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, 2022~~March 31, 2023

☐ 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)

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

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 29, 2022,~~April 28, 2023, there were ~~15,861,082~~15,999,388 shares of common stock outstanding.

Table of Contents

							March 31,			December 31,
	June 30, 2022			December 31, 2021			2023			2022
ASSETS
Cash and due from banks	$	89,167,000		$	59,405,000		$	47,151,000		$	61,894,000
Interest-earning deposits		389,938,000			915,755,000			10,787,000			34,878,000
Total cash and cash equivalents		479,105,000			975,160,000			57,938,000			96,772,000

Securities available for sale		603,638,000			592,743,000			619,973,000			602,936,000
Federal Home Loan Bank stock		17,721,000			18,002,000			17,721,000			17,721,000
Mortgage loans held for sale		12,964,000			16,117,000			3,821,000			3,565,000

Loans		3,723,800,000			3,453,459,000			3,965,528,000			3,916,619,000
Allowance for credit losses		(35,974,000	)		(35,363,000	)		(42,877,000	)		(42,246,000	)
Loans, net		3,687,826,000			3,418,096,000			3,922,651,000			3,874,373,000

Premises and equipment, net		51,402,000			57,298,000			51,510,000			51,476,000
Bank owned life insurance		75,664,000			75,242,000			81,113,000			80,727,000
Goodwill		49,473,000			49,473,000			49,473,000			49,473,000
Core deposit intangible, net		900,000			1,351,000			424,000			583,000
Other assets		79,862,000			54,267,000			91,250,000			94,993,000
Total assets	$	5,058,555,000		$	5,257,749,000		$	4,895,874,000		$	4,872,619,000

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing	$	1,740,432,000		$	1,677,952,000		$	1,376,782,000		$	1,604,750,000
Interest-bearing		2,133,461,000			2,405,241,000			2,221,236,000			2,108,061,000
Total deposits		3,873,893,000			4,083,193,000			3,598,018,000			3,712,811,000

Securities sold under agreements to repurchase		203,339,000			197,463,000			227,453,000			194,340,000
Federal funds purchased								17,207,000			0
Federal Home Loan Bank advances		362,263,000			374,000,000			377,910,000			308,263,000
Subordinated debentures		48,585,000			48,244,000			49,130,000			48,958,000
Subordinated notes		88,457,000			73,646,000			88,714,000			88,628,000
Accrued interest and other liabilities		53,035,000			24,644,000			70,070,000			78,211,000
Total liabilities		4,629,572,000			4,801,190,000			4,428,502,000			4,431,211,000

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; 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
Common stock, no par value; 40,000,000 shares authorized; 16,001,448 shares outstanding at March 31, 2023 and 15,994,884 shares outstanding at December 31, 2022								291,516,000			290,436,000
Retained earnings		188,452,000			174,536,000			232,123,000			216,313,000
Accumulated other comprehensive gain/(loss)		(47,668,000	)		(3,729,000	)
Accumulated other comprehensive income (loss)								(56,267,000	)		(65,341,000	)
Total shareholders’ equity		428,983,000			456,559,000			467,372,000			441,408,000
Total liabilities and shareholders’ equity	$	5,058,555,000		$	5,257,749,000		$	4,895,874,000		$	4,872,619,000

											Three Months		Three Months
											Ended		Ended
	Three Months Ended June 30, 2022		Three Months Ended June 30, 2021			Six Months Ended June 30, 2022		Six Months Ended June 30, 2021			March 31,		March 31,
											2023		2022
Interest income
Loans, including fees	$	36,003,000	$	33,789,000		$	69,254,000	$	66,774,000		$	57,154,000	$	33,251,000
Securities, taxable		1,898,000		1,204,000			3,563,000		2,239,000			2,131,000		1,665,000
Securities, tax-exempt		631,000		598,000			1,231,000		1,195,000			876,000		600,000
Other interest-earning assets		1,018,000		183,000			1,384,000		351,000
Interest-earning deposits												324,000		366,000
Total interest income		39,550,000		35,774,000			75,432,000		70,559,000			60,485,000		35,882,000

Interest expense
Deposits		1,873,000		2,346,000			3,698,000		5,063,000			7,907,000		1,825,000
Short-term borrowings		49,000		40,000			99,000		76,000			459,000		50,000
Federal Home Loan Bank advances		1,911,000		2,050,000			3,774,000		4,077,000			1,794,000		1,864,000
Subordinated debt and other borrowings		1,391,000		467,000			2,650,000		939,000
Subordinated debentures and other borrowings												1,941,000		1,258,000
Total interest expense		5,224,000		4,903,000			10,221,000		10,155,000			12,101,000		4,997,000

Net interest income		34,326,000		30,871,000			65,211,000		60,404,000			48,384,000		30,885,000

Provision for credit losses		500,000		(3,100,000	)		600,000		(2,800,000	)		600,000		100,000

Net interest income after provision for credit losses		33,826,000		33,971,000			64,611,000		63,204,000			47,784,000		30,785,000

Noninterest income
Service charges on deposit and sweep accounts		1,495,000		1,209,000			2,910,000		2,363,000			976,000		1,416,000
Credit and debit card income												2,060,000		1,881,000
Mortgage banking income		1,947,000		7,695,000			5,228,000		16,495,000			1,216,000		3,281,000
Credit and debit card income		2,134,000		1,920,000			4,015,000		3,598,000
Interest rate swap fees		430,000		1,495,000			1,781,000		2,148,000			1,037,000		1,351,000
Payroll services income		464,000		405,000			1,102,000		962,000
Payroll processing												746,000		638,000
Earnings on bank owned life insurance		785,000		297,000			1,072,000		574,000			401,000		287,000
Gain on sale of branch		0		1,058,000			0		1,058,000
Other income		486,000		477,000			910,000		821,000			515,000		423,000
Total noninterest income		7,741,000		14,556,000			17,018,000		28,019,000			6,951,000		9,277,000

Noninterest expense
Salaries and benefits		15,676,000		16,194,000			31,186,000		31,279,000			16,682,000		15,510,000
Occupancy		2,084,000		1,977,000			4,168,000		3,991,000			2,289,000		2,104,000
Furniture and equipment depreciation, rent and maintenance		935,000		902,000			1,869,000		1,791,000			822,000		934,000
Data processing costs		3,091,000		2,775,000			6,064,000		5,392,000			3,162,000		2,973,000
Charitable foundation contribution		500,000		0			506,000		0
Other expense		4,656,000		4,344,000			8,891,000		8,856,000			5,644,000		4,221,000
Total noninterest expenses		26,942,000		26,192,000			52,684,000		51,309,000			28,599,000		25,742,000

Income before federal income tax expense		14,625,000		22,335,000			28,945,000		39,914,000			26,136,000		14,320,000

Federal income tax expense		2,888,000		4,244,000			5,716,000		7,583,000			5,162,000		2,828,000

Net income	$	11,737,000	$	18,091,000		$	23,229,000	$	32,331,000		$	20,974,000	$	11,492,000

Basic earnings per share	$	0.74	$	1.12		$	1.47	$	2.00		$	1.31	$	0.73
Diluted earnings per share	$	0.74	$	1.12		$	1.47	$	2.00		$	1.31	$	0.73
Cash dividends per share	$	0.31	$	0.29		$	0.62	$	0.58

Average basic shares outstanding		15,848,681		16,116,070			15,844,763		16,199,096			15,996,138		15,840,801
Average diluted shares outstanding		15,848,681		16,116,666			15,844,763		16,199,620			15,996,138		15,841,037

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

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

	Three Months Ended March 31, 2023			Three Months Ended March 31, 2022

Net income	$	20,974,000		$	11,492,000

Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale		11,486,000			(35,650,000	)
Tax effect of unrealized holding gains (losses) on securities available for sale		(2,412,000	)		7,487,000
Other comprehensive income (loss), net of tax effect		9,074,000			(28,163,000	)

Comprehensive income (loss)	$	30,048,000		$	(16,671,000	)

~~The following table depicts the change in shareholders’ equity for the three months ended June 30, 2022:~~

($ 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

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

Balances, January 1, 2023	$	0	$	290,436	$	216,313		$	(65,341	)	$	441,408

Employee stock purchase plan (327 shares)				10								10

Dividend reinvestment plan (6,880 shares)				217								217

Stock-based compensation expense				853								853

Cash dividends ($0.33 per common share)						(5,164	)					(5,164	)

Net income for the three months ended March 31, 2023						20,974						20,974

Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect									9,074			9,074

Balances, March 31, 2023	$	0	$	291,516	$	232,123		$	(56,267	)	$	467,372

~~The following table depicts the change in shareholders’ equity for the six months ended June 30, 2022:~~

($ in thousands except per share amounts)	Preferred Stock		Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity			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		$	0	$	285,752	$	174,536		$	(3,729	)	$	456,559

Adoption of ASU 2016-13						316						316							316						316

Employee stock purchase plan (617 shares)				21								21
Employee stock purchase plan (281 shares)																	10								10

Dividend reinvestment plan (12,670 shares)				435								435

Stock grants to directors for retainer fees (10,837 shares)				347								347
Dividend reinvestment plan (5,835 shares)																	222								222

Stock option exercises (1,355 shares)				36								36					36								36

Stock-based compensation expense				1,608								1,608					811								811

Cash dividends ($0.62 per common share)						(9,629	)					(9,629	)
Cash dividends ($0.31 per common share)																			(4,812	)					(4,812	)

Net income for the six months ended June 30, 2022						23,229						23,229
Net income for the three months ended March 31, 2022																			11,492						11,492

Change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect									(43,939	)		(43,939	)									(28,163	)		(28,163	)

Balances, June 30, 2022	$	0	$	288,199	$	188,452		$	(47,668	)	$	428,983
Balances, March 31, 2022														$	0	$	286,831	$	181,532		$	(31,892	)	$	436,471

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

($ 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

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

($ 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

							Three Months			Three Months
	Six Months Ended June 30, 2022			Six Months Ended June 30, 2021			Ended			Ended
							March 31, 2023			March 31, 2022
Cash flows from operating activities
Net income	$	23,229,000		$	32,331,000		$	20,974,000		$	11,492,000
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization		6,692,000			6,755,000			3,049,000			3,458,000
Accretion of acquired loans		0			(68,000	)
Provision for credit losses		600,000			(2,800,000	)		600,000			100,000
Stock-based compensation expense		1,608,000			1,277,000			853,000			811,000
Stock grants to directors for retainer fee		347,000			344,000
Proceeds from sales of mortgage loans held for sale		135,521,000			352,740,000			25,645,000			79,622,000
Origination of mortgage loans held for sale		(127,413,000	)		(340,680,000	)		(24,951,000	)		(75,046,000	)
Net gain from sales of mortgage loans held for sale		(4,955,000	)		(16,892,000	)		(950,000	)		(3,205,000	)
Net gain from sales and valuation write-downs of foreclosed assets		(20,000	)		(81,000	)		0			(13,000	)
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		391,000			246,000
Net (gain) loss from sales and write-downs of fixed assets								377,000			(1,000	)
Earnings on bank owned life insurance		(1,072,000	)		(574,000	)		(401,000	)		(287,000	)
Gain on sale of branch		0			(1,058,000	)
Net (gain) loss on instruments designated at fair value and related derivatives								180,000			(55,000	)
Net change in:
Accrued interest receivable		(1,573,000	)		1,188,000			(1,947,000	)		(1,344,000	)
Other assets		(11,749,000	)		(9,099,000	)		131,000			2,589,000
Accrued interest payable and other liabilities		28,391,000			(1,695,000	)
Accrued interest and other liabilities								(5,495,000	)		9,767,000
Net cash from operating activities		49,997,000			22,179,000			18,065,000			27,888,000

Cash flows from investing activities
Loan originations and payments, net		(269,930,000	)		(64,298,000	)		(48,939,000	)		(102,241,000	)
Purchases of securities available for sale		(78,640,000	)		(168,906,000	)		(7,392,000	)		(51,705,000	)
Proceeds from maturities, calls and repayments of securities available for sale		11,641,000			44,525,000			1,703,000			2,854,000
Proceeds from sales of foreclosed assets		20,000			158,000			0			13,000
Proceeds from sales of former bank premises		0			5,000
Proceeds from Federal Home Loan Bank stock redemption		281,000			0			0			281,000
Proceeds from bank owned life insurance death benefits claim		628,000			0
Net cash transferred in branch sale		0			(2,679,000	)
Net purchases of premises and equipment and lease activity		(399,000	)		(3,555,000	)		(2,508,000	)		(332,000	)
Net cash for investing activities		(336,399,000	)		(194,750,000	)		(57,136,000	)		(151,130,000	)

Cash flows from financing activities
Net increase (decrease) in time deposits								87,115,000			(35,861,000	)
Net decrease in all other deposits								(201,908,000	)		(71,081,000	)
Net increase in securities sold under agreements to repurchase								33,113,000			6,808,000
Net change in federal funds purchased								17,207,000			0
Proceeds from Federal Home Loan Bank advances								80,000,000			28,263,000
Payoffs of and paydowns on Federal Home Loan Bank advances								(10,353,000	)		(20,000,000	)
Employee stock purchase plan								10,000			10,000
Net proceeds from stock option exercises								0			36,000
Dividend reinvestment plan								217,000			222,000
Proceeds from subordinated notes issuance								0			14,701,000
Payment of cash dividends to common shareholders								(5,164,000	)		(4,812,000	)
Net cash from (for) financing activities								237,000			(81,714,000	)

Net change in cash and cash equivalents								(38,834,000	)		(204,956,000	)
Cash and cash equivalents at beginning of period								96,772,000			975,160,000
Cash and cash equivalents at end of period							$	57,938,000		$	770,204,000

Six Months
Ended
June 30, 2022

Six Months
Ended
June 30, 2021

Cash flows from financing activities

Net decrease in time deposits

(77,992,000
)

(92,581,000
)
Net (decrease) increase in all other deposits

(131,308,000
)

366,943,000

Net increase in securities sold under agreements to repurchase

5,876,000

51,372,000

Maturities of Federal Home Loan Bank advances

(40,000,000
)

0

Proceeds from Federal Home Loan Bank advances

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

21,000

22,000

Dividend reinvestment plan

435,000

411,000

Repurchases of common stock shares

0

(10,851,000
)
Payment of cash dividends to common shareholders

(9,629,000
)

(9,220,000
)
Net cash (for) from financing activities

(209,653,000
)

306,096,000

Net change in cash and cash equivalents

(496,055,000
)

133,525,000

Cash and cash equivalents at beginning of period

975,160,000

626,006,000

Cash and cash equivalents at end of period

$
479,105,000

$
759,531,000

Supplemental disclosures of cash flows information

Cash paid during the period for:

Interest

$
8,780,000

$
10,583,000

Federal income tax

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

0

30,000

	Three Months		Three Months
	Ended		Ended
	March 31, 2023		March 31, 2022
Supplemental disclosures of cash flows information
Cash paid during the period for:
Interest	$	11,838,000	$	4,240,000
Noncash financing and investing activities:
Transfers from loans to foreclosed assets		61,000		0
Transfers from bank premises to other real estate owned		600,000		0

Basis of Presentation: The unaudited financial statements for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries. These subsidiaries include Mercantile Bank (“our bank”) and our bank’s subsidiary, Mercantile Insurance Center, Inc. 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, 2022~~March 31, 2023 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, ~~2021.~~2022.

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

~~Coronavirus Pandemic: There remains a significant amount of stress and uncertainty across national and global economies due to the pandemic of coronavirus disease~~ ~~2019~~ ~~(“Covid-~~~~19”~~~~) caused by severe acute respiratory syndrome coronavirus~~ 2 ~~(the “Coronavirus Pandemic”). 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, 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 reduce net income.~~

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

~~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”) 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, 2022,~~ ~~we recorded forgiveness transactions on all but 12 loans aggregating $0.7 million. Net loan origination fees of less than $0.1 million were recorded during the~~ ~~first~~~~six~~ ~~months of~~ ~~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, 2022,~~ ~~we recorded forgiveness transactions on all but 9 loans aggregating $2.2 million. Net loan origination fees of $0.9 million were recorded during the~~ ~~first~~~~six~~ ~~months of~~ ~~2022~~ ~~under the Second Draw.~~

~~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.~~

~~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.~~

~~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 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.~~ ~~We adopted the CECL methodology effective~~ ~~January 1, 2022.~~

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~~360,000 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.~~March 31, 2023. Stock options for ~~approximately 6,000~~5,000 shares of common stock were antidilutive and not included in determining diluted earnings per share for the three ~~and~~ ~~six~~months ended ~~June 30, 2022.~~March 31, 2023.

Approximately ~~262,000~~335,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three ~~and~~ ~~six~~months ended ~~June 30, 2021.~~March 31, 2022. In addition, stock options for approximately ~~3,000~~8,000 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.~~

Debt 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~~available for sale consist of bonds which might be sold prior to maturity due to a number of factors, including changes in interest rates, prepayment risks, yield, availability of alternative investments or liquidity needs. Debt securities 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~~reported at their 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.

value. 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 debt security’s amortized cost basis is written down to fair value through income with the establishment of an 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 issuer of 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 isare compared to 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 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~~provisions for (or ~~reversal~~reversals of) credit loss expense. Losses are charged against the allowance when ~~we believe~~ the ~~uncollectibility~~collectibility of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At ~~June 30,~~March 31, 2023, and December 31, 2022, there was no allowance ~~for credit losses~~ related to the available for sale debt securities portfolio. ~~Accrued interest receivable~~

Interest income includes amortization of purchase premiums and accretion of discounts. Premiums on ~~available for sale~~ debt securities ~~totaled $2.2 million~~are amortized to the initial call date, if applicable, or to the maturity date, on the level-yield method. Discounts on debt securities are accreted to the maturity date on the level-yield method. Premiums and discounts on mortgage-backed securities are amortized or accreted based on anticipated prepayments on the level-yield method. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

FHLBI stock is carried at ~~June 30, 2022~~ cost, classified as a restricted security, and ~~was excluded from the estimate~~periodically evaluated for impairment based on ultimate recovery of ~~credit losses as any accrued interest that is~~ ~~not~~ ~~expected to be collected is reversed against interest income.~~par value.

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 credit losses.~~costs. 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. Net unamortized deferred loan fees/(costs) amounted to ($1.4) million and ($1.0) million at March 31, 2023, and December 31, 2022, respectively.

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

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

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or 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, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, we determined that the fair value of our mortgage loans held for sale ~~was $13.3~~totaled $3.9 million and ~~$16.7~~$3.6 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, which includes a gain or loss on the interest rate commitment coverage position, 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~~Market rate risk on interest rate ~~commitment~~commitments with borrowers prior to ~~the borrower.~~loan closing is mitigated through forward commitments referred to as to-be-announced mortgage-backed securities. 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 $1.37 billion and $1.34 billion as of~~ ~~June 30, 2022~~ ~~and~~ ~~December 31, 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)amended) significantly ~~changes~~changed 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~~replaced 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~~expanded 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~~We recorded a provision expense of $0.6 million during the first quarter of 2023, mainly reflecting allocations necessitated by net loan growth; nominal loan charge-offs and continued strong loan quality metrics in large part mitigated additional reserves associated with loan growth. We did not ~~required to comply with~~adjust any qualitative reserve factors during the ~~CECL methodology requirements from~~first quarter of 2023, and the ~~enactment date~~impact 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.~~ Anupdated 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.~~less than $0.1 million.

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.

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,~~March 31, 2023 and December 31, 2022 were as follows:

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, repayment terms, and ~~repayment terms.~~estimated prepayments. Our historical loss rate is then applied to the monthly estimated future loan balances at the instrument ~~level based on remaining contractual life adjusted for amortization, prepayment and default to develop a baseline lifetime loss.~~level. 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,~~March 31, 2023 and December 31, 2022, we used a one-year reasonable and supportable economic forecast period, with a six-month straight-line reversion ~~period.~~period for all loan segments.

We are not required to develop and use our own economic forecast model, and elected to utilize economic forecasts from a third-party ~~provider~~providers that ~~analyzes~~analyze and ~~develops~~develop forecasts of the economy for the entire United States at least quarterly. The economic ~~forecast~~forecasts used for our ~~June 30, 2022~~March 31, 2023 allowance calculation ~~was~~ ~~not~~ ~~materially different from~~reflected a less than $0.1 million allowance balance increase compared to the ~~forecast~~forecasts used for our ~~March~~December 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 the historical loss ~~information~~rates as determined by our migration calculations 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 migration-based historical loss information was determined. These qualitative adjustments may increase or decrease our estimate of expected future 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~~ Effective ~~June 30,~~January 1, 2022, we ~~employed~~ ~~two~~ ~~additional qualitative factors:~~

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~~other noninterest expense on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. 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~~ ~~first~~~~six~~ ~~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.

~~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 loans serviced for others totaled approximately $1.37 billion and $1.38 billion as of March 31, 2023 and December 31, 2022, respectively. 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.

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.~~basis. Certain loans modified as troubled debt restructurings may have been previously measured for impairment under a general allowance methodology (i.e., pooling), thus at the time the loan is modified as a troubled debt restructuring the allowance 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.~~

The accounting guidance for troubled debt restructurings by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors was eliminated upon our adoption of ASU No.2022-02 Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures effective January 1, 2023.

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 historically 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 derivatives 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.~~ We had no derivative instruments designated as hedges as of ~~June 30, 2022~~March 31, 2023, and December 31, ~~2021.~~2022.

Goodwill and Core Deposit Intangible: ~~Goodwill results from business acquisitions and represents the excess of the purchase price over~~GAAP requires us to determine the fair value of ~~acquired tangible~~all the assets and liabilities of an acquired entity, and ~~identifiable intangible assets.~~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 we concluded to have the appropriate expertise to determine the fair value, we may choose to use our own calculation of fair value. In other cases, where the fair value is not readily determined, consultation with outside parties is used to determine fair value. Once valuations have been determined, the net difference between the price paid for the acquired company and the fair value of the balance sheet is recorded as goodwill. Goodwill is assessed at least annually for impairment, ~~and~~with any such impairment is recognized in the period identified. A more frequent assessment is performed ~~should events or~~if there are material changes in ~~circumstances indicate~~ the ~~carrying value of~~market place or within the ~~goodwill~~organizational structure. We conducted an annual test during ~~may~~ ~~not~~2022 ~~be recoverable. We~~using step zero, with ~~may~~ no~~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.identified.

The core deposit intangible that arose from the merger with 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~~“Revenue from Contracts with ~~Customers~~”Customers” (“Topic 606”). Under Topic 606, we must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) we satisfy a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

Our primary sources of revenue are derived from interest and dividends earned on loans, securities and other financial instruments that are not within the scope of Topic 606. We have evaluated the nature of our contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary.

We generally satisfy our performance obligations on contracts with customers as services are rendered, and the transaction prices are typically fixed and charged either on a periodic basis (generally monthly) or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

The following table depicts our sources of noninterest income presented in the Consolidated Statements of 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
									Three Months Ended March 31, 2023		Three Months Ended March 31, 2022
Service charges on deposit and sweep accounts	$	1,495,000	$	1,209,000	$	2,910,000	$	2,363,000	$	976,000	$	1,416,000
Credit and debit card fees		2,134,000		1,920,000		4,015,000		3,598,000		2,060,000		1,881,000
Payroll processing		464,000		405,000		1,102,000		962,000		746,000		638,000
Customer service fees		202,000		186,000		444,000		409,000		220,000		242,000

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. Customer service fees are recorded as other noninterest income on our Consolidated Statements of Income.

~~Newly Issued~~ ~~Not~~ ~~Yet Effective~~Adoption of New Accounting Standards: ASU No. 2022-02 Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for troubled debt restructurings (“TDRs”) by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, while adding disclosures for certain loan restructurings by creditors when a borrower is experiencing financial difficulty. This guidance requires an entity to determine whether the modification results in a new loan or a continuation of an existing loan. Additionally, the ASU requires disclosures of current period gross charge-offs by year of origination for financing receivables. This ASU iswas effective for fiscal years beginning after December 15, 2022. ~~We do~~ ~~not~~ ~~believe the~~The prospective adoption of this ASU ~~will~~did not have a material impact on our financial results. ~~The required disclosures for gross charge-offs on our financial statements will be added upon adoption of this new standard.~~

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2022
March 31, 2023
U.S. Government agency debt obligations	$	453,512,000	$	0	$	(46,177,000	)	$	407,335,000	$	454,000,000	$	0	$	(57,780,000	)	$	396,220,000
Mortgage-backed securities		40,676,000		56,000		(4,368,000	)		36,364,000		37,164,000		22,000		(5,596,000	)		31,590,000
Municipal general obligation bonds		145,002,000		190,000		(7,519,000	)		137,673,000		168,721,000		1,081,000		(6,731,000	)		163,071,000
Municipal revenue bonds		24,287,000		18,000		(2,539,000	)		21,766,000		30,812,000		200,000		(2,420,000	)		28,592,000
Other investments		500,000		0		0			500,000		500,000		0		0			500,000

	$	663,977,000	$	264,000	$	(60,603,000	)	$	603,638,000	$	691,197,000	$	1,303,000	$	(72,527,000	)	$	619,973,000

December 31, 2021
December 31, 2022
U.S. Government agency debt obligations	$	398,874,000	$	266,000	$	(8,769,000	)	$	390,371,000	$	453,836,000	$	0	$	(65,092,000	)	$	388,744,000
Mortgage-backed securities		41,906,000		549,000		(652,000	)		41,803,000		38,002,000		19,000		(6,068,000	)		31,953,000
Municipal general obligation bonds		133,894,000		4,092,000		(392,000	)		137,594,000		163,041,000		450,000		(9,058,000	)		154,433,000
Municipal revenue bonds		22,289,000		331,000		(145,000	)		22,475,000		30,267,000		102,000		(3,063,000	)		27,306,000
Other investments		500,000		0		0			500,000		500,000		0		0			500,000

	$	597,463,000	$	5,238,000	$	(9,958,000	)	$	592,743,000	$	685,646,000	$	571,000	$	(83,281,000	)	$	602,936,000

Securities with unrealized losses at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

	Less than 12 Months				12 Months or More				Total				Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2022
													Value		Loss		Value		Loss		Value		Loss
March 31, 2023
U.S. Government agency debt obligations	$	176,893,000	$	17,028,000	$	230,442,000	$	29,149,000	$	407,335,000	$	46,177,000	$	14,000,000	$	755,000	$	382,220,000	$	57,025,000	$	396,220,000	$	57,780,000
Mortgage-backed securities		23,935,000		2,259,000		11,372,000		2,109,000		35,307,000		4,368,000		29,016,000		5,508,000		1,742,000		88,000		30,758,000		5,596,000
Municipal general obligation bonds		90,305,000		5,551,000		16,284,000		1,968,000		106,589,000		7,519,000		43,446,000		940,000		67,822,000		5,791,000		111,268,000		6,731,000
Municipal revenue bonds		12,823,000		1,454,000		7,088,000		1,085,000		19,911,000		2,539,000		5,404,000		401,000		16,407,000		2,019,000		21,811,000		2,420,000

	$	303,956,000	$	26,292,000	$	265,186,000	$	34,311,000	$	569,142,000	$	60,603,000	$	91,866,000	$	7,604,000	$	468,191,000	$	64,923,000	$	560,057,000	$	72,527,000

	Less than 12 Months				12 Months or More				Total				Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
December 31, 2021
December 31, 2022
U.S. Government agency debt obligations	$	274,287,000	$	5,274,000	$	110,053,000	$	3,495,000	$	384,340,000	$	8,769,000	$	53,019,000	$	5,713,000	$	335,725,000	$	59,379,000	$	388,744,000	$	65,092,000
Mortgage-backed securities		23,184,000		652,000		24,000		0		23,208,000		652,000		31,127,000		6,068,000		12,000		0		31,139,000		6,068,000
Municipal general obligation bonds		40,748,000		392,000		0		0		40,748,000		392,000		97,252,000		4,516,000		32,870,000		4,542,000		130,122,000		9,058,000
Municipal revenue bonds		12,843,000		137,000		414,000		8,000		13,257,000		145,000		12,532,000		1,141,000		10,609,000		1,922,000		23,141,000		3,063,000

	$	351,062,000	$	6,455,000	$	110,491,000	$	3,503,000	$	461,553,000	$	9,958,000	$	193,930,000	$	17,438,000	$	379,216,000	$	65,843,000	$	573,146,000	$	83,281,000

We evaluate securities in an unrealized loss position at least quarterly. Consideration is given to 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, 2022,~~March 31, 2023, ~~651~~653 debt securities with estimated fair values totaling ~~$569~~$560 million had unrealized losses aggregating ~~$60.6~~$72.5 million. At December 31, ~~2021,~~2022, ~~333~~732 debt securities with estimated fair values totaling ~~$462~~$573 million had unrealized losses aggregating ~~$10.0~~$83.3 million. ~~After we considered whether~~At March 31, 2023, unrealized losses aggregating $63.4 million were attributable to bonds issued or guaranteed by agencies of the ~~securities~~U.S. federal government, while unrealized losses totaling $9.1 million were associated with bonds issued by ~~the federal government or its agencies and~~state-based municipalities. For available for sale debt securities in an unrealized loss position, we first assess 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~~or if it is more likely than not that we will ~~not~~be required to sell ~~our debt securities~~the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the debt security’s amortized cost basis ~~0 unrealized losses are deemed~~is written down to ~~be other-than-temporary.~~fair value through income with the establishment of an 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 issuer of the security, among other factors.

The amortized cost and fair value of debt securities at ~~June 30, 2022,~~March 31, 2023, 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.

~~MERCANTILE BANK CORPORATION~~No securities were sold during the firstthree months of 2023 or the full-year 2022.

Securities issued by the State of Michigan and all its political subdivisions had a combined amortized ~~costs~~cost of ~~$169~~$200 million and ~~$155~~$193 million at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, with estimated market values of ~~$159~~$192 million and ~~$158~~$182 million ~~respectively. Securities~~at the respective dates. We had no securities issued by all other states and their political subdivisions ~~had combined amortized costs~~as of ~~$0.3 million and $1.7 million and estimated market values of $0.2 million and $1.7 million at~~ ~~June 30, 2022~~March 31, 2023, and December 31, ~~2021,~~2022. ~~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 ~~$203~~$227 million and ~~$197~~$194 million at ~~June 30, 2022~~March 31, 2023, and December 31, ~~2021,~~2022, respectively. ~~Investments in Federal Home Loan Bank stock are restricted and~~ ~~may~~ ~~only be resold or redeemed by the issuer.~~

~~Loans originated for investment are stated~~Our total loans at ~~their principal amount outstanding adjusted for partial charge-offs,~~March 31, 2023 were $3.97 billion compared to $3.92 billion at December 31, 2022, an increase of $48.9 million, or 1.2%. The components of our loan portfolio disaggregated by class of loan within the ~~allowance,~~ loan portfolio segments at March 31, 2023 and ~~net deferred loan fees~~ December 31, 2022, and ~~costs. Interest income on~~the percentage change in loans ~~is accrued over~~from the ~~term~~end of 2022 to the end of the first quarter of 2023, are as follows:

Nonperforming loans ~~primarily using the simple interest method based on the principal balance outstanding. Interest is~~as of ~~not~~March 31, 2023 ~~accrued on loans where 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~~December 31, 2022 were as ~~an adjustment to the related loan yield.~~follows:

~~Our total~~The recorded principal balance of nonperforming 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 components of 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 from the end of~~ ~~2021~~ ~~to the end of the~~ ~~second~~ ~~quarter of~~ ~~2022,~~ ~~are~~was as follows:

~~Nonperforming loans as of~~ ~~June 30, 2022~~ ~~and~~ ~~December 31, 2021~~ ~~were as follows:~~

An age analysis of past due loans is as follows as of ~~June 30, 2022:~~March 31, 2023:

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

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~~Fair value estimates of collateral on ~~nonaccrual loans,~~distressed lending relationships, 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~~ Collateral dependent loans, representing the entire amount of loans on nonaccrual, totaled ~~$0.3~~$7.8 million and $7.7 million as of ~~June 30, 2022,~~March 31, 2023 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~~first~~~~six~~ ~~months of~~ ~~2022.~~ ~~Lost interest income on nonaccrual loans totaled less than $0.1 million and $0.1 million during the~~ ~~second~~ ~~quarter and~~ ~~first~~~~six~~ ~~months of~~ ~~2022,~~ ~~respectively.~~

~~Impaired loans as of~~ December 31, ~~2021,~~2022, ~~and average impaired loans for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2021,~~ ~~were as follows:~~respectively.

~~Impaired commercial loans for which~~ no allocation of the allowance 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 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~~ ~~quarter and~~ ~~first~~~~six~~ ~~months of~~ ~~2021,~~ ~~respectively. NaN~~No interest income was recognized on nonaccrual loans during the ~~second~~first quarter ~~and~~ ~~first~~~~six~~ ~~months~~ of ~~2021.~~2023. ~~Lost interest income on nonaccrual loans totaled less than $0.1 million and $0.1 million during the~~ ~~second~~ ~~quarter and~~ ~~first~~~~six~~ ~~months of~~ ~~2021,~~ ~~respectively.~~

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 primary risk ~~assessment for retail~~elements with respect to commercial loans ~~is primarily based on~~are the ~~type~~financial condition of ~~collateral.~~

~~Credit quality indicators were as follows as~~the borrower, the sufficiency of ~~June 30, 2022:~~

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

~~Retail credit exposure – credit risk profiled by~~ collateral, ~~type:~~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. All commercial loans are graded using the following criteria:

The following table reflects amortized cost basis of loans and year-to-date loan charge-offs as of March 31, 2023 based on year of origination (dollars in thousands):

There were no revolving loans converted to term loans during the firstthree months of 2023.

The following table reflects amortized cost of basis of loans as of December 31, 2022 based on year of origination (dollars in thousands):

There were ~~as follows as of~~no revolving loans converted to term loans during ~~December 31, 2021:~~2022.

Activity in the allowance for credit ~~exposure – credit risk profiled by internal credit risk grades:~~losses during the three months ended March 31, 2023 is as follows (dollars in thousands):

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.

~~The following table reflects loan balances as of~~ ~~June 30, 2022~~ ~~based on year of origination (dollars in thousands):~~

Activity in the allowance for credit losses during the three months ~~and~~ ~~six~~ ~~months~~ ended ~~June 30,~~March 31, 2022 is as follows (dollars in thousands):

	Commercial and industrial			Commercial vacant land, land development and residential construction			Commercial real estate – owner occupied			Commercial real estate – non-owner occupied			Commercial real estate – multi-family and residential rental			1-4 family mortgages			Other consumer loans			Unallocated			Total			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
Beginning balance																												$	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	)		(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			(742	)		106			286			(445	)		194			593			(33	)		141			100
Charge-offs		(171	)		(29	)		0			0			0			(2	)		(18	)		0			(220	)		(170	)		(29	)		0			0			0			(2	)		(4	)		0			(205	)
Recoveries		160			2			58			0			14			368			29			0			631			114			1			32			0			8			127			13			0			295
Ending balance	$	8,608		$	446		$	5,578		$	9,614		$	1,274		$	10,267		$	165		$	22		$	35,974		$	8,413		$	455		$	5,803		$	10,322		$	1,276		$	8,562		$	191		$	131		$	35,153

~~Activity in the allowance for loan losses~~There were no loans modified to borrowers experiencing financial difficulty during the firstthree months ~~and~~ ~~six~~ ~~months ended~~ ~~June 30, 2021~~ ~~and the recorded investments in loans as~~ of ~~December 31, 2021~~ 2023.~~is as follows (dollars in thousands):~~

Loans modified as troubled debt restructurings during the three months ended ~~June 30,~~March 31, 2022 were as follows:

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

Commercial:
Commercial and industrial		2	$	6,573,000	$	6,573,000		0	$	0	$	0
Vacant land, land development and residential construction		0		0		0		0		0		0
Real estate – owner occupied		0		0		0		0		0		0
Real estate – non-owner occupied		0		0		0		0		0		0
Real estate – multi-family and residential rental		0		0		0		0		0		0
Total commercial		2		6,573,000		6,573,000		0		0		0

Retail:
1-4 family mortgages		1		84,000		84,000		2		128,000		128,000
Other consumer loans		0		0		0		0		0		0
Total retail		1		84,000		84,000		2		128,000		128,000

Total loans		3	$	6,657,000	$	6,657,000		2	$	128,000	$	128,000

~~Loans modified as troubled debt restructurings during the~~ ~~six~~ ~~months ended~~ ~~June 30, 2022~~ ~~were as follows:~~

~~Loans modified as troubled debt restructurings during the~~ ~~three~~ ~~months ended~~ ~~June 30, 2021~~ ~~were as follows:~~

~~Loans modified as troubled debt restructurings during the~~ ~~six~~ ~~months ended~~ ~~June 30, 2021~~ ~~were as follows:~~

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,~~March 31, 2022 (amounts as of period end):

							Recorded
					Number of		Principal
	Number of Contracts		Recorded Principal Balance		Contracts		Balance
Commercial:
Commercial and industrial		0	$	0		0	$	0
Vacant land, land development and residential construction		0		0		0		0
Real estate – owner occupied		0		0		0		0
Real estate – non-owner occupied		0		0		0		0
Real estate – multi-family and residential rental		0		0		0		0
Total commercial		0		0		0		0

Retail:
Home equity and other		0		0
1-4 family mortgages		0		0		0		0
Other consumer loans						0		0
Total retail		0		0		0		0

Total		0	$	0
Total loans						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, 2022 (~~~~amounts as of period end):~~

~~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):~~

Activity for loans categorized as troubled debt restructurings during the three months ended ~~June 30,~~March 31, 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	$	2,829,000	$	0	$	89,000		$	143,000		$	90,000		$	4,973,000		$	0	$	10,435,000		$	146,000		$	91,000
Charge-Offs		0		0		0			0			0			0			0		0			0			0
Payments (net)		536,000		0		(2,000	)		(4,000	)		(2,000	)
Payments															(212,000	)		0		(9,677,000	)		(3,000	)		(1,000	)
Transfers to ORE		0		0		0			0			0			0			0		0			0			0
Net Additions/Deletions		6,573,000		0		0			0			0			(1,932,000	)		0		(669,000	)		0			0
Ending Balance	$	9,938,000	$	0	$	87,000		$	139,000		$	88,000		$	2,829,000		$	0	$	89,000		$	143,000		$	90,000

~~Activity for loans categorized as troubled debt restructurings during the~~ ~~six~~ ~~months ended~~ ~~June 30, 2022~~ ~~is as follows:~~

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

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

					March 31,		December 31,
	June 30, 2022		December 31, 2021		2023		2022

Land and improvements	$	13,504,000	$	15,111,000	$	13,050,000	$	13,532,000
Buildings		51,555,000		56,168,000		55,527,000		53,865,000
Furniture and equipment		22,647,000		22,974,000		23,064,000		22,941,000
		87,706,000		94,253,000		91,641,000		90,338,000
Less: accumulated depreciation		36,304,000		36,955,000		40,131,000		38,862,000

Premises and equipment, net	$	51,402,000	$	57,298,000	$	51,510,000	$	51,476,000

Depreciation expense totaled $1.5 million and ~~$1.4 million during the~~ ~~second~~ ~~quarters of~~ ~~2022~~ ~~and~~ ~~2021,~~ ~~respectively. Depreciation expense totaled $3.1~~$1.6 million during the first ~~six~~ ~~months~~quarters of 2023 and 2022, ~~compared to $2.8 million during the~~ ~~first~~~~six~~ ~~months of~~ ~~2021.~~respectively.

We enter into facility leases in the normal course of business. As of ~~June 30, 2022~~ ~~and~~ ~~December~~March 31, ~~2021,~~2023, we were under lease contracts for ~~ten~~eleven of our ~~banking~~branch facilities. The leases ~~had~~have maturity dates ranging from ~~June, 2023~~February, 2024 through December, ~~2026,~~2029, with a weighted average life of ~~2.5 years and 2.8~~2.7 years as of ~~June 30, 2022~~March 31, 2023. ~~and~~ ~~December 31, 2021,~~ ~~respectively.~~ All of our leases have multiple three- to five-year extensions; however, ~~those~~these were not factored in the lease maturities and weighted average lease term as it iswas not reasonably certain we ~~will~~would exercise the ~~options.~~options on the dates we entered into the lease agreements.

Leases are classified as either operating or finance leases at the lease ~~commitment~~commencement 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%~~5.79% as of ~~June 30, 2022~~ ~~and~~ ~~December~~March 31, ~~2021.~~2023.

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~~$3.9 million and $3.5 million as of ~~June 30, 2022,~~March 31, 2023, and ~~$3.6 million as of~~ December 31, ~~2021.~~2022, respectively. As permitted by applicable accounting standards, we have elected not to recognize short-term leases with original terms of twelve months or less on our Consolidated Balance Sheet. Total operating lease expense associated with the leases aggregated ~~$0.2 million during the~~ ~~second~~ ~~quarters of~~ ~~2022~~ ~~and~~ ~~2021,~~ ~~and $0.4~~$0.3 million during the first ~~six~~three months of ~~2022~~2023 and $1.3 million during the full year ~~2021.~~2022.

Future lease payments atwere as follows as of ~~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~~March 31, ~~2021~~ 2023:~~totaled $3.6 million, comprised of $0.8 million in~~ ~~one~~ ~~year, $1.4 million in~~ ~~one~~ 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 Lansing operations, we completed the sale of our Lansing facility on~~ ~~July 14, 2022.~~ ~~For financial statement purposes in this Form~~ 10~~-Q, we transferred from premises and equipment, net to other assets the $2.8 million in net proceeds from the sale and recorded a loss on sale of $0.4 million.~~

Our total deposits at ~~June 30, 2022~~March 31, 2023 totaled ~~$3.87~~$3.60 billion, a decrease of ~~$209~~$115 million, or ~~5.1%~~3.1%, from December 31, ~~2021.~~2022. The components of our outstanding balances at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, and percentage change in deposits from the end of ~~2021~~2022 to the end of the ~~second~~first quarter of ~~2022,~~2023, are as follows:

	June 30, 2022					December 31, 2021					Percent Increase													Percent
	Balance		%			Balance		%			(Decrease)			March 31, 2023					December 31, 2022					Increase
														Balance		%			Balance		%			(Decrease)
Noninterest-bearing demand	$	1,740,432,000		44.9	%	$	1,677,952,000		41.1	%		3.7	%

Noninterest-bearing checking														$	1,376,782,000		38.3	%	$	1,604,750,000		43.2	%		(14.2	%)
Interest-bearing checking		481,016,000		12.4			538,838,000		13.2			(10.7	)		576,678,000		16.0			575,028,000		15.5			0.3
Money market		889,035,000		23.0			1,040,176,000		25.5			(14.5	)		842,557,000		23.4			776,723,000		20.9			8.5
Savings		409,505,000		10.6			394,330,000		9.7			3.8			340,178,000		9.5			381,602,000		10.3			(10.9	)
Time, under $100,000		120,930,000		3.1			132,776,000		3.2			(8.9	)		132,482,000		3.7			113,099,000		3.0			17.1
Time, $100,000 and over		232,975,000		6.0			275,208,000		6.7			(15.3	)		329,341,000		9.1			261,609,000		7.1			25.9
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	%)	$	3,598,018,000		100.0	%	$	3,712,811,000		100.0	%		(3.1	%)

~~Total time deposits of more than~~ ~~$250,000~~ ~~totaled $152 million and $207 million at~~ ~~June 30, 2022~~ ~~and~~ ~~December 31, 2021,~~ ~~respectively.~~

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

							Three Months Ended			Twelve Months Ended
	Six Months Ended June 30, 2022			Twelve Months Ended December 31, 2021			March 31, 2023			December 31, 2022

Outstanding balance at end of period	$	203,339,000		$	197,463,000		$	227,453,000		$	194,340,000
Average interest rate at end of period		0.10	%		0.11	%		1.44	%		0.75	%

Average daily balance during the period	$	196,327,000		$	158,855,000		$	195,574,000		$	200,499,000
Average interest rate during the period		0.10	%		0.11	%		0.84	%		0.15	%

Maximum daily balance during the period	$	224,345,000		$	209,093,000		$	255,180,000		$	235,577,000

Repurchase agreements ~~generally~~ have ~~original~~ maturities of ~~less than~~ one ~~year.~~business day. Repurchase agreements are treated as financings, and the obligations to repurchase securities sold are reflected as ~~liabilities. Securities involved with the~~liabilities on our Consolidated Balance Sheets. Repurchase agreements are ~~recorded as assets~~secured by U.S. Government agency securities with an aggregate fair value equal to the aggregate outstanding balance of the repurchase agreements. The securities, which are included in securities available for sale on our ~~bank and~~Consolidated Balance Sheets, 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.~~

Federal Home Loan Bank of Indianapolis (“FHLBI”) bullet advances totaled ~~$334~~$350 million at ~~June 30, 2022,~~March 31, 2023, and were ~~expected~~scheduled to mature at varying dates from ~~July~~April 2023 through March 2028, with fixed rates of interest from 0.55% to 4.37% and averaging 2.31%. FHLBI bullet advances totaled $280 million at December 31, 2022,and were scheduled to mature at varying dates from January 2023 through June 2027, with fixed rates of interest from 0.55% to ~~3.18%~~3.13% and averaging ~~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%~~1.84%.

Maturities of FHLBI bullet advances as of ~~June 30, 2022~~March 31, 2023 were as follows:

2022	$	54,000,000
2023		80,000,000	$	70,000,000
2024		80,000,000		80,000,000
2025		50,000,000		50,000,000
2026		30,000,000		50,000,000
2027				70,000,000
Thereafter		40,000,000		30,000,000

FHLBI amortizing advances totaled $27.9 million as of March 31, 2023, with an average rate of 2.52% and with final maturities in 2042. FHLBI amortizing advances total $28.3 million as of ~~June 30,~~December 31, 2022, with an average rate of 2.52%~~. We had~~ no ~~FHLBI amortizing advances outstanding as of~~ and with final maturities in ~~December 31, 2021.~~ 2042.FHLBI amortizing advances are obtained periodically to assist in managing interest rate risk associated with certain longer-term fixed rate commercial loans, with annual principal payments that closely align with the scheduled amortization of the underlying commercial loans.

Scheduled principal payments of FHLBI amortizing advances as of March 31, 2023 were as follows:

2022	$	0
2023		353,000	$	0
2024		826,000		826,000
2025		862,000		862,000
2026		899,000		899,000
2027				938,000
Thereafter		25,323,000		24,385,000

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, 2022~~March 31, 2023 totaled ~~$932~~$665 million, with remaining availability based on collateral ~~equaling $564~~of $281 million.

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

These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized, if any, in the balance sheet. Our ~~bank’s~~ maximum exposure to loan loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. ~~Our bank uses~~We use the same credit policies in making commitments and conditional obligations as ~~it does~~we do for on-balance sheet instruments. Collateral, such as accounts receivable, securities, inventory, and property and equipment, is generally obtained based on ~~our~~management’s credit assessment of the borrower.

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~~other noninterest expense on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. 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.

~~We have determined that our commercial-related lending commitments are unconditionally cancellable. Additionally, the vast majority of unfunded~~For commercial ~~loan commitments consist of revolving~~ lines of credit, wherein the aggregate amounts outstanding and 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,~~card average outstanding balances, ~~as a percent of total available credit have remained relatively steady over the past several years. We~~we determined allowance requirements ~~for these credit types~~ by calculating the difference between the average percent outstanding of the funded commitments over the past several years to actual percent outstanding asat the end of ~~June 30, 2022~~ the period and applying the respective expected loss allocation factors to the difference as this difference represents the average of unfunded commitments we expect to eventually be drawn upon. The calculated allowance aggregated $0.2 million and $0.1 million as of March 31, 2023 and December 31, 2022, respectively. We do not reserve for residential mortgage construction loans, as the ~~retail lines~~loans are for one year or less and draws are governed by the receipt and satisfactory review of contractor and subcontractor sworn statements, lien waivers and title insurance company endorsements. Letters of credit are rarely drawn.

At March 31, 2023, and ~~credit cards as of~~ ~~June 30,~~December 31, 2022, ~~was $0.2 million.~~the rates on existing off-balance sheet instruments were substantially equivalent to current market rates, considering the underlying credit standing of the counterparties.

A summary of the contractual amounts of our financial instruments with off-balance sheet risk at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 is as follows:

					March 31,		December 31,
	June 30, 2022		December 31, 2021		2023		2022

Commercial unused lines of credit	$	1,158,512,000	$	1,098,951,000	$	1,359,164,000	$	1,283,703,000
Unused lines of credit secured by 1 – 4 family residential properties		66,431,000		64,313,000
Unused lines of credit secured by 1–4 family residential properties						72,014,000		71,972,000
Credit card unused lines of credit		106,939,000		92,146,000		127,863,000		123,687,000
Other consumer unused lines of credit		91,987,000		64,876,000		62,298,000		75,747,000
Commitments to make loans		252,579,000		212,476,000		347,062,000		329,646,000
Standby letters of credit		35,005,000		33,109,000		22,720,000		23,539,000
	$	1,711,453,000	$	1,565,871,000	$	1,991,121,000	$	1,908,294,000

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

The fair values of derivative instruments as of ~~June 30, 2022~~March 31, 2023, 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	$	340,692,000	Other Assets	$	17,069,000	$	470,678,000	Other Assets	$	22,871,000

Derivative Liabilities
Interest rate swaps		340,692,000	Other Liabilities		17,196,000		470,678,000	Other Liabilities		23,254,000

The effect of interest rate swaps that are not designated as hedging instruments resulted in ~~noninterest income~~expense of ~~$0.1~~$0.2 million during the first ~~six~~three months of ~~2022.~~2023

that was recorded in other noninterest expense on our Consolidated Statements of Income. The 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 ~~$17.2~~$23.3 million as of ~~June 30, 2022.~~March 31, 2023. We have master netting arrangements with our correspondent banks that allow us to net receivables and payables. The netting agreement also allows us to net related cash collateral received and transferred up to the fair value exposure amount. We have elected to not offset these transactions on the Consolidated Balance Sheets. As of March 31, 2023, the gross amount of derivative assets subject to master netting agreements presented on the Consolidated Balance Sheets was $19.6 million, while cash collateral reflecting cash requirements from our counterparties to us totaled $20.8 million, providing for an over-collateralized position on the Consolidated Balance Sheets of $1.2 million. As of March 31, 2023, the gross amount of derivative liabilities subject to master netting agreements presented on the Consolidated Balance Sheets was $3.3 million, while cash collateral reflecting cash requirements from us to our counterparties totaled $3.0 million, and the net amount of derivative liabilities not offset on the Consolidated Balance Sheets was $0.3 million. Cash collateral ~~totaling $18.0 million was provided by the counterparty correspondent banks as~~amounts, which are based on daily fair value calculations, are adjusted daily if fair value changes exceed an aggregate of ~~June 30, 2022.~~$250,000.

Interest rate swaps entered into with commercial loan customers had notional amounts aggregating ~~$341~~$471 million as of ~~June 30, 2022.~~March 31, 2023. Associated credit exposure is generally mitigated by securing the interest rates swaps with the underlying collateral of the loan ~~instrument that has been hedged.~~instruments.

The fair values of derivative instruments as of December 31, ~~2021~~2022, 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

279,419,000

Other Assets

4,609,000

401,572,000

Other Assets

25,697,000

Derivative Liabilities

Interest rate swaps

279,419,000

Other Liabilities

4,857,000

401,572,000

Other Liabilities

25,900,000

The effect of interest rate swaps that are not designated as hedging instruments resulted in ~~noninterest expense~~income of ~~$0.2~~less than $0.1 million during the year-ended December 31, ~~2021.~~2022

the gross amount of derivative assets subject to master netting agreements presented on the Consolidated Balance Sheets was $25.3 million, while cash collateral reflecting cash requirements from our counterparties to us totaled $25.2 million, and the net amount of derivative assets not offset in the Consolidated Balance Sheets was $0.1 million. As of December 31, 2022, the gross amount of derivative liabilities subject to master netting agreements presented on the Consolidated Balance Sheets was $0.4 million, while cash collateral reflecting cash requirements from us to our counterparties totaled $0.4 million, and the net amount of derivative liabilities not offset on the Consolidated Balance Sheets was $0. Cash collateral amounts, which are based on daily fair value calculations, are adjusted daily if fair value changes exceed an aggregate of $250,000.Interest rate swaps entered into with commercial loan customers had notional amounts aggregating ~~$279~~$402 million as of December 31, ~~2021.~~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.~~instruments.

The carrying amounts, estimated fair values and level within the fair value hierarchy of financial instruments were as follows as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 (dollars in thousands):

	Level in	June 30, 2022				December 31, 2021				Level in	March 31, 2023				December 31, 2022
	Fair Value	Carrying		Fair		Carrying		Fair		Fair Value	Carrying		Fair		Carrying		Fair
	Hierarchy	Values		Values		Values		Values		Hierarchy	Values		Values		Values		Values
Financial assets:
Cash	Level 1	$	18,692	$	18,692	$	17,872	$	17,872
Cash equivalents	Level 1		460,413		460,413		957,288		957,288
Cash and cash equivalents										Level 1	$	57,938	$	57,938	$	96,772	$	96,772
Securities available for sale	(1)		603,638		603,638		592,743		592,743	(1)		619,973		619,973		602,936		602,936
FHLBI stock	(2)		17,721		17,721		18,002		18,002	(2)		17,721		17,721		17,721		17,721
Loans, net	Level 3		3,687,826		3,632,452		3,418,096		3,498,345	Level 3		3,922,651		3,837,260		3,874,373		3,800,042
Mortgage loans held for sale	Level 2		12,964		13,283		16,117		16,707	Level 2		3,821		3,932		3,565		3,643
Mortgage servicing rights	Level 2		12,286		16,547		12,248		15,445	Level 3		11,402		18,726		11,837		17,727
Accrued interest receivable	Level 2		10,884		10,884		9,311		9,311	Level 2		17,424		17,424		15,476		15,476
Interest rate swaps	Level 2		17,069		17,069		4,609		4,609	Level 2		22,871		22,871		25,697		25,697

Financial liabilities:
Deposits	Level 2		3,873,893		3,573,291		4,083,193		4,028,249	Level 2		3,598,018		3,330,349		3,712,811		3,379,403
Repurchase agreements	Level 2		203,339		203,339		197,463		197,463	Level 2		227,453		227,453		194,340		194,340
FHLBI advances	Level 2		362,263		347,018		374,000		384,927	Level 2		377,910		360,723		308,263		292,044
Subordinated debentures	Level 2		48,585		52,820		48,244		48,284	Level 2		49,130		49,119		48,958		49,531
Subordinated notes	Level 2		88,457		83,679		73,646		73,646	Level 2		88,714		75,911		88,628		75,024
Accrued interest payable	Level 2		2,834		2,834		1,393		1,393	Level 2		3,486		3,486		3,223		3,223
Interest rate swaps	Level 2		17,196		17,196		4,857		4,857	Level 2		23,254		23,254		25,900		25,900

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 values of interest rate swaps are based on discounted cash flows using forecasted yield curves, along with insignificant unobservable inputs, such as borrower credit spreads. The fair value of other off-balance sheet items is estimated to be nominal.

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.

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,~~debt obligations, 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 0no such impairment as of ~~June 30, 2022~~March 31, 2023, or December 31, ~~2021.~~2022. We have 0no Level 1 securities available for sale.

Derivatives. We measure fair value utilizing models that use primarily market observable inputs, such as forecasted yield curves. Insignificant unobservable inputs, such as borrower credit spreads, are also utilized.

Mortgage loans held for sale. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, 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, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, we determined the fair value of our mortgage loans held for sale to be ~~$13.3~~$3.9 million and ~~$16.7~~$3.6 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~~significant borrower distress and on an ongoing basis until recovery or charge-off. The fair values of ~~impaired~~distressed 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.

The balances of assets and liabilities measured at fair value on a recurring basis as of ~~June 30, 2022~~March 31, 2023 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	$	407,335,000	$	0	$	407,335,000	$	0	$	396,220,000	$	0	$	396,220,000	$	0
Mortgage-backed securities		36,364,000		0		36,364,000		0		31,590,000		0		31,590,000		0
Municipal general obligation bonds		137,673,000		0		137,050,000		623,000		163,071,000		0		162,493,000		578,000
Municipal revenue bonds		21,766,000		0		21,766,000		0		28,592,000		0		28,592,000		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		22,871,000		0		22,871,000		0
Total	$	620,707,000	$	0	$	620,084,000	$	623,000
Total assets									$	642,844,000	$	0	$	642,266,000	$	578,000

Interest rate swaps										23,254,000		0		23,254,000		0
Total liabilities									$	23,254,000	$	0	$	23,254,000	$	0

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

There were no sales, purchases or transfers in or out of Level 1,3 ~~Level~~during the 2first quarter of 2023.

The balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 are as follows:

There were no sales, purchases or transfers in or out of Level 3 during ~~2021.~~2022. The $0.1 million reduction in Level 3 municipal general obligation bonds during 2022 reflects the scheduled maturities of such bonds.

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of ~~June 30, 2022~~March 31, 2023 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)				Quoted
											Prices in
Loans	$	7,116,000	$	0	$	0	$	7,116,000
											Active		Significant
											Markets for		Other		Significant
											Identical		Observable		Unobservable
											Assets		Inputs		Inputs
									Total		(Level 1)		(Level 2)		(Level 3)

Collateral Dependent Loans									$	4,456,000	$	0	$	0	$	4,456,000
Foreclosed assets		0		0		0		0		661,000		0		0		661,000
Total	$	7,116,000	$	0	$	0	$	7,116,000	$	5,117,000	$	0	$	0	$	5,117,000

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of December 31, ~~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)				Quoted
											Prices
Impaired Loans	$	3,807,000	$	0	$	0	$	3,807,000
											in Active		Significant
											Markets for		Other		Significant
											Identical		Observable		Unobservable
											Assets		Inputs		Inputs
									Total		(Level 1)		(Level 2)		(Level 3)

Collateral dependent loans									$	5,290,000	$	0	$	0	$	5,290,000
Foreclosed assets		0		0		0		0		0		0		0		0
Total	$	3,807,000	$	0	$	0	$	3,807,000	$	5,290,000	$	0	$	0	$	5,290,000

The carrying values are based on the estimated value of the property or other assets. Fair value estimates of collateral on ~~impaired~~nonperforming 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~~We generally assign a discount factor range of 25% to 35% for commercial real estate dependent loans and foreclosed assets, ~~we generally assign~~and a ~~15% to 25%~~ discount factor ~~for commercial-related properties, and a~~range of 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.

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~~the 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. AtAs of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, 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, 2022~~March 31, 2023 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:~~

Our actual capital levels (dollars in thousands) and the minimum levels required to be categorized as adequately and well capitalized were:

Our consolidated capital levels as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 include ~~$46.5~~$47.1 million and ~~$46.2~~$46.9 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, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, all ~~$46.5~~$47.1 million and ~~$46.2~~$46.9 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, 2022,~~March 31, 2023, our bank ~~met~~meets all capital adequacy requirements under the BASEL III capital ~~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 ~~13, 2022,~~12, 2023, our Board of Directors declared a cash dividend on our common stock in the amount of ~~$0.31~~$0.33 per share that was paid on March ~~16, 2022~~15, 2023 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.~~2023.

As of ~~June 30, 2022,~~March 31, 2023, we had the ability to repurchase up to $6.8 million in common stock shares from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations as part of a $20.0 million common stock repurchase program announced in May 2021. ~~NaN~~No shares were repurchased during the first ~~six~~ ~~months~~quarter of ~~2022.~~2023. Historically, stock 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. The actual timing, number and value of shares repurchased will be determined by us in our discretion and will depend on a number of factors, including the stock price, capital position, financial performance, general market and economic conditions, alternative uses of capital and applicable legal requirements.

On April 13, 2023, our Board of Directors declared a cash dividend on our common stock in the amount of $0.33 per share that will be paid on June 14, 2023, to shareholders of record as of June 2, 2023.

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

Future Factors include, among others, adverse changes in interest rates and interest rate relationships; increasing rates of inflation and slower growth ~~rates;~~rates or recession; significant declines in the value of commercial real estate; market volatility; demand for products and services; climate impacts; labor markets; the degree of competition by traditional and non-traditional financial ~~service~~services companies; changes in banking regulation or actions by bank regulators; changes in tax ~~laws;~~laws and other laws and regulations applicable to us; changes in prices, levies, and assessments; the impact of technological advances; potential cyber-attacks, information security breaches, and other criminal ~~activities on our computer systems;~~activities; litigation liabilities; governmental and regulatory policy changes; 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~~transition from Libor to SOFR; ~~direct and indirect climate change matters;~~ changes in the national and local ~~economies, including the ongoing disruption to financial markets and other economic activity caused by the Coronavirus Pandemic and~~economies; unstable political and economic environments; disease outbreaks, such as the COVID-19 pandemic or similar public health threats, and measures implemented to combat them; and other risk factors, including those described in our annual report on Form 10-K for the year ended December 31, ~~2021.~~2022. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a forward-looking statement.

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., at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 and the results of operations for the three months ended March 31, 2023 and ~~six months ended June 30, 2022 and June 30, 2021.~~March 31, 2022. 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.

Accounting principles generally accepted in the United States of America (“GAAP”) are complex and 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,~~estimates, see Note 1 of the Notes to our Consolidated Financial Statements included in our Form 10-K for the fiscal year ended December 31, ~~2021~~2022 (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.

Allowance for Credit Losses (“Allowance”): The allowance is maintained at a level we believe is adequate to absorb 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. Credit losses are charged against the allowance when we believe the 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. The allowance is increased through a provision charged to operating expense. Uncollectible loans are charged-off through the allowance, while recoveries of loans previously charged-off are added to the 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~~changed 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~~This standard ~~will replace~~replaced the ~~current~~ “incurred loss” approach with an “expected loss” model. ~~The new model, referred~~Referred to as the current expected credit loss (“CECL”) model, this standard applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. The standard also ~~expands the~~expanded 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 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 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, 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.

~~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 Available for Sale~~: Debt securities available for sale consist of bonds 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. Debt securities classified as available for sale are reported at their fair value. 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 an 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 compared to 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 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 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: 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 loan prepayment speeds, the remaining life of the mortgage loan pool, delinquency rates, our cost to service loans, and other factors to determine the cash flow that we will receive from 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.

Goodwill: ~~GAAP requires~~Accounting rules require us to determine the fair value of all of the assets and liabilities of an acquired entity, and to record their fair value on the date of acquisition. We employ a variety of means in ~~determination of the~~determining fair value, including the use of discounted cash flow analysis, market comparisons and projected future revenue streams. For ~~certain~~those items ~~that~~for which we ~~believe~~conclude that we have the appropriate expertise to determine ~~the~~ fair value, we may choose to use our own calculation of ~~the~~fair value. In other cases, where the fair value is not ~~easily~~readily determined, ~~we consult~~consultation with outside parties is used to determine ~~the~~ fair ~~value of the asset or liability.~~value. Once valuations have been ~~adjusted,~~determined, the net difference between the price paid for the acquired ~~company~~entity and the fair value of ~~its~~the 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~~with any such impairment is recognized in the period identified. A more frequent assessment is performed if ~~conditions~~there are material changes in the market place or ~~changes in~~within the ~~company’s~~ organizational ~~structure occur.~~structure.

There remains a significant amount of stress and uncertainty across national and global economies due to the pandemic of coronavirus disease 2019 (“Covid-19”) caused by severe acute respiratory syndrome coronavirus 2 (the “Coronavirus Pandemic”). 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, 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 reduce net income.

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

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, 2022, we recorded forgiveness transactions on all but twelve loans aggregating $0.7 million. Net loan origination fees of less than $0.1 million were recorded during the first six months of 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, 2022, we recorded forgiveness transactions on all but nine loans aggregating $2.2 million. Net loan origination fees of $0.9 million were recorded during the first six months of 2022.

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.

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. 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.

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 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. We adopted the CECL methodology effective January 1, 2022.

We reported net income of ~~$11.7~~$21.0 million, or ~~$0.74~~$1.31 per diluted share, for the ~~second~~first quarter of ~~2022,~~2023, compared with net income of ~~$18.1~~$11.5 million, or ~~$1.12 per diluted share, during the second quarter of 2021. Net income for the first six months of 2022 totaled $23.2 million, or $1.47 per diluted share, compared to $32.3 million, or $2.00~~$0.73 per diluted share, during the first ~~six months~~quarter of ~~2021. Higher~~2022. The improved operating results were in large part driven by higher net interest income, stemming from an ~~improving~~improved net interest margin and ongoing ~~strong~~robust loan growth, ~~combined with~~and 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.providing for limited provision expense.

Commercial loans increased ~~$121~~$8.6 million during the first ~~six months~~quarter of ~~2022, reflecting the net impact of growth in core commercial loans and payment activities under the PPP. Core commercial loans increased $159 million, or almost 11% on~~2023, providing for an annualized ~~basis, while PPP payment activities aggregated $37.2~~growth rate of about 1%. Full payoffs and partial paydowns of certain larger commercial loan relationships, primarily reflecting customers selling businesses and assets and using excess cash flows generated within their operations to make unscheduled principal payments and line of credit reductions, totaled about $65 million during the first ~~six months~~quarter of ~~2022. Core~~2023. Non-owner occupied commercial ~~and industrial~~real estate (“CRE”) loans increased ~~$87.4~~$17.5 million, multi-family and residential rental property loans grew ~~$48.0~~$7.4 million, ~~owner-occupied commercial real estate (“CRE”) loans were up $32.8 million, and~~ vacant land, land development and residential construction loans increased ~~$14.6~~$4.4 million, ~~while non-owner~~commercial and industrial loans declined $11.6 million and owner occupied CRE loans were down ~~$24.3~~$9.0 million. As a ~~percentage~~percent of total commercial loans, commercial and industrial loans ~~(excluding PPP loans)~~ and owner occupied CRE loans combined equaled ~~58.1%~~57.4% as of ~~June 30, 2022,~~March 31, 2023, compared to ~~57.1%~~58.2% at December 31, ~~2021.~~2022. The new commercial loan pipeline remains strong, and ~~at June 30, 2022,~~as of March 31, 2023, we had ~~$175~~$285 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~~$40.1 million during the first ~~six months~~quarter of ~~2022,~~2023, representing aan annualized growth rate of ~~over 66% on an annualized basis.~~approximately 23%. With ~~the increase in~~increased residential mortgage ~~loan~~loans rates during ~~the first half of~~ 2022 and into 2023, 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.~~loans. Generally, we sell fixed rate residential mortgage loans to third-party investors, while we ~~maintain~~retain adjustable rate residential mortgage loans on our balance sheet. During the first ~~six months~~quarter of ~~2022,~~2023, approximately ~~64%~~35% of our residential mortgage loan production was comprised of ~~adjustable~~longer-term fixed rate loans, compared to a similar level during 2022 but about ~~30% during the first six months of~~68% in 2021. The shift in product mix impacts the timing of revenue recognition; it takes an estimated 24 months for the amount of net interest income earned on a residential mortgage loan ~~that is~~ retained on our balance sheet to approximate the amount of ~~the~~ immediately recorded gain on sale of a residential mortgage loan that has been sold to a third-party investor.

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling only 0.20% of total loans as of March 31, 2023. Accruing loans past due 30 to 89 days remain very low, and foreclosed properties excluding the former branch facility totaled less than $0.1 million as of March 31, 2023. Gross loan charge-offs totaled $0.1 million during the first quarter of 2023, while recoveries of prior period loan charge-offs also totaled $0.1 million.

We recorded a provision expense of $0.6 million during the first quarter of 2023, compared to $0.1 million during the prior-year first quarter. The provision expense recorded during both periods mainly reflected allocations necessitated by net loan growth; nominal loan charge-offs and continued strong loan quality metrics during the periods in large part mitigated additional reserves associated with loan growth. We did not adjust any qualitative reserve factors during the first quarter of 2023, and the impact of the updated economic forecast was less than $0.1 million.

Total deposits decreased $115 million during the first three months of 2023, providing for an ~~investor.~~annualized reduction rate of approximately 12%. The reduction primarily reflected a customary level of customers’ tax and bonus payments and partnership distributions, as well as transfers to the repurchase agreement (“sweep account”) product. Wholesale funds, comprised of Federal Home Loan Bank of Indianapolis (“FHLBI”) advances, totaled $378 million, or about 9% of total funds, as of March 31, 2023, compared to $308 million, or about 7% of total funds, at December 31, 2022.

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling only 0.05% of total loans as of June 30, 2022. Accruing loans past due 30 to 89 days remain very low, and we had no foreclosed properties as of June 30, 2022. Gross loan charge-offs totaled less than $0.1Net interest income increased $17.5 million during the ~~second~~first quarter of ~~2022, and aggregated $0.2 million for~~2023 compared to the first six months of the year, while recoveries of prior period loan charge-offs equaled $0.3 million and $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 0.02% during the second quarter and first six months of 2022, respectively.

We recorded provisions for credit losses of $0.5 million and $0.6 million during the second quarter and first six months of 2022, respectively, compared to negative provisions for loan losses of $3.1 million and $2.8 million during the respective time periods in 2021. The provision expense recorded during the second quarter of ~~2022 mainly reflected allocations necessitated by net~~2022. Interest income was up $24.6 million, while interest expense increased $7.1 million. Interest income on loans increased significantly quarter-over-quarter, reflecting the increased interest rate environment and strong commercial and residential mortgage loan growth over the past twelve months. Our yield on loans was 5.90% during the first quarter of 2023, compared to 3.87% during the first quarter of 2022. We also recorded growth in interest income on securities, reflecting portfolio growth and the higher interest rate environment. Interest expense on deposits increased ~~specific reserves~~due to the increased interest rate environment and enhanced competition for deposits. We also recorded higher interest costs on ~~certain problem commercial loans, and a higher reserve on residential mortgage loans stemming from a projected~~borrowed funds, in large part reflecting increased ~~average life~~costs of the portfolio, which were not fully mitigated by the combined impact of a reduced Covid-19 environmental allocation, net loan recoveries and continued strong loan quality metrics. Our provision expenseour floating rate subordinated debentures.

Noninterest income totaled ~~$0.1~~$7.0 million during the first quarter of 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 the 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.

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 2022, the average balance of these funds equaled $657 million, or 13.6% of average earning assets,2023, compared to $606 million, or 13.8% of average earning assets, during the first six months of 2021; these levels are substantially higher than our typical average balance of $75 million, or approximately 2% of average earning assets. The elevated levels during 2021 and through the first half of 2022 primarily reflect increased local deposits stemming from Covid-19-related federal government stimulus payments and reduced business and consumer investing and spending, and have had a significant negative impact on our net interest margin.

~~Total deposits decreased $209~~$9.3 million during the first ~~six months~~quarter 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~~lower level of ~~local deposits~~noninterest income primarily ~~reflected a single customer’s anticipated withdrawal of a majority of funds that were obtained~~stemmed 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. 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 an increasing interest rate environment. Interest expense was $0.3 million and $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 January 2022.

~~Noninterest income~~ decreased ~~$6.8 million and $11.0 million during the second quarter and first six months of 2022, respectively, compared to the respective time periods in 2021. Mortgage~~mortgage banking income, was $5.7 million and $11.3 million lower during the second quarter and first six months of 2022 when compared to the same time periods in 2021, in large part reflecting increased 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 and interest rate swap income, which more than offset growth in credit and debit card income and payroll ~~processing. Combined, we recorded growth~~servicing fees. Higher residential mortgage loan rates negatively affected mortgage banking income during the first quarter of ~~approximately 16% when comparing~~2023. The decline in service charge income reflected increased earnings credit rates in response to the ~~second quarter and first six months~~higher interest rate environment, while the decrease in interest rate swap income mainly reflected a lower volume of ~~2022 with the respective time periods in 2021.~~transactions.

Noninterest expense ~~increased $0.8 million and $1.4~~totaled $28.6 million during the ~~second~~first quarter ~~and~~of 2023, compared to $25.7 million during the same time period in 2022. Overhead costs during the first ~~six~~three months of ~~2022, respectively, compared~~2023 included a $0.4 million write-down of a former branch facility that is under contract to sell. The higher level of noninterest expense primarily resulted from increased compensation costs, including a $1.4 million bonus accrual; no bonus accrual was recorded during the ~~respective time periods in 2021. During the second~~first quarter of ~~2022, we contributed $0.5 million to The Mercantile Bank Foundation. Excluding~~2022. Lower residential mortgage lender commissions mitigated the ~~charitable contribution, overhead costs were relatively unchanged during~~impact of merit pay increases, market adjustments and promotions over the ~~2022 periods when compared to the 2021 periods.~~past twelve months.

Our total assets ~~decreased $199~~increased $23.3 million during the first ~~six months~~quarter of ~~2022,~~2023, and totaled ~~$5.06~~$4.90 billion as of ~~June 30, 2022.~~March 31, 2023. Total loans increased ~~$270~~$48.9 million and securities available for sale ~~were up $10.9~~grew $17.0 million, while interest-earning deposits declined ~~$526~~$24.1 million. Total deposits decreased ~~$209 million.~~$115 million, while FHLBI advances increased $69.6 million and sweep accounts grew $33.1 million during the first three months of 2023.

Commercial loans increased ~~$121~~$8.6 million during the first ~~six months~~quarter of ~~2022, reflecting the net impact of growth in core commercial loans and payment activities under the PPP. Core commercial loans increased $159 million, or almost 11% on~~2023, providing for an annualized ~~basis, while PPP payment activities aggregated $37.2~~growth rate of about 1%. Full payoffs and partial paydowns of certain larger commercial loan relationships, primarily reflecting customers selling businesses and assets and using excess cash flows generated within their operations to make unscheduled principal payments and line of credit reductions, totaled about $65 million during the first ~~six months~~quarter of ~~2022. Core commercial and industrial~~2023. Non-owner occupied CRE loans increased ~~$87.4~~$17.5 million, multi-family and residential rental property loans grew ~~$48.0~~$7.4 million, ~~owner-occupied CRE loans were up $32.8 million, and~~ vacant land, land development and residential construction loans increased ~~$14.6~~$4.4 million, ~~while non-owner~~commercial and industrial loans declined $11.6 million and owner occupied CRE loans were down ~~$24.3~~$9.0 million. As a ~~percentage~~percent of total commercial loans, commercial and industrial loans ~~(excluding PPP loans)~~ and owner occupied CRE loans combined equaled ~~58.1%~~57.4% as of ~~June 30, 2022,~~March 31, 2023, compared to ~~57.1%~~58.2% at December 31, ~~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~~2022. We believe our loan portfolio ~~comprised 85.4% of total loans.~~remains well diversified.

As of ~~June 30, 2022, availability~~March 31, 2023, we had $285 million in unfunded loan commitments on ~~existing~~commercial construction and development loans ~~totaled $175 million, with most of those funds expected~~that are in the construction phase which we expect to be drawn over the next 12 to 18 months. Our current pipeline reports indicate continued strong commercial loan funding opportunities in future periods, including approximately ~~$253~~$347 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 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%~~41% 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 $148 million during the first six months of 2022, totaling $590 million, or 15.9% of total loans, as of June 30, 2022. The increasing interest rate environment has had a significant impact on our residential mortgage banking operations, especially in regards2023, similar to the ~~volume~~42% average during all of refinance activity and the borrower selection of 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 2022, compared to $482 million during the same time period in 2021, a decline of $123 million, or over 25%. Refinance volume declined $156 million; however, home purchase activity increased $32.8 million. Residential mortgage loans originated for sale generally 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.

Home equity lines of credit and other consumer-related loans increased $1.3 million during the first six months of 2022, and at June 30, 2022 totaled $61.7 million, or 1.7% of total loans. Home equity lines of credit and other consumer-related loans comprised 1.8% of total loans as of December 31, 2021. We expect the dollar volume of this loan portfolio segment to remain relatively stable in future periods.2022.

Residential mortgage loans, excluding home equity lines of credit, increased $40.1 million during the first three months of 2023, representing an annualized growth rate of approximately 23%. With increased residential mortgage loans rates during 2022 and into 2023, we have witnessed a shift in borrowers primarily selecting adjustable rate residential mortgage loans compared to fixed rate residential mortgage loans. Generally, we sell fixed rate residential mortgage loans to third-party investors, while we retain adjustable rate residential mortgage loans on our balance sheet. During the first quarter of 2023, approximately 35% of our residential mortgage loan production was comprised of longer-term fixed rate loans, compared to a similar level during 2022 but about 68% in 2021. The shift in product mix impacts the timing of revenue recognition; it takes an estimated 24 months for the amount of net interest income earned on a residential mortgage loan retained on our balance sheet to approximate the amount of immediately recorded gain on sale of a residential mortgage loan that has been sold to a third-party investor

Home equity lines of credit declined $0.1 million, while other consumer-related loans increased $0.3 million during the first quarter of 2023, and at March 31, 2023 totaled $37.3 million and $30.1 million, respectively, or an aggregate 1.7% of total loans. These loan segments equated to 1.8% of total loans as of December 31, 2022. We expect both loan portfolio segments to remain relatively steady in dollar amount but decline as a percent of total loans in future periods as commercial and residential mortgage loan portfolios grow.

	6/30/22		3/31/22		12/31/21		9/30/21		6/30/21		3/31/23		12/31/22		9/30/22		6/30/22		3/31/22
Commercial:
Commercial & Industrial (1)	$	1,187,650,000	$	1,153,814,000	$	1,137,419,000	$	1,074,394,000	$	1,103,807,000	$	1,173,440,000	$	1,185,083,000	$	1,213,630,000	$	1,187,650,000	$	1,153,814,000
Land Development & Construction		57,808,000		52,693,000		43,239,000		38,380,000		43,111,000		66,233,000		61,873,000		60,970,000		57,808,000		52,693,000
Owner Occupied Commercial RE		598,593,000		582,732,000		565,758,000		551,762,000		550,504,000		630,187,000		639,192,000		643,577,000		598,593,000		582,732,000
Non-Owner Occupied Commercial RE		1,003,118,000		1,007,361,000		1,027,415,000		998,697,000		950,993,000		1,051,221,000		1,033,734,000		1,002,638,000		1,003,118,000		1,007,361,000
Multi-Family & Residential Rental		224,591,000		207,962,000		176,593,000		179,126,000		161,894,000		219,339,000		211,948,000		224,248,000		224,591,000		207,962,000
Total Commercial		3,071,760,000		3,004,562,000		2,950,424,000		2,842,359,000		2,810,309,000		3,140,420,000		3,131,830,000		3,145,063,000		3,071,760,000		3,004,562,000

Retail (2):
Retail:
1-4 Family Mortgages		623,599,000		522,556,000		442,547,000		411,618,000		380,292,000		795,007,000		755,036,000		705,441,000		623,599,000		522,556,000
Other Consumer Loans		28,441,000		28,672,000		60,488,000		59,732,000		58,240,000		30,101,000		29,753,000		30,454,000		28,441,000		28,672,000
Total Retail		652,040,000		551,228,000		503,035,000		471,350,000		438,532,000		825,108,000		784,789,000		735,895,000		652,040,000		551,228,000

Total	$	3,723,800,000	$	3,555,790,000	$	3,453,459,000	$	3,313,709,000	$	3,248,841,000	$	3,965,528,000	$	3,916,619,000	$	3,880,958,000	$	3,723,800,000	$	3,555,790,000

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.~~conditions or other factors. Identified problem loans, which exhibit characteristics (financial or otherwise) that could cause the loans to become nonperforming or require ~~restructuring~~modification 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~~nonperforming 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 loans, comprised of nonaccrual loans and loans past due 90 days or more and accruing interest, totaled $1.8 million (0.1% of total loans) as of June 30, 2022, compared to $2.5 million (0.1% of total loans) as of December 31, 2021. Given the low 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.

Nonperforming loans totaled $7.8 million, or 0.2% of total loans, as of March 31, 2023, compared to $7.7 million, or 0.2% of total loans, as of December 31, 2022. Nonperforming assets, comprised of nonaccrual loans, loans past due 90 days or more and accruing interest and foreclosed properties, totaled $8.4 million (0.2% of total assets) as of March 31, 2023, compared to $7.7 million (0.2% of total assets) as of December 31, 2022. The volume of nonperforming assets has remained under 0.3% of total assets since year-end 2015. Given the low levels of nonperforming loans and accruing loans 30 to 89 days delinquent, combined with what we believe are strong credit administration practices, we are pleased with the overall quality of the loan portfolio.

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

OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS
NONPERFORMING LOANS											NONPERFORMING LOANS

	6/30/22		3/31/22		12/31/21		9/30/21		6/30/21			3/31/23		12/31/22		9/30/22		6/30/22		3/31/22
Residential Real Estate:
Land Development	$	0	$	0	$	0	$	0	$	0		$	8,000	$	29,000	$	30,000	$	30,000	$	31,000
Construction		0		0		0		0		0			0		124,000		0		0		0
Owner Occupied / Rental		0		0		0		11,000		41,000			1,891,000		1,304,000		1,138,000		1,508,000		1,579,000
		0		0		0		11,000		41,000			1,899,000		1,457,000		1,168,000		1,538,000		1,610,000

Commercial Real Estate:
Land Development		0		0		0		0		0			0		0		0		0		0
Construction		0		0		0		0		0			0		0		0		0		0
Owner Occupied		0		0		0		100,000		363,000			229,000		248,000		0		0		0
Non-Owner Occupied		0		0		0		0		0			0		0		0		0		0
		0		0		0		100,000		363,000			229,000		248,000		0		0		0

Non-Real Estate:
Commercial Assets		0		0		0		0		0			5,654,000		6,023,000		248,000		248,000		0
Consumer Assets		0		0		0		0		0			0		0		0		1,000		2,000
		0		0		0		0		0			5,654,000		6,023,000		248,000		249,000		2,000

Total	$	0	$	0	$	0	$	111,000	$	404,000		$	7,782,000	$	7,728,000	$	1,416,000	$	1,787,000	$	1,612,000

~~Loan~~During the first quarter of 2023, loan charge-offs totaled ~~less than~~ $0.1 million, ~~during the second quarter of 2022, and aggregated $0.2 million during the first six months of 2022,~~ while recoveries of prior period loan charge-offs also equaled $0.3 million and $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 0.02% during the second quarter and first six months of 2022, respectively.$0.1 million. 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 $36.0 million, or 0.97% of total loans, and over 2,000% of nonperforming loans as of June 30, 2022.~~

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.

The allowance for loan loss accounting in effect at December 31, 2021 and all prior periods was based on our estimate of probable incurred loan losses as of the reporting date (“incurred loss” methodology). Under the CECL methodology, our allowance is based on the total amount of credit losses that are expected over the remaining life of the loan portfolio. Our estimate of credit losses under CECL is determined using a complex model that relies on historical loss information, reasonable and supportable economic forecasts, and various qualitative factors.

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 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.

The allowance equaled $42.9 million, or 1.08% of total loans, and 551% of nonperforming loans, as of March 31, 2023. As of ~~June 30, 2022,~~March 31, 2023, the allowance was comprised of ~~$35.0~~$40.2 million in general reserves relating to performing loans and ~~$1.0~~$2.7 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 $12.6 million at June 30, 2022, consisting of $0.4 million that are on nonaccrual status and $12.2 million that are on accrual status. The latter are not included in our nonperforming ~~loan totals.~~loans. Loans with an aggregate carrying value of ~~$0.4~~$0.6 million as of ~~June 30, 2022~~March 31, 2023 had been subject to previous partial charge-offs aggregating ~~$0.4~~$0.3 million over the past several years. As of ~~June 30, 2022,~~March 31, 2023, there were no specific reserves allocated to 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:~~

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

Securities available for sale increased ~~$10.9~~$17.0 million during the first ~~six~~three months of ~~2022,~~2023, totaling ~~$604~~$620 million as of ~~June 30, 2022. Purchases~~March 31, 2023. There were no purchases or maturities of U.S. Government agency bonds ~~totaled $54.5 million~~ during the first ~~six months~~quarter of ~~2022. Purchases~~2023. There were no purchases of U.S. Government agency guaranteed mortgage-backed securities ~~totaled $2.1 million~~ during the first ~~six~~three months of ~~2022, consisting of investments~~2023; however, we did receive $0.8 million in ~~CRA-qualified securities, generally reflecting the reinvestment of $3.2 million from~~ principal paydowns on U.S. Government agency guaranteed mortgage-backed securities. Purchases of municipal bonds totaled ~~$22.0~~$7.4 million during the first ~~six months~~quarter of ~~2022;~~2023; proceeds from matured ~~and called~~ municipal bonds totaled ~~$8.3~~$0.9 million. At ~~June 30, 2022,~~March 31, 2023, the portfolio was primarily comprised of U.S. Government agency bonds ~~(67%~~(64%), municipal bonds ~~(26%~~(31%) and U.S. Government agency guaranteed mortgage-backed securities ~~(6%~~(5%). 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, 2022~~March 31, 2023 totaled ~~$604~~$620 million, including a net unrealized loss of ~~$60.3~~$71.2 million. The net unrealized loss equaled $82.7 million as of December 31, 2022. 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 any upcoming purchases ~~during the remainder of 2022~~ to generally consist of ~~U.S. Government agency bonds and~~ municipal bonds, with the securities portfolio maintained at about 12% of total assets.

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~~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”)~~FHLBI stock totaled $17.7 million as of ~~June 30, 2022, compared to $18.0 million as of~~March 31, 2023, unchanged from December 31, ~~2021. The reduction reflects the FHLBI’s repurchase of excess stock.~~2022. 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,~~deposits, primarily consisting of excess 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~~three months of ~~2022,~~2023, the average balance of these funds equaled ~~$657~~$31.1 million, or ~~13.6%~~0.7% of average earning assets, compared to ~~$606~~$784 million, or ~~13.8%~~16.1% of average earning assets, during the first ~~six months~~quarter of ~~2021; these levels are substantially higher than our typical average balance of $75 million, or~~2022. Historically, we maintained interest-earning deposits at approximately 2% of average earning assets. The elevated ~~levels~~level during ~~2021 and through~~ the first ~~half~~quarter of 2022 primarily ~~reflect~~reflected increased local deposits stemming from ~~Covid-19-related~~COVID-19-related federal government stimulus ~~payments~~programs and reduced business and consumer investing and ~~spending,~~spending. The level of interest-earning deposits declined throughout 2022 and ~~have had~~into the first quarter of 2023 as we used the excess monies to fund loan growth as well as brokered deposit and FHLBI advance maturities. We also experienced a ~~significant negative impact on our~~ net ~~interest margin.~~decline in local deposit balances during that time period. Our deposit balance at the Federal Reserve Bank of Chicago equaled $5.5 million as of March 31, 2023.

Net premises and equipment equaled ~~$51.4~~$51.5 million at ~~June 30, 2022, representing~~March 31, 2023, unchanged from December 31, 2022. We recorded a ~~decrease~~reduction of ~~$5.9~~$1.0 million associated with the planned sale of a former branch facility during the first quarter, comprised of a $0.6 million transfer to foreclosed assets and a write-down of $0.4 million. Depreciation expense totaled $1.5 million during the first ~~six months~~quarter of ~~2022. The decline primarily reflects~~2023, while investments associated with the ~~sale~~construction and opening of ~~a branch facility located in Lansing, Michigan as part~~new facilities and the renovation of a branch 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.existing facilities totaled $2.5 million.

Total deposits decreased ~~$209~~$115 million during the first ~~six~~three 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.~~2023, providing for an annualized reduction rate of approximately 12%. The ~~reduced level of local deposits~~reduction primarily reflected a ~~single customer’s expected withdrawal~~customary level of ~~a majority~~customers’ tax and bonus payments and partnership distributions, as well as transfers to the sweep account product. Wholesale funds, comprised of FHLBI advances, totaled $378 million, or about 9% of total funds, ~~that were obtained from the sale~~as of ~~a business and deposited in late 2021; excluding this withdrawal,~~March 31, 2023, compared to $308 million, or about 7% of total ~~local deposits were relatively steady during the first six months of~~funds, at December 31, 2022.

Noninterest-bearing deposits ~~increased $62.5 million and savings deposits were up $15.2 million, while interest-bearing checking accounts were down $57.8~~decreased $228 million during the first ~~six~~three months of ~~2022. Money market deposit balances were down $151 million,~~2023, in large part reflecting the ~~significant withdrawal~~aforementioned customary level of customers’ tax and bonus payments and partnership distributions and transfers to the sweep account, but also includes transfers to interest-bearing deposits and withdrawals associated with the sales of businesses. Identified deposit withdrawals associated with the heightened concern over the health of the banking industry stemming from ~~a single customer.~~the failure of two large financial institutions in March, 2023 were limited at less than 1% of total deposits. Interest-bearing checking accounts and money market deposit accounts were up $1.7 million and $65.8 million, respectively, while savings deposits declined $41.4 million. Local time deposits ~~declined $54.1 million during the first six months of 2022. We had no out-of-area deposits as of June 30, 2022, compared to $23.9 million as of December 31, 2021.~~increased $87.1 million.

Sweep accounts increased ~~$5.9~~$33.1 million during the first ~~six~~three months of ~~2022,~~2023, totaling ~~$203~~$227 million as of ~~June 30, 2022.~~March 31, 2023. The increase is primarily related to transfers from interest-bearing deposit accounts. The aggregate balance of this funding type is subject to relatively large daily fluctuations given the nature of the customers utilizing this product and the sizable balances maintained by many of the customers. The average balance of sweep accounts equaled $196 million during the first ~~six months~~quarter of ~~2022,~~2023, with a high balance of ~~$224~~$255 million and a low balance of ~~$173~~$181 million. Our sweep account program entails transferring collected funds from certain business noninterest-bearing checking accounts and savings deposits into ~~over-night~~overnight interest-bearing repurchase agreements. Such sweep accounts are not deposit accounts and are not afforded federal deposit insurance, and are accounted for as secured borrowings.

FHLBI advances ~~decreased $11.7~~increased $69.6 million during the first ~~six months~~quarter of ~~2022,~~2023, totaling ~~$362~~$378 million as of ~~June 30, 2022. Amortizing FHLBI~~March 31, 2023. Bullet advances aggregating ~~$28.3~~$80.0 million were obtained during the first quarter of 2023, consisting of $70.0 million to fund loan growth and mitigate a portion of the decline in total deposits and $10.0 million to replace a scheduled FHLBI bullet advance maturity. Payments on amortizing FHLBI advances totaled $0.4 million during the first quarter of 2023. Bullet FHLBI advances are generally obtained to provide funds for loan growth and are used to assist in managing interest rate risk, while ~~bullet advances aggregating $40.0 million matured. Amortizing~~amortizing FHLBI advances are generally acquired to match-fund specific longer-term fixed rate commercial loans, with the dollar amount and amortization structure of the underlying advances reflective of the associated commercial loans. ~~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, 2022~~March 31, 2023 totaled ~~$932~~$665 million, with remaining availability based on collateral equaling ~~$564~~$281 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

Shareholders’ equity was ~~$429~~$467 million at ~~June 30, 2022,~~March 31, 2023, compared to ~~$457~~$441 million at December 31, ~~2021. Shareholders’~~2022. Positively impacting shareholders’ equity during the first quarter was ~~positively impacted by~~ net income of ~~$23.2~~$21.0 million, which was partially offset by ~~payments~~the payment of a cash ~~dividends~~dividend totaling ~~$9.6~~$5.2 million. A ~~$43.9~~$9.1 million after-tax ~~decline~~increase in the market value of our available for sale securities portfolio, reflecting ~~significant increases~~a decline in market interest rates, ~~negatively~~positively impacted shareholders’ equity during the first ~~six months~~quarter of ~~2022.~~2023.

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 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 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 ~~$362~~$378 million, or ~~8.2%~~about 9% of combined deposits and borrowed funds, as of ~~June 30, 2022,~~March 31, 2023, compared to ~~$398~~$308 million, or ~~8.5%~~about 7% of combined deposits and borrowed funds, as of December 31, ~~2021.~~2022.

our repurchase agreements are accounted for as secured borrowings. Information regarding our repurchase agreements as of ~~June 30, 2022~~March 31, 2023 and during the first ~~six~~three months of ~~2022~~2023 is as follows:

FHLBI advances ~~decreased $11.7~~increased $69.6 million during the first ~~six months~~quarter of ~~2022,~~2023, totaling ~~$362~~$378 million as of ~~June 30, 2022. Amortizing FHLBI advance~~March 31, 2023. Bullet advances aggregating ~~$28.3~~$80.0 million were obtained during the first quarter of 2023, consisting of $70.0 million to fund loan growth and mitigate a portion of the decline in total deposits and $10.0 million to replace a scheduled FHLBI bullet advance maturity. Payments on amortizing FHLBI advances totaled $0.4 million during the first quarter of 2023. Bullet FHLBI advances are generally obtained to provide funds for loan growth and are used to assist in managing interest rate risk, while ~~bullet advances aggregating $40.0 million matured. Amortizing~~amortizing FHLBI advances are generally acquired to match-fund specific longer-term fixed rate commercial loans, with the dollar amount and amortization structure of the underlying advances reflective of the associated commercial loans. ~~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, 2022~~March 31, 2023 totaled ~~$932~~$665 million, with remaining availability based on collateral equaling ~~$564~~$281 million.

We also have the ability to borrow up to an aggregate $70.0 million on a daily basis through correspondent banks using established unsecured federal funds purchased lines of credit. We ~~did not access these~~accessed one of the lines of credit during the first ~~six months~~quarter of ~~2022.~~2023, with an average balance of $4.3 million. In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged ~~$650~~$25.4 million during the first ~~six months~~quarter of ~~2022.~~2023. 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 ~~$27.2~~$27.6 million as of ~~June 30, 2022.~~March 31, 2023. We did not utilize this line of credit during the first ~~six months~~quarter of ~~2022~~2023 or at any time during the previous 1314 fiscal years, and do not plan to access this line of credit in future periods.

The following table reflects, as of ~~June 30, 2022,~~March 31, 2023, 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	$	3,519,988,000	$	0	$	0	$	0	$	3,519,988,000	$	3,136,195,000	$	0	$	0	$	0	$	3,136,195,000
Time deposits		215,613,000		85,947,000		52,345,000		0		353,905,000		297,371,000		73,475,000		90,977,000		0		461,823,000
Short-term borrowings		203,339,000		0		0		0		203,339,000		244,660,000		0		0		0		244,660,000
Federal Home Loan Bank advances		94,353,000		161,689,000		81,838,000		24,383,000		362,263,000		90,826,000		141,762,000		121,917,000		23,405,000		377,910,000
Subordinated debentures		0		0		0		48,585,000		48,585,000		0		0		0		49,130,000		49,130,000
Subordinated notes		0		0		0		88,457,000		88,457,000		0		0		0		88,714,000		88,714,000
Other borrowed money		0		0		0		1,165,000		1,165,000		0		0		0		1,096,000		1,096,000
Property leases		591,000		1,217,000		232,000		2,278,000		4,318,000		904,000		1,722,000		870,000		1,549,000		5,045,000

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, 2022,~~March 31, 2023, we had a total of ~~$1.68~~$1.97 billion in unfunded loan commitments and ~~$35.0~~$22.7 million in unfunded standby letters of credit. Of the total unfunded loan commitments, ~~$1.46~~$1.62 billion were commitments available as lines of credit to be drawn at any time as customers’ cash needs vary, and ~~$253~~$347 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.

While we have observed the well-publicized liquidity problems at certain financial institutions during the first quarter of 2023, we do not believe that we are subject to the same circumstances that apparently caused those crises. 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~~We have developed ~~a comprehensive~~ contingency funding ~~plan~~plans that ~~provides~~provide a framework for meeting liquidity disruptions.

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, 2022,~~March 31, 2023, our bank met all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

As of ~~June 30, 2022,~~March 31, 2023, our bank’s total risk-based capital ratio was ~~13.4%~~13.8%, compared to ~~13.6%~~13.7% at December 31, ~~2021.~~2022. Our bank’s total regulatory capital increased ~~$30.7~~$17.7 million during the first ~~six months~~quarter of ~~2022,~~2023, in large part reflecting net income totaling ~~$27.6~~$23.6 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~~$6.5 million. Our bank’s total risk-based capital ratio was also impacted by a ~~$285~~$90.2 million increase in total risk-weighted assets, primarily resulting from net growth in commercial ~~loans~~ and residential mortgage loans. As of ~~June 30, 2022,~~March 31, 2023, our bank’s total regulatory capital equaled ~~$582~~$636 million, or ~~$149~~$174 million in excess of the 10.0% minimum that is among the requirements to be categorized as “well capitalized.” Our and our bank’s capital ratios as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 are disclosed in Note 12 of the Notes to Consolidated Financial Statements.

We recorded net income of ~~$11.7~~$21.0 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. We recorded net income of $23.2 million, or $1.47$1.31 per basic and diluted share, for the first ~~six months~~quarter of ~~2022,~~2023, compared to net income of ~~$32.3~~$11.5 million, or ~~$2.00~~$0.73 per basic and diluted share, for the first ~~six months~~quarter of ~~2021.~~2022. Diluted earnings per share increased $0.58, or 79.5%, during the first quarter of 2023 compared to the prior-year first quarter.

The ~~lower levels~~higher level of net income during the ~~second~~first quarter ~~and first six months~~ of ~~2022~~2023 compared to the ~~respective prior-year periods~~first quarter of 2022 resulted from ~~decreased noninterest income as well as higher credit loss provisions and overhead costs, which more than offset increased~~a significant increase in net interest ~~income. The reduction in noninterest~~ income, primarily ~~reflected decreased mortgage banking income, which outweighed increases in several key fee income categories.~~reflecting a substantially improved net interest margin and loan growth. The credit loss provisions recorded during the ~~current-year periods~~first quarters of 2023 and 2022 mainly reflected reserve allocations ~~dictated~~necessitated by commercial loan and residential mortgage loan growth; sustained strength in asset quality metrics and low levels of charge-offs during both periods partially mitigated the amount of reserve allocations associated with loan growth. Noninterest income declined during the first three months of 2023 compared to the respective 2022 period primarily due to lower levels of mortgage banking income, service charges on accounts, and interest rate swap income, which more than offset growth ~~increased specific reserves for certain problem commercial loan relationships,~~in credit and ~~a higher reserve for residential mortgage loans resulting from an increase~~debit card income and payroll servicing fees. Overhead expenses were up 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. Excluding nonrecurring transactions, overhead costs decreased slightly during the second quarter of ~~2022~~2023 compared to the prior-year ~~second~~first quarter mainly ~~reflecting lower~~due to increased compensation costs, including higher bonus accruals 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 second quarter of 2022 resulted from earning asset growth and an improved net interest margin, while the increase in net interest income during the first six months of 2022 reflected earning asset growth, which more than offset a slight decline in the net interest margin in large part driven by decreased PPP net loan fee income accretion.salary outlays.

Interest income during the ~~second~~first quarter of ~~2022~~2023 was ~~$39.6~~$60.5 million, an increase of ~~$3.8~~$24.6 million, or ~~10.6%~~68.6%, from the ~~$35.8~~$35.9 million earned during the ~~second~~first quarter of ~~2021.~~2022. The increase resulted from ~~growth in, and~~ a higher yield on average earning assets. Average earning assets equaled $4.78 billion during the current-year second quarter, up $311 million, or 7.0%, from the level of $4.47 billion during the respective 2021 period; average 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 ~~3.32%~~5.35% during the ~~second quarter~~first three months of ~~2022,~~2023, up from ~~3.20%~~2.99% during the ~~prior-year second quarter.~~respective 2022 period. The higher yield primarily resulted from an increased yield on ~~other interest-earning assets,~~loans, reflecting the rising interest rate ~~environment, and a~~environment. The yield on loans was 5.90% during the first quarter of 2023, up from 3.87% during the prior-year first quarter mainly due to higher interest rates on variable-rate commercial loans stemming from the Federal Open Market Committee (“FOMC”) significantly raising the targeted federal funds rate in an effort to curb elevated inflation levels. The FOMC increased the targeted federal funds rate by 475 basis points during the period of March 2022 through March 2023. As of March 31, 2023, approximately 64% of the commercial loan portfolio consisted of variable-rate loans. A change in earning asset mix, comprised of a decrease in lower-yielding interest-earning deposits and an increase in higher-yielding loans as a percentage of earning assets, along with increased yields on securities and interest-earning deposits, reflecting the rising interest rate environment, also contributed to the higher yield on average earning assets. On average, lower-yielding interest-earning deposits represented ~~11.1%~~0.7% of earning assets during the ~~second~~first quarter of ~~2022,~~2023, down from ~~13.9%~~16.1% during the ~~second quarter of 2021,~~respective 2022 period, while higher-yielding loans represented ~~76.0%~~85.6% of earning assets during the current-year ~~second~~first quarter, up from ~~75.3%~~71.4% during the ~~second~~first quarter of ~~2021. The yield on~~2022.

Average earning assets equaled $4.59 billion during the first quarter of 2023, down $295 million, or 6.0%, from the level of $4.88 billion during the first quarter of 2022; 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 $0.2and average securities were up $444 million ~~during the second quarter of 2022, compared to $2.9~~and $14.3 million, ~~during the prior-year second quarter.~~ respectively, while average interest-earning deposits were down $753 million.

A significant volume of excess on-balance sheet liquidity, which initially surfaced in the second quarter of 2020 ~~as a result of~~in large part due to government stimulus programs related to the ~~Covid-19~~COVID-19 environment, ~~and has persisted since that time,~~ negatively impacted the yield on average earning assets by ~~28 basis points and 42~~45 basis points during the ~~second quarters~~first quarter of ~~2022 and 2021, respectively.~~2022. The excess funds, consisting almost entirely of low-yielding deposits with the Federal Reserve Bank of Chicago, ~~are~~were mainly a product of local deposit growth and ~~PPP~~Paycheck Protection Program loan forgiveness activities.

Interest income during the first six months of 2022 was $75.4 million, an increase of $4.8 million, or 6.9%, from the $70.6 million earned during the respective 2021 period. The increase resulted from growth in average earning assets, which more than offset 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 $5.7 million during the first six months of 2021. On average, higher-yielding loans represented 73.7% of earning assets during the first six months of 2022, down from 75.9% during the respective 2021 period. The 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 2022 and 2021, respectively.

Interest expense during the second quarter of 2022 was $5.2 million, an increase of $0.3 million, or 6.5%, from the $4.9 million expensed during the second quarter of 2021. The increase is attributable to 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 of 0.72% during the second quarter of 2022 declined slightly compared to the respective 2021 period as a decrease in the cost of time deposits was substantially offset by an increase in the cost of borrowings. The cost of time deposits decreased from 1.24% during the second quarter of 2021 to 0.83% during the current-year second quarter mainly due to lower interest rates paid on local time deposits. The cost of borrowed funds increased from 1.73% during the second quarter of 2021 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 and January of 2022 and a higher cost of subordinated debentures. The cost of subordinated debentures was 4.63% during the second quarter of 2022, up from 3.79% during the respective 2021 period due to increases in the 90-Day Libor Rate.

Interest expense during the first ~~six months~~quarter of ~~2022~~2023 was ~~$10.2~~$12.1 million, an increase of ~~less than $0.1~~$7.1 million, or 142%, from the ~~amount~~$5.0 million expensed during the first ~~six months~~quarter of ~~2021.~~2022. The ~~nominal~~ increase is attributable to ~~growth in interest-bearing liabilities, which was substantially offset by~~ a ~~lower~~higher average weighted average cost of interest-bearing liabilities. Average interest-bearing liabilities were $2.99 billion during the first six months of 2022, up $353 million, or 13.4%, from the $2.64 billion average during the respective 2021 period. The weighted average cost of interest-bearing liabilities, ~~decreased~~which rose from ~~0.78%~~0.66% during the first ~~six months~~quarter of ~~2021~~2022 to ~~0.69%~~1.72% during the respective ~~current-year~~2023 period mainly due to ~~a lower~~increased costs of deposits and borrowings. Reflecting the rising interest rate environment, the cost of interest-bearing, non-time deposits increased from 0.20% during the first quarter of 2022 to 1.27% during the current-year first quarter, while the cost of time deposits ~~which more than offset an increase in~~increased from 0.89% to 2.29% during the respective periods. The higher cost of ~~borrowings. The cost of time~~interest-bearing, non-time deposits ~~decreased~~primarily resulted from ~~1.37% during the first six months of 2021 to 0.86% during the first six months of 2022 primarily due to lower interest~~increased rates paid on ~~local time deposits.~~money market accounts. The cost of borrowed funds increased from ~~1.75%~~1.82% during the first ~~six months~~quarter of ~~2021~~2022 to ~~1.86%~~2.51% during the ~~respective 2022 period,~~first quarter of 2023 mainly ~~reflecting the issuance~~due to higher costs of subordinated ~~notes~~debentures and ~~a higher cost of subordinated debentures.~~sweep accounts. The cost of subordinated debentures was ~~4.22%~~9.05% during the first ~~six months~~quarter of ~~2022,~~2023, up from ~~3.82%~~3.80% during the ~~first six months of 2021~~respective 2022 period due to increases in the 90-Day Libor Rate. The cost of sweep accounts increased from 0.10% during the first quarter of 2022 to 0.84% during the first quarter of 2023, reflecting the rising interest rate environment. A change in borrowing mix, consisting of an increase in higher-costing subordinated debentures and subordinated notes as a percentage of average total borrowings, also contributed to the increased cost of borrowings during the first quarter of 2023. Average interest-bearing liabilities totaled $2.86 billion during the current-year first quarter, compared to $3.07 billion during the prior-year first quarter, representing a decrease of $211 million, or 6.9%.

Net interest income during the ~~second~~first quarter of ~~2022~~2023 was ~~$34.3~~$48.4 million, an increase of ~~$3.4~~$17.5 million, or ~~11.2%~~56.7%, from the $30.9 million earned during the respective ~~2021~~2022 period. The increase resulted from ~~growth in average earning assets and an~~a significantly improved net interest ~~margin.~~margin and loan growth. The net interest margin increased from ~~2.76%~~2.57% in the ~~second~~first quarter of ~~2021~~2022 to ~~2.88%~~4.28% in the current-year ~~second~~first quarter due to a higher yield on average earning assets. The increased yield primarily ~~stemmed~~resulted from a higher yield on ~~other interest-earning assets,~~loans, 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.~~environment. The cost of funds equaled ~~0.44%~~1.07% in the ~~second~~first quarter of ~~2022, unchanged~~2023, up from 0.42% during the prior-year ~~second~~first quarter ~~as an increased cost~~mainly due to higher costs of deposits and borrowings, ~~primarily~~ reflecting the ~~issuance~~impact of ~~$90.0 million in subordinated notes, was offset by a decreased cost of time deposits.~~the increasing interest rate environment. 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 2.76% in the first six months of 2021 to 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 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, consisting of a decrease in higher-yielding loans as a percentage of earning assets. The cost of funds 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 cost of local time deposits. The significant level of excess on-balance sheet liquidity negatively impacted the net interest margin by 32 basis points and 37approximately 40 basis points during the first ~~six months~~quarter of ~~2022 and 2021, respectively.~~2022.

The following ~~tables set~~table sets forth certain information relating to our consolidated average interest-earning assets and interest-bearing liabilities and ~~reflect~~reflects the average yield on assets and average cost of liabilities for the ~~second~~first quarters of 2023 and ~~first six months of 2022 and 2021.~~2022. 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~~first quarters of 2023 and ~~first six months of~~ 2022 ~~and 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~~first quarters of ~~both~~2023 and 2022 ~~and 2021 and $120,000 in the first six months of both 2022 and 2021~~ for this non-GAAP, but industry standard, adjustment. These adjustments equated to increases in our net interest margin of less than one basis point for ~~each of the 2022 and 2021~~both periods.

	Quarters ended June 30,																Quarters ended March 31,
	2 0 2 2								2 0 2 1								2 0 2 3								2 0 2 2
	Average					Average			Average					Average			Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
	(dollars in thousands)																(dollars in thousands)
ASSETS
Loans	$	3,633,587		$	36,003		3.97	%	$	3,365,686		$	33,789		3.99	%	$	3,928,329		$	57,154		5.90	%	$	3,484,511		$	33,251		3.87	%
Investment securities		615,733			2,589		1.68			483,805			1,862		1.54			627,628			3,067		1.95			613,317			2,325		1.52
Other interest-earning assets		530,571			1,018		0.76			619,358			183		0.12			31,081			324		4.18			784,193			366		0.19
Total interest - earning assets		4,779,891			39,610		3.32			4,468,849			35,834		3.20			4,587,038			60,545		5.35			4,882,021			35,942		2.99

Allowance for credit losses		(35,681	)							(39,406	)							(43,076	)							(35,288	)
Other assets		333,248								323,415								311,915								321,829

Total assets	$	5,077,458							$	4,752,858							$	4,855,877							$	5,168,562


LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits	$	2,201,797		$	1,873		0.34	%	$	2,074,759		$	2,346		0.45	%	$	2,184,406		$	7,907		1.47	%	$	2,364,437		$	1,825		0.31	%
Short-term borrowings		193,735			49		0.10			150,778			40		0.11			199,880			459		0.93			198,949			50		0.10
Federal Home Loan Bank advances		373,911			1,911		2.02			394,000			2,050		2.06			338,026			1,794		2.12			372,662			1,864		2.00
Other borrowings		138,127			1,391		4.04			49,421			467		3.74			138,818			1,941		5.59			135,867			1,258		3.76
Total interest-bearing liabilities		2,907,570			5,224		0.72			2,668,958			4,903		0.74			2,861,130			12,101		1.72			3,071,915			4,997		0.66

Noninterest-bearing deposits		1,706,349								1,619,976								1,491,477								1,625,453
Other liabilities		34,666								17,995								49,746								21,331
Shareholders’ equity		428,873								445,929								453,524								449,863

Total liabilities and shareholders’ equity	$	5,077,458							$	4,752,858							$	4,855,877							$	5,168,562

Net interest income				$	34,386							$	30,931							$	48,444							$	30,945

Net interest rate spread							2.60	%							2.46	%							3.63	%							2.33	%
Net interest spread on average assets							2.72	%							2.61	%							4.05	%							2.43	%
Net interest margin on earning assets							2.88	%							2.76	%							4.28	%							2.57	%

Mercantile recorded provisions for credit losses of $0.6 million and $0.1 million during the first quarters of 2023 and 2022, respectively. The provision expense recorded during both periods mainly reflected allocations necessitated by loan growth; ongoing strong loan quality metrics and low levels of loan charge-offs during the periods in large part mitigated additional reserves associated with loan growth.

A provision for credit losses of $0.5 million was recorded during the second quarter of 2022, compared to a negative provision of $3.1 million during the second quarter of 2021. A provision for credit losses of $0.6 million was recorded during the first six months of 2022, compared to a negative provision of $2.8 million during the first six months of 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 transition adjustment of the CECL adoption included a $0.4 million decrease in the allowance 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.

During the second quarter of 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 first six months of 2022, loan charge-offs totaled $0.2 million, while recoveries of prior period loan charge-offs equaled $0.6 million, providing for net loan recoveries of $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. The allowance for 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.

~~Noninterest income during the second quarter of 2022 was $7.7 million, compared to $14.6 million during the prior-year second quarter.~~ Noninterest income during the first ~~six months~~quarter of ~~2022~~2023 was ~~$17.0~~$7.0 million, compared to ~~$28.0~~$9.3 million during the ~~first six months of 2021. During the second quarter and first six months of~~respective 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. Excluding the impacts of these transactions, noninterest income decreased $6.3 million during the second quarter of 2022 and $10.5 million during the first six months of 2022 compared to the respective 2021 periods.period. The lower ~~levels~~level of noninterest income ~~almost exclusively reflected~~primarily stemmed from decreased mortgage banking income, service charges on accounts, and interest rate swap income, which more than offset ~~increases~~growth in ~~several key fee income sources, including service charges on accounts,~~ credit and debit card income and payroll ~~processing~~servicing fees. ~~Continued strength in purchase~~Higher residential mortgage loan ~~originations during~~rates in the ~~second quarter and first six months of 2022 partially mitigated the negative impacts of higher~~rising interest ~~rates, reduced refinance activity, lower sold percentages, and decreased gain on sale rates on~~rate environment negatively affected mortgage banking income ~~during~~in the ~~periods when compared to the respective prior-year periods. The residential~~first quarter of 2023. Residential mortgage loan ~~sold percentage declined from approximately 59% during the second quarter of 2021 and approximately 70%~~production totaled $72.0 million during the first ~~six months~~quarter of ~~2021 to approximately 27% and 36%~~2023, down $96.2 million, or 57.2%, from $168 million during the ~~respective current-year periods.~~prior-year first quarter; refinance activity and purchase activity declined $51.5 million and $44.7 million, respectively. The ~~decreased sold percentages~~decline in ~~large part reflect customers’ preferences for adjustable-rate loans~~service charges on accounts reflected increased earnings credit rates in response to the ~~current~~increasing interest rate environment, ~~and construction loans representing an increased percentage of overall loan production.~~

~~The declines~~while the decrease in interest rate swap income ~~reflect~~mainly reflected a 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~~volume of ~~2022 compared to the respective prior-year periods.~~transactions.

Noninterest expense totaled ~~$26.9~~$28.6 million during the ~~second~~first quarter of ~~2022, up from $26.2~~2023, compared to $25.7 million during the prior-year ~~second~~first 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~~quarter of ~~2021~~2023 included ~~$0.5~~a $0.4 million ~~in net losses on sales and write-downs~~write-down of a former branch ~~facilities.~~facility. Excluding ~~these transactions,~~this transaction, noninterest expense ~~decreased $0.2 million in the second quarter of 2022 and~~ increased ~~$0.9~~$2.5 million in the first ~~six months~~quarter of ~~2022~~2023 compared to the respective ~~2021 periods.~~2022 period. The ~~slightly lower level of~~higher noninterest expense ~~in the second quarter of 2022 primarily~~mainly resulted from increased compensation costs, including a $1.4 million bonus accrual and salary increases, which outweighed reductions in residential mortgage lender commissions and incentives and higher residential mortgage loan deferred salary costs. No bonus accrual was recorded during the first quarter of 2022. The higher level of salary costs ~~as well as~~primarily stemmed from annual merit pay increases and market adjustments. The 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~~resulted from reduced loan production, while 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~~loan. A $0.5 million aggregate increase in interest rate swap reserves and ~~associated incentives resulted from reduced loan production,~~collateral costs, along with a $0.3 million increase in ~~large part~~FDIC deposit insurance premiums, 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~~industry-wide assessment rate that became effective on January 1, 2023, also contributed to the ~~prior-year periods. Other employee~~higher level of overhead costs ~~consisting mainly~~during the first quarter 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.2023.

During the ~~second~~first quarter of 2023, we recorded income before federal income tax of $26.1 million and a federal income tax expense of $5.1 million. During the first quarter of 2022, we recorded income before federal income tax of ~~$14.6~~$14.3 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 first six months of 2022, we recorded income before federal income tax of $28.9 million and a federal income tax expense of $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$2.8 million. The ~~decreased~~increase in federal income tax expense in ~~both 2022 periods~~the first three months of 2023 resulted from ~~lower levels~~the higher level of income before federal income tax. Our effective tax rate was 19.8% during both the ~~second~~first quarter of 2023 and the prior-year first ~~six months of 2022 and 19.0% during the respective 2021 periods.~~quarter.

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.

The following table depicts our GAP position as of ~~June 30, 2022:~~March 31, 2023:

	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)	$	1,793,249,000		$	80,274,000		$	905,967,000		$	339,911,000		$	3,119,401,000		$	2,034,567,000		$	94,097,000		$	883,760,000		$	202,990,000		$	3,215,414,000
Residential real estate loans		35,674,000			15,605,000			116,338,000			423,407,000			591,024,000			53,857,000			16,716,000			182,002,000			484,604,000			737,179,000
Consumer loans		1,330,000			731,000			10,666,000			648,000			13,375,000			2,330,000			451,000			9,115,000			1,039,000			12,935,000
Securities (2)		18,232,000			12,821,000			216,149,000			374,157,000			621,359,000			25,971,000			16,499,000			238,017,000			357,207,000			637,694,000
Other interest-earning assets		398,401,000			1,501,000			3,000,000			0			402,902,000
Interest-earning deposits																	6,786,000			1,751,000			2,250,000			0			10,787,000
Allowance for credit losses		0			0			0			0			(35,974,000	)		0			0			0			0			(42,877,000	)
Other assets		0			0			0			0			346,468,000			0			0			0			0			324,742,000
Total assets		2,246,886,000			110,932,000			1,252,120,000			1,138,123,000		$	5,058,555,000			2,123,511,000			129,514,000			1,315,144,000			1,045,840,000		$	4,895,874,000

Liabilities:
Interest-bearing checking		481,016,000			0			0			0			481,016,000			576,678,000			0			0			0			576,678,000
Savings deposits		409,505,000			0			0			0			409,505,000			340,178,000			0			0			0			340,178,000
Money market accounts		889,035,000			0			0			0			889,035,000			842,557,000			0			0			0			842,557,000
Time deposits under $100,000		22,018,000			57,273,000			41,639,000			0			120,930,000			17,785,000			77,474,000			37,223,000			0			132,482,000
Time deposits $100,000 & over		51,801,000			84,521,000			96,653,000			0			232,975,000			27,112,000			175,000,000			127,229,000			0			329,341,000
Short-term borrowings		203,339,000			0			0			0			203,339,000			244,660,000			0			0			0			244,660,000
Federal Home Loan Bank advances		24,000,000			70,353,000			243,527,000			24,383,000			362,263,000			30,000,000			60,826,000			263,679,000			23,405,000			377,910,000
Other borrowed money		49,750,000			0			88,457,000			0			138,207,000			50,226,000			0			88,714,000			0			138,940,000
Noninterest-bearing checking		0			0			0			0			1,740,432,000			0			0			0			0			1,376,782,000
Other liabilities		0			0			0			0			51,870,000			0			0			0			0			68,974,000
Total liabilities		2,130,464,000			212,147,000			470,276,000			24,383,000			4,629,572,000			2,129,196,000			313,300,000			516,845,000			23,405,000			4,428,502,000
Shareholders' equity		0			0			0			0			428,983,000			0			0			0			0			467,372,000
Total liabilities & shareholders' equity		2,130,464,000			212,147,000			470,276,000			24,383,000		$	5,058,555,000			2,129,196,000			313,300,000			516,845,000			23,405,000		$	4,895,874,000

Net asset (liability) GAP	$	116,422,000		$	(101,215,000	)	$	781,844,000		$	1,113,740,000					$	(5,685,000	)	$	(183,786,000	)	$	798,299,000		$	1,022,435,000

Cumulative GAP	$	116,422,000		$	15,207,000		$	797,051,000		$	1,910,791,000					$	(5,685,000	)	$	(189,471,000	)	$	608,828,000		$	1,631,263,000

Percent of cumulative GAP to total assets		2.3	%		0.3	%		15.8	%		37.8	%					(0.1	%)		(3.9	%)		12.4	%		33.3	%

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.

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, 2022,~~March 31, 2023, in which it was assumed that changes in market interest rates occurred ranging from up 300 basis points to down ~~200~~300 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 ~~$140~~$186 million in net interest income projected using our balance sheet amounts and anticipated replacement rates as of ~~June 30, 2022.~~March 31, 2023. 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			Dollar Change			Percent Change
	Interest Income			Interest Income			In Net			In Net
Interest Rate Scenario							Interest Income			Interest Income

Interest rates down 300 basis points							$	(11,600,000	)		(6.2	%)
Interest rates down 200 basis points	$	(10,000,000	)		(7.2%	)		(11,300,000	)		(6.2	)
Interest rates down 100 basis points		(4,500,000	)		(3.2	)		(4,900,000	)		(2.6	)
Interest rates up 100 basis points		4,300,000			3.1			5,700,000			3.0
Interest rates up 200 basis points		8,800,000			6.3			11,700,000			6.3
Interest rates up 300 basis points		13,400,000			9.5			17,500,000			9.4

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.

As of ~~June 30, 2022,~~March 31, 2023, 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, 2022.~~March 31, 2023.

There have been no changes in our internal control over financial reporting during the quarter ended ~~June 30, 2022~~March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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.

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, ~~2021.~~2022.

We made no unregistered sales of equity securities during the quarter ended ~~June 30, 2022.~~March 31, 2023.

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. 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. No shares were repurchased during the first ~~six months~~quarter of ~~2022.~~2023. Historically, stock 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. As of ~~June 30, 2022,~~March 31, 2023, repurchases aggregating $6.8 million were available to be made under the current repurchase program.

Repurchases made during the ~~second~~first quarter of ~~2022~~2023 are detailed in the table below.

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~~May 5, ~~2022.~~2023.

PART I.	Financial Information	Page No.

	Item 1. Financial Statements

	Consolidated Balance Sheets (Unaudited) ~~– June 30, 2022~~- March 31, 2023 and December 31, ~~2021~~2022	1

	Consolidated Statements of Income (Unaudited) - Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2023 and March 31, 2022 ~~and June 30, 2021~~	2

	Consolidated Statements of Comprehensive Income (Unaudited) - Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2023 and March 31, 2022 ~~and June 30, 2021~~	3

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) –- Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2023 and March 31, 2022 ~~and June 30, 2021~~	4

	Consolidated Statements of Cash Flows (Unaudited) ~~– Six~~- Three Months Ended ~~June 30,~~March 31, 2023 and March 31, 2022 ~~and June 30, 2021~~	8 6

	Notes to Consolidated Financial Statements (Unaudited)	10 8

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	5546

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	7660

	Item 4. Controls and Procedures	7862

PART II.	Other Information

	Item 1. Legal Proceedings	7963

	Item 1A. Risk Factors	7963

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	7963

	Item 3. Defaults Upon Senior Securities	7963

	Item 4. Mine Safety Disclosures	7963

	Item 5. Other Information	7963

	Item 6. Exhibits	8064

	Signatures	8165

	Weighted
	Average		Amortized		Fair
	Yield (%)		Cost		Value

Due in 2023		0.98	$	20,361,000	$	19,997,000
Due in 2024 through 2028		1.32		319,037,000		293,271,000
Due in 2029 through 2033		2.03		278,488,000		241,115,000
Due in 2034 and beyond		3.58		35,647,000		33,500,000
Mortgage-backed securities		2.12		37,164,000		31,590,000
Other investments		8.00		500,000		500,000

Total available for sale securities		1.76	$	691,197,000	$	619,973,000

	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

	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

	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)	$	726,012,000	$	40,317,000	$	363,381,000	$	508,666,000	$	136,632,000
Grades 5 – 7		454,518,000		17,379,000		234,999,000		481,799,000		87,816,000
Grades 8 – 9		7,120,000		112,000		213,000		12,653,000		143,000
Total commercial	$	1,187,650,000	$	57,808,000	$	598,593,000	$	1,003,118,000	$	224,591,000

	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

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

Commercial:
Commercial and industrial	$	0	$	0	$	0	$	0	$	1,187,650,000	$	1,187,650,000	$	0
Vacant land, land development, and residential construction		0		0		0		0		57,808,000		57,808,000		0
Real estate – owner occupied		0		0		0		0		598,593,000		598,593,000		0
Real estate – non-owner occupied		0		0		0		0		1,003,118,000		1,003,118,000		0
Real estate – multi-family and residential rental		0		0		0		0		224,591,000		224,591,000		0
Total commercial		0		0		0		0		3,071,760,000		3,071,760,000		0

Retail:
1-4 family mortgages		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		105,000		107,000		207,000		419,000		651,621,000		652,040,000		0

Total past due loans	$	105,000	$	107,000	$	207,000	$	419,000	$	3,723,381,000	$	3,723,800,000	$	0

	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

	Other Consumer Loans		Retail 1-4 Family Mortgages

Performing	$	28,440,000	$	622,061,000
Nonperforming		1,000		1,538,000
Total retail	$	28,441,000	$	623,599,000

	(Grade 11.)	~~Included~~“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 for 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 ~~Commercial~~deterioration of the repayment prospects for the loan at some future date.

	Grade 8.	“Substandard” Loans with this rate 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 ~~Industrial~~where collection or liquidation in full is highly questionable and improbable.

	Grade 10.	“Loss” Loans ~~Grades~~with this rating are considered uncollectible, and of such little value that continuance as an active asset is 1not –warranted.

	2023		2022		2021		2020		2019		Prior		Term Total		Revolving Loans		Grand Total
Commercial:
Commercial and Industrial:
Grades 1 – 4	$	38,167	$	101,497	$	129,476	$	38,182	$	8,393	$	11,100	$	326,815	$	396,886	$	723,701
Grades 5 – 7		25,597		128,333		42,304		26,770		8,472		512		231,988		194,070		426,058
Grades 8 – 9		9,947		24		249		0		0		43		10,263		13,418		23,681
Total	$	73,711	$	229,854	$	172,029	$	64,952	$	16,865	$	11,655	$	569,066	$	604,374	$	1,173,440
Current year-to-date gross write offs	$	0	$	36	$	0	$	0	$	0	$	0	$	36	$	0	$	36

Vacant Land, Land Development and Residential Construction:
Grades 1 – 4	$	2,916	$	28,645	$	5,225	$	3,121	$	0	$	321	$	40,228	$	0	$	40,228
Grades 5 – 7		5,310		11,643		7,602		341		48		586		25,530		374		25,904
Grades 8 – 9		0		0		0		0		0		101		101		0		101
Total	$	8,226	$	40,288	$	12,827	$	3,462	$	48	$	1,008	$	65,859	$	374	$	66,233
Current year-to-date gross write offs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

Real Estate – Owner Occupied:
Grades 1 – 4	$	39,686	$	167,851	$	110,400	$	51,319	$	18,545	$	22,312	$	410,113	$	0	$	410,113
Grades 5 – 7		15,364		97,215		42,009		32,707		9,976		12,171		209,442		0		209,442
Grades 8 – 9		7,500		2,966		0		44		0		122		10,632		0		10,632
Total	$	62,550	$	268,032	$	152,409	$	84,070	$	28,521	$	34,605	$	630,187	$	0	$	630,187
Current year-to-date gross write offs	$	0	$	14	$	0	$	0	$	0	$	0	$	14	$	0	$	14

Real Estate – Non-Owner Occupied:
Grades 1 – 4	$	11,142	$	114,392	$	162,687	$	92,232	$	47,592	$	21,345	$	449,390	$	0	$	449,390
Grades 5 – 7		65,990		174,725		156,779		112,205		31,078		48,780		589,557		0		589,557
Grades 8 – 9		0		6,644		5,630		0		0		0		12,274		0		12,274
Total	$	77,132	$	295,761	$	325,096	$	204,437	$	78,670	$	70,125	$	1,051,221	$	0	$	1,051,221
Current year-to-date gross write offs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

Real Estate – Multi-Family and Residential Rental:
Grades 1 – 4	$	9,717	$	31,937	$	39,603	$	35,737	$	5,213	$	6,386	$	128,593	$	0	$	128,593
Grades 5 – 7		5,470		32,355		23,634		12,323		3,041		2,602		79,425		0		79,425
Grades 8 – 9		0		11,250		0		0		0		71		11,321		0		11,321
Total	$	15,187	$	75,542	$	63,237	$	48,060	$	8,254	$	9,059	$	219,339	$	0	$	219,339
Current year-to-date gross write offs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

Total Commercial	$	236,806	$	909,477	$	725,598	$	404,981	$	132,358	$	126,452	$	2,535,672	$	604,748	$	3,140,420
Total Comm current YTD gross write offs	$	0	$	50	$	0	$	0	$	0	$	0	$	50	$	0	$	50

	Retail Home Equity and Other		Retail 1-4 Family Mortgages

Performing	$	60,369,000	$	440,861,000
Nonperforming		119,000		1,686,000
Total retail	$	60,488,000	$	442,547,000

	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			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

	Retail			Retail
	1-4 Family			Other Consumer
	Mortgages			Loans
Retail Loan Portfolio:
Beginning Balance	$	627,000		$	1,202,000
Charge-Offs		0			0
Payments		(78,000	)		(2,000	)
Transfers to ORE		0			0
Net Additions/Deletions (1)		1,797,000			(1,187,000	)
Ending Balance	$	2,346,000		$	13,000

	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, 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

											Minimum Required
											to be Well
						Minimum Required					Capitalized Under
						for Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2023
Total capital (to risk weighted assets)
Consolidated	$	652,509		14.1	%	$	369,891		8.0	%	$	NA		NA
Bank		636,393		13.8			369,708		8.0			462,134		10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated		520,918		11.3			277,418		6.0		NA		NA
Bank		593,516		12.8			277,281		6.0			369,708		8.0
Common equity tier 1 (to risk weighted assets)
Consolidated		473,863		10.3			208,064		4.5		NA		NA
Bank		593,516		12.8			207,961		4.5			300,388		6.5
Tier 1 capital (to average assets)
Consolidated		520,918		10.7			195,380		4.0		NA		NA
Bank		593,516		12.2			195,290		4.0			244,112		5.0

December 31, 2022
Total capital (to risk weighted assets)
Consolidated	$	634,729		14.0	%	$	362,675		8.0	%	$	NA		NA
Bank		618,709		13.7			362,490		8.0			453,112		10.0	%
Tier 1 capital (to risk weighted assets)
Consolidated		503,855		11.1			272,007		6.0		NA		NA
Bank		576,463		12.7			271,868		6.0			362,490		8.0
Common equity tier 1 (to risk weighted assets)
Consolidated		456,970		10.1			204,005		4.5		NA		NA
Bank		576,463		12.7			203,901		4.5			294,523		6.5
Tier 1 capital (to average assets)
Consolidated		503,855		10.1			199,647		4.0		NA		NA
Bank		576,463		11.6			199,563		4.0			249,453		5.0

NONPERFORMING LOANS RECONCILIATION

	1st Qtr			4th Qtr			3rd Qtr			2nd Qtr			1st Qtr
	2023			2022			2022			2022			2022

Beginning balance	$	7,728,000		$	1,416,000		$	1,787,000		$	1,612,000		$	2,468,000
Additions, net of transfers to ORE		662,000			6,368,000			0			309,000			93,000
Returns to performing status		(31,000	)		0			(160,000	)		0			(213,000	)
Principal payments		(515,000	)		(56,000	)		(211,000	)		(134,000	)		(641,000	)
Loan charge-offs		(62,000	)		0			0			0			(95,000	)

Total	$	7,782,000		$	7,728,000		$	1,416,000		$	1,787,000		$	1,612,000

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	%

Outstanding balance at March 31, 2023	$	227,453,000
Weighted average interest rate at March 31, 2023		1.44	%
Maximum daily balance three months ended March 31, 2023	$	255,180,000
Average daily balance for three months ended March 31, 2023	$	195,574,000
Weighted average interest rate for three months ended March 31, 2023		0.84	%

	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	%

Period	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		0	$	0		0	$	6,818,000
May 1 – 31		0		0		0		6,818,000
June 1 – 30		0		0		0		6,818,000
Total		0	$	0		0	$	6,818,000

EXHIBIT NO.	EXHIBIT DESCRIPTION

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

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, 2022,~~March 31, 2023, 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)

	MERCANTILE BANK CORPORATION



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



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