financial market disruptions, significant changes in benchmark rates, or adverse changes in the value of certain of our loans, and our income and expense.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
We made no unregistered sales of equity securities during the quarter ended June 30, ~~2020.~~2021.

Issuer Purchases of Equity Securities

On May ~~7, 2019,~~27, 2021, we announced that our Board of Directors had authorized a program to repurchase up to $20.0 million of our common stock from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations. This ~~stock repurchase plan~~program replaces a similar $20.0 million program that had been announced on May 7, 2019 that was ~~instituted~~nearing exhaustion. The actual timing, number and value of shares repurchased under the program will be determined by management in ~~conjunction with~~its discretion and will depend on a number of factors, including the ~~completion~~market price of our ~~existing repurchase~~stock, general market and economic conditions, our capital position, financial performance and alternative uses of capital, and applicable legal requirements. The program ~~that was introduced~~may be discontinued at any time.
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MERCANTILE BANK CORPORATION
During the second quarter of 2021, we repurchased a total of 228,649 shares for $7.3 million, or a weighted average all-in cost per share of $31.99. The stock buybacks have been funded from cash dividends paid to us from our bank. Additional repurchases may be made in ~~January 2015 and later expanded in April 2016. As reflected in~~future periods under the ~~table below, no shares were repurchased~~authorized plan or a new plan, which would also likely be funded from cash dividends paid to us from our bank.
Repurchases made during the second quarter of ~~2020. In light of~~2021 are detailed in the significant disruption caused by the Coronavirus Pandemic and the evolving nature of its impact on our business and the broader economy, we elected to temporarily cease stock repurchases beginning in late March 2020 in order to preserve capital for lending and other purposes. We have the ability to reinstate the buyback program as circumstances warrant.table below.

Period

(a) Total
Number of
Shares
Purchased

(b) Average
Price Paid Per
Share

(c) Total Number
of
Shares Purchased
as
Part of Publicly
Announced Plans
or
Programs

(d) Maximum
Number
of Shares or
Approximate
Dollar
Value that May Yet
Be
Purchased Under
the
Plans or Programs

(a) Total
Number of
Shares
Purchased

(b) Average
Price Paid Per
Share

(c) Total Number
of
Shares Purchased
as
Part of Publicly
Announced Plans
or
Programs

(d) Maximum
Number
of Shares or
Approximate
Dollar
Value that May Yet
Be
Purchased Under
the
Plans or Programs

April 1 – 30
0 $
NA
$ 0 $ 10,135,000
60,858

$
32.14

60,858

$
4,333,000

May 1 – 31
0
NA
0 10,135,000
83,780

32.27

83,780

1,629,000

June 1 – 30
0
NA
0 10,135,000
84,011

31.59

84,011

17,346,000

Total
0 $
NA
$ 0 $ 10,135,000
228,649

$
31.99

228,649

$
17,346,000

Item 3. Defaults Upon Senior Securities.
Not applicable.

Item 4. Mine Safety Disclosures.
Not applicable.

Item 5. Other Information.
Not applicable.

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Item 6. Exhibits

~~Exhibit No.~~EXHIBIT NO.
EXHIBIT DESCRIPTION
3.1
Our Articles of Incorporation are incorporated by reference to Exhibit 3.1 of our Form 10-Q for the quarter ended June 30, 2009
3.2
Our Amended and Restated Bylaws dated as of February 26, 2015 are incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed February 26, 2015

31
Rule 13a-14(a) Certifications

32.1
Section 1350 Chief Executive Officer Certification
32.2
Section 1350 Chief Financial Officer Certification
101
The following financial information from Mercantile’s Quarterly Report on Form 10-Q for the quarter ended June 30, ~~2020,~~2021, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements

104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August ~~7, 2020.~~6, 2021.

MERCANTILE BANK CORPORATION
By:
~~/s/~~ /s/ Robert B. Kaminski, Jr.
Robert B. Kaminski, Jr.
President and Chief Executive Officer
(Principal Executive Officer)

By:
~~/s/~~ /s/ Charles E. Christmas
Charles E. Christmas
Executive Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)

82

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2020
June 30, 2021
U.S. Government agency debt obligations	$	161,575,000	$	957,000	$	(35,000	)	$	162,497,000	$	323,641,000	$	423,000	$	(3,923,000	)	$	320,141,000
Mortgage-backed securities		34,765,000		1,269,000		(1,000	)		36,033,000		36,803,000		813,000		(297,000	)		37,319,000
Municipal general obligation bonds		97,171,000		5,296,000		0			102,467,000		124,808,000		4,754,000		(127,000	)		129,435,000
Municipal revenue bonds		5,947,000		217,000		0			6,164,000		18,467,000		363,000		(100,000	)		18,730,000
Other investments		500,000		0		0			500,000		500,000		0		0			500,000

	$	299,958,000	$	7,739,000	$	(36,000	)	$	307,661,000	$	504,219,000	$	6,353,000	$	(4,447,000	)	$	506,125,000

December 31, 2019
December 31, 2020
U.S. Government agency debt obligations	$	185,103,000	$	2,449,000	$	(1,142,000	)	$	186,410,000	$	242,522,000	$	516,000	$	(897,000	)	$	242,141,000
Mortgage-backed securities		41,998,000		554,000		(82,000	)		42,470,000		23,869,000		1,021,000		0			24,890,000
Municipal general obligation bonds		98,245,000		2,864,000		(30,000	)		101,079,000		101,991,000		5,833,000		0			107,824,000
Municipal revenue bonds		4,133,000		63,000		0			4,196,000		11,521,000		473,000		(2,000	)		11,992,000
Other investments		500,000		0		0			500,000		500,000		0		0			500,000

	$	329,979,000	$	5,930,000	$	(1,254,000	)	$	334,655,000	$	380,403,000	$	7,843,000	$	(899,000	)	$	387,347,000

	Less than 12 Months				12 Months or More				Total				Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
June 30, 2020
June 30, 2021
U.S. Government agency debt obligations	$	16,370,000	$	35,000	$	0	$	0	$	16,370,000	$	35,000	$	252,288,000	$	3,900,000	$	3,977,000	$	23,000	$	256,265,000	$	3,923,000
Mortgage-backed securities		0		0		26,000		1,000		26,000		1,000		13,972,000		297,000		0		0		13,972,000		297,000
Municipal general obligation bonds		0		0		0		0		0		0		19,301,000		127,000		0		0		19,301,000		127,000
Municipal revenue bonds		0		0		0		0		0		0		9,187,000		100,000		0		0		9,187,000		100,000

	$	16,370,000	$	35,000	$	26,000	$	1,000	$	16,396,000	$	36,000	$	294,748,000	$	4,424,000	$	3,977,000	$	23,000	$	298,725,000	$	4,447,000

	Weighted Average Yield	Amortized Cost		Fair Value

Due in 2020	4.11%	$	410,000	$	412,000
Due in 2021 through 2025	1.97		60,097,000		61,369,000
Due in 2026 through 2030	2.13		133,632,000		137,347,000
Due in 2031 and beyond	2.64		70,554,000		72,000,000
Mortgage-backed securities	2.57		34,765,000		36,033,000
Other investments	4.50		500,000		500,000

Total available for sale securities	2.27%	$	299,958,000	$	307,661,000

											Percent
	June 30, 2021					December 31, 2020					Increase
	Balance		%			Balance		%			(Decrease)

Commercial:
Commercial and industrial (1)	$	1,103,807,000		34.0	%	$	1,145,423,000		35.9	%		(3.6	%)
Vacant land, land development, and residential construction		43,111,000		1.3			55,055,000		1.7			(21.7	)
Real estate – owner occupied		550,504,000		16.9			529,953,000		16.6			3.9
Real estate – non-owner occupied		950,993,000		29.3			917,436,000		28.7			3.7
Real estate – multi-family and residential rental		161,894,000		5.0			146,095,000		4.6			10.8
Total commercial		2,810,309,000		86.5			2,793,962,000		87.5			0.6

Retail:
Home equity and other		58,240,000		1.8			61,620,000		1.9			(5.5	)
1-4 family mortgages		380,292,000		11.7			337,888,000		10.6			12.5
Total retail		438,532,000		13.5			399,508,000		12.5			9.8

Total loans	$	3,248,841,000		100.0	%	$	3,193,470,000		100.0	%		1.7	%

	June 30, 2021		December 31, 2020

Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans		2,746,000		3,384,000

Total nonperforming loans	$	2,746,000	$	3,384,000

	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Current		Total Loans		Recorded Balance > 89 Days and Accruing

Commercial:
Commercial and industrial	$	0	$	456,000	$	606,000	$	1,062,000	$	1,102,745,000	$	1,103,807,000	$	0
Vacant land, land development, and residential construction		0		0		0		0		43,111,000		43,111,000		0
Real estate – owner occupied		0		431,000		0		431,000		550,073,000		550,504,000		0
Real estate – non-owner occupied		0		0		0		0		950,993,000		950,993,000		0
Real estate – multi-family and residential rental		0		0		0		0		161,894,000		161,894,000		0
Total commercial		0		887,000		606,000		1,493,000		2,808,816,000		2,810,309,000		0

Retail:
Home equity and other		50,000		0		35,000		85,000		58,155,000		58,240,000		0
1-4 family mortgages		200,000		55,000		101,000		356,000		379,936,000		380,292,000		0
Total retail		250,000		55,000		136,000		441,000		438,091,000		438,532,000		0

Total past due loans	$	250,000	$	942,000	$	742,000	$	1,934,000	$	3,246,907,000	$	3,248,841,000	$	0

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Second Quarter Average Recorded Principal Balance		Year-To-Date Average Recorded Principal Balance
With an allowance recorded
Commercial:
Commercial and industrial	$	2,975,000	$	2,975,000	$	355,000	$	1,661,000	$	1,222,000
Vacant land, land development and residential construction		0		0		0		0		0
Real estate – owner occupied		1,214,000		1,214,000		117,000		872,000		826,000
Real estate – non-owner occupied		153,000		153,000		5,000		156,000		158,000
Real estate – multi-family and residential rental		0		0		0		0		0
Total commercial		4,342,000		4,342,000		477,000		2,689,000		2,206,000
Retail:
Home equity and other		250,000		232,000		207,000		242,000		256,000
1-4 family mortgages		528,000		528,000		103,000		581,000		620,000
Total retail		778,000		760,000		310,000		823,000		876,000

Total with an allowance recorded	$	5,120,000	$	5,102,000	$	787,000	$	3,512,000	$	3,082,000

Total impaired loans:
Commercial	$	19,748,000	$	19,691,000	$	477,000	$	19,088,000	$	20,198,000
Retail		5,994,000		4,224,000		310,000		4,287,000		4,372,000
Total impaired loans	$	25,742,000	$	23,915,000	$	787,000	$	23,375,000	$	24,570,000

	Commercial and Industrial		Commercial Vacant Land, Land Development, and Residential Construction		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Commercial Real Estate - Multi-Family and Residential Rental		Commercial and Industrial		Commercial Vacant Land, Land Development, and Residential Construction		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Commercial Real Estate - Multi-Family and Residential Rental

Internal credit risk grade groupings:
Grades 1 – 4 ⁽¹⁾	$	1,008,010,000	$	21,500,000	$	309,221,000	$	545,764,000	$	73,394,000	$	767,987,000	$	23,647,000	$	311,512,000	$	417,311,000	$	109,220,000
Grades 5 – 7		289,342,000		30,914,000		253,695,000		294,423,000		58,461,000		330,408,000		19,358,000		211,916,000		533,682,000		52,412,000
Grades 8 – 9		10,103,000		570,000		4,705,000		958,000		192,000		5,412,000		106,000		27,076,000		0		262,000
Total commercial	$	1,307,455,000	$	52,984,000	$	567,621,000	$	841,145,000	$	132,047,000	$	1,103,807,000	$	43,111,000	$	550,504,000	$	950,993,000	$	161,894,000

	Retail Home Equity and Other		Retail 1-4 Family Mortgages		Retail Home Equity and Other		Retail 1-4 Family Mortgages

Performing		64,493,000		364,695,000	$	58,087,000	$	378,305,000
Nonperforming		250,000		2,366,000		153,000		1,987,000
Total retail	$	64,743,000	$	367,061,000	$	58,240,000	$	380,292,000

	Commercial Loans			Retail Loans			Unallocated			Total

Allowance for loan losses:
Balance at March 31, 2021	$	34,711,000		$	3,794,000		$	190,000		$	38,695,000
Provision for loan losses		(2,712,000	)		(383,000	)		(5,000	)		(3,100,000	)
Charge-offs		(66,000	)		(2,000	)		0			(68,000	)
Recoveries		159,000			227,000			0			386,000
Ending balance	$	32,092,000		$	3,636,000		$	185,000		$	35,913,000


Allowance for loan losses:
Balance at December 31, 2020	$	33,779,000		$	4,129,000		$	59,000		$	37,967,000
Provision for loan losses		(2,130,000	)		(796,000	)		126,000			(2,800,000	)
Charge-offs		(81,000	)		(40,000	)		0			(121,000	)
Recoveries		524,000			343,000			0			867,000
Ending balance	$	32,092,000		$	3,636,000		$	185,000		$	35,913,000

Ending balance: individually evaluated for impairment	$	477,000		$	310,000		$	0		$	787,000

Ending balance: collectively evaluated for impairment	$	31,615,000		$	3,326,000		$	185,000		$	35,126,000


Total loans (*):
Ending balance	$	2,564,526,000		$	438,532,000					$	3,003,058,000

Ending balance: individually evaluated for impairment	$	19,691,000		$	4,224,000					$	23,915,000

Ending balance: collectively evaluated for impairment	$	2,544,835,000		$	434,308,000					$	2,979,143,000

	Number of Contracts		Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance

Commercial:
Commercial and industrial		8	$	2,831,000	$	2,831,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		1		692,000		692,000
Real estate – non-owner occupied		0		0		0
Real estate – multi-family and residential rental		0		0		0
Total commercial		9		3,523,000		3,523,000

Retail:
Home equity and other		3		414,000		412,000
1-4 family mortgages		1		10,000		10,000
Total retail		4		424,000		422,000

Total loans		13	$	3,947,000	$	3,945,000

	Retail Home Equity and Other			Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance	$	1,099,000		$	820,000
Charge-Offs		0			0
Payments		(115,000	)		(131,000	)
Transfers to ORE		0			0
Net Additions/Deletions		412,000			10,000
Ending Balance	$	1,396,000		$	699,000

	June 30, 2020					December 31, 2019					Percent Increase			June 30, 2021					December 31, 2020					Percent Increase
	Balance		%			Balance		%			(Decrease)			Balance		%			Balance		%			(Decrease)

Noninterest-bearing demand	$	1,445,620,000		44.3	%	$	924,916,000		34.4	%		56.3	%	$	1,620,829,000		44.1	%	$	1,433,403,000		42.0	%		13.1	%
Interest-bearing checking		382,522,000		11.7			332,373,000		12.3			15.1			477,151,000		13.0			473,053,000		13.9			0.9
Money market		541,929,000		16.6			509,368,000		18.9			6.4			725,681,000		19.8			611,912,000		17.9			18.6
Savings		301,881,000		9.2			269,318,000		10.0			12.1			387,783,000		10.6			338,070,000		9.9			14.7
Time, under $100,000		178,838,000		5.5			198,123,000		7.4			(9.7	)		142,531,000		3.9			165,548,000		4.9			(13.9	)
Time, $100,000 and over		334,781,000		10.3			322,827,000		12.0			3.7			286,383,000		7.8			342,633,000		10.0			(16.4	)
Total local deposits		3,185,571,000		97.6			2,556,925,000		95.0			24.6			3,640,358,000		99.2			3,364,619,000		98.6			8.2

Out-of-area time, under $100,000		0	NA				0	NA			NA
Out-of-area time, $100,000 and over		76,709,000		2.4			133,459,000		5.0			(42.5	)		30,913,000		0.8			46,934,000		1.4			(34.1	)
Total out-of-area deposits		76,709,000		2.4			133,459,000		5.0			(42.5	)

Total deposits	$	3,262,280,000		100.0	%	$	2,690,384,000		100.0	%		21.3	%	$	3,671,271,000		100.0	%	$	3,411,553,000		100.0	%		7.6	%

	Six Months Ended June 30, 2020			Twelve Months Ended December 31, 2019			Six Months Ended June 30, 2021			Twelve Months Ended December 31, 2020

Outstanding balance at end of period	$	167,527,000		$	102,675,000		$	169,737,000		$	118,365,000
Average interest rate at end of period		0.10	%		0.17	%		0.11	%		0.12	%

Average daily balance during the period	$	123,486,000		$	105,234,000		$	141,861,000		$	132,880,000
Average interest rate during the period		0.13	%		0.24	%		0.11	%		0.12	%
Maximum daily balance during the period	$	167,527,000		$	133,411,000		$	180,719,000		$	173,186,000

2020	$	0
2021		20,000,000	$	20,000,000
2022		94,000,000		94,000,000
2023		80,000,000		80,000,000
2024		80,000,000		80,000,000
2025				50,000,000
Thereafter		120,000,000		70,000,000

	Notional Amount		Balance Sheet Location	Fair Value

Derivative Assets
Interest rate swaps	$	118,326,000	Other Assets	$	2,573,000

Derivative Liabilities
Interest rate swaps		118,326,000	Other Liabilities		2,665,000

	Notional Amount		Balance Sheet Location	Fair Value

Derivative Assets
Interest rate swaps	$	33,731,000	Other Assets	$	1,003,000

Derivative Liabilities
Interest rate swaps		33,731,000	Other Liabilities		1,027,000

	Level in	June 30, 2020				December 31, 2019				Level in		June 30, 2021				December 31, 2020
	Fair Value Hierarchy	Carrying Values		Fair Values		Carrying Values		Fair Values		Fair Value Hierarchy		Carrying Values		Fair Values		Carrying Values		Fair Values

Financial assets:
Cash	Level 1	$	18,930	$	18,930	$	16,430	$	16,430	Level 1		$	17,782	$	17,782	$	16,953	$	16,953
Cash equivalents	Level 2		452,297		452,297		217,301		217,301	Level 2			741,749		741,749		609,053		609,053
Securities available for sale	(1)		307,661		307,661		334,655		334,655		(1)		506,125		506,125		387,347		387,347
FHLBI stock	(2)		18,002		18,002		18,002		18,002		(2)		18,002		18,002		18,002		18,002
Loans, net	Level 3		3,259,673		3,346,702		2,827,800		2,887,168	Level 3			3,212,928		3,297,771		3,155,503		3,294,522
Loans held for sale	Level 2		41,137		42,806		4,978		4,978
Mortgage loans held for sale										Level 2			27,720		28,915		22,888		24,029
Mortgage servicing rights	Level 2		5,636		8,418		4,652		7,375	Level 2			10,168		13,769		8,189		10,006
Accrued interest receivable	Level 2		9,290		9,290		9,944		9,944	Level 2			9,651		9,651		10,861		10,861

Financial liabilities:
Deposits	Level 2		3,262,280		3,237,888		2,690,384		2,600,452	Level 2			3,671,271		3,656,246		3,411,553		3,397,768
Repurchase agreements	Level 2		167,527		167,527		102,675		102,675	Level 2			169,737		169,737		118,365		118,365
FHLBI advances	Level 2		394,000		413,915		354,000		361,887	Level 2			394,000		407,972		394,000		410,881
Subordinated debentures	Level 2		47,222		46,172		46,881		46,140	Level 2			47,904		47,859		47,563		47,574
Accrued interest payable	Level 2		3,011		3,011		3,949		3,949	Level 2			1,885		1,885		2,313		2,313

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities
U.S. Government agency debt obligations	$	162,497,000	$	0	$	162,497,000	$	0	$	320,141,000	$	0	$	320,141,000	$	0
Mortgage-backed securities		36,033,000		0		36,033,000		0		37,319,000		0		37,319,000		0
Municipal general obligation bonds		102,467,000		0		101,661,000		806,000		129,435,000		0		128,718,000		717,000
Municipal revenue bonds		6,164,000		0		6,164,000		0		18,730,000		0		18,730,000		0
Other investments		500,000		0		500,000		0		500,000		0		500,000		0
Total	$	307,661,000	$	0	$	306,855,000	$	806,000	$	506,125,000	$	0	$	505,408,000	$	717,000

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Impaired loans	$	1,107,000	$	0	$	0	$	1,107,000	$	2,880,000	$	0	$	0	$	2,880,000
Foreclosed assets		452,000		0		0		452,000		701,000		0		0		701,000
Total	$	1,559,000	$	0	$	0	$	1,559,000	$	3,581,000	$	0	$	0	$	3,581,000

	Actual					Minimum Required for Capital Adequacy Purposes					Minimum Required to be Well Capitalized Under Prompt Corrective Action Regulations					Actual					Minimum Required for Capital Adequacy Purposes					Minimum Required to be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2020
June 30, 2021
Total capital (to risk weighted assets)
Consolidated	$	444,772		13.7	%	$	259,076		8.0	%	$	NA		NA		$	481,324		13.1	%	$	294,175		8.0	%	NA		NA
Bank		436,832		13.5			259,017		8.0			323,771		10.0	%		477,684		13.0			293,957		8.0			367,447		10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated		412,526		12.7			194,307		6.0			NA		NA			445,410		12.1			220,631		6.0		NA		NA
Bank		404,587		12.5			194,263		6.0			259,017		8.0			441,770		12.0			220,468		6.0			293,957		8.0
Common equity tier 1 (to risk weighted assets)
Consolidated		367,379		11.3			145,730		4.5			NA		NA			399,581		10.9			165,474		4.5		NA		NA
Bank		404,587		12.5			145,697		4.5			210,452		6.5			441,770		12.0			165,351		4.5			238,841		6.5
Tier 1 capital (to average assets)
Consolidated		412,526		10.2			161,668		4.0			NA		NA			445,410		9.5			188,065		4.0		NA		NA
Bank		404,587		10.0			161,639		4.0			202,048		5.0			441,770		9.4			187,971		4.0			234,964		5.0

December 31, 2019
Total capital (to risk weighted assets)
Consolidated	$	429,038		13.1	%	$	262,141		8.0	%	$	NA		NA
Bank		424,917		13.0			262,088		8.0			327,610		10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated		405,148		12.4			196,606		6.0			NA		NA
Bank		401,027		12.2			196,566		6.0			262,088		8.0
Common equity tier 1 (to risk weighted assets)
Consolidated		360,342		11.0			147,454		4.5			NA		NA
Bank		401,027		12.2			147,425		4.5			212,947		6.5
Tier 1 capital (to average assets)
Consolidated		405,148		11.3			143,689		4.0			NA		NA
Bank		401,027		11.2			143,670		4.0			179,588		5.0

	6/30/20		3/31/20		12/31/19		9/30/19		6/30/19		6/30/21		3/31/21		12/31/20		9/30/20		6/30/20
Commercial:
Commercial & Industrial	$	1,307,455,000	$	873,679,000		846,551,000		882,748,000	$	881,196,000	$	1,103,807,000	$	1,284,507,000	$	1,145,423,000	$	1,321,419,000	$	1,307,455,000
Land Development & Construction		52,984,000		62,908,000		56,119,000		48,417,000		45,158,000		43,111,000		58,738,000		55,055,000		50,941,000		52,984,000
Owner Occupied Commercial RE		567,621,000		579,229,000		579,003,000		567,267,000		556,868,000		550,504,000		544,342,000		529,953,000		549,364,000		567,621,000
Non-Owner Occupied Commercial RE		841,145,000		823,366,000		835,346,000		883,080,000		852,844,000		950,993,000		932,334,000		917,436,000		878,897,000		841,145,000
Multi-Family & Residential Rental		132,047,000		133,148,000		124,525,000		126,855,000		128,489,000		161,894,000		147,294,000		146,095,000		137,740,000		132,047,000
Total Commercial		2,901,252,000		2,472,330,000		2,441,544,000		2,508,367,000		2,464,555,000		2,810,309,000		2,967,215,000		2,793,962,000		2,938,361,000		2,901,252,000

Retail:
1-4 Family Mortgages		367,061,000		356,338,000		339,749,000		346,094,000		335,618,000		380,292,000		337,844,000		337,888,000		348,460,000		367,061,000
Home Equity & Other Consumer Loans		64,743,000		72,875,000		75,374,000		78,552,000		81,320,000		58,240,000		59,311,000		61,620,000		63,723,000		64,743,000
Total Retail		431,804,000		429,213,000		415,123,000		424,646,000		416,938,000		438,532,000		397,155,000		399,508,000		412,183,000		431,804,000

Total	$	3,333,056,000	$	2,901,543,000		2,856,667,000		2,933,013,000	$	2,881,493,000	$	3,248,841,000	$	3,364,370,000	$	3,193,470,000	$	3,350,544,000	$	3,333,056,000

NONPERFORMING LOANS

	6/30/20		3/31/20		12/31/19		9/30/19		6/30/19
Residential Real Estate:
Land Development	$	36,000	$	37,000	$	34,000	$	32,000	$	33,000
Construction		198,000		283,000		0		0		0
Owner Occupied / Rental		2,552,000		2,651,000		2,104,000		2,390,000		2,779,000
		2,786,000		2,971,000		2,138,000		2,422,000		2,812,000

Commercial Real Estate:
Land Development		0		43,000		0		0		0
Construction		0		0		0		0		0
Owner Occupied		275,000		287,000		134,000		183,000		642,000
Non-Owner Occupied		25,000		0		0		26,000		26,000
		300,000		330,000		134,000		209,000		668,000

Non-Real Estate:
Commercial Assets		98,000		156,000		0		0		2,000
Consumer Assets		28,000		12,000		12,000		13,000		23,000
		126,000		168,000		12,000		13,000		25,000

Total	$	3,212,000	$	3,469,000	$	2,284,000	$	2,644,000	$	3,505,000

OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS

	6/30/20		3/31/20		12/31/19		9/30/19		6/30/19		6/30/21		3/31/21		12/31/20		9/30/20		6/30/20
Residential Real Estate:
Land Development	$	0	$	0	$	0	$	0	$	0	$	34,000	$	34,000	$	35,000	$	36,000	$	36,000
Construction		0		0		0		0		0		0		0		0		198,000		198,000
Owner Occupied / Rental		198,000		271,000		260,000		186,000		446,000		2,096,000		2,294,000		2,519,000		2,399,000		2,552,000
		198,000		271,000		260,000		186,000		446,000		2,130,000		2,328,000		2,554,000		2,633,000		2,786,000

Commercial Real Estate:
Land Development		0		0		0		0		0		0		0		0		0		0
Construction		0		0		0		0		0		0		0		0		0		0
Owner Occupied		0		0		192,000		57,000		0		0		283,000		619,000		1,262,000		275,000
Non-Owner Occupied		0		0		0		0		0		0		0		22,000		23,000		25,000
		0		0		192,000		57,000		0		0		283,000		641,000		1,285,000		300,000

Non-Real Estate:
Commercial Assets		0		0		0		0		0		606,000		169,000		172,000		198,000		98,000
Consumer Assets		0		0		0		0		0		10,000		13,000		17,000		25,000		28,000
		0		0		0		0		0		616,000		182,000		189,000		223,000		126,000

Total	$	198,000	$	271,000	$	452,000	$	243,000	$	446,000	$	2,746,000	$	2,793,000	$	3,384,000	$	4,141,000	$	3,212,000

NONPERFORMING LOANS RECONCILIATION

	2nd Qtr			1st Qtr			4th Qtr			3rd Qtr			2nd Qtr
	2020			2020			2019			2019			2019

Beginning balance	$	3,469,000		$	2,284,000		$	2,644,000		$	3,505,000		$	4,138,000
Additions, net of transfers to ORE		220,000			1,302,000			(80,000	)		338,000			(85,000	)
Returns to performing status		(26,000	)		(7,000	)		0			(126,000	)		0
Principal payments		(278,000	)		(110,000	)		(232,000	)		(1,014,000	)		(512,000	)
Loan charge-offs		(173,000	)		0			(48,000	)		(59,000	)		(36,000	)

Total	$	3,212,000		$	3,469,000		$	2,284,000		$	2,644,000		$	3,505,000

Outstanding balance at June 30, 2020	$	167,527,000
Weighted average interest rate at June 30, 2020		0.10	%
Maximum daily balance six months ended June 30, 2020	$	167,527,000
Average daily balance for six months ended June 30, 2020	$	123,486,000
Weighted average interest rate for six months ended June 30, 2020		0.13	%

Outstanding balance at June 30, 2021	$	169,737,000
Weighted average interest rate at June 30, 2021		0.11	%
Maximum daily balance six months ended June 30, 2021	$	180,719,000
Average daily balance for six months ended June 30, 2021	$	141,861,000
Weighted average interest rate for six months ended June 30, 2021		0.11	%

	One Year		One to		Three to		Over				One Year		One to		Three to		Over
	or Less		Three Years		Five Years		Five Years		Total		or Less		Three Years		Five Years		Five Years		Total

Deposits without a stated maturity	$	2,671,952,000	$	0	$	0	$	0	$	2,671,952,000	$	3,211,444,000	$	0	$	0	$	0	$	3,211,444,000
Time deposits		348,542,000		207,563,000		34,223,000		0		590,328,000		271,352,000		136,357,000		52,118,000		0		459,827,000
Short-term borrowings		167,527,000		0		0		0		167,527,000		169,737,000		0		0		0		169,737,000
Federal Home Loan Bank advances		0		154,000,000		160,000,000		80,000,000		394,000,000		60,000,000		174,000,000		110,000,000		50,000,000		394,000,000
Subordinated debentures		0		0		0		47,222,000		47,222,000		0		0		0		47,904,000		47,904,000
Other borrowed money		0		0		0		2,550,000		2,550,000		0		0		0		1,565,000		1,565,000
Property leases		658,000		1,153,000		747,000		1,221,000		3,779,000		777,000		1,521,000		481,000		1,173,000		3,952,000

	Quarters ended June 30,																Quarters ended June 30,
	2 0 2 0								2 0 1 9								2 0 2 1								2 0 2 0
	Average					Average			Average					Average			Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
	(dollars in thousands)																(dollars in thousands)
ASSETS
Loans	$	3,294,883		$	34,322		4.18	%	$	2,848,343		$	36,765		5.18	%	$	3,365,686		$	33,789		3.99	%	$	3,254,985		$	34,322		4.18	%
Investment securities		333,843			2,809		3.37			357,718			2,545		2.85			483,805			1,862		1.54			333,843			2,809		3.37
Other interest-earning assets		251,833			93		0.15			94,616			569		2.38			619,358			183		0.12			251,833			93		0.15
Total interest - earning assets		3,880,559			37,224		3.85			3,300,677			39,879		4.85			4,468,849			35,834		3.20			3,840,661			37,224		3.85

Allowance for loan losses		(26,538	)							(23,549	)							(39,406	)							(26,538	)
Other assets		265,552								252,470								323,415								305,450

Total assets	$	4,119,573							$	3,529,598							$	4,752,858							$	4,119,573


LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits	$	1,767,986		$	3,700		0.84	%	$	1,719,433		$	5,529		1.29	%	$	2,074,759		$	2,346		0.45	%	$	1,767,986		$	3,700		0.84	%
Short-term borrowings		163,339			55		0.14			107,423			68		0.26			150,778			40		0.11			163,339			55		0.14
Federal Home Loan Bank advances		394,000			2,214		2.22			374,000			2,261		2.39			394,000			2,050		2.06			394,000			2,214		2.22
Other borrowings		49,735			624		4.96			49,379			845		6.77			49,421			467		3.74			49,735			624		4.96
Total interest-bearing liabilities		2,375,060			6,593		1.11			2,250,235			8,703		1.55			2,668,958			4,903		0.74			2,375,060			6,593		1.11

Noninterest-bearing deposits		1,304,986								875,645								1,619,976								1,304,986
Other liabilities		17,297								14,586								17,995								17,297
Shareholders’ equity		422,230								389,132								445,929								422,230

Total liabilities and shareholders’ equity	$	4,119,573							$	3,529,598							$	4,752,858							$	4,119,573

Net interest income				$	30,631							$	31,176							$	30,931							$	30,631

Net interest rate spread							2.74	%							3.30	%							2.46	%							2.74	%
Net interest spread on average assets							2.98	%							3.54	%							2.61	%							2.98	%
Net interest margin on earning assets							3.17	%							3.79	%							2.76	%							3.17	%

	Six months ended June 30,																Six months ended June 30,
	2 0 2 0								2 0 1 9								2 0 2 1								2 0 2 0
	Average					Average			Average					Average			Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
	(dollars in thousands)																(dollars in thousands)
ASSETS
Loans	$	3,077,965		$	67,764		4.42	%	$	2,818,055		$	72,555		5.19	%	$	3,324,006		$	66,774		4.01	%	$	3,052,441		$	67,764		4.42	%
Investment securities		339,374			6,886		4.06			356,098			5,046		2.83			451,837			3,554		1.57			339,374			6,886		4.06
Other interest-earning assets		202,735			568		0.55			81,339			976		2.42			605,564			351		0.12			202,735			568		0.55
Total interest - earning assets		3,620,074			75,218		4.17			3,255,492			78,577		4.87			4,381,407			70,679		3.23			3,594,550			75,218		4.17

Allowance for loan losses		(25,124	)							(23,140	)							(38,794	)							(25,124	)
Other assets		266,229								253,577								323,759								291,753

Total assets	$	3,861,179							$	3,485,929							$	4,666,372							$	3,861,179


LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits	$	1,746,008		$	8,342		0.96	%	$	1,694,138		$	10,334		1.23	%	$	2,050,959		$	5,063		0.50	%	$	1,746,008		$	8,342		0.96	%
Short-term borrowings		133,095			94		0.14			105,987			173		0.33			141,861			76		0.11			133,095			94		0.14
Federal Home Loan Bank advances		379,714			4,427		2.31			376,519			4,494		2.37			394,000			4,077		2.06			379,714			4,427		2.31
Other borrowings		49,709			1,348		5.36			49,321			1,695		6.84			49,610			939		3.76			49,709			1,348		5.36
Total interest-bearing liabilities		2,308,526			14,211		1.23			2,225,965			16,696		1.51			2,636,430			10,155		0.78			2,308,526			14,211		1.23

Noninterest-bearing deposits		1,114,406								864,011								1,565,458								1,114,406
Other liabilities		17,326								13,299								19,723								17,326
Shareholders’ equity		420,921								382,654								444,761								420,921

Total liabilities and shareholders’ equity	$	3,861,179							$	3,485,929							$	4,666,372							$	3,861,179

Net interest income				$	61,007							$	61,881							$	60,524							$	61,007

Net interest rate spread							2.94	%							3.36	%							2.45	%							2.94	%
Net interest spread on average assets							3.17	%							3.58	%							2.62	%							3.17	%
Net interest margin on earning assets							3.38	%							3.83	%							2.76	%							3.38	%