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, ~~2021~~2022

☐ 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 ~~30, 2021,~~29, 2022, there were ~~15,892,819~~15,861,082 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, ~~2021~~2022 and December 31, ~~2020~~2021	1

	Consolidated Statements of Income (Unaudited) - Three and Six Months Ended June 30, ~~2021~~2022 and June 30, ~~2020~~2021	2

	Consolidated Statements of Comprehensive Income (Unaudited) - Three and Six Months Ended June 30, ~~2021~~2022 and June 30, ~~2020~~2021	3

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) – Three and Six Months Ended June 30, ~~2021~~2022 and June 30, ~~2020~~2021	4

	Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended June 30, ~~2021~~2022 and June 30, ~~2020~~2021	8

	Notes to Consolidated Financial Statements (Unaudited)	10

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	5455

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	76

	Item 4. Controls and Procedures	78

PART II.	Other Information

	Item 1. Legal Proceedings	79

	Item 1A. Risk Factors	79

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	79

	Item 3. Defaults Upon Senior Securities	8079

	Item 4. Mine Safety Disclosures	8079

	Item 5. Other Information	8079

	Item 6. Exhibits	8180

	Signatures	8281

Table of Contents

MERCANTILE BANK CORPORATION

PART I --- FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30, 2021			December 31, 2020
							June 30, 2022			December 31, 2021
ASSETS
Cash and due from banks	$	75,893,000		$	62,832,000		$	89,167,000		$	59,405,000
Interest-earning deposits		683,638,000			563,174,000			389,938,000			915,755,000
Total cash and cash equivalents		759,531,000			626,006,000			479,105,000			975,160,000

Securities available for sale		506,125,000			387,347,000			603,638,000			592,743,000
Federal Home Loan Bank stock		18,002,000			18,002,000			17,721,000			18,002,000
Mortgage loans held for sale								12,964,000			16,117,000

Loans		3,248,841,000			3,193,470,000			3,723,800,000			3,453,459,000
Allowance for loan losses		(35,913,000	)		(37,967,000	)
Allowance for credit losses								(35,974,000	)		(35,363,000	)
Loans, net		3,212,928,000			3,155,503,000			3,687,826,000			3,418,096,000

Premises and equipment, net		58,250,000			58,959,000			51,402,000			57,298,000
Bank owned life insurance		72,679,000			72,131,000			75,664,000			75,242,000
Goodwill		49,473,000			49,473,000			49,473,000			49,473,000
Core deposit intangible, net		1,827,000			2,436,000			900,000			1,351,000
Mortgage loans held for sale		27,720,000			22,888,000
Other assets		50,879,000			44,599,000			79,862,000			54,267,000

Total assets	$	4,757,414,000		$	4,437,344,000		$	5,058,555,000		$	5,257,749,000

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing	$	1,620,829,000		$	1,433,403,000		$	1,740,432,000		$	1,677,952,000
Interest-bearing		2,050,442,000			1,978,150,000			2,133,461,000			2,405,241,000
Total deposits		3,671,271,000			3,411,553,000			3,873,893,000			4,083,193,000

Securities sold under agreements to repurchase		169,737,000			118,365,000			203,339,000			197,463,000
Federal Home Loan Bank advances		394,000,000			394,000,000			362,263,000			374,000,000
Subordinated debentures		47,904,000			47,563,000			48,585,000			48,244,000
Subordinated notes								88,457,000			73,646,000
Accrued interest and other liabilities		22,614,000			24,309,000			53,035,000			24,644,000
Total liabilities		4,305,526,000			3,995,790,000			4,629,572,000			4,801,190,000

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; 16,007,185 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
Common stock, no par value; 40,000,000 shares authorized; 15,861,055 shares issued and outstanding at June 30, 2022 and 15,839,944 shares issued and outstanding at December 31, 2021								288,199,000			285,752,000
Retained earnings		157,150,000			134,039,000			188,452,000			174,536,000
Accumulated other comprehensive gain/(loss)		1,506,000			5,486,000			(47,668,000	)		(3,729,000	)
Total shareholders’ equity		451,888,000			441,554,000			428,983,000			456,559,000

Total liabilities and shareholders’ equity	$	4,757,414,000		$	4,437,344,000		$	5,058,555,000		$	5,257,749,000

See accompanying notes to consolidated financial statements.

Table of Contents

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended June 30, 2021			Three Months Ended June 30, 2020		Six Months Ended June 30, 2021			Six Months Ended June 30, 2020		Three Months Ended June 30, 2022		Three Months Ended June 30, 2021			Six Months Ended June 30, 2022		Six Months Ended June 30, 2021

Interest income
Loans, including fees	$	33,789,000		$	34,322,000	$	66,774,000		$	67,764,000	$	36,003,000	$	33,789,000		$	69,254,000	$	66,774,000
Securities, taxable		1,204,000			2,187,000		2,239,000			5,628,000		1,898,000		1,204,000			3,563,000		2,239,000
Securities, tax-exempt		598,000			562,000		1,195,000			1,138,000		631,000		598,000			1,231,000		1,195,000
Other interest-earning assets		183,000			93,000		351,000			568,000		1,018,000		183,000			1,384,000		351,000
Total interest income		35,774,000			37,164,000		70,559,000			75,098,000		39,550,000		35,774,000			75,432,000		70,559,000

Interest expense
Deposits		2,346,000			3,700,000		5,063,000			8,342,000		1,873,000		2,346,000			3,698,000		5,063,000
Short-term borrowings		40,000			55,000		76,000			94,000		49,000		40,000			99,000		76,000
Federal Home Loan Bank advances		2,050,000			2,214,000		4,077,000			4,427,000		1,911,000		2,050,000			3,774,000		4,077,000
Subordinated debentures and other borrowings		467,000			624,000		939,000			1,348,000
Subordinated debt and other borrowings												1,391,000		467,000			2,650,000		939,000
Total interest expense		4,903,000			6,593,000		10,155,000			14,211,000		5,224,000		4,903,000			10,221,000		10,155,000

Net interest income		30,871,000			30,571,000		60,404,000			60,887,000		34,326,000		30,871,000			65,211,000		60,404,000

Provision for loan losses		(3,100,000	)		7,600,000		(2,800,000	)		8,350,000
Provision for credit losses												500,000		(3,100,000	)		600,000		(2,800,000	)

Net interest income after provision for loan losses		33,971,000			22,971,000		63,204,000			52,537,000
Net interest income after provision for credit losses												33,826,000		33,971,000			64,611,000		63,204,000

Noninterest income
Service charges on deposit and sweep accounts		1,209,000			1,045,000		2,363,000			2,267,000		1,495,000		1,209,000			2,910,000		2,363,000
Mortgage banking income		7,695,000			7,640,000		16,495,000			10,267,000		1,947,000		7,695,000			5,228,000		16,495,000
Credit and debit card income		1,920,000			1,374,000		3,598,000			2,735,000		2,134,000		1,920,000			4,015,000		3,598,000
Interest rate swap fees		1,495,000			0		2,148,000			0		430,000		1,495,000			1,781,000		2,148,000
Payroll services income		405,000			370,000		962,000			947,000		464,000		405,000			1,102,000		962,000
Earnings on bank owned life insurance		297,000			307,000		574,000			643,000		785,000		297,000			1,072,000		574,000
Gain on sale of branch		1,058,000			0		1,058,000			0		0		1,058,000			0		1,058,000
Other income		477,000			248,000		821,000			675,000		486,000		477,000			910,000		821,000
Total noninterest income		14,556,000			10,984,000		28,019,000			17,534,000		7,741,000		14,556,000			17,018,000		28,019,000

Noninterest expense
Salaries and benefits		16,194,000			14,126,000		31,279,000			27,654,000		15,676,000		16,194,000			31,186,000		31,279,000
Occupancy		1,977,000			1,862,000		3,991,000			3,921,000		2,084,000		1,977,000			4,168,000		3,991,000
Furniture and equipment depreciation, rent and maintenance		902,000			851,000		1,791,000			1,629,000		935,000		902,000			1,869,000		1,791,000
Data processing costs		2,775,000			2,633,000		5,392,000			5,117,000		3,091,000		2,775,000			6,064,000		5,392,000
Charitable foundation contribution												500,000		0			506,000		0
Other expense		4,344,000			3,744,000		8,856,000			7,835,000		4,656,000		4,344,000			8,891,000		8,856,000
Total noninterest expenses		26,192,000			23,216,000		51,309,000			46,156,000		26,942,000		26,192,000			52,684,000		51,309,000

Income before federal income tax expense		22,335,000			10,739,000		39,914,000			23,915,000		14,625,000		22,335,000			28,945,000		39,914,000

Federal income tax expense		4,244,000			2,041,000		7,583,000			4,545,000		2,888,000		4,244,000			5,716,000		7,583,000

Net income	$	18,091,000		$	8,698,000	$	32,331,000		$	19,370,000	$	11,737,000	$	18,091,000		$	23,229,000	$	32,331,000

Basic earnings per share	$	1.12		$	0.54	$	2.00		$	1.19	$	0.74	$	1.12		$	1.47	$	2.00
Diluted earnings per share	$	1.12		$	0.54	$	2.00		$	1.19	$	0.74	$	1.12		$	1.47	$	2.00
Cash dividends per share	$	0.29		$	0.28	$	0.58		$	0.56	$	0.31	$	0.29		$	0.62	$	0.58

Average basic shares outstanding		16,116,070			16,212,500		16,199,096			16,281,391		15,848,681		16,116,070			15,844,763		16,199,096
Average diluted shares outstanding		16,116,666			16,213,264		16,199,620			16,282,341		15,848,681		16,116,666			15,844,763		16,199,620

See accompanying notes to consolidated financial statements.

Table of Contents

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended June 30, 2021			Three Months Ended June 30, 2020			Six Months Ended June 30, 2021			Six Months Ended June 30, 2020			Three Months Ended June 30, 2022			Three Months Ended June 30, 2021			Six Months Ended June 30, 2022			Six Months Ended June 30, 2021


Net income	$	18,091,000		$	8,698,000		$	32,331,000		$	19,370,000		$	11,737,000		$	18,091,000		$	23,229,000		$	32,331,000

Other comprehensive income/(loss):
Unrealized holding gains/(losses) on securities available for sale		4,130,000			1,636,000			(5,038,000	)		3,027,000			(19,969,000	)		4,130,000			(55,619,000	)		(5,038,000	)
Tax effect of unrealized holding gains/(losses) on securities available for sale		(867,000	)		(344,000	)		1,058,000			(637,000	)		4,193,000			(867,000	)		11,680,000			1,058,000
Other comprehensive income/(loss), net of tax		3,263,000			1,292,000			(3,980,000	)		2,390,000			(15,776,000	)		3,263,000			(43,939,000	)		(3,980,000	)

Comprehensive income	$	21,354,000		$	9,990,000		$	28,351,000		$	21,760,000
Comprehensive income/(loss)													$	(4,039,000	)	$	21,354,000		$	(20,710,000	)	$	28,351,000

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, ~~2021:~~

2022:

($ 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

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

Balances, March 31, 2022	$	0	$	286,831	$	181,532		$	(31,892	)	$	436,471

Employee stock purchase plan (336 shares)				11								11

Dividend reinvestment plan (6,835 shares)				213								213

Stock grants to directors for retainer fees (10,837 shares)				347								347

Stock-based compensation expense				797								797

Cash dividends ($0.31 per common share)						(4,817	)					(4,817	)

Net income for the three months ended June 30, 2022						11,737						11,737

Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect									(15,776	)		(15,776	)

Balances, June 30, 2022	$	0	$	288,199	$	188,452		$	(47,668	)	$	428,983

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, ~~2021:~~2022:

($ 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

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

Balances, January 1, 2022	$	0	$	285,752	$	174,536		$	(3,729	)	$	456,559

Adoption of ASU 2016-13						316						316

Employee stock purchase plan (617 shares)				21								21

Dividend reinvestment plan (12,670 shares)				435								435

Stock grants to directors for retainer fees (10,837 shares)				347								347

Stock option exercises (1,355 shares)				36								36

Stock-based compensation expense				1,608								1,608

Cash dividends ($0.62 per common share)						(9,629	)					(9,629	)

Net income for the six months ended June 30, 2022						23,229						23,229

Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect									(43,939	)		(43,939	)

Balances, June 30, 2022	$	0	$	288,199	$	188,452		$	(47,668	)	$	428,983

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, ~~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)
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

($ 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)				11									11

Dividend reinvestment plan (6,263 shares)				198									198

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

Stock-based compensation expense				634									634

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

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

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

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

($ 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)				22									22

Dividend reinvestment plan (12,910 shares)				411									411

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

Stock-based compensation expense				1,277									1,277

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

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

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

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

(Unaudited)

	Six Months Ended June 30, 2021			Six Months Ended June 30, 2020			Six Months Ended June 30, 2022			Six Months Ended June 30, 2021

Cash flows from operating activities
Net income	$	32,331,000		$	19,370,000		$	23,229,000		$	32,331,000
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization		6,755,000			3,385,000			6,692,000			6,755,000
Accretion of acquired loans		(68,000	)		(225,000	)		0			(68,000	)
Provision for loan losses		(2,800,000	)		8,350,000
Provision for credit losses								600,000			(2,800,000	)
Stock-based compensation expense		1,277,000			1,366,000			1,608,000			1,277,000
Stock grants to directors for retainer fee		344,000			349,000			347,000			344,000
Proceeds from sales of mortgage loans held for sale		352,740,000			291,485,000			135,521,000			352,740,000
Origination of mortgage loans held for sale		(340,680,000	)		(317,417,000	)		(127,413,000	)		(340,680,000	)
Net gain from sales of mortgage loans held for sale		(16,892,000	)		(9,856,000	)		(4,955,000	)		(16,892,000	)
Net gain from sales and valuation write-downs of foreclosed assets		(81,000	)		(183,000	)		(20,000	)		(81,000	)
Net (gain) loss from sales and valuation write-downs of former bank premises		245,000			(27,000	)
Net loss from sales and valuation write-downs of former bank premises								0			245,000
Net loss from sales and write-downs of fixed assets		246,000			54,000			391,000			246,000
Earnings on bank owned life insurance		(574,000	)		(643,000	)		(1,072,000	)		(574,000	)
Gain on sale of branch		(1,058,000	)		0			0			(1,058,000	)
Net change in:
Accrued interest receivable		1,188,000			654,000			(1,573,000	)		1,188,000
Other assets		(9,099,000	)		(4,766,000	)		(11,749,000	)		(9,099,000	)
Accrued interest payable and other liabilities		(1,695,000	)		(4,285,000	)		28,391,000			(1,695,000	)
Net cash (for) from operating activities		22,179,000			(12,389,000	)
Net cash from operating activities								49,997,000			22,179,000

Cash flows from investing activities
Loan originations and payments, net		(64,298,000	)		(440,380,000	)		(269,930,000	)		(64,298,000	)
Purchases of securities available for sale		(168,906,000	)		(188,630,000	)		(78,640,000	)		(168,906,000	)
Proceeds from maturities, calls and repayments of securities available for sale		44,525,000			220,916,000			11,641,000			44,525,000
Proceeds from sales of foreclosed assets		158,000			313,000			20,000			158,000
Proceeds from sales of former bank premises		5,000			162,000			0			5,000
Proceeds from Federal Home Loan Bank stock redemption								281,000			0
Proceeds from bank owned life insurance death benefits claim								628,000			0
Net cash transferred in branch sale		(2,679,000	)		0			0			(2,679,000	)
Net purchases of premises and equipment and lease activity		(3,555,000	)		(4,429,000	)		(399,000	)		(3,555,000	)
Net cash for investing activities		(194,750,000	)		(412,048,000	)		(336,399,000	)		(194,750,000	)

See accompanying notes to consolidated financial statements.

Table of Contents

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

	Six Months Ended June 30, 2021			Six Months Ended June 30, 2020			Six Months Ended June 30, 2022			Six Months Ended June 30, 2021

Cash flows from financing activities
Net decrease in time deposits		(92,581,000	)		(64,081,000	)		(77,992,000	)		(92,581,000	)
Net increase in all other deposits		366,943,000			635,977,000
Net (decrease) increase in all other deposits								(131,308,000	)		366,943,000
Net increase in securities sold under agreements to repurchase		51,372,000			64,852,000			5,876,000			51,372,000
Maturities of Federal Home Loan Bank advances		0			(20,000,000	)		(40,000,000	)		0
Proceeds from Federal Home Loan Bank advances		0			60,000,000			28,263,000			0
Net proceeds from subordinated notes issuance								14,645,000			0
Proceeds from stock option exercises, net of cashless exercises								36,000			0
Employee stock purchase plan		22,000			25,000			21,000			22,000
Dividend reinvestment plan		411,000			404,000			435,000			411,000
Repurchases of common stock shares		(10,851,000	)		(6,282,000	)		0			(10,851,000	)
Payment of cash dividends to common shareholders		(9,220,000	)		(8,962,000	)		(9,629,000	)		(9,220,000	)
Net cash from financing activities		306,096,000			661,933,000
Net cash (for) from financing activities								(209,653,000	)		306,096,000

Net change in cash and cash equivalents		133,525,000			237,496,000			(496,055,000	)		133,525,000
Cash and cash equivalents at beginning of period		626,006,000			233,731,000			975,160,000			626,006,000
Cash and cash equivalents at end of period	$	759,531,000		$	471,227,000		$	479,105,000		$	759,531,000

Supplemental disclosures of cash flows information
Cash paid during the period for:
Interest	$	10,583,000		$	15,149,000		$	8,780,000		$	10,583,000
Federal income tax		12,150,000			5,300,000			5,200,000			12,150,000
Noncash financing and investing activities:
Transfers from premises and equipment to other assets								2,847,000			0
Transfers from loans to foreclosed assets		30,000			11,000			0			30,000

See accompanying notes to consolidated financial statements.

Table of Contents

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	1.SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The unaudited financial statements for the six months ended June 30, ~~2021~~2022 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 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 (“GAAP”) 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, ~~2021~~2022 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, ~~2020.~~2021.

We have ~~five~~5 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~~There remains a significant amount of ~~the~~ ~~first~~ ~~quarter~~stress and ~~into the~~ ~~second~~ ~~quarter of~~ ~~2020~~uncertainty across national and global economies 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.~~circumstances, including supply chain disruptions and inflationary pressures.

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~~reduce 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 Coronavirus Aid, Relief and Economic Security Act (“CARES ~~Act~~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,~~2022, we recorded forgiveness transactions on ~~approximately 1,900~~all but 12 loans aggregating ~~$487~~$0.7 million. Net loan origination fees of ~~$3.5~~less than $0.1 million were recorded during the first six months of ~~2021.~~2022.

(Continued)

Table of Contents

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	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,~~2022, we recorded forgiveness transactions on ~~approximately 200~~all but 9 loans aggregating ~~$29.2~~$2.2 million. Net loan origination fees of ~~$2.2~~$0.9 million were recorded during the first six months of ~~2021~~2022 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 (“CECL”) Methodology Delay

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 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~~We adopted 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 (CECL methodology effective ~~three~~January 1, 2022. ~~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)~~

~~Table of Contents~~

~~MERCANTILE BANK CORPORATION~~

~~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 325,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three and six months ended June 30, 2022. In addition, stock options for approximately 1,000 shares of common stock were included in determining diluted earnings per share for the three and six months ended June 30, 2022. Stock options for approximately 6,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three and six months ended June 30, 2022.

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.~~

(Continued)

Table of Contents

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

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. As of June 30, 2022 and December 31, 2021, all of our debt securities were designated as available for sale. 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.

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~~For available for sale 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,~~an unrealized loss position, we ~~consider our intent~~first assess whether we intend to sell, ~~the security, whether~~or if it is more likely than not that we will be required to sell the security before recovery ~~and whether we expect to recover~~of 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.basis. If either of the criteria regarding intent or requirement to sell is met, the ~~entire difference between~~security’s amortized cost ~~and~~basis is written down to fair value ~~is recognized as impairment~~ through ~~earnings.~~income with the establishment of an allowance. For debt securities available for sale that do not meet the aforementioned criteria, ~~the amount of impairment~~we evaluate whether any decline in fair value is ~~split into~~ ~~two~~ ~~components as follows:~~ 1~~) OTTI related~~due to credit loss ~~which must be recognized in~~factors. In making this assessment, we consider any changes to the ~~income statement,~~rating of the security by a rating agency and 2~~) OTTI~~adverse conditions specifically related to the security, among other ~~factors, such as liquidity conditions in the market or changes in market interest rates, which is recognized in other comprehensive income. The~~factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is ~~defined as~~compared to the ~~difference between~~amortized cost basis of the security. If the present value of the cash flows expected to be collected ~~and~~is less than the amortized ~~cost.~~

cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when we believe the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At June 30, 2022, there was no allowance for credit losses related to the available for sale debt securities portfolio. Accrued interest receivable on available for sale debt securities totaled $2.2 million at June 30, 2022 and was excluded from the estimate of credit losses as any accrued interest that is not expected to be collected is reversed against interest income.

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~~credit 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)~~

~~Table of Contents~~

~~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~~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.

(Continued)

Table of Contents

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or 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, ~~2021~~2022 and December 31, ~~2020,~~2021, we determined that the fair value of our mortgage loans held for sale ~~to be $28.9~~was $13.3 million and ~~$24.0~~$16.7 million, respectively.

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 mortgage 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 and recorded as part of mortgage banking income. Mortgage loans serviced for others totaled approximately ~~$1.20~~$1.37 billion and ~~$1.04~~$1.34 billion as of June 30, ~~2021,~~2022 and December 31, ~~2020,~~2021, respectively.

Allowance for Credit Losses (“Allowance”): 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 CECL model, applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. The standard also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance. 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 was effective for interim and annual reporting periods beginning after December 15, 2019.

Financial institutions 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. 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 continued to experience an unprecedented economic environment whereby a sizable portion of the economy had been significantly impacted by government-imposed activity limitations and similar reactions by businesses and individuals, substantial government stimulus was provided to businesses, individuals and state and local governments and financial institutions offered businesses and individuals payment relief options, economic forecasts were regularly revised with no economic forecast consensus. Given the high degree of uncertainty surrounding economic forecasting, we elected to postpone the adoption of CECL until January 1, 2022, and continued to use our incurred loan loss reserve model as permitted through December 31, 2021.

We adopted CECL effective January 1, 2022 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2022 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss accounting standards. The transition adjustment of the CECL adoption included a decrease in the allowance of $0.4 million, which included a $0.3 million increase to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $0.1 million tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet.

Accrued interest receivable for loans is included in other assets on our Consolidated Balance Sheet. We elected not to measure an allowance for accrued interest receivable and instead elected to reverse interest income on loans that are placed on nonaccrual status, which is generally when the loan becomes 90 days past due, or earlier if we believe the collection of interest is doubtful. We believe this policy results in the timely reversal of uncollectible interest.

(Continued)

Table of Contents

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

The allowance is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged-off against the allowance when we believe the uncollectibility of a loan balance is confirmed.

The allowance is measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped into homogenous segments, or pools, for analysis. Commercial loans are divided among five segments based primarily on collateral type, risk characteristics, and primary and secondary sources of repayment. These segments are then further stratified based on the commercial loan grade that is assigned using our standard loan grading paradigm. Retail loans are divided into one of two groups based on if the loan is secured by residential real estate or not.

Our loan portfolio segments as of June 30, 2022 were as follows:

Commercial Loans

■

Commercial and Industrial

■

Owner Occupied Commercial Real Estate

■

Non-Owner Occupied Commercial Real Estate

■

Multi-Family and Residential Rental

■

Vacant Land, Land Development and Residential Construction

Retail Loans

■

1-4 Family Mortgages

■

Other Consumer Loans

The “remaining life methodology” is utilized for substantially all loan pools. This non-discounted cash flow approach projects an estimated future amortized cost basis based on current loan balance and repayment terms. Our historical loss rate is then applied to future loan balances at the instrument level based on remaining contractual life adjusted for amortization, prepayment and default to develop a baseline lifetime loss. The baseline lifetime loss is adjusted for changes in macroeconomic conditions over the reasonable and supportable forecast and reversion periods via a series of macroeconomic forecast inputs, such as gross domestic product, unemployment rates, interest rates, credit spreads, stock market volatility and property price indices, to quantify the impact of current and forecasted economic conditions on expected loan performance.

We use migration to determine historical loss rates for commercial loans given the comprehensive loan grading process employed by the bank for over two decades, while an open pool approach is best suited for retail loans given the smaller dollar size of the segments. A baseline loss rate is produced at each reporting date for each loan portfolio segment using bank-specific loan charge-off and recovery data over a defined historical look-back period. The look-back period represents the number of data periods that will be used to calculate a baseline loss rate for each loan portfolio segment. We determined that the look-back period commencing on January 1, 2011 through the current reporting date was reasonable and appropriate.

Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses. The forecast period represents the time frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental factors that are expected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult or may not be possible in later periods. Subsequent to the end of the forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in relation to then current economic conditions as well as any developing loan loss activity and resulting historical data. As of June 30, 2022, we used a one-year reasonable and supportable economic forecast period, with a six-month straight-line reversion period.

(Continued)

Table of Contents

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

We are not required to develop and use our own economic forecast model, and elected to utilize economic forecasts from a third-party provider that analyzes and develops forecasts of the economy for the entire United States at least quarterly. The economic forecast used for our June 30, 2022 allowance calculation was not materially different from the forecast used for our March 31, 2022 allowance calculation. Our methodology does provide for a potential qualitative factor that can be used in the event of local or regional conditions that depart from the conditions and forecasts for the entire country.

During each reporting period, we also consider the need to adjust historical loss information to reflect the extent to which we expect current conditions and reasonable and supportable economic forecasts to differ from the conditions that existed for the period over which the historical loss information was determined. These qualitative adjustments may increase or decrease our estimate of expected future credit losses.

Traditional qualitative factors include:

Changes in lending policies and procedures

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

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

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

Changes in the quality of the loan review program

Changes in the value of underlying collateral dependent loans

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

Effect of other factors such as competition and legal and regulatory requirements on the level of estimated credit losses

The estimation of future credit losses should reflect consideration of all significant factors that affect the collectibility of the loan portfolio at each evaluation date. While our methodology considers both the historical loss rates as well as the traditional qualitative factors, there may be instances or situations where additional qualitative factors need to be considered.

As of June 30, 2022, we employed two additional qualitative factors:

The Coronavirus Pandemic Factor was established effective June 30, 2020 to address the unique circumstances, challenges and uncertainties associated with the Coronavirus Pandemic.

The Historical Loss Information Factor was established effective January 1, 2022 to address the low level of loan losses during the look-back period.

Expected credit losses are estimated over the contractual terms of the loans, adjusted for expected prepayments when appropriate. The contractual term generally excludes potential extensions, renewals and modifications.

We are also required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is increased or decreased via the provision for credit losses account on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.

The credit loss provisions recorded during the second quarter and firstsix months of 2022 mainly reflected allocations necessitated by commercial loan and residential mortgage loan growth, increased specific reserves for certain problem commercial loan relationships, and a higher reserve for residential mortgage loans stemming from slower principal prepayment rates and the associated extended average life of the portfolio.

(Continued)

Table of Contents

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.SIGNIFICANT ACCOUNTING POLICIES(Continued)

The required reserve allocations resulting from these factors were largely offset by the positive impact of a change in the Covid-19 environmental factor, the recording of net loan recoveries, and ongoing strong loan quality metrics during the periods. Improvement in overall Covid-19 conditions, including increased vaccination rates, the availability of booster shots, and the lifting of many economic growth-restraining restrictions, reduced the credit reserve amount related to the Covid-19 environmental factor.

Mortgage Banking Activities: Mortgage loan servicing rights 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)~~

~~Table of Contents~~

~~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.”~~loans. Certain loans modified as troubled debt restructurings may have been previously measured for impairment under a general allowance methodology (i.e., pooling), thus at the time the loan 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 Reporting for Financial Institutions Working with Customers Affected by the 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 Pandemic. Pursuant to the guidance, the federal banking agencies 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. As part of the Consolidated Appropriations Act that was enacted in late 2020, this guidance was extended to January 1, ~~2022~~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)

1416

Table of Contents

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.

~~Financial institutions 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.~~ ~~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 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. 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~~as 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)~~

We had 15no

~~Table~~ derivative instruments designated as hedges as of ~~Contents~~

~~MERCANTILE BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

1.June 30, 2022 ~~SIGNIFICANT ACCOUNTING POLICIES~~~~(Continued)~~and December 31, 2021.

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.

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” (“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.

(Continued)

Table of Contents

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

The following table depicts our sources of noninterest income that are scoped within Topic 606:

	Three Months Ended June 30, 2022		Three Months Ended June 30, 2021		Six Months Ended June 30, 2022		Six Months Ended June 30, 2021

Service charges on deposit and sweep accounts	$	1,495,000	$	1,209,000	$	2,910,000	$	2,363,000
Credit and debit card fees		2,134,000		1,920,000		4,015,000		3,598,000
Payroll processing		464,000		405,000		1,102,000		962,000
Customer service fees		202,000		186,000		444,000		409,000

Service Charges on Deposit and Sweep Accounts: We earn fees from deposit and sweep customers for account maintenance, transaction-based and overdraft services. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month reflecting the period over which we satisfy the performance obligation. Transaction-based fees, which include services such as stop payment and returned item charges, are recognized at the time the transaction is executed as that is the point in time we fulfill the customer request. Service charges on deposit and sweep accounts are withdrawn from the customer account balance.

Credit and Debit Card Fees: We earn interchange income on our cardholder debit and credit card usage. Interchange income is primarily comprised of fees whenever our debit and credit cards are processed through card payment networks such as Visa. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Payroll Processing Fees: We earn fees from providing payroll processing services for our commercial clients. Fees are assessed for processing weekly or bi-weekly payroll files, reports and documents, as well as year-end tax-related files, reports and documents. Fees are recognized and collected as payroll processing services are completed for each payroll run and year-end processing activities.

Customer Service Fees: We earn fees by providing a variety of other services to our customers, such as wire transfers, check ordering, sales of cashier checks and money orders, and rentals of safe deposit boxes. Generally, fees are recognized and collected daily, concurrently with the point in time we fulfill the customer request. Safe deposit box rentals are on annual contracts, with fees generally earned at the time of the contract signing or renewal.

~~Adoption of New Accounting Standards:~~Newly Issued Not Yet Effective Standards In ~~June 2016,~~ ~~the FASB issued~~: ASU No. ~~2016~~2022-~~13,~~02 ~~Measurement of~~Financial Instruments – Credit Losses ~~on Financial Instruments~~(Topic 326): Troubled Debt Restructurings and Vintage Disclosures. 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~~eliminates the accounting ~~model~~guidance for ~~purchased credit-impaired~~troubled debt ~~securities and loans, and expands~~restructurings (“TDRs”) by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, while adding disclosures for certain loan restructurings by creditors when a borrower is experiencing financial difficulty. This guidance requires an entity to determine whether the ~~disclosure requirements regarding~~modification results in a new loan or a continuation of an ~~entity’s assumptions, models, and methods for estimating~~existing loan. Additionally, the ~~allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class~~ASU requires disclosures of ~~financial asset~~current period gross charge-offs by ~~credit quality indicator, disaggregated by the~~ year of ~~origination.~~origination for financing receivables. This ASU is effective for ~~interim and annual reporting periods~~fiscal years beginning after December 15, ~~2019.~~2022.

~~(Continued)~~

~~Table of Contents~~

~~MERCANTILE BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

1.~~SIGNIFICANT ACCOUNTING POLICIES~~ ~~(Continued)~~

~~Financial institutions were~~We do 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.~~ ~~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 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. Given the high degree of uncertainty surrounding economic forecasting, we have elected to postponebelieve the adoption of ~~CECL, and~~this ASU will ~~continue to use our incurred loan loss reserve model as permitted.~~

~~Hastings Branch Sale: As previously disclosed in~~have 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 Liabilitiesmaterial impact on our ~~Consolidated Balance Sheets were understated by $2.8 million and $2.7 million as~~financial results. The required disclosures for gross charge-offs on our financial statements will be added upon adoption 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.~~this new standard.

~~(Continued)~~

~~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

June 30, 2021

U.S. Government agency debt obligations

$
323,641,000

$
423,000

$
(3,923,000
)

$
320,141,000

Mortgage-backed securities

36,803,000

813,000

(297,000
)

37,319,000

Municipal general obligation bonds

124,808,000

4,754,000

(127,000
)

129,435,000

Municipal revenue bonds

18,467,000

363,000

(100,000
)

18,730,000

Other investments

500,000

0

0

500,000

$
504,219,000

$
6,353,000

$
(4,447,000
)

$
506,125,000

December 31, 2020

U.S. Government agency debt obligations

$
242,522,000

$
516,000

$
(897,000
)

$
242,141,000

Mortgage-backed securities

23,869,000

1,021,000

0

24,890,000

Municipal general obligation bonds

101,991,000

5,833,000

0

107,824,000

Municipal revenue bonds

11,521,000

473,000

(2,000
)

11,992,000

Other investments

500,000

0

0

500,000

$
380,403,000

$
7,843,000

$
(899,000
)

$
387,347,000

~~Securities with unrealized losses at~~ ~~June 30, 2021~~ ~~and~~ ~~December 31, 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

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

June 30, 2021

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

$ 294,748,000 $ 4,424,000 $ 3,977,000 $ 23,000 $ 298,725,000 $ 4,447,000

(Continued)

Table of Contents

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2.~~SECURITIES~~ ~~(Continued)~~

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:

	Less than 12 Months				12 Months or More				Total				Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
December 31, 2020
June 30, 2022
U.S. Government agency debt obligations	$	118,650,000	$	897,000	$	0	$	0	$	118,650,000	$	897,000	$	453,512,000	$	0	$	(46,177,000	)	$	407,335,000
Mortgage-backed securities		0		0		0		0		0		0		40,676,000		56,000		(4,368,000	)		36,364,000
Municipal general obligation bonds		0		0		0		0		0		0		145,002,000		190,000		(7,519,000	)		137,673,000
Municipal revenue bonds		423,000		2,000		0		0		423,000		2,000		24,287,000		18,000		(2,539,000	)		21,766,000
Other investments														500,000		0		0			500,000

	$	119,073,000	$	899,000	$	0	$	0	$	119,073,000	$	899,000	$	663,977,000	$	264,000	$	(60,603,000	)	$	603,638,000

December 31, 2021
U.S. Government agency debt obligations													$	398,874,000	$	266,000	$	(8,769,000	)	$	390,371,000
Mortgage-backed securities														41,906,000		549,000		(652,000	)		41,803,000
Municipal general obligation bonds														133,894,000		4,092,000		(392,000	)		137,594,000
Municipal revenue bonds														22,289,000		331,000		(145,000	)		22,475,000
Other investments														500,000		0		0			500,000

													$	597,463,000	$	5,238,000	$	(9,958,000	)	$	592,743,000

Securities with unrealized losses at June 30, 2022 and December 31, 2021, 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
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
June 30, 2022
U.S. Government agency debt obligations	$	176,893,000	$	17,028,000	$	230,442,000	$	29,149,000	$	407,335,000	$	46,177,000
Mortgage-backed securities		23,935,000		2,259,000		11,372,000		2,109,000		35,307,000		4,368,000
Municipal general obligation bonds		90,305,000		5,551,000		16,284,000		1,968,000		106,589,000		7,519,000
Municipal revenue bonds		12,823,000		1,454,000		7,088,000		1,085,000		19,911,000		2,539,000

	$	303,956,000	$	26,292,000	$	265,186,000	$	34,311,000	$	569,142,000	$	60,603,000

(Continued)

Table of Contents

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2.	SECURITIES (Continued)

	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
December 31, 2021
U.S. Government agency debt obligations	$	274,287,000	$	5,274,000	$	110,053,000	$	3,495,000	$	384,340,000	$	8,769,000
Mortgage-backed securities		23,184,000		652,000		24,000		0		23,208,000		652,000
Municipal general obligation bonds		40,748,000		392,000		0		0		40,748,000		392,000
Municipal revenue bonds		12,843,000		137,000		414,000		8,000		13,257,000		145,000

	$	351,062,000	$	6,455,000	$	110,491,000	$	3,503,000	$	461,553,000	$	9,958,000

We evaluate securities ~~for other-than-temporary impairment~~in an unrealized loss position at least ~~on a quarterly basis.~~quarterly. 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 debt securities whose fair value is less than their amortized cost basis, we also consider our intent to sell the security, whether it is more likely than not that we will be required to sell the security before recovery and if we do not expect to recover the entire amortized cost basis of the security. In analyzing an issuer’s financial condition, we may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition.

At June 30, ~~2021,~~2022, ~~209~~651 debt securities with estimated fair values totaling ~~$299~~$569 million ~~have~~had unrealized losses aggregating ~~$4.4~~$60.6 million. At December 31, 2021, 333 debt securities with estimated fair values totaling $462 million had unrealized losses aggregating $10.0 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, ~~2021,~~2022, 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)

1920

Table of Contents

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2.	2.SECURITIES (Continued)

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

	Weighted Average Yield			Amortized Cost		Fair Value

Due in 2022		1.35	%	$	3,750,000	$	3,738,000
Due in 2023 through 2027		1.14			266,931,000		250,890,000
Due in 2028 through 2032		1.84			311,780,000		277,595,000
Due in 2033 and beyond		2.33			40,340,000		34,551,000
Mortgage-backed securities		2.04			40,676,000		36,364,000
Other investments		3.88			500,000		500,000

Total available for sale securities		1.60	%	$	663,977,000	$	603,638,000

Securities issued by the State of Michigan and all its political subdivisions had a combined amortized ~~cost~~costs of ~~$141~~$169 million and ~~$109~~$155 million at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, with estimated market values of ~~$145~~$159 million and ~~$116~~$158 million, respectively. Securities issued by all other states and their political subdivisions had a combined amortized ~~cost~~costs of ~~$2.7~~$0.3 million and ~~$4.1~~$1.7 million and estimated market values of $0.2 million and $1.7 million at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, ~~respectively, with estimated market values of $2.8 million and $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 ~~$170~~$203 million and ~~$118~~$197 million at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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~~
3.
LOANS AND ALLOWANCE FOR CREDIT 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~~collectibility 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~~
3.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Our total loans at June 30, 2022 were $3.72 billion compared to $3.45 billion at December 31, 2021, an increase of $270 million, or 7.8%. The ~~recorded principal balance~~components of ~~nonperforming~~our loan portfolio disaggregated by class of loan within the loan portfolio segments at June 30, 2022 and December 31, 2021, and the percentage change in loans ~~was~~from the end of 2021 to the end of the second quarter of 2022, are as follows:

Percent

June 30, 2022

December 31, 2021

Increase

Balance

%

Balance

%

(Decrease)

June 30,
2021

December 31,
2020

Commercial:

Commercial and industrial
$ 606,000 $ 172,000
Commercial and industrial (1)
$ 1,187,650,000 31.9
%
$ 1,137,419,000 32.9
%
4.4
%
Vacant land, land development, and residential construction
0 0 57,808,000 1.6 43,239,000 1.3 33.7
Real estate – owner occupied
0 619,000 598,593,000 16.1 565,758,000 16.4 5.8
Real estate – non-owner occupied
0 22,000 1,003,118,000 26.9 1,027,415,000 29.7 (2.4
)
Real estate – multi-family and residential rental
0 0 224,591,000 6.0 176,593,000 5.1 27.2
Total commercial
606,000 813,000 3,071,760,000 82.5 2,950,424,000 85.4 4.1

Retail:

Home equity and other
153,000 242,000
1-4 family mortgages
1,987,000 2,329,000 623,599,000 16.7 442,547,000 12.8 40.9
Other consumer loans (2)
28,441,000 0.8 60,488,000 1.8 (53.0
)
Total retail
2,140,000 2,571,000 652,040,000 17.5 503,035,000 14.6 29.6

Total nonperforming loans
$ 2,746,000 $ 3,384,000
Total loans
$ 3,723,800,000 100.0
%
$ 3,453,459,000 100.0
%
7.8
%
(1)
For June 30, 2022, and December 31, 2021, includes $2.9 million and $40.1 million in loans originated under the Paycheck Protection Program, respectively.
(2)
In conjunction with the adoption of the CECL methodology effective January 1, 2022, home equity lines of credit were reclassified to 1-4 family mortgage loans from other consumer loans. Home equity lines of credit totaled $33.3 million and $29.5 million as of June 30, 2022 and December 31, 2021, respectively.

~~An age analysis of past due~~Nonperforming loans ~~is as follows~~ as of June 30, ~~2021:~~2022 and December 31, 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

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

June 30,
2022

December 31,
2021

Loans past due 90 days or more still accruing interest
$ 0 $ 155,000
Nonaccrual loans
1,787,000 2,313,000

Total nonperforming loans
$ 1,787,000 $ 2,468,000

(Continued)

22
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.~~LOANS AND ALLOWANCE FOR LOAN~~
3.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The recorded principal balance of nonperforming loans was as follows:

June 30,
2022

December 31,
2021

Commercial:

Commercial and industrial
$ 248,000 $ 663,000
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
248,000 663,000

Retail:

1-4 family mortgages
1,538,000 1,686,000
Other consumer loans
1,000 119,000
Total retail
1,539,000 1,805,000

Total nonperforming loans
$ 1,787,000 $ 2,468,000
An age analysis of past due loans is as follows as of ~~December 31, 2020:~~June 30, 2022:

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
$ 261,000 $ 172,000 $ 0 $ 433,000 $ 1,144,990,000 $ 1,145,423,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 1,187,650,000 $ 1,187,650,000 $ 0
Vacant land, land development, and residential construction
0 0 0 0 55,055,000 55,055,000 0 0 0 0 0 57,808,000 57,808,000 0
Real estate – owner occupied
0 197,000 421,000 618,000 529,335,000 529,953,000 0 0 0 0 0 598,593,000 598,593,000 0
Real estate – non-owner occupied
0 0 23,000 23,000 917,413,000 917,436,000 0 0 0 0 0 1,003,118,000 1,003,118,000 0
Real estate – multi-family and residential rental
0 0 0 0 146,095,000 146,095,000 0 0 0 0 0 224,591,000 224,591,000 0
Total commercial
261,000 369,000 444,000 1,074,000 2,792,888,000 2,793,962,000 0 0 0 0 0 3,071,760,000 3,071,760,000 0

Retail:

Home equity and other
112,000 65,000 54,000 231,000 61,389,000 61,620,000 0
1-4 family mortgages
1,147,000 247,000 342,000 1,736,000 336,152,000 337,888,000 0 102,000 107,000 207,000 416,000 623,183,000 623,599,000 0
Other consumer loans
3,000 0 0 3,000 28,438,000 28,441,000 0
Total retail
1,259,000 312,000 396,000 1,967,000 397,541,000 399,508,000 0 105,000 107,000 207,000 419,000 651,621,000 652,040,000 0

Total past due loans
$ 1,520,000 $ 681,000 $ 840,000 $ 3,041,000 $ 3,190,429,000 $ 3,193,470,000 $ 0 $ 105,000 $ 107,000 $ 207,000 $ 419,000 $ 3,723,381,000 $ 3,723,800,000 $ 0

(Continued)

23
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

~~Impaired~~An age analysis of past due loans is as follows as of ~~June 30, 2021,~~ December 31, 2021:~~and average impaired loans for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2021,~~ ~~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
$ 2,732,000 $ 2,675,000 $ 3,129,000 $ 4,167,000
Vacant land, land development and residential construction
0 0 0 0
Real estate – owner occupied
12,674,000 12,674,000 13,114,000 13,607,000
Real estate – non-owner occupied
0 0 156,000 218,000
Real estate – multi-family and residential rental
0 0 0 0
Total commercial
15,406,000 15,349,000 16,399,000 17,992,000
Retail:

Home equity and other
1,317,000 1,237,000 1,088,000 1,054,000
1-4 family mortgages
3,899,000 2,227,000 2,376,000 2,442,000
Total retail
5,216,000 3,464,000 3,464,000 3,496,000

Total with no related allowance recorded
$ 20,622,000 $ 18,813,000 $ 19,863,000 $ 21,488,000

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
$ 14,000 $ 0 $ 193,000 $ 207,000 $ 1,137,212,000 $ 1,137,419,000 $ 155,000
Vacant land, land development, and residential construction
13,000 0 0 13,000 43,226,000 43,239,000 0
Real estate – owner occupied
0 0 0 0 565,758,000 565,758,000 0
Real estate – non-owner occupied
0 0 0 0 1,027,415,000 1,027,415,000 0
Real estate – multi-family and residential rental
0 0 0 0 176,593,000 176,593,000 0
Total commercial
27,000 0 193,000 220,000 2,950,204,000 2,950,424,000 155,000

Retail:

Home equity and other
132,000 2,000 20,000 154,000 60,334,000 60,488,000 0
1-4 family mortgages
1,265,000 241,000 82,000 1,588,000 440,959,000 442,547,000 0
Total retail
1,397,000 243,000 102,000 1,742,000 501,293,000 503,035,000 0

Total past due loans
$ 1,424,000 $ 243,000 $ 295,000 $ 1,962,000 $ 3,451,497,000 $ 3,453,459,000 $ 155,000

(Continued)

24
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.~~LOANS AND ALLOWANCE FOR LOAN~~
3.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Nonaccrual loans as of June 30, 2022 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 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

Recorded

Principal

Related

Balance

Allowance

With no allowance recorded:

Commercial:

Commercial and industrial
$ 248,000 $ 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
248,000 0

Retail:

1-4 family mortgages
1,000 0
Other consumer loans
1,454,000 0
Total retail
1,455,000 0

Total with no allowance recorded
$ 1,703,000 $ 0

With an allowance recorded:

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:

1-4 family mortgages
84,000 48,000
Other consumer loans
0 0
Total retail
84,000 48,000

Total with an allowance recorded
$ 84,000 $ 48,000

Total nonaccrual loans:

Commercial
$ 248,000 $ 0
Retail
1,539,000 48,000
Total nonaccrual loans
$ 1,787,000 $ 48,000

(Continued)

25
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.~~LOANS AND ALLOWANCE FOR LOAN~~
3.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. 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 nonaccrual loans, as well as on foreclosed and repossessed assets, are reviewed periodically. We also have a process in place to monitor whether value estimates at each quarter-end are reflective of current market conditions. Our credit policies establish criteria for obtaining appraisals and determining internal value estimates. We may also adjust outside and internal valuations based on identifiable trends within our markets, such as recent sales of similar properties or assets, listing prices and offers received. In addition, we may discount certain appraised and internal value estimates to address distressed market conditions. Under CECL for collateral dependent loans in instances where the borrower is experiencing financial difficulties, we adopted the practical expedient to measure the allowance based on the fair value of collateral. The allowance is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral and the recorded principal balance. If the fair value of the collateral exceeds the recorded principal balance, no allowance is required.

Nonaccrual commercial loans totaled $0.3 million as of June 30, 2022, while nonaccrual retail loans aggregated $1.5 million, a vast majority of which were collateralized by residential property. Nonaccrual loans aggregating $1.8 million had related specific reserve allocations of less than $0.1 million as of June 30, 2022. No interest income was recognized on nonaccrual loans during the second quarter and firstsix months of 2022. Lost interest income on nonaccrual loans totaled less than $0.1 million and $0.1 million during the second quarter and firstsix months of 2022, respectively.
Impaired loans as of December 31, ~~2020,~~2021, and average impaired loans for the three and six months ended June 30, ~~2020,~~2021, 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
$ 6,242,000 $ 6,242,000 $ 9,460,000 $ 9,016,000
Vacant land, land development and residential construction
0 0 326,000 246,000
Real estate – owner occupied
14,782,000 14,593,000 4,316,000 3,100,000
Real estate – non-owner occupied
341,000 341,000 12,000 67,000
Real estate – multi-family and residential rental
0 0 2,000 4,000
Total commercial
21,365,000 21,176,000 14,116,000 12,433,000
Retail:

Home equity and other
1,072,000 987,000 1,273,000 1,252,000
1-4 family mortgages
4,455,000 2,575,000 2,627,000 2,407,000
Total retail
5,527,000 3,562,000 3,900,000 3,659,000

Total with no related allowance recorded
$ 26,892,000 $ 24,738,000 $ 18,016,000 �� $ 16,092,000

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
$ 2,893,000 $ 2,818,000 $ 3,129,000 $ 4,167,000
Vacant land, land development and residential construction
0 0 0 0
Real estate – owner occupied
9,674,000 9,674,000 13,114,000 13,607,000
Real estate – non-owner occupied
0 0 156,000 218,000
Real estate – multi-family and residential rental
91,000 91,000 0 0
Total commercial
12,658,000 12,583,000 16,399,000 17,992,000
Retail:

Home equity and other
1,173,000 1,107,000 1,088,000 1,054,000
1-4 family mortgages
3,166,000 2,025,000 2,376,000 2,442,000
Total retail
4,339,000 3,132,000 3,464,000 3,496,000

Total with no related allowance recorded
$ 16,997,000 $ 15,715,000 $ 19,863,000 $ 21,488,000

(Continued)

26
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.~~LOANS AND ALLOWANCE FOR LOAN~~
3.
LOANS AND ALLOWANCE FOR CREDIT 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
$ 343,000 $ 343,000 $ 53,000 $ 1,751,000 $ 1,320,000 $ 2,192,000 $ 2,192,000 $ 266,000 $ 1,661,000 $ 1,222,000
Vacant land, land development and residential construction
0 0 0 192,000 128,000 0 0 0 0 0
Real estate – owner occupied
763,000 734,000 77,000 126,000 443,000 761,000 761,000 84,000 872,000 826,000
Real estate – non-owner occupied
162,000 162,000 8,000 85,000 57,000 146,000 146,000 4,000 156,000 158,000
Real estate – multi-family and residential rental
0 0 0 0 0 0 0 0 0 0
Total commercial
1,268,000 1,239,000 138,000 2,154,000 1,948,000 3,099,000 3,099,000 354,000 2,689,000 2,206,000
Retail:

Home equity and other
300,000 283,000 241,000 486,000 486,000 160,000 140,000 123,000 242,000 256,000
1-4 family mortgages
698,000 698,000 172,000 638,000 544,000 412,000 412,000 69,000 581,000 620,000
Total retail
998,000 981,000 413,000 1,124,000 1,030,000 572,000 552,000 192,000 823,000 876,000

Total with an allowance recorded
$ 2,266,000 $ 2,220,000 $ 551,000 $ 3,278,000 $ 2,978,000 $ 3,671,000 $ 3,651,000 $ 546,000 $ 3,512,000 $ 3,082,000

Total impaired loans:

Commercial
$ 22,633,000 $ 22,415,000 $ 138,000 $ 16,270,000 $ 14,381,000 $ 15,757,000 $ 15,682,000 $ 354,000 $ 19,088,000 $ 20,198,000
Retail
6,525,000 4,543,000 413,000 5,024,000 4,689,000 4,911,000 3,684,000 192,000 4,287,000 4,372,000
Total impaired loans
$ 29,158,000 $ 26,958,000 $ 551,000 $ 21,294,000 $ 19,070,000 $ 20,668,000 $ 19,366,000 $ 546,000 $ 23,375,000 $ 24,570,000

Impaired commercial loans for which no allocation of the allowance ~~for loan losses~~ has been made in large part consist of performing troubled debt restructurings where the estimated collateral fair value exceeds the recorded principal balance, while impaired retail loans with no allowance allocation generally reflect situations whereby the ~~loans have~~recorded principal balance has been charged-down to estimated collateral fair value. Interest income recognized on accruing troubled debt restructurings totaled $0.4 million and $0.8 million during the second ~~quarters of~~ ~~2021~~quarter and~~2020,~~ ~~and $0.8 million and $0.6 million during the~~ first six months of 2021, ~~and~~ ~~2020,~~ respectively. NaN interest income was recognized on nonaccrual loans during the second quarter and first six months of ~~2021~~2021. ~~or during the respective~~ ~~2020~~ ~~periods.~~ Lost interest income on nonaccrual loans totaled less than $0.1 million ~~during the~~ ~~second~~ ~~quarters of~~ ~~2021~~ ~~and~~ ~~2020,~~and $0.1 million during thesecond quarter and first six months of 2021, ~~and~~ ~~2020.~~respectively.

(Continued)

27
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.~~LOANS AND ALLOWANCE FOR LOAN~~
3.
LOANS AND ALLOWANCE FOR CREDIT 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, ~~2021:~~2022:

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)
$ 767,987,000 $ 23,647,000 $ 311,512,000 $ 417,311,000 $ 109,220,000 $ 726,012,000 $ 40,317,000 $ 363,381,000 $ 508,666,000 $ 136,632,000
Grades 5 – 7
330,408,000 19,358,000 211,916,000 533,682,000 52,412,000 454,518,000 17,379,000 234,999,000 481,799,000 87,816,000
Grades 8 – 9
5,412,000 106,000 27,076,000 0 262,000 7,120,000 112,000 213,000 12,653,000 143,000
Total commercial
$ 1,103,807,000 $ 43,111,000 $ 550,504,000 $ 950,993,000 $ 161,894,000 $ 1,187,650,000 $ 57,808,000 $ 598,593,000 $ 1,003,118,000 $ 224,591,000

Retail credit exposure – credit risk profiled by collateral type:

Retail
Home Equity
and Other

Retail
1-4 Family
Mortgages

Other
Consumer
Loans

Retail
1-4 Family
Mortgages

Performing
$ 58,087,000 $ 378,305,000 $ 28,440,000 $ 622,061,000
Nonperforming
153,000 1,987,000 1,000 1,538,000
Total retail
$ 58,240,000 $ 380,292,000 $ 28,441,000 $ 623,599,000

(1)
Included in Commercial and Industrial Loans Grades 1 – 4 are ~~$246~~$2.9 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~~
3.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Credit quality indicators were as follows as of December 31, ~~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)
$ 828,706,000 $ 22,547,000 $ 315,134,000 $ 396,700,000 $ 91,711,000 $ 729,224,000 $ 28,390,000 $ 346,082,000 $ 503,482,000 $ 119,473,000
Grades 5 – 7
306,614,000 32,398,000 185,541,000 520,395,000 54,111,000 398,378,000 14,730,000 208,060,000 511,280,000 56,968,000
Grades 8 – 9
10,103,000 110,000 29,278,000 341,000 273,000 9,817,000 119,000 11,616,000 12,653,000 152,000
Total commercial
$ 1,145,423,000 $ 55,055,000 $ 529,953,000 $ 917,436,000 $ 146,095,000 $ 1,137,419,000 $ 43,239,000 $ 565,758,000 $ 1,027,415,000 $ 176,593,000

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
$ 61,378,000 $ 335,559,000 $ 60,369,000 $ 440,861,000
Nonperforming
242,000 2,329,000 119,000 1,686,000
Total retail
$ 61,620,000 $ 337,888,000 $ 60,488,000 $ 442,547,000

(1)
Included in Commercial and Industrial Loans Grades 1 – 4 are ~~$365~~$40.1 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~~
3.
LOANS AND ALLOWANCE FOR CREDIT 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~~
3.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

~~Activity in the allowance for~~The following table reflects loan ~~losses and the recorded investments in loans~~balances as of ~~and during the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ June 30, ~~2021~~2022 ~~are as follows:~~based on year of origination (dollars in thousands):

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.~~

2022

2021

2020

2019

2018

Prior

Term Total

Revolving
Loans

Grand
Total

Commercial:

Commercial and Industrial:

Grades 1 – 4
$ 73,547 $ 183,393 $ 54,533 $ 13,863 $ 3,792 $ 10,932 $ 340,060 $ 385,952 $ 726,012
Grades 5 – 7
122,198 68,241 62,274 9,459 2,074 600 264,846 189,672 454,518
Grades 8 – 9
3,849 249 0 0 55 47 4,200 2,920 7,120
Total
$ 199,594 $ 251,883 $ 116,807 $ 23,322 $ 5,921 $ 11,579 $ 609,106 $ 578,544 $ 1,187,650

Vacant Land, Land Development and Residential Construction:

Grades 1 – 4
$ 17,011 $ 19,004 $ 3,660 $ 0 $ 0 $ 354 $ 40,029 $ 288 $ 40,317
Grades 5 – 7
5,248 10,652 572 55 0 794 17,321 58 17,379
Grades 8 – 9
0 0 0 0 16 96 112 0 112
Total
$ 22,259 $ 29,656 $ 4,232 $ 55 $ 16 $ 1,244 $ 57,462 $ 346 $ 57,808

Real Estate – Owner Occupied:

Grades 1 – 4
$ 81,554 $ 175,628 $ 63,568 $ 20,865 $ 10,866 $ 10,900 $ 363,381 $ 0 $ 363,381
Grades 5 – 7
88,415 64,394 40,122 11,405 23,771 6,892 234,999 0 234,999
Grades 8 – 9
0 0 47 0 166 0 213 0 213
Total
$ 169,969 $ 240,022 $ 103,737 $ 32,270 $ 34,803 $ 17,792 $ 598,593 $ 0 $ 598,593

Real Estate – Non-Owner Occupied:

Grades 1 – 4
$ 64,529 $ 193,494 $ 144,040 $ 78,997 $ 10,428 $ 17,178 $ 508,666 $ 0 $ 508,666
Grades 5 – 7
83,053 178,420 133,404 23,436 15,620 47,866 481,799 0 481,799
Grades 8 – 9
6,849 5,804 0 0 0 0 12,653 0 12,653
Total
$ 154,431 $ 377,718 $ 277,444 $ 102,433 $ 26,048 $ 65,044 $ 1,003,118 $ 0 $ 1,003,118

Real Estate – Multi-Family and Residential Rental:

Grades 1 – 4
$ 26,872 $ 58,323 $ 37,867 $ 5,768 $ 3,121 $ 4,681 $ 136,632 $ 0 $ 136,632
Grades 5 – 7
38,618 26,763 13,928 3,486 3,591 1,430 87,816 0 87,816
Grades 8 – 9
88 0 0 0 0 55 143 0 143
Total
$ 65,578 $ 85,086 $ 51,795 $ 9,254 $ 6,712 $ 6,166 $ 224,591 $ 0 $ 224,591
Total Commercial
$ 611,831 $ 984,365 $ 554,015 $ 167,334 $ 73,500 $ 101,825 $ 2,492,870 $ 578,890 $ 3,071,760

Retail:

1-4 Family Mortgages
$ 174,239 $ 240,232 $ 97,334 $ 13,962 $ 15,543 $ 49,346 $ 590,656 $ 32,943 $ 623,599
Other Consumer Loans
2,905 3,822 1,599 1,447 624 702 11,099 17,342 28,441
Total Retail
$ 177,144 $ 244,054 $ 98,933 $ 15,409 $ 16,167 $ 50,048 $ 601,755 $ 50,285 $ 652,040

Grand Total
$ 788,975 $ 1,228,419 $ 652,948 $ 182,743 $ 89,667 $ 151,873 $ 3,094,625 $ 629,175 $ 3,723,800

(Continued)

31
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Activity in the allowance for ~~loan~~credit losses ~~for loans~~ during the three months and six months ended June 30, ~~2020~~2022 ~~and the recorded investments~~is as follows (dollars in ~~loans as of~~ ~~December 31, 2020~~ ~~are as follows:~~thousands):

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
Provision for loan losses
6,466,000 1,074,000 60,000 7,600,000
Charge-offs
(301,000
)
(34,000
)
0 (335,000
)
Recoveries
47,000 106,000 0 153,000
Ending balance
$ 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
Provision for loan losses
7,039,000 1,321,000 (10,000
)
8,350,000
Charge-offs
(314,000
)
(61,000
)
0 (375,000
)
Recoveries
167,000 215,000 0 382,000
Ending balance
$ 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

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

Total loans (*):

Ending balance
$ 2,428,703,000 $ 399,508,000 $ 2,828,211,000

Ending balance: individually evaluated for impairment
$ 22,415,000 $ 4,543,000 $ 26,958,000

Ending balance: collectively evaluated for impairment
$ 2,406,288,000 $ 394,965,000 $ 2,801,253,000

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

1-4 family
mortgages

Other
consumer
loans

Unallocated

Total

Allowance for credit losses:

Balance at 3-31-22
$ 8,413 $ 455 $ 5,803 $ 10,322 $ 1,276 $ 8,562 $ 191 $ 131 $ 35,153
Provision for credit losses
150 (10 ) (251 ) (708 ) (8 ) 1,464 (28 ) (109 ) 500
Charge-offs
0 0 0 0 0 0 (15 ) 0 (15 )
Recoveries
45 1 26 0 6 241 17 0 336
Ending balance
$ 8,608 $ 446 $ 5,578 $ 9,614 $ 1,274 $ 10,267 $ 165 $ 22 $ 35,974

Balance at 12-31-21
$ 10,782 $ 420 $ 6,045 $ 13,301 $ 1,695 $ 2,449 $ 626 $ 45 $ 35,363
Adoption of ASU 2016-13
(1,571 ) (43 ) (560 ) (2,534 ) (621 ) 5,395 (411 ) (55 ) (400 )
Provision for credit losses
(592 ) 96 35 (1,153 ) 186 2,057 (61 ) 32 600
Charge-offs
(171 ) (29 ) 0 0 0 (2 ) (18 ) 0 (220 )
Recoveries
160 2 58 0 14 368 29 0 631
Ending balance
$ 8,608 $ 446 $ 5,578 $ 9,614 $ 1,274 $ 10,267 $ 165 $ 22 $ 35,974

~~(*) 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~~
3.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Activity in the allowance for loan losses during the three months and six months ended June 30, 2021 and the recorded investments in loans as of December 31, 2021 is as follows (dollars in thousands):

Commercial and industrial

Commercial vacant
land, land
development and
residential
construction

Commercial real estate – owner occupied

Commercial real estate – non-owner occupied

Commercial real
estate –
multi-family and
residential rental

Home
equity and
other

1–4 family
mortgages

Unallocated

Total

Allowance for loan losses:

Balance at 3-31-21
$ 10,111 $ 720 $ 8,304 $ 13,751 $ 1,825 $ 841 $ 2,953 $ 190 $ 38,695
Provision for loan losses
(764 ) (243 ) (696 ) (966 ) (38 ) (125 ) (263 ) (5 ) (3,100 )
Charge-offs
(54 ) 0 (12 ) 0 0 (2 ) 0 0 (68 )
Recoveries
47 2 105 0 0 28 204 0 386
Ending balance
$ 9,340 $ 479 $ 7,701 $ 12,785 $ 1,787 $ 742 $ 2,894 $ 185 $ 35,913

Balance at 12-31-20
$ 9,424 $ 679 $ 8,246 $ 13,611 $ 1,819 $ 889 $ 3,240 $ 59 $ 37,967
Provision for loan losses
(181 ) (203 ) (877 ) (826 ) (32 ) (207 ) (600 ) 126 (2,800 )
Charge-offs
(54 ) (15 ) (12 ) 0 0 (6 ) (34 ) 0 (121 )
Recoveries
151 18 344 0 0 66 288 0 867
Ending balance
$ 9,340 $ 479 $ 7,701 $ 12,785 $ 1,787 $ 742 $ 2,894 $ 185 $ 35,913

Ending balance: individually evaluated for impairment
$ 355 $ 0 $ 117 $ 5 $ 0 $ 207 $ 103 $ 0 $ 787

Ending balance: collectively evaluated for impairment
$ 8,985 $ 479 $ 7,584 $ 12,780 $ 1,787 $ 535 $ 2,791 $ 185 $ 35,126

Total loans (*):

Ending balance
$ 1,097,309 $ 43,239 $ 565,758 $ 1,027,415 $ 176,593 $ 60,488 $ 442,547 $ 3,413,349

Ending balance: individually evaluated for impairment
$ 5,010 $ 0 $ 10,435 $ 146 $ 91 $ 1,247 $ 2,437 $ 19,366

Ending balance: collectively evaluated for impairment
$ 1,092,299 $ 43,239 $ 555,323 $ 1,027,269 $ 176,502 $ 59,241 $ 440,110 $ 3,393,983
(*)
Excludes $40.1 million in loans originated under the Paycheck Protection Program.
(Continued)

33
Table of Contents
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Loans modified as troubled debt restructurings during the three months ended June 30, 2022 were as follows:

Number of
Contracts

Pre-
Modification
Recorded
Principal
Balance

Post-
Modification
Recorded
Principal
Balance

Commercial:

Commercial and industrial
2 $ 6,573,000 $ 6,573,000
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 6,573,000 6,573,000

Retail:

1-4 family mortgages
1 84,000 84,000
Other consumer loans
0 0 0
Total retail
1 84,000 84,000

Total loans
3 $ 6,657,000 $ 6,657,000
Loans modified as troubled debt restructurings during the six months ended June 30, 2022 were as follows:

Number of
Contracts

Pre-
Modification
Recorded
Principal
Balance

Post-
Modification
Recorded
Principal
Balance

Commercial:

Commercial and industrial
2 $ 6,573,000 $ 6,573,000
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 6,573,000 6,573,000

Retail:

1-4 family mortgages
3 212,000 212,000
Other consumer loans
0 0 0
Total retail
3 212,000 212,000

Total loans
5 $ 6,785,000 $ 6,785,000
(Continued)
34
Table of Contents
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Loans modified as troubled debt restructurings during the three 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, 2021 were as follows:

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)

3335
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.~~LOANS AND ALLOWANCE FOR LOAN~~
3.
LOANS AND ALLOWANCE FOR CREDIT 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, ~~2020~~ 2022 (~~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
2 $ 6,000 $ 6,000 0 $ 0
Vacant land, land development and residential construction
0 0 0 0 0
Real estate – owner occupied
0 0 0 0 0
Real estate – non-owner occupied
0 0 0 0 0
Real estate – multi-family and residential rental
0 0 0 0 0
Total commercial
2 6,000 6,000 0 0

Retail:

Home equity and other
7 438,000 439,000 0 0
1-4 family mortgages
1 20,000 20,000 0 0
Total retail
8 458,000 459,000 0 0

Total loans
10 $ 464,000 $ 465,000
Total
0 $ 0

~~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, ~~2020~~ 2022 (~~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
8 $ 6,545,000 $ 6,542,000 0 $ 0
Vacant land, land development and residential construction
0 0 0 0 0
Real estate – owner occupied
8 4,261,000 3,659,000 0 0
Real estate – non-owner occupied
0 0 0 0 0
Real estate – multi-family and residential rental
0 0 0 0 0
Total commercial
16 10,806,000 10,201,000 0 0

Retail:

Home equity and other
10 503,000 505,000 0 0
1-4 family mortgages
1 20,000 20,000 0 0
Total retail
11 523,000 525,000 0 0

Total loans
27 $ 11,329,000 $ 10,726,000
Total
0 $ 0

(Continued)

3436
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.~~LOANS AND ALLOWANCE FOR LOAN~~
3.
LOANS AND ALLOWANCE FOR CREDIT 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, 2021 (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
1 431,000
Real estate – non-owner occupied
0 0
Real estate – multi-family and residential rental
0 0
Total commercial
1 431,000

Retail:

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

Total
1 $ 431,000

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, 2021 (amounts as of period end):

Number of
Contracts

Recorded
Principal
Balance

Commercial:

Commercial and industrial
2 $ 522,000
Vacant land, land development and residential construction
0 0
Real estate – owner occupied
1 431,000
Real estate – non-owner occupied
0 0
Real estate – multi-family and residential rental
0 0
Total commercial
3 953,000

Retail:

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

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)~~
~~Activity for loans categorized as troubled debt restructurings during the~~ ~~three~~ ~~months ended~~ ~~June 30, 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 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

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

~~(Continued)~~

37
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Activity for loans categorized as troubled debt restructurings during the ~~six~~three months ended June 30, ~~2021~~2022 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
$ 6,414,000 $ 0 $ 14,797,000 $ 480,000 $ 0 $ 2,829,000 $ 0 $ 89,000 $ 143,000 $ 90,000
Charge-Offs
0 0 0 0 0 0 0 0 0 0
Payments
(3,521,000
)
0 (1,595,000
)
(327,000
)
0
Payments (net)
536,000 0 (2,000
)
(4,000
)
(2,000
)
Transfers to ORE
0 0 0 0 0 0 0 0 0 0
Net Additions/Deletions
2,670,000 0 686,000 0 0 6,573,000 0 0 0 0
Ending Balance
$ 5,563,000 $ 0 $ 13,888,000 $ 153,000 $ 0 $ 9,938,000 $ 0 $ 87,000 $ 139,000 $ 88,000

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

Retail

Retail

1-4 Family

Other Consumer

Mortgages

Loans

Retail Loan Portfolio:

Beginning Balance
$ 2,346,000 $ 13,000
Charge-Offs
0 0
Payments (net)
(91,000
)
(10,000
)
Transfers to ORE
0 0
Net Additions/Deletions
84,000 0
Ending Balance
$ 2,339,000 $ 3,000

(Continued)

38
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Activity for loans categorized as troubled debt restructurings during the ~~three~~six months ended June 30, ~~2020~~2022 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 $ 4,973,000 $ 0 $ 10,435,000 $ 146,000 $ 91,000
Charge-Offs
0 0 0 0 0 0 0 0 0 0
Payments
(2,143,000
)
(2,000
)
(20,000
)
(4,000
)
(2,000
)
Payments (net)
324,000 0 (9,679,000
)
(7,000
)
(3,000
)
Transfers to ORE
0 0 0 0 0 0 0 0 0 0
Net Additions/Deletions
6,000 0 0 0 0 4,641,000 0 (669,000
)
0 0
Ending Balance
$ 10,067,000 $ 80,000 $ 3,791,000 $ 170,000 $ 1,000 $ 9,938,000 $ 0 $ 87,000 $ 139,000 $ 88,000

Retail

Retail

1-4 Family

Other Consumer

Retail
Home Equity
and Other

Retail
1-4 Family
Mortgages

Mortgages

Loans

Retail Loan Portfolio:

Beginning Balance
$ 1,452,000 $ 715,000 $ 627,000 $ 1,202,000
Charge-Offs
0 0 0 0
Payments
(175,000
)
(20,000
)
Payments (net)
(169,000
)
(12,000
)
Transfers to ORE
0 0 0 0
Net Additions/Deletions
438,000 20,000
Net Additions/Deletions (1)
1,881,000 (1,187,000
)
Ending Balance
$ 1,715,000 $ 715,000 $ 2,339,000 $ 3,000

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

(Continued)

39
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Activity for loans categorized as troubled debt restructurings during the ~~six~~three 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
$ 8,587,000 $ 85,000 $ 1,145,000 $ 178,000 $ 7,000 $ 3,760,000 $ 0 $ 13,887,000 $ 471,000 $ 0
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
)
Payments (net)
(845,000
)
0 (685,000
)
(318,000
)
0
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 2,648,000 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
$ 1,415,000 $ 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
$ 1,099,000 $ 820,000
Charge-Offs
0 0
Payments (net)
(115,000
)
(131,000
)
Transfers to ORE
0 0
Net Additions/Deletions
412,000 10,000
Ending Balance
$ 1,396,000 $ 699,000

(Continued)

40
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

~~The allowance related to~~Activity for loans categorized as troubled debt restructurings ~~was~~during the six months ended June 30, 2021 is as follows:

June 30,
2021

December 31,
2020

Commercial:

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

Retail:

Home equity and other
175,000 202,000
1-4 family mortgages
103,000 145,000
Total retail
278,000 347,000

Total related allowance
$ 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.

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
$ 6,414,000 $ 0 $ 14,797,000 $ 480,000 $ 0
Charge-Offs
0 0 0 0 0
Payments (net)
(3,521,000
)
0 (1,595,000
)
(327,000
)
0
Transfers to ORE
0 0 0 0 0
Net Additions/Deletions
2,670,000 0 686,000 0 0
Ending Balance
$ 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
$ 1,146,000 $ 806,000
Charge-Offs
0 0
Payments (net)
(232,000
)
(153,000
)
Transfers to ORE
0 0
Net Additions/Deletions
482,000 46,000
Ending Balance
$ 1,396,000 $ 699,000
(Continued)

41
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4.
4.PREMISES AND EQUIPMENT, NET

Premises and equipment are comprised of the following:

June 30,
2021

December 31,
2020

June 30,
2022

December 31,
2021

Land and improvements
$ 14,553,000 $ 16,533,000 $ 13,504,000 $ 15,111,000
Buildings
55,718,000 56,114,000 51,555,000 56,168,000
Furniture and equipment
22,467,000 21,522,000 22,647,000 22,974,000
92,738,000 94,169,000 87,706,000 94,253,000
Less: accumulated depreciation
34,488,000 35,210,000 36,304,000 36,955,000

Premises and equipment, net
$ 58,250,000 $ 58,959,000 $ 51,402,000 $ 57,298,000

Depreciation expense totaled ~~$1.4~~$1.5 million and ~~$1.3~~$1.4 million during the second quarters of ~~2021~~2022 and ~~2020,~~2021, respectively. Depreciation expense totaled $3.1 million during the firstsix months of 2022, compared to $2.8 million during the first six months of 2021.
We enter into facility leases in the normal course of business. As of June 30, 2022 and December 31, 2021, we were under lease contracts for ten of our banking facilities. The leases had maturity dates ranging from June, 2023 through December, 2026, with a weighted average life of 2.5 years and 2.8 years as of June 30, 2022 and December 31, 2021, respectively. All of our leases have multiple three- to five-year extensions; however, those were not factored in the lease maturities and weighted average lease term as it is not reasonably certain we will exercise the options.
Leases are classified as either operating or finance leases at the lease commitment date, with all of our current leases determined to be operating leases. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent our right to use an underlying asset for the lease term, while lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date at the estimated present value of lease payments over the lease term. We use our incremental borrowing rate, on a collateralized basis, at lease commencement to calculate the present value of lease payments. The weighted average discount rate for leases was 4.70% as of June 30, 2022 and December 31, 2021.
The right-of-use assets, included in premises and equipment, net on our Consolidated Balance Sheets, and the lease liabilities, included in other liabilities on our Consolidated Balance Sheets, each totaled $3.0 million as of June 30, 2022, and $3.6 million as of December 31, 2021. As permitted by applicable accounting standards, we have elected not to recognize short-term leases with original terms of twelve months or less on our Consolidated Balance Sheet. Total operating lease expense associated with the leases aggregated $0.2 million during the second quarters of 2022 and 2021, ~~compared to $2.5~~and $0.4 million during the first six months of ~~2020.~~2022 and 2021.

5.~~DEPOSITS~~
~~Our total deposits~~Future lease payments at June 30, 2022 totaled $4.3 million, comprised of $0.6 million in one year, $1.2 million in one to three years, $0.2 million in three to five years and $2.3 million in over five years. Future lease payments at December 31, 2021 totaled ~~$3.67 billion, an increase~~$3.6 million, comprised of ~~$260~~$0.8 million ~~or 7.6%, from~~in ~~December~~ ~~31,~~one year, $1.4 million in ~~2020.~~one ~~The components~~to three years, $0.3 million in three to five years and $1.1 million in over five years.
As part of the relocation of our ~~outstanding balances at~~Lansing operations, we completed the sale of our Lansing facility on ~~June 30, 2021~~July 14, 2022. For financial statement purposes in this Form 10-Q, we transferred from premises and ~~December 31, 2020,~~ ~~and percentage change~~equipment, net to other assets the $2.8 million in ~~deposits~~net proceeds from the ~~end~~sale and recorded a loss on sale of ~~2020~~ ~~to the end of the~~ ~~second~~ ~~quarter of~~ ~~2021,~~ ~~are as follows:~~$0.4 million.

June 30, 2021

December 31, 2020

Percent
Increase

Balance

%

Balance

%

(Decrease)

Noninterest-bearing demand
$ 1,620,829,000 44.1
%
$ 1,433,403,000 42.0
%
13.1
%
Interest-bearing checking
477,151,000 13.0 473,053,000 13.9 0.9
Money market
725,681,000 19.8 611,912,000 17.9 18.6
Savings
387,783,000 10.6 338,070,000 9.9 14.7
Time, under $100,000
142,531,000 3.9 165,548,000 4.9 (13.9
)
Time, $100,000 and over
286,383,000 7.8 342,633,000 10.0 (16.4
)
Total local deposits
3,640,358,000 99.2 3,364,619,000 98.6 8.2

Out-of-area time, $100,000 and over
30,913,000 0.8 46,934,000 1.4 (34.1
)

Total deposits
$ 3,671,271,000 100.0
%
$ 3,411,553,000 100.0
%
7.6
%
~~Total time deposits of more than~~ ~~$250,000~~ ~~totaled $219 million and $272 million at~~ ~~June 30, 2021~~ ~~and~~ ~~December 31, 2020,~~ ~~respectively.~~

(Continued)

42
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5.
DEPOSITS
Our total deposits at 6.June 30, 2022 totaled $3.87 billion, a decrease of $209 million, or 5.1%, from December 31,2021. The components of our outstanding balances at June 30, 2022 and December 31, 2021, and percentage change in deposits from the end of 2021 to the end of the second quarter of 2022, are as follows:

June 30, 2022

December 31, 2021

Percent
Increase

Balance

%

Balance

%

(Decrease)

Noninterest-bearing demand
$ 1,740,432,000 44.9
%
$ 1,677,952,000 41.1
%
3.7
%
Interest-bearing checking
481,016,000 12.4 538,838,000 13.2 (10.7
)
Money market
889,035,000 23.0 1,040,176,000 25.5 (14.5
)
Savings
409,505,000 10.6 394,330,000 9.7 3.8
Time, under $100,000
120,930,000 3.1 132,776,000 3.2 (8.9
)
Time, $100,000 and over
232,975,000 6.0 275,208,000 6.7 (15.3
)
Total local deposits
3,873,893,000 100.0 4,059,280,000 99.4 (4.6 )

Out-of-area time, $100,000 and over
0 0.0 23,913,000 0.6 (100.0 %)

Total deposits
$ 3,873,893,000 100.0
%
$ 4,083,193,000 100.0
%
(5.1
%)
Total time deposits of more than $250,000 totaled $152 million and $207 million at June 30, 2022 and December 31, 2021, respectively.
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, 2021

Twelve Months
Ended
December 31, 2020

Six Months
Ended
June 30,
2022

Twelve Months
Ended
December 31,
2021

Outstanding balance at end of period
$ 169,737,000 $ 118,365,000 $ 203,339,000 $ 197,463,000
Average interest rate at end of period
0.11
%
0.12
%
0.10
%
0.11
%

Average daily balance during the period
$ 141,861,000 $ 132,880,000 $ 196,327,000 $ 158,855,000
Average interest rate during the period
0.11
%
0.12
%
0.10
%
0.11
%
Maximum daily balance during the period
$ 180,719,000 $ 173,186,000 $ 224,345,000 $ 209,093,000

Repurchase agreements generally have original maturities of less than one 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.
(Continued)

43
Table of Contents
7.
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7.
FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES

Federal Home Loan Bank of Indianapolis (“FHLBI”) bullet advances totaled ~~$394~~$334 million at June 30, ~~2021~~ ~~and~~ ~~December 31, 2020,~~2022, and were expected to mature at varying dates from ~~November 2021~~July 2022 through June 2027, with fixed rates of interest from 0.55% to 3.18% and averaging ~~2.06%~~1.96%. FHLBI bullet advances totaled $374 million at December 31, 2021, and were expected to mature at varying dates from January 2022 through June 2027, with fixed rates of interest from 0.55% to 3.18% and averaging 2.00%.
Maturities of FHLBI bullet advances as of ~~both dates.~~June 30, 2022 were as follows:
2022
$ 54,000,000
2023
80,000,000
2024
80,000,000
2025
50,000,000
2026
30,000,000
Thereafter
40,000,000
FHLBI amortizing advances totaled $28.3 million as of June 30, 2022, with an average rate of 2.52%. We had no FHLBI amortizing advances outstanding as of December 31, 2021. FHLBI amortizing advances are obtained periodically to assist in managing interest rate risk associated with certain longer-term fixed rate commercial loans, with annual principal payments that closely align with the scheduled amortization of the underlying commercial loans.
Scheduled principal payments of FHLBI amortizing advances were as follows:
2022
$ 0
2023
353,000
2024
826,000
2025
862,000
2026
899,000
Thereafter
25,323,000

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, ~~2021~~2022 totaled ~~$807~~$932 million, with remaining availability based on collateral equaling ~~$407~~$564 million.

~~Maturities of currently outstanding FHLBI advances are as follows:~~
2021
$ 20,000,000
2022
94,000,000
2023
80,000,000
2024
80,000,000
2025
50,000,000
Thereafter
70,000,000

~~(Continued)~~
43

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

8.
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.
(Continued)
44
Table of Contents
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8.
COMMITMENTS AND OFF-BALANCE SHEET RISK(Continued)

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
We are required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is increased or decreased via the provision for credit losses account on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated ~~loss exposure resulting from these instruments~~lives. The allowance is ~~expensed~~calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.
We have determined that our commercial-related lending commitments are unconditionally cancellable. Additionally, the vast majority of unfunded commercial loan commitments consist of revolving lines of credit wherein the aggregate amounts outstanding and ~~recorded~~available remain relatively stable, and any seasonality of line usage is nominal. Line of credit draws, irrespective of the maximum credit or individual note amount, are governed by borrowing or advance formulas, while draws off of commercial and residential construction loans are governed by the receipt and satisfactory review of contractor and subcontractor sworn statements, lien waivers and title insurance company endorsements. Letters of credit are rarely drawn. For retail lines of credit, including home equity lines of credit, overdraft protection lines of credit and personal unsecured lines of credit, and credit cards, average outstanding balances as a ~~liability. There was 0 liability balance~~percent of total available credit have remained relatively steady over the past several years. We determined allowance requirements for these ~~instruments~~credit types by calculating the difference between the average percent outstanding of the funded commitments over the past several years to actual percent outstanding as of June 30, ~~2021~~2022 and applying the respective expected loss allocation factors to the difference as this difference represents the average of unfunded commitments we expect to eventually be drawn upon. The calculated allowance for the retail lines of credit and credit cards as of ~~December 31, 2020.~~June 30, 2022 was $0.2 million.

A summary of the contractual amounts of our financial instruments with off-balance sheet risk at June 30, ~~2021~~2022 and December 31, ~~2020~~2021 follows:

June 30,
2021

December 31,
2020

June 30,
2022

December 31,
2021

Commercial unused lines of credit
$ 1,112,887,000 $ 1,019,496,000 $ 1,158,512,000 $ 1,098,951,000
Unused lines of credit secured by 1 – 4 family residential properties
60,021,000 59,396,000 66,431,000 64,313,000
Credit card unused lines of credit
81,190,000 72,495,000 106,939,000 92,146,000
Other consumer unused lines of credit
54,540,000 30,707,000 91,987,000 64,876,000
Commitments to make loans
161,227,000 227,558,000 252,579,000 212,476,000
Standby letters of credit
26,234,000 20,543,000 35,005,000 33,109,000
$ 1,496,099,000 $ 1,430,195,000 $ 1,711,453,000 $ 1,565,871,000

(Continued)

4445
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9.
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~~banks 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~~banks are recognized directly to earnings.

The ~~estimated~~ fair values of derivative instruments as of June 30, 2022 are reflected in the following table.

Notional Amount

Balance Sheet Location

Fair Value

Derivative Assets
Interest rate swaps
$ 340,692,000
Other Assets
$ 17,069,000

Derivative Liabilities

Interest rate swaps 340,692,000 Other Liabilities 17,196,000
The effect of interest rate swaps that are not designated as hedging instruments resulted in noninterest income of $0.1 million during the firstsix months of 2022.
The 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 $17.2 million as of June 30, 2022. Cash collateral totaling $18.0 million was provided by the counterparty correspondent banks as of June 30, 2022.
Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $341 million as of June 30, 2022. 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 fair values of derivative instruments as of December 31, 2021 are reflected in the following table.

Notional Amount

Balance Sheet
Location

Fair Value

Notional Amount

Balance Sheet Location

Fair Value

Derivative Assets

Interest rate swaps
$ 118,326,000
Other Assets
$ 2,573,000 $ 279,419,000 Other Assets $ 4,609,000

Derivative Liabilities
Interest rate swaps
118,326,000
Other Liabilities
2,665,000 279,419,000
Other Liabilities
4,857,000
(Continued)
46
Table of Contents
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9.
DERIVATIVES AND HEDGING INSTRUMENTS (Continued)

The effect of interest rate swaps that are not designated as hedging instruments resulted in noninterest expense of ~~less than $0.1~~$0.2 million during the year-ended ~~first~~~~six~~ ~~months of~~ December 31, 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~~$4.9 million as of ~~June 30,~~December 31, 2021. Cash collateral totaling ~~$2.3~~$3.6 million was provided to the counterparty correspondent ~~bank~~banks as of ~~June 30,~~December 31, 2021.

Interest rate swaps entered into with commercial loan customers had notional amounts aggregating ~~$118.3~~$279 million as of ~~June 30,~~December 31, 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.
~~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, ~~2021~~2022 and December 31, ~~2020~~2021 (dollars in thousands):

Level in

June 30, 2021

December 31, 2020

Level in

June 30, 2022

December 31, 2021

Fair Value
Hierarchy

Carrying
Values

Fair
Values

Carrying
Values

Fair
Values

Fair
Value

Carrying

Fair

Carrying

Fair

Hierarchy

Values

Values

Values

Values

Financial assets:

Cash

Level 1
$ 17,782 $ 17,782 $ 16,953 $ 16,953
Level 1
$ 18,692 $ 18,692 $ 17,872 $ 17,872
Cash equivalents

Level 2
741,749 741,749 609,053 609,053
Level 1
460,413 460,413 957,288 957,288
Securities available for sale
(1) 506,125 506,125 387,347 387,347 (1) 603,638 603,638 592,743 592,743
FHLBI stock
(2) 18,002 18,002 18,002 18,002 (2) 17,721 17,721 18,002 18,002
Loans, net

Level 3
3,212,928 3,297,771 3,155,503 3,294,522
Level 3
3,687,826 3,632,452 3,418,096 3,498,345
Mortgage loans held for sale

Level 2
27,720 28,915 22,888 24,029
Level 2
12,964 13,283 16,117 16,707
Mortgage servicing rights

Level 2
10,168 13,769 8,189 10,006
Level 2
12,286 16,547 12,248 15,445
Accrued interest receivable

Level 2
9,651 9,651 10,861 10,861
Level 2
10,884 10,884 9,311 9,311
Interest rate swaps

Level 2
17,069 17,069 4,609 4,609

Financial liabilities:

Deposits

Level 2
3,671,271 3,656,246 3,411,553 3,397,768
Level 2
3,873,893 3,573,291 4,083,193 4,028,249
Repurchase agreements

Level 2
169,737 169,737 118,365 118,365
Level 2
203,339 203,339 197,463 197,463
FHLBI advances

Level 2
394,000 407,972 394,000 410,881
Level 2
362,263 347,018 374,000 384,927
Subordinated debentures

Level 2
47,904 47,859 47,563 47,574
Level 2
48,585 52,820 48,244 48,284
Subordinated notes

Level 2
88,457 83,679 73,646 73,646
Accrued interest payable

Level 2
1,885 1,885 2,313 2,313
Level 2
2,834 2,834 1,393 1,393
Interest rate swaps

Level 2
17,196 17,196 4,857 4,857

(1)
See Note 11 for a description of the fair value hierarchy as well as a disclosure of levels for classes of financial assets and liabilities.

(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)

4647
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

10.
FAIR VALUES OF FINANCIAL INSTRUMENTS~~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 deposit accounts other than noninterest-bearing checking accounts is based on discounted cash flows using current market rates applied to the estimated life. The fair value of mortgage servicing rights is estimated using a valuation model that calculates the present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. The fair values of subordinated debentures, subordinated notes, and FHLBI advances are based on current rates for similar financing. The fair value of off-balance sheet items is estimated to be nominal.

11.
~~11.~~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)

4748
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11.
FAIR VALUES ~~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, ~~2021~~2022 or December 31, ~~2020.~~2021. We have 0 Level 1 securities available for sale.

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 ~~fair value,~~market, 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, ~~2021~~2022 and December 31, ~~2020,~~2021, we determined the fair value of our mortgage loans held for sale to be ~~$28.9~~$13.3 million and ~~$24.0~~$16.7 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)

4849
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11.
~~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, ~~2021~~2022 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
$ 320,141,000 $ 0 $ 320,141,000 $ 0 $ 407,335,000 $ 0 $ 407,335,000 $ 0
Mortgage-backed securities
37,319,000 0 37,319,000 0 36,364,000 0 36,364,000 0
Municipal general obligation bonds
129,435,000 0 128,718,000 717,000 137,673,000 0 137,050,000 623,000
Municipal revenue bonds
18,730,000 0 18,730,000 0 21,766,000 0 21,766,000 0
Other investments
500,000 0 500,000 0 500,000 0 500,000 0
Interest rate swaps
17,069,000 0 17,069,000 0
Total
$ 506,125,000 $ 0 $ 505,408,000 $ 717,000 $ 620,707,000 $ 0 $ 620,084,000 $ 623,000

There were no transfers in or out of Level 1, Level 2 or Level 3 during the first six months of ~~2021.~~2022. The less than $0.1 million reduction in Level 3 municipal general obligation bonds during the first six months of ~~2021~~2022 reflects the scheduled maturities of such bonds.

The balances of assets and liabilities measured at fair value on a recurring basis as of December 31, ~~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)

Available for sale securities

U.S. Government agency debt obligations
$ 242,141,000 $ 0 $ 242,141,000 $ 0
Mortgage-backed securities
24,890,000 0 24,890,000 0
Municipal general obligation bonds
107,824,000 0 107,058,000 766,000
Municipal revenue bonds
11,992,000 0 11,992,000 0
Other investments
500,000 0 500,000 0
Total
$ 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~~ ~~2020.~~

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
$ 390,371,000 $ 0 $ 390,371,000 $ 0
Mortgage-backed securities
41,803,000 0 41,803,000 0
Municipal general obligation bonds
137,594,000 0 136,917,000 677,000
Municipal revenue bonds
22,475,000 0 22,475,000 0
Other investments
500,000 0 500,000 0
Interest rate swaps
4,609,000 0 4,609,000 0
Total
$ 597,352,000 $ 0 $ 596,675,000 $ 677,000

(Continued)

4950
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11.
~~11.~~FAIR VALUES (Continued)

There were no transfers in or out of Level 1, Level 2 or Level 3 during 2021.
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~~2022 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
$ 4,999,000 $ 0 $ 0 $ 4,999,000
Loans
$ 7,116,000 $ 0 $ 0 $ 7,116,000
Foreclosed assets
404,000 0 0 404,000 0 0 0 0
Total
$ 5,403,000 $ 0 $ 0 $ 5,403,000 $ 7,116,000 $ 0 $ 0 $ 7,116,000

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of December 31, ~~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)

Impaired loans
$ 2,880,000 $ 0 $ 0 $ 2,880,000
Impaired Loans
$ 3,807,000 $ 0 $ 0 $ 3,807,000
Foreclosed assets
701,000 0 0 701,000 0 0 0 0
Total
$ 3,581,000 $ 0 $ 0 $ 3,581,000 $ 3,807,000 $ 0 $ 0 $ 3,807,000

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)

5051
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

12.
~~12.~~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, ~~2021~~2022 and December 31, ~~2020,~~2021, 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, ~~2021~~2022 that we believe have changed our bank’s categorization.

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

Amount

Ratio

Amount

Ratio

Amount

Ratio

June 30, 2021

Total capital (to risk weighted assets)

Consolidated
$ 481,324 13.1 % $ 294,175 8.0 %
NA

NA

Bank
477,684 13.0 293,957 8.0 367,447 10.0 %
Tier 1 capital (to risk weighted assets)

Consolidated
445,410 12.1 220,631 6.0
NA

NA

Bank
441,770 12.0 220,468 6.0 293,957 8.0
Common equity tier 1 (to risk weighted assets)

Consolidated
399,581 10.9 165,474 4.5
NA

NA

Bank
441,770 12.0 165,351 4.5 238,841 6.5
Tier 1 capital (to average assets)

Consolidated
445,410 9.5 188,065 4.0
NA

NA

Bank
441,770 9.4 187,971 4.0 234,964 5.0

Actual

Minimum Required
for Capital
Adequacy Purposes

Minimum Required
to be Well
Capitalized Under
Prompt Corrective
Action Regulations

Amount

Ratio

Amount

Ratio

Amount

Ratio

June 30, 2022

Total capital (to risk weighted assets)

Consolidated $ 597,495 13.8 $ 346,868 8.0 % $ NA NA %
Bank
582,487 13.4 346,698 8.0 433,372 10.0
Tier 1 capital (to risk weighted assets)

Consolidated
473,065 10.9 260,151 6.0
NA

NA

Bank
546,513 12.6 260,023 6.0 346,698 8.0
Common equity tier 1 (to risk weighted assets)

Consolidated
426,553 9.8 195,114 4.5
NA

NA

Bank
546,513 12.6 195,018 4.5 281,692 6.5
Tier 1 capital (to average assets)

Consolidated
473,065 9.3 203,286 4.0
NA

NA

Bank
546,513 10.8 203,201 4.0 254,001 5.0

(Continued)

5152
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

12.
~~12.~~REGULATORY MATTERS (Continued)

December 31, 2020

Actual
Minimum Required
for Capital
Adequacy Purposes

Minimum Required
to be Well
Capitalized Under
Prompt Corrective
Action Regulations

Amount Ratio
Amount
Ratio Amount
Ratio

December 31, 2021

Total capital (to risk weighted assets)

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

NA
$ 565,143 14.0 % $ 324,101 8.0 % $ NA NA %
Bank
457,203 13.5 271,196 8.0 338,995 10.0 % 551,760 13.6 323,928 8.0 404,910 10.0
Tier 1 capital (to risk weighted assets)

Consolidated
430,146 12.7 203,494 6.0
NA

NA
456,133 11.3 243,076 6.0
NA

NA

Bank
419,236 12.4 203,397 6.0 271,196 8.0 516,397 12.8 242,946 6.0 323,928 8.0
Common equity tier 1 (to risk weighted assets)

Consolidated
384,658 11.3 152,621 4.5
NA

NA
409,963 10.1 182,307 4.5
NA

NA

Bank
419,236 12.4 152,548 4.5 220,347 6.5 516,397 12.8 182,210 4.5 263,192 6.5
Tier 1 capital (to average assets)

Consolidated
430,146 9.8 176,053 4.0
NA

NA
456,133 9.2 198,574 4.0
NA

NA

Bank
419,236 9.5 175,999 4.0 219,999 5.0 516,397 10.4 198,510 4.0 248,137 5.0

Our consolidated capital levels as of June 30, ~~2021~~2022 and December 31, ~~2020~~2021 include ~~$45.8~~$46.5 million and ~~$45.5~~$46.2 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, ~~2021~~2022 and December 31, ~~2020,~~2021, all ~~$45.8~~$46.5 million and ~~$45.5~~$46.2 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, ~~2021,~~2022, our bank ~~meets~~met all capital adequacy requirements under the BASEL III capital ~~rules on a fully phased-in basis.~~rules.

~~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 14, 2021,~~ ~~our Board of Directors declared a cash dividend on our common stock in the amount of $0.29 per share that was paid on~~ ~~March 17, 2021~~ ~~to shareholders of record as of~~ ~~March 5, 2021.~~ On ~~April 15, 2021,~~ ~~our Board of Directors declared a cash dividend on our common stock in the amount of $0.29 per share that was paid on~~ ~~June 16, 2021~~ ~~to shareholders of record as of~~ ~~June 4, 2021.~~ On ~~July 15, 2021,~~ ~~our Board of Directors declared a cash dividend on our common stock in the amount of $0.30 per share that will be paid on~~ ~~September 15, 2021~~ ~~to shareholders of record as of~~ ~~September 3, 2021.~~
(Continued)

5253
Table of Contents

MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

12.  REGULATORY MATTERS (Continued)
InOur 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 ~~May 2021,~~January 13, 2022, ~~we announced that~~ our Board of Directors declared a cash dividend on our common stock in the amount of $0.31 per share that was paid on March 16, 2022 to shareholders of record as of March 4, 2022. On April 14, 2022, our Board of Directors declared a cash dividend on our common stock in the amount of $0.31 per share that was paid on June 15, 2022 to shareholders of record as of June 3, 2022. On July 14, 2022, our Board of Directors declared a cash dividend on our common stock in the amount of $0.32 per share that will be paid on September 14, 2022 to shareholders of record as of September 2, 2022.
As of June 30, 2022, we had ~~authorized a program~~the ability to repurchase up to ~~$20.0~~$6.8 million ~~of our~~in common stock shares from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable ~~regulations. This program replaces~~regulations as part of a ~~similar~~ $20.0 million common stock repurchase program ~~that had been~~ announced in May ~~2019~~2021. ~~that was nearing exhaustion. During~~NaN shares were repurchased during the first six months of ~~2021,~~2022. ~~we repurchased a total of approximately 347,000 shares at a total price of $10.9 million, at an average price per share of $31.28. Availability under the repurchase plan totaled $17.3 million as of~~ ~~June 30, 2021.~~ ~~The~~Historically, stock ~~buybacks~~repurchases 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.

5354
Table of Contents

MERCANTILE BANK CORPORATION

Item 2.  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,~~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;~~financial service companies; changes in banking regulation or actions by bank regulators; ~~changes in the method of determining Libor and the phase out of Libor;~~ changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; ~~risks associated with~~potential cyber-attacks, information security breaches, and other criminal activities on our computer systems; litigation liabilities; governmental and regulatory policy changes; ~~our participation in the Paycheck Protection Program administered by the Small Business Administration;~~ the outcomes of existing or future 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, and the failure to meet client expectations and other facts; adoption of SOFR and changes in the method of determining SOFR; direct and indirect climate change matters; changes in the national and local economies, including the ~~significant~~ongoing disruption to financial ~~market~~markets and other economic activity caused by the ~~outbreak~~Coronavirus Pandemic and ~~continuance of the Coronavirus Pandemic;~~unstable political and economic environments; and risk factors described in our annual report on Form 10-K for the year ended December 31, ~~2020, our March 31, 2021 Form 10-Q or in this report.~~2021. 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 subsidiary Mercantile Insurance Center, Inc. ~~(“our insurance company”)~~, at June 30, ~~2021~~2022 and December 31, ~~2020~~2021 and the results of operations for the three months and six months ended June 30, ~~2021~~2022 and June 30, ~~2020.~~2021. 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~~Accounting principles generally accepted in the United States of America (“GAAP”) are complex and ~~requires~~require us to apply significant judgment to various accounting, reporting and disclosure matters. We must use assumptions and estimates to apply these principles where actual measurements are not possible or practical. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited financial statements included in this report. For a discussion of our significant accounting 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, ~~2020~~2021 (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.

5455
Table of Contents

MERCANTILE BANK CORPORATION

Allowance for ~~Loan~~Credit Losses (“Allowance”): The allowance ~~for loan losses (“allowance”)~~ is maintained at a level we believe is adequate to absorb ~~probable incurred~~estimated credit losses identified and inherent in the loan portfolio. Our evaluation of the adequacy of the allowance is an estimate based on past loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, guidance from bank regulatory agencies, and assessments of the impact of current and anticipated economic conditions on the loan portfolio. 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~~Credit losses are charged against the allowance when we believe the ~~uncollectability~~uncollectibility 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~~Uncollectible loans are charged-off through the ~~allowance. Recoveries~~allowance, while recoveries of loans previously charged-off are added to the allowance. ~~A loan is considered impaired when it is probable~~
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 ~~contractual interest~~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, applies to financial assets subject to credit losses and ~~principal payments~~measured at amortized cost, and certain off-balance sheet credit exposures. The standard also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance. In addition, entities will ~~not be collected either~~need to disclose the amortized cost balance for ~~the amounts or~~each class of financial asset by credit quality indicator, disaggregated by the ~~dates as scheduled in the loan agreement. Impairment is evaluated on an individual loan basis. If a loan is impaired, a portion~~year 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 natureorigination. This ASU was effective for interim 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.annual reporting periods beginning after December 15, 2019.

Financial institutions were not required to comply with the ~~Current Expected Credit Loss (“CECL”)~~CECL methodology requirements from the enactment date of the Coronavirus Aid, Relief and Economic Security Act (“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 ana further extension of the required CECL adoption date to January 1, ~~2022, which is the date we expect to adopt.~~2022. An economic forecast is a key component of the CECL methodology. As we ~~continue~~continued to experience an unprecedented economic environment whereby a sizable portion of the economy ~~has~~had been significantly impacted by government-imposed activity limitations and similar reactions by businesses and individuals, substantial government stimulus ~~has been~~was provided to businesses, individuals and state and local governments and financial institutions ~~have~~ offered businesses and individuals payment relief options, economic forecasts ~~are~~were regularly ~~revised.~~revised with no economic forecast consensus. Given the high degree of uncertainty surrounding economic forecasting, we ~~have~~ elected to postpone the adoption of CECL until January 1, 2022, and ~~will continue~~continued to use our incurred loan loss reserve model as ~~permitted.~~permitted through December 31, 2021.

We adopted CECL effective January 1, 2022 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2022 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss accounting standards. The transition adjustment of the CECL adoption included a decrease in the allowance of $0.4 million, and a $0.3 million increase to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $0.1 million tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet.
See Note 1- Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the allowance. See also Note 3 – Loans and Allowance for Credit Losses in this Quarterly Report on Form 10-Q for further information regarding our loan portfolio and allowance.

5556
Table of Contents

MERCANTILE BANK CORPORATION

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.

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.

Debt Securities ~~and Other Financial Instruments:~~Available for Sale ~~Securities~~: Debt securities available for sale consist of bonds ~~and notes~~ which might be sold prior to maturity due to a number of factors, including changes in interest rates, prepayment risks, yield and availability of alternative investments or liquidity ~~needs or other factors. Securities~~needs. Debt securities classified as available for sale are reported at their fair value. ~~Declines~~For available for sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with the establishment 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 foran allowance. For debt securities available for sale that do not meet the aforementioned criteria, we evaluate whether any decline in fair value is due to credit loss factors. In making this assessment, we consider any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are ~~obtained from outside sources and applied~~compared to ~~individual securities within the portfolio. The difference between~~ the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the ~~current~~credit loss, limited by the amount that the fair value ~~of securities~~ is less than the amortized cost basis. Any impairment that has not been recorded ~~as a valuation adjustment and reported~~through an allowance for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses under CECL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when we believe the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At June 30, 2022, there was no allowance for credit losses related to the available for sale debt securities portfolio.
Mortgage Servicing ~~Rights:~~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~~servicing 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.

57
Table of Contents
MERCANTILE BANK CORPORATION
~~Goodwill:~~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.

56

~~Table of Contents~~
~~MERCANTILE BANK CORPORATION~~

Coronavirus Pandemic
~~The U.S. economy deteriorated rapidly during the latter part~~There remains a significant amount of ~~the first quarter~~stress and ~~into the second quarter of 2020~~uncertainty across national and global economies 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.~~circumstances, including supply chain disruptions and inflationary pressures.

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~~reduce 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,~~2022, we recorded forgiveness transactions on ~~approximately 1,900~~all but twelve loans aggregating ~~$487~~$0.7 million. Net loan origination fees of ~~$3.5~~less than $0.1 million were recorded during the first six months of ~~2021.~~2022.

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,~~2022, we recorded forgiveness transactions on ~~approximately 200~~all but nine loans aggregating ~~$29.2~~$2.2 million. Net loan origination fees of ~~$2.2~~$0.9 million were recorded during the first six months of ~~2021 under the Second Draw.~~2022.

~~A PPP loan is assigned a risk weight~~
58
Table of ~~0% under the risk-based capital rules of the federal banking agencies.~~Contents
MERCANTILE BANK CORPORATION

●
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.

57

~~Table of Contents~~
~~MERCANTILE BANK CORPORATION~~

●
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. We elected to suspend GAAP principles and regulatory determinations as permitted up to December 31, 2021.

●
Current Expected Credit Loss Methodology Delay
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 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~~ We adopted 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 payment deferment program. As of 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 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.CECL methodology effective January 1, 2022.

Financial Overview
We reported net income of ~~$18.1~~$11.7 million, or ~~$1.12~~$0.74 per diluted share, for the second quarter of ~~2021,~~2022, compared towith net income of ~~$8.7~~$18.1 million, or ~~$0.54~~$1.12 per diluted share, during the second quarter of ~~2020.~~2021. Net income for the first six months of ~~2021~~2022 totaled ~~$32.3~~$23.2 million, or ~~$2.00~~$1.47 per diluted share, compared to ~~$19.4~~$32.3 million, or ~~$1.19~~$2.00 per diluted share, during the first six months of ~~2020.~~2021. Higher net interest income, stemming from an improving net interest margin and ongoing strong loan growth, combined with continued strength in asset quality metrics and increases in several key fee income revenue streams, in large part mitigated a significant decline in residential mortgage banking revenue as industry-wide originations come off of the record levels of 2020 and 2021, which were driven by low residential mortgage rates and resulting refinance activity. Our earnings performance in the 2021 periods also benefited from large negative loan loss provisions reflecting improved economic conditions and expectations during those time periods.

Commercial loans increased ~~$16.3~~$121 million during the first six months of ~~2021,~~2022, reflecting the ~~combined~~ net impact of growth ofin core commercial loans and ~~net activity~~payment activities under the PPP. Core commercial loans increased ~~$135~~$159 million, or ~~approximately~~almost 11% on an annualized basis, ~~during the first six months of 2021. Net~~while PPP ~~loans declined $119~~payment activities aggregated $37.2 million, during the first six months of ~~2021, comprised of $209 in~~2022. Core commercial and industrial loans increased $87.4 million, ~~PPP~~multi-family and residential rental property loans ~~extended~~grew $48.0 million, owner-occupied commercial real estate (“CRE”) loans were up $32.8 million, and ~~$328~~vacant land, land development and residential construction loans increased $14.6 million, ~~in forgiveness transactions.~~while non-owner occupied CRE loans were down $24.3 million. As a percentage of total commercial loans, commercial and industrial loans (excluding PPP loans) and owner occupied ~~commercial real estate (“CRE”)~~CRE loans combined equaled ~~54.9%~~58.1% as of June 30, ~~2021,~~2022, compared to ~~53.9%~~57.1% at December 31, ~~2020.~~2021. The new commercial loan pipeline remains strong, and at June 30, ~~2021,~~2022, we had ~~$167~~$175 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase.

Residential mortgage loans, excluding home equity lines of credit, increased $148 million during the first six months of 2022, representing a growth rate of over 66% on an annualized basis. With the increase in residential mortgage loan rates during the first half of 2022, we have witnessed a shift in borrowers primarily now selecting adjustable rate residential mortgage loans compared to fixed rate residential mortgage loans in the previous couple of years. Generally, we sell fixed rate residential mortgage loans to third-party investors, while we maintain adjustable rate residential mortgage loans on our balance sheet. During the first six months of 2022, approximately 64% of our residential mortgage loan production was comprised of adjustable rate loans, compared to about 30% during the first six months of 2021. The shift in product mix impacts the timing of revenue recognition; it takes an estimated 24 months for the amount of interest income earned on a residential mortgage loan that is retained on our balance sheet to approximate the amount of the immediately recorded gain on sale of a residential mortgage loan that has been sold to an investor.

5859
Table of Contents

MERCANTILE BANK CORPORATION

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling only ~~0.08%~~0.05% of total loans as of June 30, ~~2021.~~2022. Accruing loans past due 30 to 89 days remain very ~~low.~~low, and we had no foreclosed properties as of June 30, 2022. Gross loan charge-offs totaled less than $0.1 million during the second quarter of ~~2021,~~2022, and aggregated ~~$0.1~~$0.2 million for the first six months of the year, while recoveries of prior period loan charge-offs equaled ~~$0.4~~$0.3 million and ~~$0.9~~$0.6 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%~~0.02% during the second quarter and first six months of ~~2021,~~2022, respectively.

We recorded ~~a negative loan loss provision expense~~provisions for credit losses of ~~$3.1~~$0.5 million and $0.6 million during the second quarter and first six months of ~~2021,~~2022, respectively, compared to anegative provisions for loan losses of $3.1 million and $2.8 million during the respective time periods in 2021. The provision expense ~~of $7.6 million~~recorded during the second quarter of ~~2020. We recorded~~2022 mainly reflected allocations necessitated by net commercial and residential mortgage loan growth, increased specific reserves on certain problem commercial loans, and a ~~negative~~higher reserve on residential mortgage loans stemming from a projected increased average life of the portfolio, which were not fully mitigated by the combined impact of a reduced Covid-19 environmental allocation, net loan ~~loss~~recoveries and continued strong loan quality metrics. Our provision expense ~~of $2.8~~totaled $0.1 million during the first ~~six months~~quarter of ~~2021, compared~~2022, in large part reflecting allocations necessitated by net loan growth which was mitigated by net loan recoveries and continued strong loan quality metrics. Our adoption of Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments, on January 1, 2022, resulted in a $0.4 million one-time reduction to ~~a provision expense of $8.4 million during~~ the ~~first six months of 2020.~~allowance for credit losses. 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. The provision expense recorded during the 2020 periods mainly consisted of an allocation associated with a newly created Coronavirus Pandemic environmental factor (“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.

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,~~2022, the average balance of these funds equaled ~~$606~~$657 million, or ~~13.8%~~13.6% of average earning assets, compared to ~~$203~~$606 million, or ~~5.6%~~13.8% of average earning assets, during the first six months of ~~2020, and a more~~2021; these levels are substantially higher than our typical ~~$81.3~~average balance of $75 million, or ~~2.5%~~approximately 2% of average earning ~~assets, during the first six months of 2019.~~assets. The elevated ~~level~~levels during ~~2020~~2021 and ~~into~~through the first half of ~~2021~~2022 primarily ~~reflects~~reflect increased local deposits stemming from Covid-19-related 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~~spending, and have had a significant negative impact ~~of 35 to 40 basis points~~ on our net interest ~~margin~~margin.
Total deposits decreased $209 million during the first six months of 2022, totaling $3.87 billion at June 30, 2022. Local deposits decreased $185 million and out-of-area deposits declined $23.9 million. The reduced level of local deposits primarily reflected a single customer’s anticipated withdrawal of a majority of funds that were obtained from the sale of a business and deposited in late 2021; excluding this withdrawal, total local deposits were relatively steady during the first six months of 2022.
Net interest income increased $3.5 million and $4.8 million during the second quarter and first six months of 2022, respectively, compared to the respective time periods in 2021.
~~Total local deposits increased $276~~ Interest income was $3.8 million and $4.9 million higher during the second quarter and first six months of 2022 when compared to the same time periods in 2021, in large part reflecting higher average balances of earning assets and ~~are up $1.1 billion since year-end 2019, equating to growth rates of about 8%~~an increasing interest rate environment. Interest expense was $0.3 million and ~~42%, respectively. Approximately two-thirds of the deposit increase~~$0.1 million higher during the second quarter and first six months of 2022 when compared to the respective time periods in 2021, primarily reflecting the net impact of lower deposit interest costs and increased costs on borrowed funds associated with the $90.0 million in subordinated notes issued in December 2021 and ~~the last 18 months is comprised of increased noninterest-bearing checking account balances.~~January 2022.

~~Net interest~~Noninterest income ~~increased $0.3~~decreased $6.8 million and $11.0 million during the second quarter ~~of 2021 compared to the second quarter of 2020, while decreasing $0.5 million during the~~and first six months of ~~2021~~2022, respectively, compared to the respective time periods in 2021. Mortgage banking income was $5.7 million and $11.3 million lower during the second quarter and first six months of ~~2020. Interest income and interest expense declined during the 2021 periods~~2022 when 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~~in 2021, was $14.6 million, compared to $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 same time period in 2020. The improved level mainly resulted from increased mortgage banking income and fee income generated from a commercial lending interest rate swap program that was introduced in the latter part of 2020. In addition, a gain on the sale of a branch totaling $1.1 million was recorded during the second quarter of 2021.
Noninterest expense during the second quarter of 2021 was $26.2 million, compared to $23.2 million during the prior-year second quarter. Noninterest expense during the first six months of 2021 was $51.3 million, compared to $46.2 million during the same time period in 2020. A majority of the increase is in salary and benefit costs, in large part reflecting increased ~~health insurance costs, annual employee merit pay increases,~~residential mortgage loan rates which substantially reduced the volume of refinance activity. We continued to record growth in treasury management-related fee income categories, such as service charges on accounts, credit and ~~a lower level~~debit card income and payroll processing. Combined, we recorded growth of ~~deferred salary costs associated~~approximately 16% when comparing the second quarter and first six months of 2022 with ~~PPP loan originations. In addition, we accrued for our bonus programs during~~ the ~~2021~~respective time periods ~~which we did not do during the 2020 periods due to the onset of the Coronavirus Pandemic.~~in 2021.

5960
Table of Contents

MERCANTILE BANK CORPORATION

Noninterest expense increased $0.8 million and $1.4 million during the second quarter and first six months of 2022, respectively, compared to the respective time periods in 2021. During the second quarter of 2022, we contributed $0.5 million to The Mercantile Bank Foundation. Excluding the charitable contribution, overhead costs were relatively unchanged during the 2022 periods when compared to the 2021 periods.
Financial Condition
Our total assets ~~increased $320~~decreased $199 million during the first six months of ~~2021,~~2022, and totaled ~~$4.76~~$5.06 billion as of June 30, ~~2021.~~2022. Total loans increased ~~$55.4~~$270 million and securities available for sale were up ~~$119~~$10.9 million, ~~and~~while interest-earning deposits ~~grew by $120 million, while total~~declined $526 million. Total deposits decreased $209 million.
Commercial loans increased ~~$260 million and sweep accounts were up $51.4~~$121 million during the first six months of ~~2021.~~
~~Commercial~~2022, reflecting the net impact of growth in core commercial loans and payment activities under the PPP. Core commercial loans increased ~~$16.3~~$159 million, or almost 11% on an annualized basis, while PPP payment activities aggregated $37.2 million, during the first six months of 2021, and at June 30, 2021 totaled $2.81 billion, or 86.5% of the loan portfolio. As of December 31, 2020, the commercial loan portfolio comprised 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 2021.2022. Core commercial and industrial loans increased ~~$135~~$87.4 million, ~~non-owner occupied CRE loans grew $33.6 million, owner occupied CRE loans were up $20.6 million and~~ multi-family and residential rental property loans ~~increased $15.8~~grew $48.0 million, ~~while~~owner-occupied CRE loans were up $32.8 million, and vacant land, land development and residential construction loans ~~declined $11.9~~increased $14.6 million, while non-owner occupied CRE loans were down $24.3 million. As a percentage of total commercial loans, commercial and industrial loans (excluding PPP loans) and owner occupied CRE loans combined equaled ~~54.9%~~58.1% as of June 30, ~~2021,~~2022, compared to ~~53.9%~~57.1% at December 31, ~~2020.~~2021. At June 30, 2022, commercial loans totaled $3.07 billion, or 82.5% of the loan portfolio. As of December 31, 2021, the commercial loan portfolio comprised 85.4% of total loans.

As of June 30, ~~2021,~~2022, availability on existing construction and development loans totaled ~~$167~~$175 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 ~~$161~~approximately $253 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~~potentially 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 averaged 34% during the first six months of 2022. Historically, the level of commercial lines of credit usage equaled 40% to 45%; however, the level averaged approximately 32% since the onset of the Coronavirus Pandemic through the end of the third quarter of 2021.

Residential mortgage loans, excluding home equity lines of credit, increased ~~$42.4~~$148 million during the first six months of ~~2021,~~2022, totaling ~~$380~~$590 million, or ~~11.7%~~15.9% of total loans, as of June 30, ~~2021. Activity within the~~2022. The increasing interest rate environment has had a significant impact on our residential mortgage ~~loan function was very active during~~banking operations, especially in regards to the ~~first half~~volume of ~~2021, primarily reflecting~~ refinance ~~transactions spurred by low residential mortgage loan interest rates, strength in home purchase~~ activity and the ~~continuing success~~borrower selection of ~~strategic initiatives that have been implemented over the past several years to gain market share and increase production. We originated $482 million in~~fixed rate versus adjustable rate residential mortgage products which combined have resulted in a material decline in the volume of residential mortgage loans being sold. Residential mortgage volume totaled $359 million during the first six months of ~~2021, an increase of over 18%~~2022, compared to ~~originations~~$482 million during the ~~first six months~~same time period in 2021, a decline of ~~2020. The production composition during the first six months of 2021 was almost equal between~~$123 million, or over 25%. Refinance volume declined $156 million; however, home 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 production during the first three months of 2021, but dropped to about 39% during the second quarter.activity increased $32.8 million. Residential mortgage loans originated for sale generally ~~consisting~~consist of longer-term fixed rate residential mortgage loans, while adjustable rate residential mortgage loans are maintained in the residential mortgage loan portfolio. We have experienced a significant pattern shift as it pertains to the type of residential mortgage loan product selected by our borrowers with a majority now selecting adjustable rate offerings compared to the past couple of years when a longer-term fixed rate was the most popular selection. During the first six months of 2022, approximately 36% of residential mortgage loan production consisted of longer-term fixed rate loans, compared to a level of about 70% during the first six months of 2021 totaled $336 million, or approximately 70% of total residential mortgage loans originated. During the first six months of 2020, residential mortgage loans originated for sale totaled $321 million, or 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 remain solid in future periods.2021.

~~Other~~Home equity lines of credit and other consumer-related loans ~~declined $3.4~~increased $1.3 million during the first six months of ~~2021,~~2022, and at June 30, ~~2021~~2022 totaled ~~$58.2~~$61.7 million, or ~~1.8%~~1.7% of total loans. ~~Other~~Home equity lines of credit and other consumer-related loans comprised ~~1.9%~~1.8% of total loans as of December 31, ~~2020.~~2021. We expect the dollar volume of this loan portfolio segment to ~~decline~~remain relatively stable in future ~~periods as scheduled principal payments exceed anticipated new loan origination volumes.~~
periods.

6061
Table of Contents

MERCANTILE BANK CORPORATION

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

6/30/21

3/31/21

12/31/20

9/30/20

6/30/20

6/30/22

3/31/22

12/31/21

9/30/21

6/30/21

Commercial:

Commercial & Industrial(1)
$ 1,103,807,000 $ 1,284,507,000 $ 1,145,423,000 $ 1,321,419,000 $ 1,307,455,000 $ 1,187,650,000 $ 1,153,814,000 $ 1,137,419,000 $ 1,074,394,000 $ 1,103,807,000
Land Development & Construction
43,111,000 58,738,000 55,055,000 50,941,000 52,984,000 57,808,000 52,693,000 43,239,000 38,380,000 43,111,000
Owner Occupied Commercial RE
550,504,000 544,342,000 529,953,000 549,364,000 567,621,000 598,593,000 582,732,000 565,758,000 551,762,000 550,504,000
Non-Owner Occupied Commercial RE
950,993,000 932,334,000 917,436,000 878,897,000 841,145,000 1,003,118,000 1,007,361,000 1,027,415,000 998,697,000 950,993,000
Multi-Family & Residential Rental
161,894,000 147,294,000 146,095,000 137,740,000 132,047,000 224,591,000 207,962,000 176,593,000 179,126,000 161,894,000
Total Commercial
2,810,309,000 2,967,215,000 2,793,962,000 2,938,361,000 2,901,252,000 3,071,760,000 3,004,562,000 2,950,424,000 2,842,359,000 2,810,309,000

Retail:

Retail (2):

1-4 Family Mortgages
380,292,000 337,844,000 337,888,000 348,460,000 367,061,000 623,599,000 522,556,000 442,547,000 411,618,000 380,292,000
Home Equity & Other Consumer Loans
58,240,000 59,311,000 61,620,000 63,723,000 64,743,000
Other Consumer Loans
28,441,000 28,672,000 60,488,000 59,732,000 58,240,000
Total Retail
438,532,000 397,155,000 399,508,000 412,183,000 431,804,000 652,040,000 551,228,000 503,035,000 471,350,000 438,532,000

Total
$ 3,248,841,000 $ 3,364,370,000 $ 3,193,470,000 $ 3,350,544,000 $ 3,333,056,000 $ 3,723,800,000 $ 3,555,790,000 $ 3,453,459,000 $ 3,313,709,000 $ 3,248,841,000

(1)
~~(*)~~ Includes $2.9 million, $12.2 million, $40.1 million, $116 million, and $246 ~~million, $455 million, $365 million, $555 million and $549~~ million in loans originated under the Paycheck Protection Program for June 30, 2022, March 31, 2022, December 31, 2021, September 30, 2021, and June 30, 2021, ~~March 31, 2021, December 31, 2020, September 30, 2020, and June 30, 2020,~~ respectively.
(2)
For March 31, 2022 and June 30, 2022, home equity lines of credit balances are included in 1-4 family mortgage loans. For prior periods, home equity lines of credit balances are included in other consumer loans.

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. 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,~~loans, comprised of nonaccrual loans and loans past due 90 days or more and accruing interest, ~~and foreclosed properties,~~ totaled ~~$3.2~~$1.8 million (0.1% of total ~~assets)~~loans) as of June 30, ~~2021,~~2022, compared to ~~$4.1~~$2.5 million (0.1% of total ~~assets)~~loans) as of December 31, ~~2020.~~2021. Given the low ~~level~~levels 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. We had no foreclosed properties as of June 30, 2022 or December 31, 2021.

6162
Table of Contents

MERCANTILE BANK CORPORATION

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

~~NONPERFORMING LOANS~~
NONPERFORMING LOANS

6/30/22

3/31/22

12/31/21

9/30/21

6/30/21

Residential Real Estate:

Land Development
$ 30,000 $ 31,000 $ 32,000 $ 33,000 $ 34,000
Construction
0 0 0 0 0
Owner Occupied / Rental
1,508,000 1,579,000 1,768,000 2,052,000 2,096,000
1,538,000 1,610,000 1,800,000 2,085,000 2,130,000

Commercial Real Estate:

Land Development
0 0 0 0 0
Construction
0 0 0 0 0
Owner Occupied
0 0 0 0 0
Non-Owner Occupied
0 0 0 0 0
0 0 0 0 0

Non-Real Estate:

Commercial Assets
248,000 0 662,000 673,000 606,000
Consumer Assets
1,000 2,000 6,000 8,000 10,000
249,000 2,000 668,000 681,000 616,000

Total
$ 1,787,000 $ 1,612,000 $ 2,468,000 $ 2,766,000 $ 2,746,000

6/30/21

3/31/21

12/31/20

9/30/20

6/30/20

Residential Real Estate:

Land Development
$ 34,000 $ 34,000 $ 35,000 $ 36,000 $ 36,000
Construction
0 0 0 198,000 198,000
Owner Occupied / Rental
2,096,000 2,294,000 2,519,000 2,399,000 2,552,000
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
Construction
0 0 0 0 0
Owner Occupied
0 283,000 619,000 1,262,000 275,000
Non-Owner Occupied
0 0 22,000 23,000 25,000
0 283,000 641,000 1,285,000 300,000

Non-Real Estate:

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

Total
$ 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
OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS

6/30/22

3/31/22

12/31/21

9/30/21

6/30/21

Residential Real Estate:

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

Commercial Real Estate:

Land Development
0 0 0 0 0
Construction
0 0 0 0 0
Owner Occupied
0 0 0 100,000 363,000
Non-Owner Occupied
0 0 0 0 0
0 0 0 100,000 363,000

Non-Real Estate:

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

Total
$ 0 $ 0 $ 0 $ 111,000 $ 404,000

6263
Table of Contents

MERCANTILE BANK CORPORATION

~~The following tables provide a reconciliation of nonperforming assets:~~NONPERFORMING LOANS RECONCILIATION

~~NONPERFORMING LOANS RECONCILIATION~~

2nd Qtr

1st Qtr

4th Qtr

3rd Qtr

2nd Qtr

2nd Qtr

1st Qtr

4th Qtr

3rd Qtr

2nd Qtr

2021

2021

2020

2020

2020

2022

2022

2021

2021

2021

Beginning balance
$ 2,793,000 $ 3,384,000 $ 4,141,000 $ 3,212,000 $ 3,469,000 $ 1,612,000 $ 2,468,000 $ 2,766,000 $ 2,746,000 $ 2,793,000
Additions, net of transfers to ORE
492,000 116,000 538,000 1,301,000 220,000 309,000 93,000 218,000 361,000 492,000
Returns to performing status
0 (115,000
)
0 (72,000
)
(26,000
)
0 (213,000
)
0 (50,000
)
0
Principal payments
(484,000
)
(559,000
)
(1,064,000
)
(249,000
)
(278,000
)
(134,000
)
(641,000
)
(377,000
)
(291,000
)
(484,000
)
Loan charge-offs
(55,000
)
(33,000
)
(231,000
)
(51,000
)
(173,000
)
0 (95,000
)
(139,000
)
0 (55,000
)

Total
$ 2,746,000 $ 2,793,000 $ 3,384,000 $ 4,141,000 $ 3,212,000 $ 1,787,000 $ 1,612,000 $ 2,468,000 $ 2,766,000 $ 2,746,000

OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS RECONCILIATION

2nd Qtr

1st Qtr

4th Qtr

3rd Qtr

2nd Qtr

2nd Qtr

1st Qtr

4th Qtr

3rd Qtr

2nd Qtr

2021

2021

2020

2020

2020

2022

2022

2021

2021

2021

Beginning balance
$ 374,000 $ 701,000 $ 512,000 $ 198,000 $ 271,000 $ 0 $ 0 $ 111,000 $ 404,000 $ 374,000
Additions
30,000 0 434,000 314,000 0 0 0 0 0 30,000
Sale proceeds
0 (77,000
)
(245,000
)
0 (49,000 ) 0 0 (111,000
)
(209,000
)
0
Valuation write-downs
0 (250,000
)
0 0 (24,000 ) 0 0 0 (84,000
)
0

Total
$ 404,000 $ 374,000 $ 701,000 $ 512,000 $ 198,000 $ 0 $ 0 $ 0 $ 111,000 $ 404,000

~~Gross loan~~Loan charge-offs totaled less than $0.1 million during the second quarter of ~~2021,~~2022, and aggregated ~~$0.1~~$0.2 million ~~for~~during the first six months of ~~the year,~~2022, while recoveries of prior period loan charge-offs equaled ~~$0.4~~$0.3 million and ~~$0.9~~$0.6 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%~~0.02% during the second quarter and first six months of ~~2021,~~2022, 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 ~~$35.9~~$36.0 million, or ~~1.11%~~0.97% of total loans, ~~(1.20% of total loans excluding PPP loans),~~ and over ~~1,300%~~2,000% of nonperforming loans as of June 30, ~~2021.~~2022.

~~In each~~We adopted CECL effective January 1, 2022 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2022 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss accounting ~~period, we adjust~~standards. The transition adjustment of the CECL adoption included a decrease in the allowance of $0.4 million, which included a $0.3 million increase to the ~~amount we believe is necessary~~retained earnings account to ~~maintain~~reflect the ~~allowance at an adequate level. Through~~cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the ~~loan review and credit departments, we establish portions~~$0.1 million tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet.
The allowance for loan loss accounting in effect at December 31, 2021 and all prior periods was based on ~~specifically identifiable problem loans. The evaluation~~our estimate of probable incurred loan losses as of the reporting date (“incurred loss” methodology). Under the CECL methodology, our allowance is ~~further~~ based on ~~but not limited to, consideration~~the total amount of credit losses that are expected over the ~~internally prepared allowance analysis, loan loss migration analysis, composition~~remaining life of the loan ~~portfolio, third party analysis~~portfolio. Our estimate of ~~the loan administration processes~~credit losses under CECL is determined using a complex model that relies on historical loss information, reasonable and ~~portfolio,~~supportable economic forecasts, and ~~general economic conditions.~~
various qualitative factors.

6364
Table of Contents

MERCANTILE BANK CORPORATION

Financial institutions 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. 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 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. 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.
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.

64

~~Table of Contents~~
~~MERCANTILE BANK CORPORATION~~

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, 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.

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~~mortgage 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.

See Note 1- Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the allowance. See also Note 3 – Loans and Allowance for Credit Losses in this Quarterly Report on Form 10-Q for further information regarding our loan portfolio and allowance.
As of June 30, ~~2021,~~2022, the allowance was comprised of ~~$35.1~~$35.0 million in general reserves relating to ~~non-impaired~~performing loans and ~~$0.8~~$1.0 million in specific reserves on other loans, primarily accruing loans designated as troubled debt restructurings. Specific reserve allocations relating to nonaccrual loans were nominal in amount. Troubled debt restructurings totaled ~~$21.7~~$12.6 million at June 30, ~~2021,~~2022, consisting of ~~$0.9~~$0.4 million that are on nonaccrual status and ~~$20.8~~$12.2 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~~Loans with an aggregate carrying value of ~~$0.7~~$0.4 million as of June 30, ~~2021~~2022 had been subject to previous partial charge-offs aggregating ~~$1.0~~$0.4 million over the past ~~ten~~several years. As of June 30, ~~2021,~~2022, 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:

6/30/21

3/31/21

12/31/20

9/30/20

6/30/20

6/30/22

3/31/22

12/31/21

9/30/21

6/30/21

Performing
$ 20,840,000 $ 19,606,000 $ 23,133,000 $ 11,522,000 $ 16,018,000 $ 12,174,000 $ 5,131,000 $ 16,728,000 $ 20,518,000 $ 20,840,000
Nonperforming
859,000 431,000 510,000 1,113,000 521,000 420,000 379,000 746,000 782,000 859,000

Total
$ 21,699,000 $ 20,037,000 $ 23,643,000 $ 12,635,000 $ 16,539,000 $ 12,594,000 $ 5,510,000 $ 17,474,000 $ 21,300,000 $ 21,699,000

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.

65

~~Table of Contents~~
~~MERCANTILE BANK CORPORATION~~

Securities available for sale increased ~~$119~~$10.9 million during the first six months of ~~2021,~~2022, totaling ~~$506~~$604 million as of June 30, ~~2021.~~2022. Purchases of U.S. Government agency bonds totaled ~~$114~~$54.5 million during the first six months of ~~2021, in part reflecting the reinvestment of proceeds from called U.S. Government agency bonds that totaled $33.4 million.~~2022. Purchases of U.S. Government agency guaranteed mortgage-backed securities totaled ~~$18.7~~$2.1 million during the first six months of ~~2021,~~2022, consisting of investments in CRA-qualified securities, ~~in part~~generally reflecting the reinvestment of ~~$5.7~~$3.2 million from principal paydowns on U.S. Government agency guaranteed mortgage-backed securities. Purchases of municipal bonds totaled ~~$35.7~~$22.0 million during the first six months of ~~2021;~~2022; proceeds from matured and called municipal bonds totaled ~~$5.5~~$8.3 million. At June 30, ~~2021,~~2022, the portfolio was primarily comprised of U.S. Government agency bonds ~~(63%~~(67%), municipal bonds ~~(29%~~(26%) and U.S. Government agency ~~issued or~~ guaranteed mortgage-backed securities ~~(8%~~(6%). 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, ~~2021~~2022 totaled ~~$506~~$604 million, including a net unrealized ~~gain~~loss of ~~$1.9~~$60.3 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, no unrealized losses are deemed to be other-than-temporary. 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 ~~2021~~2022 to generally consist of U.S. Government agency bonds and municipal bonds, with the securities portfolio maintained at about 12% of total assets.

~~FHLBI stock totaled $18.0 million as~~
65
Table of June 30, 2021, unchanged from the balance at December 31, 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.Contents
MERCANTILE BANK CORPORATION

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.

Federal Home Loan Bank of Indianapolis (“FHLBI”) stock totaled $17.7 million as of June 30, 2022, compared to $18.0 million as of December 31, 2021. The reduction reflects the FHLBI’s repurchase of excess stock. Our investment in FHLBI stock is necessary to engage in their advance and other financing programs. We have regularly received quarterly cash dividends, and we expect a cash dividend will continue to be paid in future quarterly periods.
Interest-earning 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,~~2022, the average balance of these funds equaled ~~$606~~$657 million, or ~~13.8%~~13.6% of average earning assets, compared to ~~$203~~$606 million, or ~~5.6%~~13.8% of average earning assets, during the first six months of ~~2020, and a more~~2021; these levels are substantially higher than our typical ~~$81.3~~average balance of $75 million, or ~~2.5%~~approximately 2% of average earning ~~assets, during the first six months of 2019.~~assets. The elevated ~~level~~levels during ~~2020~~2021 and ~~into~~through the first half of ~~2021~~2022 primarily ~~reflects~~reflect increased local deposits stemming from Covid-19-related 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~~spending, and have had a significant 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 2021 and into 2022.~~margin.

Net premises and equipment equaled ~~$58.3~~$51.4 million at June 30, ~~2021,~~2022, representing a decrease of ~~$0.7~~$5.9 million during the first six months of ~~2021. An aggregate increase of $5.6 million stems from facility remodeling and new lease activities, while a~~2022. The decline ~~of $3.5 million was recorded from~~primarily reflects the sale of a branch facility ~~(along with the associated loans and deposits) to another financial institution and the sale~~located in Lansing, Michigan as part of a ~~former~~ branch ~~facility. Depreciation expense totaled $2.8~~relocation project whereby we are moving our operations to a leased facility that better aligns with our operations in the greater Lansing area and provides for lower operating costs, along with depreciation expense. We had no foreclosed or repossessed assets as of June 30, 2022, unchanged from December 31, 2021.
Total deposits decreased $209 million during the first six months of ~~2021. Foreclosed and repossessed assets equaled $0.4 million as of~~2022, totaling $3.87 billion at June 30, ~~2021,~~2022. Local deposits decreased $185 million and out-of-area deposits declined $23.9 million. The reduced level of local deposits primarily reflected a ~~reduction~~single customer’s expected withdrawal of ~~$0.3 million~~a majority of funds that were obtained from ~~December 31, 2020.~~
~~Total~~the sale of a business and deposited in late 2021; excluding this withdrawal, total local deposits were relatively steady during the first six months of 2022. Noninterest-bearing deposits increased ~~$260~~$62.5 million and savings deposits were up $15.2 million, while interest-bearing checking accounts were down $57.8 million, during the first six months of ~~2021, totaling $3.67 billion at June 30, 2021.~~2022. Money market deposit balances were down $151 million, in large part reflecting the significant withdrawal from a single customer. Local time deposits increased $276 million, while out-of-area deposits decreased $16.0 million. As a percentage of total deposits, out-of-area deposits equaled 0.8% as of June 30, 2021, compared to 1.4% as of December 31, 2020.

66

~~Table of Contents~~
~~MERCANTILE BANK CORPORATION~~

~~Noninterest-bearing checking accounts increased $187~~declined $54.1 million during the first six months of ~~2021, while interest-bearing checking~~2022. We had no out-of-area deposits as of June 30, 2022, compared to $23.9 million as of December 31, 2021.
Sweep accounts and money market deposit accounts grew $4.1 million and $114 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 were up $49.7 million, primarily reflecting the impact of federal government stimulus programs and lower consumer investing and spending. Local time deposits decreased $79.3increased $5.9 million during the first six months of 2021, primarily reflecting the maturity and withdrawal of funds from certain public unit time deposits and time deposits that were opened as part of a special time deposit campaign we ran during early 2019. The reduction in out-of-area deposits during the first six months of 2021 reflects maturities during the period that were not replaced as the funds were no longer needed.
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 federal government stimulus programs and lower consumer investing and spending.
~~Sweep accounts increased $51.4 million during the first six months of 2021,~~2022, totaling ~~$170~~$203 million as of June 30, ~~2021.~~2022. The aggregate balance of this funding type ~~can be~~is subject to relatively large daily fluctuations given the nature of the customers utilizing this product and the sizable balances ofmaintained by many of the customers. The average balance of sweep accounts equaled ~~$142~~$196 million during the first six months of ~~2021,~~2022, with a high balance of ~~$181~~$224 million and a low balance of ~~$113~~$173 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.

66
Table of Contents
MERCANTILE BANK CORPORATION
FHLBI advances ~~aggregated $394~~decreased $11.7 million during the first six months of 2022, totaling $362 million as of June 30, ~~2021, unchanged from~~2022. Amortizing FHLBI advances aggregating $28.3 million were obtained, while bullet advances aggregating $40.0 million matured. Amortizing FHLBI advances are generally acquired to match-fund specific longer-term fixed rate commercial loans, with the ~~year-end 2020 balance. The~~dollar amount and amortization structure of the underlying advances reflective of the associated commercial loans. Bullet FHLBI advances are generally obtained to provide funds for loan growth and are used to assist in managing interest rate risk. FHLBI advances are collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on commercial real estate property loans, and substantially all other assets of our bank, under a blanket lien arrangement. Our borrowing line of credit as of June 30, ~~2021~~2022 totaled ~~$807~~$932 million, with remaining availability based on collateral equaling ~~$407~~$564 million.
On January 14, 2022, we entered into Subordinated Note Purchase Agreements with certain institutional accredited investors pursuant to which we issued and sold $15.0 million in aggregate principal amount of its 3.25% fixed-to-floating rate subordinated notes (“Notes”). The Notes have a stated maturity date of January 30, 2032, are redeemable by us at our option, in whole or in part, on or after January 30, 2027 on any interest payment date at a redemption price of 100% of the principal amount of the Notes being redeemed. The Notes are not subject to redemption at the option of the holder. The Notes will bear interest at a fixed rate of 3.25% per year until January 29, 2027. Commencing on January 30, 2027 and through the stated maturity date of January 30, 2032, the interest rate will reset quarterly at a variable rate equal to the then-current Three-Month Term SOFR plus 212 basis points. On January 14, 2022, we injected $15.0 million of the issuance proceeds into our bank as an increase to equity capital. This $15.0 million issuance was a follow-on to the $75.0 million issuance that was completed on December 15, 2021, in which $70.0 million of the issuance proceeds were injected into our bank as an increase to equity capital.

Shareholders’ equity was ~~$452~~$429 million at June 30, ~~2021,~~2022, compared to ~~$442~~$457 million at December 31, ~~2020. The $10.3 million increase during the first six months of 2021 primarily reflects the positive impact of~~2021. Shareholders’ equity was positively impacted by net income ~~totaling $32.3~~of $23.2 million, which was partially offset by ~~the negative impact~~payments of cash dividends ~~and common stock repurchases~~ totaling ~~$9.2~~$9.6 million. A $43.9 million ~~and $10.9 million, respectively. Reflecting an increase~~after-tax decline in the market value of our available for sale securities portfolio, reflecting significant increases in market interest rates, ~~the change in net unrealized holding gain/loss on securities available for sale, net of tax effect, had a $4.0 million negative impact on~~negatively impacted shareholders’ equity during the first six months of ~~2021.~~2022.

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.~~deposits. 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 and managing interest rate risk, we ~~have regularly obtained~~periodically obtain monies from wholesale funding sources. Wholesale funds, primarily comprised of deposits from customers outside of our market areas and advances from the FHLBI, totaled ~~$425~~$362 million, or ~~10.0%~~8.2% of combined deposits and borrowed funds, as of June 30, ~~2021,~~2022, compared to ~~$441~~$398 million, or ~~11.2%~~8.5% of combined deposits and borrowed funds, as of December 31, ~~2020.~~2021.

67

~~Table of Contents~~
~~MERCANTILE BANK CORPORATION~~

Sweep accounts increased ~~$51.4~~$5.9 million during the first six months of ~~2021,~~2022, totaling ~~$170~~$203 million as of June 30, ~~2021.~~2022. The aggregate balance of this funding type ~~can be~~is subject to relatively large daily fluctuations given the nature of the customers utilizing this product and the sizable balances ofmaintained by many of the customers. The average balance of sweep accounts equaled ~~$142~~$196 million during the first six months of ~~2021,~~2022, with a high balance of ~~$181~~$224 million and a low balance of ~~$113~~$173 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.

67
Table of Contents
MERCANTILE BANK CORPORATION
Information regarding our repurchase agreements as of June 30, ~~2021~~2022 and during the first six months of ~~2021~~2022 is as follows:

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
%
Outstanding balance at June 30, 2022
$ 203,339,000
Weighted average interest rate at June 30, 2022
0.10
%
Maximum daily balance six months ended June 30, 2022
$ 224,345,000
Average daily balance for six months ended June 30, 2022
$ 196,327,000
Weighted average interest rate for six months ended June 30, 2022
0.10
%

FHLBI advances ~~aggregated $394~~decreased $11.7 million during the first six months of 2022, totaling $362 million as of June 30, ~~2021, unchanged from~~2022. Amortizing FHLBI advance aggregating $28.3 million were obtained, while bullet advances aggregating $40.0 million matured. Amortizing FHLBI advances are generally acquired to match-fund specific longer-term fixed rate commercial loans, with the ~~year-end 2020 balance. The~~dollar amount and amortization structure of the underlying advances reflective of the associated commercial loans. Bullet FHLBI advances are generally obtained to provide funds for loan growth and are used to assist in managing interest rate risk. FHLBI advances are collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on commercial real estate property loans, and substantially all other assets of our bank, under a blanket lien arrangement. Our borrowing line of credit as of June 30, ~~2021~~2022 totaled ~~$807~~$932 million, with remaining availability based on collateral equaling ~~$407~~$564 million.

We also have the ability to borrow up to an aggregate $70.0 million on a daily basis through correspondent banks using established unsecured federal funds purchased lines of credit. We did not access ~~the~~these lines of credit during the first six months of ~~2021.~~2022. In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged ~~$564~~$650 million during the first six months of ~~2021.~~2022. 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 ~~$35.2~~$27.2 million as of June 30, ~~2021.~~2022. We did not utilize this line of credit during the first six months of ~~2021~~2022 or at any time during the previous ~~twelve~~13 fiscal years, and do not plan to access this line of credit in future periods.

The following table reflects, as of June 30, ~~2021,~~2022, 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
$ 3,211,444,000 $ 0 $ 0 $ 0 $ 3,211,444,000 $ 3,519,988,000 $ 0 $ 0 $ 0 $ 3,519,988,000
Time deposits
271,352,000 136,357,000 52,118,000 0 459,827,000 215,613,000 85,947,000 52,345,000 0 353,905,000
Short-term borrowings
169,737,000 0 0 0 169,737,000 203,339,000 0 0 0 203,339,000
Federal Home Loan Bank advances
60,000,000 174,000,000 110,000,000 50,000,000 394,000,000 94,353,000 161,689,000 81,838,000 24,383,000 362,263,000
Subordinated debentures
0 0 0 47,904,000 47,904,000 0 0 0 48,585,000 48,585,000
Subordinated notes
0 0 0 88,457,000 88,457,000
Other borrowed money
0 0 0 1,565,000 1,565,000 0 0 0 1,165,000 1,165,000
Property leases
777,000 1,521,000 481,000 1,173,000 3,952,000 591,000 1,217,000 232,000 2,278,000 4,318,000

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, ~~2021,~~2022, we had a total of ~~$1.47~~$1.68 billion in unfunded loan commitments and ~~$26.2~~$35.0 million in unfunded standby letters of credit. Of the total unfunded loan commitments, ~~$1.31~~$1.46 billion were commitments available as lines of credit to be drawn at any time as customers’ cash needs vary, and ~~$161~~$253 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.

68

~~Table of Contents~~
~~MERCANTILE BANK CORPORATION~~

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.
68
Table of Contents
MERCANTILE BANK CORPORATION

Capital Resources
Shareholders’ equity was ~~$452~~$429 million at June 30, ~~2021,~~2022, compared to ~~$442~~$457 million at December 31, ~~2020. The $10.3 million increase during the first six months of 2021 primarily reflects the positive impact of~~2021. Shareholders’ equity was positively impacted by net income ~~totaling $32.3~~of $23.2 million, which was partially offset by ~~the negative impact~~payments of cash dividends ~~and common stock repurchases~~ totaling ~~$9.2~~$9.6 million. A $43.9 million ~~and $10.9 million, respectively. Reflecting an increase~~after-tax decline in the market value of our available for sale securities portfolio, reflecting significant increases in market interest rates, ~~the change in net unrealized holding gain/loss on securities available for sale, net of tax effect, had a $4.0 million negative impact on~~negatively impacted shareholders’ equity during the first six months of ~~2021.~~
In May 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 program replaces a similar $20.0 million program that had been announced in May 2019 that was nearing exhaustion. During the first six months of 2021, we repurchased a total of approximately 347,000 shares at a total price of $10.9 million, at an average price per share of $31.28. Availability under the repurchase plan 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.2022.

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, ~~2021,~~2022, our bank met all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

As of June 30, ~~2021,~~2022, our bank’s total risk-based capital ratio was ~~13.0%~~13.4%, compared to ~~13.5%~~13.6% at December 31, ~~2020.~~2021. Our bank’s total regulatory capital increased ~~$20.5~~$30.7 million during the first six months of ~~2021,~~2022, in large part reflecting ~~the net impact of~~ net income totaling ~~$34.9~~$27.6 million and a $15.0 million equity injection associated with the Notes issuance, which was partially offset by cash dividends paid to us aggregating $13.0 million. Our bank’s total risk-based capital ratio was also impacted by a $285 million increase in total risk-weighted assets, primarily resulting from net growth in ~~core~~ commercial loans and ~~securities available for sale.~~residential mortgage loans. As of June 30, ~~2021,~~2022, our bank’s total regulatory capital equaled ~~$478~~$582 million, or ~~$110~~$149 million in excess of the 10.0% minimum ~~which~~that is among the requirements to be categorized as “well capitalized.” Our and our bank’s capital ratios as of June 30, ~~2021~~2022 and December 31, ~~2020~~2021 are disclosed in Note 12 of the Notes to Consolidated Financial Statements.

Results of Operations
We recorded net income of $11.7 million, or $0.74 per basic and diluted share, for the second quarter of 2022, compared to net income of $18.1 million, or $1.12 per basic and diluted share, for the second quarter of ~~2021, compared to~~2021. We recorded net income of ~~$8.7~~$23.2 million, or ~~$0.54~~$1.47 per basic and diluted share, for the ~~second quarter~~first six months of ~~2020. We recorded~~2022, compared to net income of $32.3 million, or $2.00 per basic and diluted share, for the first six months of ~~2021, compared to net income of $19.4 million, or $1.19 per basic and diluted share, for the first six months of 2020.~~2021.

69

~~Table of Contents~~
~~MERCANTILE BANK CORPORATION~~

The ~~improved~~lower levels of net income during the second quarter and first six months of ~~2021~~2022 compared to the respective prior-year periods ~~primarily~~ resulted from ~~lower provision expense~~decreased noninterest income as well as higher credit loss provisions and ~~increased noninterest income,~~overhead costs, which more than offset increased net interest income. The reduction in noninterest income primarily reflected decreased mortgage banking income, which outweighed increases in several key fee income categories. The credit loss provisions recorded during the current-year periods mainly reflected allocations dictated by commercial and residential mortgage loan growth, increased specific reserves for certain problem commercial loan relationships, and a higher ~~noninterest expense.~~reserve for residential mortgage loans resulting from an increase in the average life of the portfolio. Negative loan loss 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~~Excluding nonrecurring transactions, overhead costs decreased slightly during the second quarter of 2022 compared to the prior-year second quarter, mainly reflecting lower compensation costs, and were up less than 2% during the first six months of 2022 compared to the respective 2021 period, primarily reflecting higher data processing costs. The higher level of net interest income during the ~~current-year~~ second quarter ~~mainly~~of 2022 resulted from ~~fee income generated from~~earning asset growth and an improved net interest ~~rate swap program that was introduced during~~margin, while the ~~fourth quarter of 2020, a gain on the sale of a branch, and increased credit and debit card income, while growth~~increase in ~~noninterest~~net interest income during the first six months of ~~2021 primarily~~2022 reflected ~~improved mortgage banking income, along with increases~~earning asset growth, which more than offset a slight decline in the ~~aforementioned revenue streams. The higher levels~~net interest margin in large part driven by decreased PPP net loan fee income accretion.
69
Table of ~~noninterest expense mainly reflected increased compensation costs.~~Contents
MERCANTILE BANK CORPORATION

Interest income during the second quarter of ~~2021~~2022 was ~~$35.8~~$39.6 million, ~~a decrease~~an increase of ~~$1.4~~$3.8 million, or ~~3.7%~~10.6%, from the ~~$37.2~~$35.8 million earned during the second quarter of ~~2020.~~2021. The ~~decrease~~increase resulted from growth in, and a ~~lower~~higher yield on, average earning assets. Average earning assets ~~which more than offset~~equaled $4.78 billion during the ~~impact~~current-year second quarter, up $311 million, or 7.0%, from the level of ~~growth in~~$4.47 billion during the respective 2021 period; average ~~earning assets.~~loans and average securities were up $268 million and $132 million, respectively, while average interest-earning deposits decreased $88.8 million. The yield on average earning assets was ~~3.20%~~3.32% during the second quarter of ~~2021, compared to 3.85%~~2022, up from 3.20% during the prior-year second ~~quarter of 2020.~~quarter. The ~~decline~~higher yield primarily resulted from an increased yield on other interest-earning assets, reflecting the rising interest rate environment, and a change in earning asset ~~mix.~~mix, comprised of a decrease in lower-yielding interest-earning deposits and an increase in higher-yielding loans as a percentage of earning assets. On average, lower-yielding interest-earning deposits represented ~~13.9%~~11.1% of earning assets during the second quarter of ~~2021, up~~2022, down from ~~6.6%~~13.9% during the second quarter of ~~2020,~~2021, while higher-yielding loans represented ~~75.3%~~76.0% of earning assets during the current-year second quarter, ~~down~~up from ~~84.8%~~75.3% during the second quarter of 2021. The yield on average loans during the second quarter of 2022 was virtually unchanged from the yield during the second quarter of 2021 as the negative impact of a lower level of PPP net loan fee accretion was substantially offset by the positive impact of higher interest rates on variable-rate commercial loans stemming from the Federal Open Market Committee (“FOMC”) significantly raising the targeted federal funds rate by a total of 150 basis points during the period of March 2022 through June 2022. PPP net loan fee accretion totaled $0.2 million during the second quarter of 2022, compared to $2.9 million during the prior-year second quarter. A significant volume of excess on-balance sheet liquidity, which initially surfaced in the second quarter of 2020 as a result of the Covid-19 environment and has persisted ~~during the remainder of 2020 and the first six months of 2021,~~since that time, negatively impacted the yield on average earning assets by 28 basis points and 42 basis points during the second ~~quarter~~quarters of ~~2021.~~2022 and 2021, respectively. The excess funds, consisting ~~primarily~~almost entirely of low-yielding deposits with the Federal Reserve Bank of Chicago, are mainly a product of ~~federal government stimulus programs, lower business and consumer spending and investing,~~local deposit growth and PPP loan forgiveness activities.
Decreased yields on securities and loans also contributed to the lower yield on average earning assets in the current-year second quarter compared to the respective 2020 period. The yield on securities was 1.54% during the second quarter of 2021, down from 3.37% during the prior-year second quarter mainly due to decreased accelerated discount accretion on called U.S. Government agency bonds and lower yields on newly purchased bonds, reflecting the declining interest rate environment. Accelerated discount accretion totaled $0.9 million during the second quarter of 2020; no accelerated discount accretion was recorded during the second 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. The yield on loans was 3.99% during the current-year second quarter, down from 4.18% during the 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 $4.47 billion during the current-year second quarter, up $628 million, or 16.4%, from the level of $3.84 billion during the respective 2020 period; average interest-earning deposits were up $367 million, average securities increased $150 million, and average loans were up $111 million.

70

~~Table of Contents~~
~~MERCANTILE BANK CORPORATION~~

Interest income during the first six months of ~~2021~~2022 was ~~$70.6~~$75.4 million, ~~a decrease~~an increase of ~~$4.5~~$4.8 million, or ~~6.0%~~6.9%, from the ~~$75.1~~$70.6 million earned during the ~~first six months of 2020.~~respective 2021 period. The ~~decrease~~increase resulted from ~~a lower yield on~~growth in average earning assets, which more than offset ~~the impact of growth in~~a lower yield on average earning assets. Average earning assets equaled $4.83 billion during the first six months of 2022, up $449 million, or 10.3%, from the level of $4.38 billion during the first six months of 2021; average loans were up $235 million, average securities increased $163 million, and average interest-earning deposits were up $51.1 million. The yield on average earning assets was 3.16% during the first six months of 2022, compared to 3.23% during the respective prior-year period. The decline resulted from a lower yield on loans and a change in earning asset mix, which more than offset a higher yield on other interest-earning assets, reflecting the increasing interest rate environment. The yield on loans was 3.92% during the first six months of 2022, down from 4.01% during the respective 2021 period primarily due to a lower yield on commercial loans. The decrease in the yield on commercial loans from 4.06% during the first six months of 2021 to 4.01% in the comparable current-year period primarily reflected a lower level of PPP net loan accretion, which more than offset the previously mentioned impact of higher interest rates on variable-rate loans resulting from FOMC rate hikes. PPP net loan fee accretion totaled $1.0 million during the first six months of 2022, compared to ~~4.17%~~$5.7 million during the ~~respective 2020 period. The decline primarily resulted from a change in earning asset mix and lower yields on loans and securities.~~first six months of 2021. On average, ~~lower-yielding interest-earning deposits~~higher-yielding loans represented ~~13.8%~~73.7% of earning assets during the first six months of ~~2021, up~~2022, down from ~~5.6% during the first six months of 2020, while higher-yielding loans represented~~ 75.9% ~~and 84.9% of earning assets~~ during the respective ~~periods.~~2021 period. The ~~previously mentioned~~ significant volume of excess on-balance sheet liquidity negatively impacted the yield on average earning assets by 37 basis points and 43 basis points during the first six months of ~~2021. The yield on loans declined from 4.42% during the first six months of 2020 to 4.01% during the first six months of~~2022 and 2021, mainly due to a lower yield on commercial loans, which equaled 4.46% and 4.06% during the respective periods. The decreased yield on commercial loans primarily reflected reduced interest rates on variable-rate commercial loans resulting from the FOMC significantly decreasing the targeted federal funds rate by a total of 150 basis points in March of 2020, along with the origination of new loans and renewal of maturing loans in the lower interest rate environment. The yield on securities was 1.57% during the first six months of 2021, down from 4.06% during the respective 2020 period mainly due to decreased accelerated discount accretion on called U.S. Government agency bonds and lower yields on newly purchased bonds, reflecting the declining interest rate environment. Accelerated discount accretion totaled $2.7 million during the first six months of 2020; accelerated discount accretion of less than $0.1 million was recorded during the first six months of 2021. A decreased yield on interest-earning deposits also contributed to the lower yield on average earning assets during the first six months of 2021 compared to the first six months of 2020. The yield on interest-earning deposits was 0.12% during the first six months of 2021, down from 0.55% during the respective 2020 period, mainly reflecting the decreased interest rate environment. Average earning assets equaled $4.38 billion during the first six months of 2021, up $787 million, or 21.9%, from the level of $3.59 billion during the first six months of 2020; average interest-earning deposits were up $403 million, average loans increased $272 million, and average securities were up $112 million.respectively.

Interest expense during the second quarter of ~~2021~~2022 was ~~$4.9~~$5.2 million, ~~a decrease~~an increase of ~~$1.7~~$0.3 million, or ~~25.6%~~6.5%, from the ~~$6.6~~$4.9 million expensed during the second quarter of ~~2020.~~2021. The ~~decrease~~increase is attributable to ~~a lower~~growth in average interest-bearing liabilities, which totaled $2.91 billion during the current-year second quarter compared to $2.67 billion during the prior-year second quarter, representing an increase of $239 million, or 8.9%. The weighted average cost of interest-bearing liabilities ~~which equaled 0.74%~~of 0.72% during the second quarter of 2022 declined slightly compared to the respective 2021 period as a decrease in the ~~current-year second quarter compared to 1.11% in the prior-year second quarter. The decline mainly reflected lower rates paid on local~~cost of time deposits ~~and a change in funding mix, consisting of~~was substantially offset by an increase in ~~average lower-cost interest-bearing non-time deposits and a decrease in average higher-cost time deposits as a percentage~~the cost of ~~average total interest-bearing liabilities.~~borrowings. The cost of time deposits ~~declined~~decreased from ~~2.04%~~1.24% during the second quarter of ~~2020~~2021 to ~~1.24%~~0.83% during the current-year second quarter mainly due to lower 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, 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.deposits. The cost of borrowed funds ~~decreased~~increased 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%~~to 1.90% during the second quarter of 2022 primarily due to the issuance of $90.0 million in subordinated notes in December of 2021 ~~down from 2.22% during the prior-year second quarter, primarily reflecting the impact~~and January of 2022 and a ~~blend and extend transaction that was executed in June 2020 with the FHLBI to extend the duration~~higher cost of ~~our advance portfolio as part of our interest rate risk management program and the declining interest rate environment.~~subordinated debentures. The cost of subordinated debentures was ~~3.79%~~4.63% during the second quarter of ~~2021, down~~2022, up from ~~5.10%~~3.79% during the respective ~~2020~~2021 period due to ~~decreases~~increases in the 90-Day Libor Rate. ~~Average interest-bearing liabilities were $2.67 billion during the second quarter of 2021, up $294 million, or 12.4%, from the $2.38 billion average during the second quarter of 2020.~~

7170
Table of Contents

MERCANTILE BANK CORPORATION

Interest expense during the first six months of ~~2021~~2022 was ~~$10.1~~$10.2 million, ~~a decrease~~an increase of ~~$4.1~~less than $0.1 million ~~or 28.5%,~~ from the ~~$14.2 million~~amount expensed during the first six months of ~~2020.~~2021. The ~~decrease~~nominal increase is attributable to growth in interest-bearing liabilities, which was substantially offset by a lower weighted average cost of interest-bearing liabilities. Average interest-bearing liabilities ~~which equaled 0.78% in~~were $2.99 billion during the first six months of ~~2021 compared to 1.23% in~~2022, up $353 million, or 13.4%, from the $2.64 billion average during the respective ~~2020~~2021 period. The ~~decrease in the~~ weighted average cost of interest-bearing liabilities reflected lower costs of time deposits, non-time deposit accounts, and borrowed funds and 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. 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%~~0.78% during the first six months of 2021 ~~primarily reflecting~~to 0.69% during the respective current-year period mainly due to a lower ~~interest rates paid on money market accounts;~~cost of time deposits, which more than offset an increase in the ~~reduced interest rates mainly reflect the decreasing interest rate environment.~~cost of borrowings. The cost of ~~borrowed funds~~time deposits 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%1.37% during the first six months of 2021 ~~down from 2.31%~~to 0.86% during the first six months of ~~2020,~~2022 primarily due to lower interest rates paid on local time deposits. The cost of borrowed funds increased from 1.75% during the first six months of 2021 to 1.86% during the respective 2022 period, mainly reflecting the ~~impact~~issuance of ~~the aforementioned blend~~subordinated notes and ~~extend transaction that was executed in June 2020 with the FHLBI and the lower interest rate environment.~~a higher cost of subordinated debentures. The cost of subordinated debentures was 4.22% during the first six months of 2022, up from 3.82% during the first six months of 2021 ~~down from 5.50% during the respective 2020 period~~ due to ~~decreases~~increases in the 90-Day Libor Rate. On average, lower-cost non-time deposits represented 58.8% of total interest-bearing liabilities during the first six months of 2021, up from 49.5% during the first six months of 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 $2.64 billion during the first six months of 2021, up $328 million, or 14.2%, from the $2.31 billion average during the first six months of 2020.

Net interest income during the second quarter of ~~2021~~2022 was ~~$30.9~~$34.3 million, an increase of ~~$0.3~~$3.4 million, or ~~1.0%~~11.2%, from the ~~$30.6~~$30.9 million earned during the respective ~~2020~~2021 period. The increase resulted from growth in average earning assets and an improved net interest margin. The net interest margin increased from 2.76% in the ~~positive impact~~second quarter of 2021 to 2.88% in the current-year second quarter due to a higher yield on average earning assets. The increased yield primarily stemmed from a higher yield on other interest-earning assets, reflecting the rising interest rate environment, and a change in earning asset mix, comprised of a reduction in lower-yielding interest-earning deposits and an increase in higher-yielding loans as a percentage of earning assets. The cost of funds equaled 0.44% in the second quarter of 2022, unchanged from the prior-year second quarter as an increased cost of borrowings, primarily reflecting the issuance of $90.0 million in subordinated notes, was offset by a decreased cost of time deposits. The significant level of excess on-balance sheet liquidity negatively impacted the net interest margin by 23 basis points and 37 basis points during the second quarters of 2022 and 2021, respectively.
Net interest income during the first six months of 2022 was $65.2 million, an increase of $4.8 million, or 8.0%, from the $60.4 million earned during the first six months of 2021. The increase resulted from growth in average earning assets, which more than offset a lower net interest margin. The net interest margin decreased from ~~3.17% in the second quarter of 2020 to~~ 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 yields on securities and commercial loans, while the decreased cost of funds mainly reflected lower rates paid on local time deposits and a change in funding mix. The previously discussed significant level of excess on-balance sheet liquidity negatively impacted the net interest margin by 37 basis points during the second quarter of 2021.
~~Net interest income during~~ the first six months of 2021 was $60.4 million, a decrease of $0.5 million, or 0.8%, from the $60.9 million earned during the first six months of 2020. The decrease 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 3.38% in the first six months of 2020 to ~~2.76%~~2.73% in the respective 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~~mainly resulted from a lower yield on commercial loans, in large part reflecting a reduced level of PPP net loan accretion, and a change in earning asset mix, ~~and lower yields on commercial~~consisting of a decrease in higher-yielding loans ~~and securities, while the decreased~~as a percentage of earning assets. The cost of funds ~~mainly reflected~~equaled 0.43% during the first six months of 2022, down from 0.46% during the respective prior-year period primarily due to a lower ~~costs~~cost of ~~deposits and borrowed funds and a change in funding mix.~~local time deposits. The ~~aforementioned~~ significant level of excess on-balance sheet liquidity negatively impacted the net interest margin by 32 basis points and 37 basis points during the first six months of ~~2021.~~2022 and 2021, respectively.

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 ~~2021~~2022 and ~~2020.~~2021. 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 ~~2021~~2022 and ~~2020~~2021 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 ~~2021~~2022 and ~~2020~~2021 and $120,000 in the first six months of both ~~2021~~2022 and ~~2020~~2021 for this non-GAAP, but industry standard, adjustment. These adjustments equated to ~~one basis point~~ increases in our net interest margin of less than one basis point for each of the ~~2021~~2022 and ~~2020~~2021 periods.

71
Table of Contents
MERCANTILE BANK CORPORATION

Quarters ended June 30,

2 0 2 2

2 0 2 1

Average

Average

Average

Average

Balance

Interest

Rate

Balance

Interest

Rate

(dollars in thousands)

ASSETS

Loans
$ 3,633,587 $ 36,003 3.97 % $ 3,365,686 $ 33,789 3.99 %
Investment securities
615,733 2,589 1.68 483,805 1,862 1.54
Other interest-earning assets
530,571 1,018 0.76 619,358 183 0.12
Total interest - earning assets
4,779,891 39,610 3.32 4,468,849 35,834 3.20

Allowance for credit losses
(35,681
)
(39,406
)

Other assets
333,248 323,415

Total assets
$ 5,077,458 $ 4,752,858

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest-bearing deposits
$ 2,201,797 $ 1,873 0.34 % $ 2,074,759 $ 2,346 0.45 %
Short-term borrowings
193,735 49 0.10 150,778 40 0.11
Federal Home Loan Bank advances
373,911 1,911 2.02 394,000 2,050 2.06
Other borrowings
138,127 1,391 4.04 49,421 467 3.74
Total interest-bearing liabilities
2,907,570 5,224 0.72 2,668,958 4,903 0.74

Noninterest-bearing deposits
1,706,349 1,619,976
Other liabilities
34,666 17,995
Shareholders’ equity
428,873 445,929

Total liabilities and shareholders’ equity
$ 5,077,458 $ 4,752,858

Net interest income
$ 34,386 $ 30,931

Net interest rate spread
2.60 % 2.46 %
Net interest spread on average assets
2.72 % 2.61 %
Net interest margin on earning assets
2.88 % 2.76 %

72
Table of Contents

MERCANTILE BANK CORPORATION

Quarters ended June 30,

2 0 2 1

2 0 2 0

Average

Average

Average

Average

Balance

Interest

Rate

Balance

Interest

Rate

(dollars in thousands)

ASSETS

Loans
$ 3,365,686 $ 33,789 3.99 % $ 3,254,985 $ 34,322 4.18 %
Investment securities
483,805 1,862 1.54 333,843 2,809 3.37
Other interest-earning assets
619,358 183 0.12 251,833 93 0.15
Total interest - earning assets
4,468,849 35,834 3.20 3,840,661 37,224 3.85

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

Other assets
323,415 305,450

Total assets
$ 4,752,858 $ 4,119,573

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest-bearing deposits
$ 2,074,759 $ 2,346 0.45 % $ 1,767,986 $ 3,700 0.84 %
Short-term borrowings
150,778 40 0.11 163,339 55 0.14
Federal Home Loan Bank advances
394,000 2,050 2.06 394,000 2,214 2.22
Other borrowings
49,421 467 3.74 49,735 624 4.96
Total interest-bearing liabilities
2,668,958 4,903 0.74 2,375,060 6,593 1.11

Noninterest-bearing deposits
1,619,976 1,304,986
Other liabilities
17,995 17,297
Shareholders’ equity
445,929 422,230

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

Net interest income
$ 30,931 $ 30,631

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

Six months ended June 30,

2 0 2 2

2 0 2 1

Average

Average

Average

Average

Balance

Interest

Rate

Balance

Interest

Rate

(dollars in thousands)

ASSETS

Loans
$ 3,559,461 $ 69,254 3.92 % $ 3,324,006 $ 66,774 4.01 %
Investment securities
614,532 4,914 1.60 451,837 3,554 1.57
Other interest-earning assets
656,682 1,384 0.42 605,564 351 0.12
Total interest - earning assets
4,830,675 75,552 3.16 4,381,407 70,679 3.23

Allowance for credit losses
(35,486
)
(38,794
)

Other assets
327,569 323,759

Total assets
$ 5,122,758 $ 4,666,372

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest-bearing deposits
$ 2,282,667 $ 3,698 0.33 % $ 2,050,959 $ 5,063 0.50 %
Short-term borrowings
196,328 99 0.10 141,861 76 0.11
Federal Home Loan Bank advances
373,290 3,774 2.01 394,000 4,077 2.06
Other borrowings
137,004 2,650 3.90 49,610 939 3.76
Total interest-bearing liabilities
2,989,289 10,221 0.69 2,636,430 10,155 0.78

Noninterest-bearing deposits
1,666,125 1,565,458
Other liabilities
28,034 19,723
Shareholders’ equity
439,310 444,761

Total liabilities and shareholders’ equity
$ 5,122,758 $ 4,666,372

Net interest income
$ 65,331 $ 60,524

Net interest rate spread
2.47 % 2.45 %
Net interest spread on average assets
2.57 % 2.62 %
Net interest margin on earning assets
2.73 % 2.76 %

73
Table of Contents

MERCANTILE BANK CORPORATION

Six months ended June 30,

2 0 2 1

2 0 2 0

Average

Average

Average

Average

Balance

Interest

Rate

Balance

Interest

Rate

(dollars in thousands)

ASSETS

Loans
$ 3,324,006 $ 66,774 4.01 % $ 3,052,441 $ 67,764 4.42 %
Investment securities
451,837 3,554 1.57 339,374 6,886 4.06
Other interest-earning assets
605,564 351 0.12 202,735 568 0.55
Total interest - earning assets
4,381,407 70,679 3.23 3,594,550 75,218 4.17

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

Other assets
323,759 291,753

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

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest-bearing deposits
$ 2,050,959 $ 5,063 0.50 % $ 1,746,008 $ 8,342 0.96 %
Short-term borrowings
141,861 76 0.11 133,095 94 0.14
Federal Home Loan Bank advances
394,000 4,077 2.06 379,714 4,427 2.31
Other borrowings
49,610 939 3.76 49,709 1,348 5.36
Total interest-bearing liabilities
2,636,430 10,155 0.78 2,308,526 14,211 1.23

Noninterest-bearing deposits
1,565,458 1,114,406
Other liabilities
19,723 17,326
Shareholders’ equity
444,761 420,921

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

Net interest income
$ 60,524 $ 61,007

Net interest rate spread
2.45 % 2.94 %
Net interest spread on average assets
2.62 % 3.17 %
Net interest margin on earning assets
2.76 % 3.38 %
A ~~negative loan loss~~ provision ~~expense~~for credit losses of ~~$3.1~~$0.5 million was recorded during the second quarter of ~~2021,~~2022, compared to a negative provision ~~expense~~ of ~~$7.6~~$3.1 million during the second quarter of ~~2020.~~2021. A ~~negative loan loss~~ provision ~~expense~~for credit losses of ~~$2.8~~$0.6 million was recorded during the first six months of ~~2021,~~2022, compared to a negative provision ~~expense~~ of ~~$8.4~~$2.8 million during the first six months of ~~2020.~~2021. The provision expense recorded during the current-year periods mainly reflected allocations necessitated by commercial loan and residential mortgage loan growth, increased specific reserves for certain problem commercial loan relationships, and a higher reserve for residential mortgage loans stemming from slower principal prepayment rates and the associated extended average life of the portfolio. The required reserve allocations resulting from these factors were largely offset by the positive impact of a change in the Covid-19 environmental factor, the recording of net loan recoveries, and ongoing strong loan quality metrics during the periods. The Covid-19 environmental factor was added in the second quarter of 2020 to address the unique challenges and economic uncertainty resulting from the pandemic and its potential impact on the collectability of the loan portfolio. Improvement in overall Covid-19 conditions, including increased vaccination rates, the availability of booster shots, and the lifting of many economic growth-restraining restrictions, lessened the required credit reserve amount related to the Covid-19 environmental factor. 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.
We adopted CECL effective January 1, 2022, using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2022, are presented under CECL, while prior period amounts continue to be reported in accordance with the incurred loss accounting standards. The ~~provision expense recorded during~~transition adjustment of the ~~2020 periods primarily reflected an allocation associated with~~CECL adoption included a ~~newly created Covid-19 factor~~$0.4 million decrease in the allowance and ~~an increased allocation related~~a $0.3 million increase to the ~~existing economic and business conditions environmental factor. The Covid-19 factor was added~~retained earnings account to ~~address~~reflect the ~~unique challenges and economic uncertainty resulting from~~cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the ~~pandemic and its potential~~$0.1 million tax impact ~~on the collectability~~portion being recorded as part of the ~~loan portfolio.~~deferred tax asset in other assets on our Consolidated Balance Sheet.

74

~~Table~~During the second quarter of ~~Contents~~
~~MERCANTILE BANK CORPORATION~~

2022, loan charge-offs totaled less than $0.1 million, while recoveries of prior period loan charge-offs equaled $0.3 million, providing for net loan recoveries of $0.3 million, or an annualized 0.04% of average total loans. 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~~first six months of ~~2020,~~2022, loan charge-offs totaled ~~$0.3~~$0.2 million, while recoveries of prior period loan charge-offs equaled ~~$0.1~~$0.6 million, providing for net loan ~~charge-offs~~recoveries of ~~$0.2~~$0.4 million, or an annualized 0.02% of average total loans. During the first six months of 2021, loan charge-offs totaled $0.1 million, while recoveries of prior period loan charge-offs equaled $0.8 million, providing for net loan 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 recoveries.~~ The allowance for ~~loans,~~credit losses, as a percentage of total loans, was 1.0% as of June 30, 2022 and December 31, 2021, and 1.1% as of June 30, 2021, 1.2% as of December 31, 2020, and 1.0% as of June 30, 2020. Excluding PPP loans, the allowance for loans, 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, 2020.2021.

Noninterest income during the second quarter of ~~2021~~2022 was ~~$14.6~~$7.7 million, compared to ~~$11.0~~$14.6 million during the prior-year second quarter. Noninterest income during the first six months of ~~2021~~2022 was ~~$28.0~~$17.0 million, compared to ~~$17.5~~$28.0 million during the ~~respective 2020 period. Noninterest income during~~first six months of 2021. During the second quarter and first six months of ~~2021~~2022, noninterest income included a $0.5 million bank owned life insurance claim, while noninterest income during the respective prior-year periods included a $1.1 million gain on the sale of a ~~branch facility.~~branch. Excluding the ~~impact~~impacts of ~~this transaction,~~these transactions, noninterest income ~~increased $2.5~~decreased $6.3 million ~~or 22.9%,~~during the second quarter of 2022 and $10.5 million during the first six months of 2022 compared to the respective 2021 periods. The lower levels of noninterest income almost exclusively reflected decreased mortgage banking income and interest rate swap income, which more than offset increases in several key fee income sources, including service charges on accounts, credit and debit card income, and payroll processing fees. Continued strength in purchase residential mortgage loan originations during the second quarter and first six months of 2022 partially mitigated the negative impacts of higher interest rates, reduced refinance activity, lower sold percentages, and decreased gain on sale rates on mortgage banking income during the periods when compared to the respective prior-year periods. The residential mortgage loan sold percentage declined from approximately 59% during the second quarter of 2021 and ~~$9.4 million, or 53.8%,~~approximately 70% 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 2020approximately 27% 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 million36% during the respective ~~2020 period,~~current-year periods. The decreased sold percentages in large part reflect customers’ preferences for adjustable-rate loans in the current interest rate environment and construction loans representing an ~~increase~~increased percentage 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 2021.
Noninterest expense totaled $26.2 million during the second quarter of 2021, up $3.0 million, or 12.8%, from the prior-year second quarter. Noninterest expense during the first six months of 2021 was $51.3 million, an increase of $5.2 million, or 11.2%, from the $46.1 million expensed during the first six months of 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 PPPoverall 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 contributed to the increased noninterest expense in the first six months of 2021. Federal Deposit Insurance Corporation deposit insurance premiums were up $0.1 million in the current-year second quarter and $0.3 million in the first six months of 2021 compared to the respective 2020 periods, reflecting an increased assessment base and rate. Noninterest expense during the first six months of 2021 includes $0.5 million in net losses on sales and write-downs of former branch facilities.production.

7574
Table of Contents

MERCANTILE BANK CORPORATION

The declines in interest rate swap income reflect lower transaction volumes. In aggregate, service charges on accounts, credit and debit card income, and payroll processing fees were up nearly 16% during the second quarter and first six months of 2022 compared to the respective prior-year periods.
Noninterest expense totaled $26.9 million during the second quarter of 2022, up from $26.2 million during the prior-year second quarter. Noninterest expense during the first six months of 2022 was $52.7 million, compared to $51.3 million during the respective prior-year period. Overhead costs during the second quarter and first six months of 2022 included a $0.4 million expense associated with the sale of a branch facility and a $0.5 million contribution to The Mercantile Bank Foundation. Overhead costs during the first six months of 2021 included $0.5 million in net losses on sales and write-downs of former branch facilities. Excluding these transactions, noninterest expense decreased $0.2 million in the second quarter of 2022 and increased $0.9 million in the first six months of 2022 compared to the respective 2021 periods. The slightly lower level of expense in the second quarter of 2022 primarily resulted from higher residential mortgage loan deferred salary costs as well as decreased health insurance costs and residential mortgage lender commissions and associated incentives, which more than offset increased regular salary expense and a larger bonus accrual. The higher level of expense in the first six months of 2022 mainly reflected increased regular salary expense and data processing costs, which more than offset higher residential mortgage loan deferred costs and lower residential mortgage lender commissions and related incentives. The increased residential mortgage loan deferred salary costs reflected the outcome of an updated loan origination cost study and resulting higher allocated cost per loan, while the decreased residential mortgage lender commissions and associated incentives resulted from reduced loan production, in large part reflecting lower refinance activity. Health insurance costs were lower in the 2022 periods due to a lower volume of claims. Regular salary expense, mainly reflecting annual employee merit pay increases, and data processing costs, primarily reflecting higher transaction volume and software support costs, were up in the 2022 periods compared to the prior-year periods. Other employee costs, consisting mainly of meals, entertainment, training, travel, and mileage, increased in the 2022 periods in large part due to the easing of Covid-19 pandemic-related restrictions. Stock-based compensation also increased in the 2022 periods.
During the second quarter of 2022, we recorded income before federal income tax of $14.6 million and a federal income tax expense of $2.9 million. During the second quarter of 2021, we recorded income before federal income tax of $22.3 million and a federal income tax expense of $4.2 million. During the ~~second quarter~~first six months of ~~2020,~~2022, we recorded income before federal income tax of ~~$10.7~~$28.9 million and a federal income tax expense of ~~$2.0~~$5.7 million. During the first six months of 2021, we recorded income before federal income tax of $39.9 million and a federal income tax expense of $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.~~ The ~~increased~~decreased federal income tax expense in both ~~2021~~2022 periods resulted from ~~higher~~lower levels of income before federal income tax. Our effective tax rate was ~~19.0%~~19.8% during ~~both~~ the second quarter and first six months of ~~2021~~2022 and 19.0% during the respective ~~2020~~2021 periods.

75
Table of Contents
MERCANTILE BANK CORPORATION

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.

76
Table of Contents

MERCANTILE BANK CORPORATION

The following table depicts our GAP position as of June 30, ~~2021:~~2022:

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)
$ 560,871,000 $ 328,578,000 $ 1,474,207,000 $ 453,988,000 $ 2,817,644,000 $ 1,793,249,000 $ 80,274,000 $ 905,967,000 $ 339,911,000 $ 3,119,401,000
Residential real estate loans
23,072,000 22,630,000 126,949,000 243,646,000 416,297,000 35,674,000 15,605,000 116,338,000 423,407,000 591,024,000
Consumer loans
855,000 901,000 12,485,000 659,000 14,900,000 1,330,000 731,000 10,666,000 648,000 13,375,000
Securities (2)
18,839,000 9,543,000 162,202,000 333,543,000 524,127,000 18,232,000 12,821,000 216,149,000 374,157,000 621,359,000
Other interest-earning assets
680,888,000 1,500,000 1,250,000 0 683,638,000 398,401,000 1,501,000 3,000,000 0 402,902,000
Allowance for loan losses
0 0 0 0 (35,913,000
)
Allowance for credit losses
0 0 0 0 (35,974,000
)
Other assets
0 0 0 0 336,721,000 0 0 0 0 346,468,000
Total assets
1,284,525,000 363,152,000 1,777,093,000 1,031,836,000 $ 4,757,414,000 2,246,886,000 110,932,000 1,252,120,000 1,138,123,000 $ 5,058,555,000

Liabilities:

Interest-bearing checking
477,151,000 0 0 0 477,151,000 481,016,000 0 0 0 481,016,000
Savings deposits
387,783,000 0 0 0 387,783,000 409,505,000 0 0 0 409,505,000
Money market accounts
725,681,000 0 0 0 725,681,000 889,035,000 0 0 0 889,035,000
Time deposits under $100,000
17,455,000 61,903,000 63,173,000 0 142,531,000 22,018,000 57,273,000 41,639,000 0 120,930,000
Time deposits $100,000 & over
47,293,000 144,701,000 125,302,000 0 317,296,000 51,801,000 84,521,000 96,653,000 0 232,975,000
Short-term borrowings
169,737,000 0 0 0 169,737,000 203,339,000 0 0 0 203,339,000
Federal Home Loan Bank advances
0 60,000,000 284,000,000 50,000,000 394,000,000 24,000,000 70,353,000 243,527,000 24,383,000 362,263,000
Other borrowed money
49,468,000 0 0 0 49,468,000 49,750,000 0 88,457,000 0 138,207,000
Noninterest-bearing checking
0 0 0 0 1,620,829,000 0 0 0 0 1,740,432,000
Other liabilities
0 0 0 0 21,050,000 0 0 0 0 51,870,000
Total liabilities
1,874,568,000 266,604,000 472,475,000 50,000,000 4,305,526,000 2,130,464,000 212,147,000 470,276,000 24,383,000 4,629,572,000
Shareholders' equity
0 0 0 0 451,888,000 0 0 0 0 428,983,000
Total liabilities & shareholders' equity
1,874,568,000 266,604,000 472,475,000 50,000,000 $ 4,757,414,000 2,130,464,000 212,147,000 470,276,000 24,383,000 $ 5,058,555,000

Net asset (liability) GAP
$ (590,043,000
)
$ 96,548,000 $ 1,304,618,000 $ 981,836,000 $ 116,422,000 $ (101,215,000
)
$ 781,844,000 $ 1,113,740,000

Cumulative GAP
$ (590,043,000
)
$ (493,495,000
)
$ 811,123,000 $ 1,792,959,000 $ 116,422,000 $ 15,207,000 $ 797,051,000 $ 1,910,791,000

Percent of cumulative GAP to total assets
(12.4
%)
(10.4
%)
17.0 % 37.7 % 2.3 % 0.3 % 15.8 % 37.8 %

⁽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, ~~2021.~~2022.
77
Table of Contents
MERCANTILE BANK CORPORATION

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.

77

~~Table of Contents~~
~~MERCANTILE BANK CORPORATION~~

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, ~~2021,~~2022, in which it was assumed that changes in market interest rates occurred ranging from up 300 basis points to down ~~100~~200 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 ~~$119~~$140 million in net interest income projected using our balance sheet amounts and anticipated replacement rates as of June 30, ~~2021.~~2022. The resulting estimates are generally within our policy parameters established to manage and monitor interest rate risk.

Dollar Change

Percent Change

In Net

In Net

Interest Rate Scenario

Interest Income

Interest Income

Interest rates down 100 basis points
$ (500,000
)
(0.4 %)
Interest rates up 100 basis points
6,800,000 5.7
Interest rates up 200 basis points
12,500,000 10.5
Interest rates up 300 basis points
18,100,000 15.2

Dollar Change

Percent Change

In Net

In Net

Interest Income

Interest Income

Interest Rate Scenario
Interest rates down 200 basis points
$ (10,000,000
)
(7.2% )
Interest rates down 100 basis points
(4,500,000
)
(3.2 )
Interest rates up 100 basis points
4,300,000 3.1
Interest rates up 200 basis points
8,800,000 6.3
Interest rates up 300 basis points
13,400,000 9.5

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, ~~2021,~~2022, 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, ~~2021.~~2022.

There have been no changes in our internal control over financial reporting during the quarter ended June 30, ~~2021~~2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

78
Table of Contents

MERCANTILE BANK CORPORATION

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, ~~2020 and our March 31, 2021 Form 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.2021.

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, ~~2021.~~2022.

Issuer Purchases of Equity Securities

On May 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 program replaces a similar $20.0 million program that had been announced on May 7, 2019 that was nearing exhaustion.~~ The actual timing, number and value of shares repurchased under the program will be determined by management in its discretion and will depend on a number of factors, including the market price of our stock, general market and economic conditions, our capital position, financial performance and alternative uses of capital, and applicable legal requirements. The program may be discontinued at any time.

79

~~Table~~ No shares were repurchased during the first six months of ~~Contents~~
~~MERCANTILE BANK CORPORATION~~

~~During the second quarter~~2022. As of ~~2021, we repurchased a total of 228,649 shares for $7.3~~June 30, 2022, repurchases aggregating $6.8 million ~~or a weighted average all-in cost per share of $31.99. The stock buybacks have been funded from cash dividends paid~~were available 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.~~current repurchase program.

Repurchases made during the second quarter of ~~2021~~2022 are detailed in the 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

Total
Number of
Shares
Purchased

Average
Price Paid Per
Share

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

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

April 1 – 30

60,858

$
32.14

60,858

$
4,333,000
0 $ 0 0 $ 6,818,000
May 1 – 31

83,780

32.27

83,780

1,629,000
0 0 0 6,818,000
June 1 – 30

84,011

31.59

84,011

17,346,000
0 0 0 6,818,000
Total

228,649

$
31.99

228,649

$
17,346,000
0 $ 0 0 $ 6,818,000

Item 3. Defaults Upon Senior Securities.
Not applicable.

Item 4. Mine Safety Disclosures.
Not applicable.

Item 5. Other Information.
Not applicable.

8079
Table of Contents

MERCANTILE BANK CORPORATION

Item 6. Exhibits

EXHIBIT NO.
EXHIBIT DESCRIPTION

3.1
~~Our~~ Articles of Incorporation ~~are~~of Mercantile Bank Corporation, including all amendments thereto, incorporated by reference to Exhibit 3.1 of our Form ~~10-Q for the quarter ended June 30, 2009~~S-4 Registration Statement filed February 16, 2022

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, ~~2021,~~2022, 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)

8180
Table of Contents

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 ~~6, 2021.~~5, 2022.

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)

8281

											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 no related allowance recorded
Commercial:
Commercial and industrial	$	2,732,000	$	2,675,000		$	3,129,000	$	4,167,000
Vacant land, land development and residential construction		0		0			0		0
Real estate – owner occupied		12,674,000		12,674,000			13,114,000		13,607,000
Real estate – non-owner occupied		0		0			156,000		218,000
Real estate – multi-family and residential rental		0		0			0		0
Total commercial		15,406,000		15,349,000			16,399,000		17,992,000
Retail:
Home equity and other		1,317,000		1,237,000			1,088,000		1,054,000
1-4 family mortgages		3,899,000		2,227,000			2,376,000		2,442,000
Total retail		5,216,000		3,464,000			3,464,000		3,496,000

Total with no related allowance recorded	$	20,622,000	$	18,813,000		$	19,863,000	$	21,488,000

	Recorded
	Principal		Related
	Balance		Allowance
With no allowance recorded:
Commercial:
Commercial and industrial	$	248,000	$	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		248,000		0

Retail:
1-4 family mortgages		1,000		0
Other consumer loans		1,454,000		0
Total retail		1,455,000		0

Total with no allowance recorded	$	1,703,000	$	0

With an allowance recorded:
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:
1-4 family mortgages		84,000		48,000
Other consumer loans		0		0
Total retail		84,000		48,000

Total with an allowance recorded	$	84,000	$	48,000

Total nonaccrual loans:
Commercial	$	248,000	$	0
Retail		1,539,000		48,000
Total nonaccrual loans	$	1,787,000	$	48,000

	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)	$	767,987,000	$	23,647,000	$	311,512,000	$	417,311,000	$	109,220,000	$	726,012,000	$	40,317,000	$	363,381,000	$	508,666,000	$	136,632,000
Grades 5 – 7		330,408,000		19,358,000		211,916,000		533,682,000		52,412,000		454,518,000		17,379,000		234,999,000		481,799,000		87,816,000
Grades 8 – 9		5,412,000		106,000		27,076,000		0		262,000		7,120,000		112,000		213,000		12,653,000		143,000
Total commercial	$	1,103,807,000	$	43,111,000	$	550,504,000	$	950,993,000	$	161,894,000	$	1,187,650,000	$	57,808,000	$	598,593,000	$	1,003,118,000	$	224,591,000

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

Performing	$	58,087,000	$	378,305,000	$	28,440,000	$	622,061,000
Nonperforming		153,000		1,987,000		1,000		1,538,000
Total retail	$	58,240,000	$	380,292,000	$	28,441,000	$	623,599,000

	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

	2022		2021		2020		2019		2018		Prior		Term Total		Revolving Loans		Grand Total
Commercial:
Commercial and Industrial:
Grades 1 – 4	$	73,547	$	183,393	$	54,533	$	13,863	$	3,792	$	10,932	$	340,060	$	385,952	$	726,012
Grades 5 – 7		122,198		68,241		62,274		9,459		2,074		600		264,846		189,672		454,518
Grades 8 – 9		3,849		249		0		0		55		47		4,200		2,920		7,120
Total	$	199,594	$	251,883	$	116,807	$	23,322	$	5,921	$	11,579	$	609,106	$	578,544	$	1,187,650

Vacant Land, Land Development and Residential Construction:
Grades 1 – 4	$	17,011	$	19,004	$	3,660	$	0	$	0	$	354	$	40,029	$	288	$	40,317
Grades 5 – 7		5,248		10,652		572		55		0		794		17,321		58		17,379
Grades 8 – 9		0		0		0		0		16		96		112		0		112
Total	$	22,259	$	29,656	$	4,232	$	55	$	16	$	1,244	$	57,462	$	346	$	57,808

Real Estate – Owner Occupied:
Grades 1 – 4	$	81,554	$	175,628	$	63,568	$	20,865	$	10,866	$	10,900	$	363,381	$	0	$	363,381
Grades 5 – 7		88,415		64,394		40,122		11,405		23,771		6,892		234,999		0		234,999
Grades 8 – 9		0		0		47		0		166		0		213		0		213
Total	$	169,969	$	240,022	$	103,737	$	32,270	$	34,803	$	17,792	$	598,593	$	0	$	598,593

Real Estate – Non-Owner Occupied:
Grades 1 – 4	$	64,529	$	193,494	$	144,040	$	78,997	$	10,428	$	17,178	$	508,666	$	0	$	508,666
Grades 5 – 7		83,053		178,420		133,404		23,436		15,620		47,866		481,799		0		481,799
Grades 8 – 9		6,849		5,804		0		0		0		0		12,653		0		12,653
Total	$	154,431	$	377,718	$	277,444	$	102,433	$	26,048	$	65,044	$	1,003,118	$	0	$	1,003,118

Real Estate – Multi-Family and Residential Rental:
Grades 1 – 4	$	26,872	$	58,323	$	37,867	$	5,768	$	3,121	$	4,681	$	136,632	$	0	$	136,632
Grades 5 – 7		38,618		26,763		13,928		3,486		3,591		1,430		87,816		0		87,816
Grades 8 – 9		88		0		0		0		0		55		143		0		143
Total	$	65,578	$	85,086	$	51,795	$	9,254	$	6,712	$	6,166	$	224,591	$	0	$	224,591
Total Commercial	$	611,831	$	984,365	$	554,015	$	167,334	$	73,500	$	101,825	$	2,492,870	$	578,890	$	3,071,760

Retail:
1-4 Family Mortgages	$	174,239	$	240,232	$	97,334	$	13,962	$	15,543	$	49,346	$	590,656	$	32,943	$	623,599
Other Consumer Loans		2,905		3,822		1,599		1,447		624		702		11,099		17,342		28,441
Total Retail	$	177,144	$	244,054	$	98,933	$	15,409	$	16,167	$	50,048	$	601,755	$	50,285	$	652,040

Grand Total	$	788,975	$	1,228,419	$	652,948	$	182,743	$	89,667	$	151,873	$	3,094,625	$	629,175	$	3,723,800

	Commercial and industrial			Commercial vacant land, land development and residential construction			Commercial real estate – owner occupied			Commercial real estate – non-owner occupied			Commercial real estate – multi-family and residential rental			1-4 family mortgages			Other consumer loans			Unallocated			Total
Allowance for credit losses:
Balance at 3-31-22	$	8,413		$	455		$	5,803		$	10,322		$	1,276		$	8,562		$	191		$	131		$	35,153
Provision for credit losses		150			(10	)		(251	)		(708	)		(8	)		1,464			(28	)		(109	)		500
Charge-offs		0			0			0			0			0			0			(15	)		0			(15	)
Recoveries		45			1			26			0			6			241			17			0			336
Ending balance	$	8,608		$	446		$	5,578		$	9,614		$	1,274		$	10,267		$	165		$	22		$	35,974

Balance at 12-31-21	$	10,782		$	420		$	6,045		$	13,301		$	1,695		$	2,449		$	626		$	45		$	35,363
Adoption of ASU 2016-13		(1,571	)		(43	)		(560	)		(2,534	)		(621	)		5,395			(411	)		(55	)		(400	)
Provision for credit losses		(592	)		96			35			(1,153	)		186			2,057			(61	)		32			600
Charge-offs		(171	)		(29	)		0			0			0			(2	)		(18	)		0			(220	)
Recoveries		160			2			58			0			14			368			29			0			631
Ending balance	$	8,608		$	446		$	5,578		$	9,614		$	1,274		$	10,267		$	165		$	22		$	35,974

	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			Home equity and other			1–4 family mortgages			Unallocated			Total
Allowance for loan losses:
Balance at 3-31-21	$	10,111		$	720		$	8,304		$	13,751		$	1,825		$	841		$	2,953		$	190		$	38,695
Provision for loan losses		(764	)		(243	)		(696	)		(966	)		(38	)		(125	)		(263	)		(5	)		(3,100	)
Charge-offs		(54	)		0			(12	)		0			0			(2	)		0			0			(68	)
Recoveries		47			2			105			0			0			28			204			0			386
Ending balance	$	9,340		$	479		$	7,701		$	12,785		$	1,787		$	742		$	2,894		$	185		$	35,913

Balance at 12-31-20	$	9,424		$	679		$	8,246		$	13,611		$	1,819		$	889		$	3,240		$	59		$	37,967
Provision for loan losses		(181	)		(203	)		(877	)		(826	)		(32	)		(207	)		(600	)		126			(2,800	)
Charge-offs		(54	)		(15	)		(12	)		0			0			(6	)		(34	)		0			(121	)
Recoveries		151			18			344			0			0			66			288			0			867
Ending balance	$	9,340		$	479		$	7,701		$	12,785		$	1,787		$	742		$	2,894		$	185		$	35,913

Ending balance: individually evaluated for impairment	$	355		$	0		$	117		$	5		$	0		$	207		$	103		$	0		$	787

Ending balance: collectively evaluated for impairment	$	8,985		$	479		$	7,584		$	12,780		$	1,787		$	535		$	2,791		$	185		$	35,126

Total loans (*):
Ending balance	$	1,097,309		$	43,239		$	565,758		$	1,027,415		$	176,593		$	60,488		$	442,547					$	3,413,349

Ending balance: individually evaluated for impairment	$	5,010		$	0		$	10,435		$	146		$	91		$	1,247		$	2,437					$	19,366

Ending balance: collectively evaluated for impairment	$	1,092,299		$	43,239		$	555,323		$	1,027,269		$	176,502		$	59,241		$	440,110					$	3,393,983

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

Commercial:
Commercial and industrial		2	$	6,573,000	$	6,573,000
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		6,573,000		6,573,000

Retail:
1-4 family mortgages		1		84,000		84,000
Other consumer loans		0		0		0
Total retail		1		84,000		84,000

Total loans		3	$	6,657,000	$	6,657,000

	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

	Retail			Retail
	1-4 Family			Other Consumer
	Mortgages			Loans
Retail Loan Portfolio:
Beginning Balance	$	2,346,000		$	13,000
Charge-Offs		0			0
Payments (net)		(91,000	)		(10,000	)
Transfers to ORE		0			0
Net Additions/Deletions		84,000			0
Ending Balance	$	2,339,000		$	3,000

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

Noninterest-bearing demand	$	1,620,829,000		44.1	%	$	1,433,403,000		42.0	%		13.1	%
Interest-bearing checking		477,151,000		13.0			473,053,000		13.9			0.9
Money market		725,681,000		19.8			611,912,000		17.9			18.6
Savings		387,783,000		10.6			338,070,000		9.9			14.7
Time, under $100,000		142,531,000		3.9			165,548,000		4.9			(13.9	)
Time, $100,000 and over		286,383,000		7.8			342,633,000		10.0			(16.4	)
Total local deposits		3,640,358,000		99.2			3,364,619,000		98.6			8.2

Out-of-area time, $100,000 and over		30,913,000		0.8			46,934,000		1.4			(34.1	)

Total deposits	$	3,671,271,000		100.0	%	$	3,411,553,000		100.0	%		7.6	%

	Six Months Ended June 30, 2021			Twelve Months Ended December 31, 2020			Six Months Ended June 30, 2022			Twelve Months Ended December 31, 2021

Outstanding balance at end of period	$	169,737,000		$	118,365,000		$	203,339,000		$	197,463,000
Average interest rate at end of period		0.11	%		0.12	%		0.10	%		0.11	%

Average daily balance during the period	$	141,861,000		$	132,880,000		$	196,327,000		$	158,855,000
Average interest rate during the period		0.11	%		0.12	%		0.10	%		0.11	%
Maximum daily balance during the period	$	180,719,000		$	173,186,000		$	224,345,000		$	209,093,000

2022	$	54,000,000
2023		80,000,000
2024		80,000,000
2025		50,000,000
2026		30,000,000
Thereafter		40,000,000

2022	$	0
2023		353,000
2024		826,000
2025		862,000
2026		899,000
Thereafter		25,323,000

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

	Notional Amount		Balance Sheet Location	Fair Value
Derivative Assets
Interest rate swaps	$	340,692,000	Other Assets	$	17,069,000

Derivative Liabilities
Interest rate swaps		340,692,000	Other Liabilities		17,196,000

	Level in		June 30, 2021				December 31, 2020				Level in	June 30, 2022				December 31, 2021
	Fair Value Hierarchy		Carrying Values		Fair Values		Carrying Values		Fair Values		Fair Value	Carrying		Fair		Carrying		Fair
											Hierarchy	Values		Values		Values		Values
Financial assets:
Cash	Level 1		$	17,782	$	17,782	$	16,953	$	16,953	Level 1	$	18,692	$	18,692	$	17,872	$	17,872
Cash equivalents	Level 2			741,749		741,749		609,053		609,053	Level 1		460,413		460,413		957,288		957,288
Securities available for sale		(1)		506,125		506,125		387,347		387,347	(1)		603,638		603,638		592,743		592,743
FHLBI stock		(2)		18,002		18,002		18,002		18,002	(2)		17,721		17,721		18,002		18,002
Loans, net	Level 3			3,212,928		3,297,771		3,155,503		3,294,522	Level 3		3,687,826		3,632,452		3,418,096		3,498,345
Mortgage loans held for sale	Level 2			27,720		28,915		22,888		24,029	Level 2		12,964		13,283		16,117		16,707
Mortgage servicing rights	Level 2			10,168		13,769		8,189		10,006	Level 2		12,286		16,547		12,248		15,445
Accrued interest receivable	Level 2			9,651		9,651		10,861		10,861	Level 2		10,884		10,884		9,311		9,311
Interest rate swaps											Level 2		17,069		17,069		4,609		4,609

Financial liabilities:
Deposits	Level 2			3,671,271		3,656,246		3,411,553		3,397,768	Level 2		3,873,893		3,573,291		4,083,193		4,028,249
Repurchase agreements	Level 2			169,737		169,737		118,365		118,365	Level 2		203,339		203,339		197,463		197,463
FHLBI advances	Level 2			394,000		407,972		394,000		410,881	Level 2		362,263		347,018		374,000		384,927
Subordinated debentures	Level 2			47,904		47,859		47,563		47,574	Level 2		48,585		52,820		48,244		48,284
Subordinated notes											Level 2		88,457		83,679		73,646		73,646
Accrued interest payable	Level 2			1,885		1,885		2,313		2,313	Level 2		2,834		2,834		1,393		1,393
Interest rate swaps											Level 2		17,196		17,196		4,857		4,857

	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	$	320,141,000	$	0	$	320,141,000	$	0	$	407,335,000	$	0	$	407,335,000	$	0
Mortgage-backed securities		37,319,000		0		37,319,000		0		36,364,000		0		36,364,000		0
Municipal general obligation bonds		129,435,000		0		128,718,000		717,000		137,673,000		0		137,050,000		623,000
Municipal revenue bonds		18,730,000		0		18,730,000		0		21,766,000		0		21,766,000		0
Other investments		500,000		0		500,000		0		500,000		0		500,000		0
Interest rate swaps										17,069,000		0		17,069,000		0
Total	$	506,125,000	$	0	$	505,408,000	$	717,000	$	620,707,000	$	0	$	620,084,000	$	623,000

	Actual					Minimum Required for Capital Adequacy Purposes					Minimum Required to be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2021
Total capital (to risk weighted assets)
Consolidated	$	481,324		13.1	%	$	294,175		8.0	%	NA		NA
Bank		477,684		13.0			293,957		8.0			367,447		10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated		445,410		12.1			220,631		6.0		NA		NA
Bank		441,770		12.0			220,468		6.0			293,957		8.0
Common equity tier 1 (to risk weighted assets)
Consolidated		399,581		10.9			165,474		4.5		NA		NA
Bank		441,770		12.0			165,351		4.5			238,841		6.5
Tier 1 capital (to average assets)
Consolidated		445,410		9.5			188,065		4.0		NA		NA
Bank		441,770		9.4			187,971		4.0			234,964		5.0

	6/30/21		3/31/21		12/31/20		9/30/20		6/30/20		6/30/22		3/31/22		12/31/21		9/30/21		6/30/21
Commercial:
Commercial & Industrial(1)	$	1,103,807,000	$	1,284,507,000	$	1,145,423,000	$	1,321,419,000	$	1,307,455,000	$	1,187,650,000	$	1,153,814,000	$	1,137,419,000	$	1,074,394,000	$	1,103,807,000
Land Development & Construction		43,111,000		58,738,000		55,055,000		50,941,000		52,984,000		57,808,000		52,693,000		43,239,000		38,380,000		43,111,000
Owner Occupied Commercial RE		550,504,000		544,342,000		529,953,000		549,364,000		567,621,000		598,593,000		582,732,000		565,758,000		551,762,000		550,504,000
Non-Owner Occupied Commercial RE		950,993,000		932,334,000		917,436,000		878,897,000		841,145,000		1,003,118,000		1,007,361,000		1,027,415,000		998,697,000		950,993,000
Multi-Family & Residential Rental		161,894,000		147,294,000		146,095,000		137,740,000		132,047,000		224,591,000		207,962,000		176,593,000		179,126,000		161,894,000
Total Commercial		2,810,309,000		2,967,215,000		2,793,962,000		2,938,361,000		2,901,252,000		3,071,760,000		3,004,562,000		2,950,424,000		2,842,359,000		2,810,309,000

Retail:
Retail (2):
1-4 Family Mortgages		380,292,000		337,844,000		337,888,000		348,460,000		367,061,000		623,599,000		522,556,000		442,547,000		411,618,000		380,292,000
Home Equity & Other Consumer Loans		58,240,000		59,311,000		61,620,000		63,723,000		64,743,000
Other Consumer Loans												28,441,000		28,672,000		60,488,000		59,732,000		58,240,000
Total Retail		438,532,000		397,155,000		399,508,000		412,183,000		431,804,000		652,040,000		551,228,000		503,035,000		471,350,000		438,532,000

Total	$	3,248,841,000	$	3,364,370,000	$	3,193,470,000	$	3,350,544,000	$	3,333,056,000	$	3,723,800,000	$	3,555,790,000	$	3,453,459,000	$	3,313,709,000	$	3,248,841,000

NONPERFORMING LOANS

	6/30/22		3/31/22		12/31/21		9/30/21		6/30/21
Residential Real Estate:
Land Development	$	30,000	$	31,000	$	32,000	$	33,000	$	34,000
Construction		0		0		0		0		0
Owner Occupied / Rental		1,508,000		1,579,000		1,768,000		2,052,000		2,096,000
		1,538,000		1,610,000		1,800,000		2,085,000		2,130,000

Commercial Real Estate:
Land Development		0		0		0		0		0
Construction		0		0		0		0		0
Owner Occupied		0		0		0		0		0
Non-Owner Occupied		0		0		0		0		0
		0		0		0		0		0

Non-Real Estate:
Commercial Assets		248,000		0		662,000		673,000		606,000
Consumer Assets		1,000		2,000		6,000		8,000		10,000
		249,000		2,000		668,000		681,000		616,000

Total	$	1,787,000	$	1,612,000	$	2,468,000	$	2,766,000	$	2,746,000

OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS

	6/30/22		3/31/22		12/31/21		9/30/21		6/30/21
Residential Real Estate:
Land Development	$	0	$	0	$	0	$	0	$	0
Construction		0		0		0		0		0
Owner Occupied / Rental		0		0		0		11,000		41,000
		0		0		0		11,000		41,000

Commercial Real Estate:
Land Development		0		0		0		0		0
Construction		0		0		0		0		0
Owner Occupied		0		0		0		100,000		363,000
Non-Owner Occupied		0		0		0		0		0
		0		0		0		100,000		363,000

Non-Real Estate:
Commercial Assets		0		0		0		0		0
Consumer Assets		0		0		0		0		0
		0		0		0		0		0

Total	$	0	$	0	$	0	$	111,000	$	404,000

	2nd Qtr			1st Qtr			4th Qtr			3rd Qtr			2nd Qtr			2nd Qtr			1st Qtr			4th Qtr			3rd Qtr			2nd Qtr
	2021			2021			2020			2020			2020			2022			2022			2021			2021			2021

Beginning balance	$	2,793,000		$	3,384,000		$	4,141,000		$	3,212,000		$	3,469,000		$	1,612,000		$	2,468,000		$	2,766,000		$	2,746,000		$	2,793,000
Additions, net of transfers to ORE		492,000			116,000			538,000			1,301,000			220,000			309,000			93,000			218,000			361,000			492,000
Returns to performing status		0			(115,000	)		0			(72,000	)		(26,000	)		0			(213,000	)		0			(50,000	)		0
Principal payments		(484,000	)		(559,000	)		(1,064,000	)		(249,000	)		(278,000	)		(134,000	)		(641,000	)		(377,000	)		(291,000	)		(484,000	)
Loan charge-offs		(55,000	)		(33,000	)		(231,000	)		(51,000	)		(173,000	)		0			(95,000	)		(139,000	)		0			(55,000	)

Total	$	2,746,000		$	2,793,000		$	3,384,000		$	4,141,000		$	3,212,000		$	1,787,000		$	1,612,000		$	2,468,000		$	2,766,000		$	2,746,000

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	%

Outstanding balance at June 30, 2022	$	203,339,000
Weighted average interest rate at June 30, 2022		0.10	%
Maximum daily balance six months ended June 30, 2022	$	224,345,000
Average daily balance for six months ended June 30, 2022	$	196,327,000
Weighted average interest rate for six months ended June 30, 2022		0.10	%

	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	$	3,211,444,000	$	0	$	0	$	0	$	3,211,444,000	$	3,519,988,000	$	0	$	0	$	0	$	3,519,988,000
Time deposits		271,352,000		136,357,000		52,118,000		0		459,827,000		215,613,000		85,947,000		52,345,000		0		353,905,000
Short-term borrowings		169,737,000		0		0		0		169,737,000		203,339,000		0		0		0		203,339,000
Federal Home Loan Bank advances		60,000,000		174,000,000		110,000,000		50,000,000		394,000,000		94,353,000		161,689,000		81,838,000		24,383,000		362,263,000
Subordinated debentures		0		0		0		47,904,000		47,904,000		0		0		0		48,585,000		48,585,000
Subordinated notes												0		0		0		88,457,000		88,457,000
Other borrowed money		0		0		0		1,565,000		1,565,000		0		0		0		1,165,000		1,165,000
Property leases		777,000		1,521,000		481,000		1,173,000		3,952,000		591,000		1,217,000		232,000		2,278,000		4,318,000