[PART I. Financial Information](index=3&type=section&id=PART%20I.%20Financial%20Information) [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements of Mercantile Bank Corporation, including balance sheets, income statements, comprehensive income statements, statements of changes in shareholders' equity, and cash flow statements, along with detailed notes explaining significant accounting policies and specific financial instrument details [Consolidated Balance Sheets (Unaudited)](index=3&type=section&id=Consolidated%20Balance%20Sheets%20(Unaudited)) Total assets decreased to $5,175.9 million, driven by lower cash and deposits, offset by loan growth; liabilities and equity also declined | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Total assets | $5,175,899 | $5,257,749 | $(81,850) | | Total cash and cash equivalents | $770,204 | $975,160 | $(204,956) | | Loans, net | $3,520,637 | $3,418,096 | $102,541 | | Total deposits | $3,976,251 | $4,083,193 | $(106,942) | | Total liabilities | $4,739,428 | $4,801,190 | $(61,762) | | Total shareholders' equity | $436,471 | $456,559 | $(20,088) | [Consolidated Statements of Income (Unaudited)](index=4&type=section&id=Consolidated%20Statements%20of%20Income%20(Unaudited)) Net income decreased to **$11.5 million** in Q1 2022, driven by lower noninterest income, despite higher net interest income and reduced credit loss provision | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | :------------- | | Total interest income | $35,882 | $34,785 | $1,097 | 3.15% | | Total interest expense | $4,997 | $5,252 | $(255) | -4.86% | | Net interest income | $30,885 | $29,533 | $1,352 | 4.58% | | Provision for credit losses | $100 | $300 | $(200) | -66.67% | | Total noninterest income | $9,277 | $13,463 | $(4,186) | -31.09% | | Total noninterest expenses | $25,742 | $25,117 | $625 | 2.49% | | Net income | $11,492 | $14,239 | $(2,747) | -19.29% | | Basic earnings per share | $0.73 | $0.87 | $(0.14) | -16.09% | | Diluted earnings per share | $0.73 | $0.87 | $(0.14) | -16.09% | | Cash dividends per share | $0.31 | $0.29 | $0.02 | 6.90% | [Consolidated Statements of Comprehensive Income (Unaudited)](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20(Unaudited)) Comprehensive income shifted from a gain to a **$16.7 million** loss in Q1 2022, driven by significant unrealized losses on available-for-sale securities | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | | :------------------------------------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | | Net income | $11,492 | $14,239 | $(2,747) | | Unrealized holding gains (losses) on securities available for sale | $(35,650) | $(9,168) | $(26,482) | | Tax effect of unrealized holding gains (losses) on securities AFS | $7,487 | $1,925 | $5,562 |\n| Other comprehensive income (loss), net of tax effect | $(28,163) | $(7,243) | $(20,920) | | Comprehensive income (loss) | $(16,671) | $6,996 | $(23,667) | [Consolidated Statements of Changes in Shareholders' Equity (Unaudited)](index=7&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity%20(Unaudited)) Shareholders' equity decreased to **$436.5 million**, primarily due to a **$28.2 million** net unrealized loss on available-for-sale securities, offsetting net income | Metric | Balances, January 1, 2022 (in thousands) | Balances, March 31, 2022 (in thousands) | Change (in thousands) | | :------------------------------------------------------------------ | :--------------------------------------- | :-------------------------------------- | :-------------------- | | Common Stock | $285,752 | $286,831 | $1,079 | | Retained Earnings | $174,536 | $181,532 | $6,996 | | Accumulated Other Comprehensive Income (Loss) | $(3,729) | $(31,892) | $(28,163) | | Total Shareholders' Equity | $456,559 | $436,471 | $(20,088) | - The change in net unrealized holding gain/(loss) on securities available for sale, net of tax effect, was a significant negative impact of **$(28,163) thousand** on shareholders' equity during Q1 2022[19](index=19&type=chunk) [Consolidated Statements of Cash Flows (Unaudited)](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20(Unaudited)) Cash and cash equivalents significantly decreased by **$205.0 million** in Q1 2022, driven by net cash used in investing and financing activities | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (in thousands) | | :-------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | | Net cash from (for) operating activities | $27,888 | $(1,421) | $29,309 | | Net cash for investing activities | $(151,130) | $(237,925) | $86,795 | | Net cash from (for) financing activities | $(81,714) | $265,684 | $(347,398) | | Net change in cash and cash equivalents | $(204,956) | $26,338 | $(235,304) | | Cash and cash equivalents at end of period | $770,204 | $652,344 | $117,860 | [Notes to Consolidated Financial Statements (Unaudited)](index=11&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements%20(Unaudited)) This section details disclosures for financial statements, covering accounting policies, financial instruments, regulatory capital, CECL adoption, pandemic impact, and fair value measurements [Note 1. Significant Accounting Policies](index=11&type=section&id=Note%201.%20Significant%20Accounting%20Policies) This note outlines financial statement presentation, pandemic impact, PPP accounting, and CECL adoption, detailing key policies for securities, loans, and credit losses - The company adopted the CECL methodology effective January 1, 2022, using the modified retrospective method. This resulted in a **$0.4 million** decrease in the allowance for credit losses and a **$0.3 million** increase to retained earnings[55](index=55&type=chunk)[211](index=211&type=chunk) - The Coronavirus Pandemic continues to pose stress and uncertainty, potentially impacting financial condition and results of operations through declining asset quality and negative effects on net interest income due to an asset-sensitive position[33](index=33&type=chunk)[222](index=222&type=chunk) | PPP Loan Program | Originated Loans (approx.) | Forgiveness Transactions (as of March 31, 2022) | Net Loan Origination Fees (Q1 2022) | | :--------------- | :------------------------- | :---------------------------------------------- | :---------------------------------- | | First Draw | $553 million (2,200 loans) | All but 6 loans ($0.9 million) | < $0.1 million | | Second Draw | $208 million (1,200 loans) | All but 38 loans ($11.3 million) | $0.8 million | [Note 2. Securities](index=21&type=section&id=Note%202.%20Securities) Debt securities, classified as available for sale, are carried at fair value and experienced a significant increase in unrealized losses in Q1 2022 due to changing interest rates | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | | :-------------------------------------- | :---------------------------- | :------------------------------- | :-------------------- | | Securities available for sale (Fair Value) | $605,661 | $592,743 | $12,918 | | Gross Unrealized Gains | $776 | $5,238 | $(4,462) | | Gross Unrealized Losses | $(41,146) | $(9,958) | $(31,188) | | Net Unrealized Loss | $(40,370) | $(4,720) | $(35,650) | - At March 31, 2022, **527 debt securities** had unrealized losses aggregating **$41.1 million**, up from **$10.0 million** (**333 securities**) at December 31, 2021. These losses are attributed to changing interest rate environments, and the company does not intend to sell them before recovery[102](index=102&type=chunk) [Note 3. Loans and Allowance for Credit Losses](index=23&type=section&id=Note%203.%20Loans%20and%20Allowance%20for%20Credit%20Losses) Total loans increased by **$102 million** to **$3.56 billion**, driven by commercial and retail growth, while nonperforming loans decreased and the allowance for credit losses remained stable | Loan Category | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | % Change | | :---------------------------------------------- | :---------------------------- | :------------------------------- | :-------------------- | :------- | | Total loans | $3,555,790 | $3,453,459 | $102,331 | 3.0% | | Commercial and industrial (incl. PPP) | $1,153,814 | $1,137,419 | $16,395 | 1.4% | | Vacant land, land development, residential construction | $52,693 | $43,239 | $9,454 | 21.9% | | 1-4 family mortgages | $522,556 | $442,547 | $80,009 | 18.1% | | Other consumer loans | $28,672 | $60,488 | $(31,816) | -52.6% | | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | | :------------------------------------ | :---------------------------- | :------------------------------- | :-------------------- | | Total nonperforming loans | $1,612 | $2,468 | $(856) | | Allowance for credit losses | $35,153 | $35,363 | $(210) | | Allowance for credit losses as % of total loans | 0.99% | 1.02% | -0.03% | - Net loan recoveries totaled **$0.1 million** in Q1 2022 (**0.01%** of average total loans annualized), resulting from **$0.3 million** in recoveries offsetting **$0.2 million** in charge-offs[132](index=132&type=chunk)[253](index=253&type=chunk) [Note 4. Premises and Equipment, Net](index=40&type=section&id=Note%204.%20Premises%20and%20Equipment,%20Net) Net premises and equipment decreased by **$1.2 million** to **$56.1 million** due to depreciation expense, with details on operating lease commitments for banking facilities | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | | :-------------------------- | :---------------------------- | :------------------------------- | :-------------------- | | Premises and equipment, net | $56,078 | $57,298 | $(1,220) | | Depreciation expense (Q1) | $1,600 | $1,400 | $200 | - The company has operating lease liabilities and right-of-use assets of **$2.6 million** as of March 31, 2022, for ten banking facilities with maturities ranging from June 2022 through December 2026[144](index=144&type=chunk)[146](index=146&type=chunk) [Note 5. Deposits](index=42&type=section&id=Note%205.%20Deposits) Total deposits decreased by **$107 million** to **$3.98 billion**, mainly due to lower money market and time deposits, with a single customer withdrawal impacting local deposits | Deposit Type | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | % Change | | :---------------------------- | :---------------------------- | :------------------------------- | :-------------------- | :------- | | Total deposits | $3,976,251 | $4,083,193 | $(106,942) | -2.6% | | Noninterest-bearing checking | $1,686,203 | $1,677,952 | $8,251 | 0.5% | | Interest-bearing checking | $544,221 | $538,838 | $5,383 | 1.0% | | Money market | $943,246 | $1,040,176 | $(96,930) | -9.3% | | Savings | $406,545 | $394,330 | $12,215 | 3.1% | | Time, under $100,000 | $127,755 | $132,776 | $(5,021) | -3.8% | | Time, $100,000 and over | $252,088 | $275,208 | $(23,120) | -8.4% | - The decrease in local deposits primarily reflected a single customer's withdrawal of a majority of funds deposited in late 2021. Excluding this, local deposits were up approximately **$50 million**[231](index=231&type=chunk)[266](index=266&type=chunk) [Note 6. Securities Sold Under Agreements to Repurchase](index=42&type=section&id=Note%206.%20Securities%20Sold%20Under%20Agreements%20to%20Repurchase) Repurchase agreements increased to **$204.3 million** at March 31, 2022, from **$197.5 million**, with the average interest rate remaining low | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | | :-------------------------------------- | :---------------------------- | :------------------------------- | :-------------------- | | Outstanding balance at end of period | $204,271 | $197,463 | $6,808 | | Average interest rate at end of period | 0.10% | 0.11% | -0.01% | | Average daily balance during the period | $198,949 | $158,855 | $40,094 | [Note 7. Federal Home Loan Bank of Indianapolis Advances](index=43&type=section&id=Note%207.%20Federal%20Home%20Loan%20Bank%20of%20Indianapolis%20Advances) FHLBI advances increased by **$8.3 million** to **$382.3 million**, including new amortizing advances, used for interest rate risk management and loan growth | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | | :------------------------------------ | :---------------------------- | :------------------------------- | :-------------------- | | Total FHLBI advances | $382,263 | $374,000 | $8,263 | | FHLBI bullet advances | $354,000 | $374,000 | $(20,000) | | FHLBI amortizing advances | $28,300 | $0 | $28,300 | | Average rate on FHLBI bullet advances | 1.98% | 2.00% | -0.02% | - The company's borrowing line of credit with FHLBI totaled **$932 million** as of March 31, 2022, with **$544 million** remaining availability based on collateral[155](index=155&type=chunk) [Note 8. Commitments and Off-Balance Sheet Risk](index=43&type=section&id=Note%208.%20Commitments%20and%20Off-Balance%20Sheet%20Risk) Off-balance sheet commitments totaled **$1.54 billion**, primarily commercial unused lines and loan commitments, with an allowance for credit exposures maintained | Off-Balance Sheet Item | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | | :------------------------------------------------------ | :---------------------------- | :------------------------------- | :-------------------- | | Commercial unused lines of credit | $1,115,888 | $1,098,951 | $16,937 | | Unused lines of credit secured by 1–4 family residential properties | $65,112 | $64,313 | $799 | | Commitments to make loans | $158,102 | $212,476 | $(54,374) | | Standby letters of credit | $32,954 | $33,109 | $(155) | | Total off-balance sheet commitments | $1,540,413 | $1,565,871 | $(25,458) | - The calculated allowance for retail lines of credit and credit cards as of March 31, 2022, was **less than $0.1 million**[160](index=160&type=chunk) [Note 9. Derivatives and Hedging Activities](index=44&type=section&id=Note%209.%20Derivatives%20and%20Hedging%20Activities) Interest rate swaps manage commercial loan interest rate risk, not for trading, with a **$338.2 million** notional amount and a **$0.2 million** net liability as of March 31, 2022 | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | | :-------------------------------------- | :---------------------------- | :------------------------------- | :-------------------- | | Notional Amount of Interest Rate Swaps | $338,231 | $279,419 | $58,812 | | Derivative Assets (Fair Value) | $10,053 | $4,609 | $5,444 | | Derivative Liabilities (Fair Value) | $10,246 | $4,857 | $5,389 | | Net Fair Value (Liabilities - Assets) | $(193) | $(248) | $55 | - The effect of interest rate swaps not designated as hedging instruments resulted in noninterest income of **less than $0.1 million** during Q1 2022[165](index=165&type=chunk) [Note 10. Fair Values of Financial Instruments](index=46&type=section&id=Note%2010.%20Fair%20Values%20of%20Financial%20Instruments) This note presents carrying and fair values for financial instruments, with valuations based on market prices, dealer quotes, exit price models, and valuation models | Financial Instrument | March 31, 2022 Carrying Value (in thousands) | March 31, 2022 Fair Value (in thousands) | December 31, 2021 Carrying Value (in thousands) | December 31, 2021 Fair Value (in thousands) | | :------------------------------ | :------------------------------------------- | :--------------------------------------- | :---------------------------------------------- | :------------------------------------------ | | Securities available for sale | $605,661 | $605,661 | $592,743 | $592,743 | | Loans, net | $3,520,637 | $3,542,217 | $3,418,096 | $3,498,345 | | Deposits | $3,976,251 | $3,795,104 | $4,083,193 | $4,028,249 | | FHLBI advances | $382,263 | $372,887 | $374,000 | $384,927 | | Interest rate swaps (assets) | $10,053 | $10,053 | $4,609 | $4,609 | | Interest rate swaps (liabilities) | $10,246 | $10,246 | $4,857 | $4,857 | [Note 11. Fair Values](index=47&type=section&id=Note%2011.%20Fair%20Values) This note defines fair value and outlines the Level 1, 2, and 3 hierarchy, describing methodologies for valuing securities, derivatives, and impaired loans - The company uses a fair value hierarchy: **Level 1** (quoted prices in active markets), **Level 2** (significant other observable inputs), and **Level 3** (significant unobservable inputs)[177](index=177&type=chunk)[178](index=178&type=chunk)[179](index=179&type=chunk) | Asset Type (Recurring Fair Value) | Total (in thousands) | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | | :-------------------------------------- | :------------------- | :--------------------- | :--------------------- | :--------------------- | | **March 31, 2022** | | | | | | U.S. Government agency debt obligations | $410,578 | $0 | $410,578 | $0 | | Mortgage-backed securities | $37,746 | $0 | $37,746 | $0 | | Municipal general obligation bonds | $134,671 | $0 | $133,994 | $677 | | Municipal revenue bonds | $22,166 | $0 | $22,166 | $0 | | Interest rate swaps | $10,053 | $0 | $10,053 | $0 | | **December 31, 2021** | | | | | | U.S. Government agency debt obligations | $390,371 | $0 | $390,371 | $0 | | Mortgage-backed securities | $41,803 | $0 | $41,803 | $0 | | Municipal general obligation bonds | $137,594 | $0 | $136,917 | $677 | | Municipal revenue bonds | $22,475 | $0 | $22,475 | $0 | | Interest rate swaps | $4,609 | $0 | $4,609 | $0 | | Asset Type (Nonrecurring Fair Value) | Total (in thousands) | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | | :----------------------------------- | :------------------- | :--------------------- | :--------------------- | :--------------------- | | **March 31, 2022** | | | | | | Loans | $1,338 | $0 | $0 | $1,338 | | **December 31, 2021** | | | | | | Impaired loans | $3,807 | $0 | $0 | $3,807 | [Note 12. Regulatory Matters](index=50&type=section&id=Note%2012.%20Regulatory%20Matters) The company and its bank were "well capitalized" at March 31, 2022, exceeding all minimum regulatory capital ratios, with details on dividends and stock repurchase programs - Both Mercantile Bank Corporation (consolidated) and Mercantile Bank (bank) were categorized as **"well capitalized"** under regulatory frameworks as of March 31, 2022, and December 31, 2021[193](index=193&type=chunk) | Capital Ratio (Consolidated) | Actual Ratio (March 31, 2022) | Minimum Required for Capital Adequacy | | :--------------------------------------- | :---------------------------- | :------------------------------------ | | Total capital (to risk weighted assets) | 14.1% | 8.0% | | Tier 1 capital (to risk weighted assets) | 11.1% | 6.0% | | Common equity tier 1 (to risk weighted assets) | 10.0% | 4.5% | | Tier 1 capital (to average assets) | 9.0% | 4.0% | - The Board of Directors declared a cash dividend of **$0.31 per share** for Q1 2022, paid on March 16, 2022, and another **$0.31 per share** dividend declared on April 14, 2022, to be paid on June 15, 2022[200](index=200&type=chunk) - As of March 31, 2022, the company had **$6.8 million** remaining under a **$20.0 million** common stock repurchase program authorized in May 2021. No shares were repurchased in Q1 2022[201](index=201&type=chunk)[313](index=313&type=chunk)[315](index=315&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=53&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 2022 financial performance and condition, covering critical accounting policies, pandemic impact, liquidity, capital, and operations, highlighting loan growth, declining mortgage income, and CECL adoption [Forward-Looking Statements](index=53&type=section&id=Forward-Looking%20Statements) This section notes the report contains forward-looking statements subject to risks and uncertainties, where actual results may differ materially, with no obligation to update - The report contains forward-looking statements that are not guarantees of future performance and involve risks, uncertainties, and assumptions that could cause actual results to differ materially[203](index=203&type=chunk) - Future factors influencing performance include adverse changes in interest rates, inflation, real estate values, market volatility, competition, regulatory changes, cyber-attacks, litigation, and the ongoing impact of the Coronavirus Pandemic[204](index=204&type=chunk) [Introduction](index=53&type=section&id=Introduction) This section introduces the management's discussion, comparing financial condition at March 31, 2022, and December 31, 2021, and Q1 2022 and Q1 2021 results - The discussion compares financial condition at March 31, 2022, and December 31, 2021, and results of operations for the three months ended March 31, 2022, and March 31, 2021[205](index=205&type=chunk) [Critical Accounting Policies](index=53&type=section&id=Critical%20Accounting%20Policies) Critical accounting policies, including CECL, Income Tax, Debt Securities, Mortgage Servicing Rights, and Goodwill, involve significant judgment and estimates that can materially impact financial statements - Critical accounting policies, including Allowance for Credit Losses, Income Tax Accounting, Debt Securities Available for Sale, Mortgage Servicing Rights, and Goodwill, involve significant judgment and estimates, with potential for material impact on financial statements[206](index=206&type=chunk) - The company adopted the CECL model effective January 1, 2022, replacing the "incurred loss" approach, which resulted in a **$0.4 million** decrease in the allowance for credit losses and a **$0.3 million** increase to retained earnings[209](index=209&type=chunk)[210](index=210&type=chunk)[211](index=211&type=chunk) [Coronavirus Pandemic](index=56&type=section&id=Coronavirus%20Pandemic) The Coronavirus Pandemic continues to create economic stress and uncertainty, potentially impacting financial condition and operations due to asset sensitivity, with details on PPP and regulatory deferrals - The Coronavirus Pandemic continues to cause significant stress and uncertainty, potentially leading to declining asset quality and negative impacts on net interest income due to the company's asset-sensitive position[221](index=221&type=chunk)[222](index=222&type=chunk) - The company participated in the PPP, originating approximately **2,200 loans** (**$553 million**) in the first draw and **1,200 loans** (**$208 million**) in the second draw. As of March 31, 2022, most loans had forgiveness transactions recorded[223](index=223&type=chunk)[224](index=224&type=chunk) - Regulatory relief for Troubled Debt Restructuring (TDR) and Current Expected Credit Loss (CECL) methodology adoption was extended, with the company electing to postpone CECL adoption until January 1, 2022[225](index=225&type=chunk) [First Quarter 2022 Financial Overview](index=57&type=section&id=First%20Quarter%202022%20Financial%20Overview) Net income for Q1 2022 was **$11.5 million** (**$0.73** diluted EPS), down from **$14.2 million** in Q1 2021, primarily due to decreased mortgage banking revenue, despite strong loan growth | Metric | Q1 2022 (in millions) | Q1 2021 (in millions) | Change (in millions) | YoY Change (%) | | :-------------------------- | :-------------------- | :-------------------- | :------------------- | :------------- | | Net income | $11.5 | $14.2 | $(2.7) | -19.01% | | Diluted EPS | $0.73 | $0.87 | $(0.14) | -16.09% | | Provision for credit losses | $0.1 | $0.3 | $(0.2) | -66.67% | - Core commercial loans increased by **$82.0 million** (over **11%** annualized) in Q1 2022, while PPP payment activities aggregated **$27.9 million**[227](index=227&type=chunk) - Nonperforming loans were very low at **0.05%** of total loans as of March 31, 2022, and the company had no foreclosed properties. Net loan recoveries totaled **$0.1 million** in Q1 2022[228](index=228&type=chunk) - Elevated interest-earning balances (primarily at the Federal Reserve Bank of Chicago) negatively impacted net interest margin due to increased local deposits from federal stimulus and reduced spending[230](index=230&type=chunk) [Financial Condition](index=58&type=section&id=Financial%20Condition) Total assets decreased by **$81.9 million** to **$5.18 billion**, driven by lower interest-earning deposits, partially offset by increased loans and securities, with nonperforming assets remaining low | Metric | March 31, 2022 (in millions) | December 31, 2021 (in millions) | Change (in millions) | | :-------------------------------------- | :--------------------------- | :------------------------------ | :------------------- | | Total assets | $5,180 | $5,258 | $(78) | | Total loans | $3,556 | $3,453 | $103 | | Securities available for sale | $606 | $593 | $13 | | Interest-earning deposits | $699 | $916 | $(217) | | Total deposits | $3,976 | $4,083 | $(107) | | Nonperforming assets | $1.6 | $2.5 | $(0.9) | - Commercial loans increased **$54.1 million** in Q1 2022, with core commercial loans growing **$82.0 million** (**11%** annualized), while PPP loan activities reduced by **$27.9 million**[236](index=236&type=chunk) - Residential mortgage loans increased **$48.1 million** to **$523 million**, representing **14.7%** of total loans. Originations declined by almost **32%** YoY, with refinance activity decreasing significantly[239](index=239&type=chunk) - The allowance for credit losses was **$35.2 million**, or **0.99%** of total loans, and **2,181%** of nonperforming loans, as of March 31, 2022[253](index=253&type=chunk) [Liquidity](index=65&type=section&id=Liquidity) The company manages liquidity through deposits, borrowed funds, and capital, with wholesale funds stable at **$398 million**, sweep accounts increasing, and FHLBI advances rising, maintaining significant borrowing capacity - Wholesale funds, comprising out-of-market deposits and FHLBI advances, totaled **$398 million** (**8.7%** of combined deposits and borrowed funds) as of March 31, 2022, stable from December 31, 2021[273](index=273&type=chunk) | Metric | March 31, 2022 (in thousands) | | :-------------------------------------- | :---------------------------- | | Repurchase agreements outstanding balance | $204,271 | | FHLBI advances | $382,263 | | Correspondent bank unsecured federal funds purchased lines of credit | $70,000 | | Federal Reserve Bank of Chicago Discount Window availability | $31,100 | - The company had **$1.51 billion** in unfunded loan commitments and **$33.0 million** in unfunded standby letters of credit as of March 31, 2022[277](index=277&type=chunk) [Capital Resources](index=66&type=section&id=Capital%20Resources) Shareholders' equity decreased to **$436 million** due to a **$28.2 million** after-tax decline in available-for-sale securities, while the bank's total risk-based capital ratio exceeded minimums | Metric | March 31, 2022 (in millions) | December 31, 2021 (in millions) | Change (in millions) | | :-------------------------------------- | :--------------------------- | :------------------------------ | :------------------- | | Shareholders' equity | $436 | $457 | $(21) | | After-tax decline in AFS securities market value | $(28.2) | N/A | N/A | - The bank's total risk-based capital ratio was **13.8%** at March 31, 2022, exceeding the **10.0%** minimum for "well capitalized" status by **$157 million**[282](index=282&type=chunk) - The company had **$6.8 million** remaining under its **$20.0 million** common stock repurchase program as of March 31, 2022, with no repurchases made in Q1 2022[201](index=201&type=chunk)[313](index=313&type=chunk)[315](index=315&type=chunk) [Results of Operations](index=67&type=section&id=Results%20of%20Operations) Net income for Q1 2022 was **$11.5 million**, down from **$14.2 million** in Q1 2021, driven by decreased noninterest income and increased noninterest expense, offset by improved net interest income | Metric | Q1 2022 (in millions) | Q1 2021 (in millions) | Change (in millions) | YoY Change (%) | | :-------------------------- | :-------------------- | :-------------------- | :------------------- | :------------- | | Net income | $11.5 | $14.2 | $(2.7) | -19.01% | | Net interest income | $30.9 | $29.5 | $1.4 | 4.75% | | Noninterest income | $9.3 | $13.5 | $(4.2) | -31.11% | | Noninterest expense | $25.7 | $25.1 | $0.6 | 2.39% | | Provision for credit losses | $0.1 | $0.3 | $(0.2) | -66.67% | | Metric | Q1 2022 | Q1 2021 | Change | | :-------------------------------------- | :------ | :------ | :----- | | Net interest margin on earning assets | 2.57% | 2.77% | -0.20% | | Yield on average earning assets | 2.99% | 3.26% | -0.27% | | Weighted average cost of interest-bearing liabilities | 0.66% | 0.82% | -0.16% | - Mortgage banking income significantly decreased due to reduced refinance activity (down **59%** YoY) and rising interest rates, despite a **24%** increase in purchase mortgage originations[292](index=292&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=70&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Primary market risk is interest rate risk, managed via GAP analysis and net interest income simulation, projecting increased net interest income with rising rates and showing cumulative positive GAP - The company's primary market risk exposure is interest rate risk, managed using GAP analysis and net interest income simulation[295](index=295&type=chunk)[296](index=296&type=chunk) | Interest Rate Scenario (over next 12 months) | Dollar Change in Net Interest Income (in thousands) | Percent Change in Net Interest Income | | :------------------------------------------- | :-------------------------------------------------- | :------------------------------------ | | Interest rates down 100 basis points | $9,100 | 7.0% | | Interest rates up 100 basis points | $7,400 | 5.7% | | Interest rates up 200 basis points | $15,100 | 11.7% | | Interest rates up 300 basis points | $22,800 | 17.6% | | Interest rates up 400 basis points | $30,500 | 23.6% | | GAP Position (March 31, 2022) | Cumulative GAP (in thousands) | Percent of Cumulative GAP to Total Assets | | :---------------------------- | :---------------------------- | :---------------------------------------- | | Within Three Months | $(424,904) | (8.2)% | | Within Twelve Months | $(320,956) | (6.2)% | | One to Five Years | $752,338 | 14.5% | | After Five Years | $1,863,270 | 36.0% | [Item 4. Controls and Procedures](index=73&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of March 31, 2022, with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2022[306](index=306&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2022[307](index=307&type=chunk) [PART II. Other Information](index=74&type=section&id=PART%20II.%20Other%20Information) [Item 1. Legal Proceedings](index=74&type=section&id=Item%201.%20Legal%20Proceedings) The company is not a party to any current legal proceedings material to its financial condition - The company is not involved in any material legal proceedings[310](index=310&type=chunk) [Item 1A. Risk Factors](index=74&type=section&id=Item%201A.%20Risk%20Factors) No material changes to the risk factors previously disclosed in the company's annual report on Form 10-K - No material changes to risk factors from the prior annual report on Form 10-K[311](index=311&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=74&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No unregistered sales of equity securities or common stock repurchases occurred in Q1 2022, with **$6.8 million** remaining under the repurchase program - No unregistered sales of equity securities were made during Q1 2022[312](index=312&type=chunk) | Metric | Q1 2022 | | :-------------------------------------- | :------ | | Total Number of Shares Purchased | 0 | | Approximate Dollar Value Remaining Under Repurchase Program | $6,818,000 | [Item 3. Defaults Upon Senior Securities](index=74&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable to the company for the reported period - Not applicable[316](index=316&type=chunk) [Item 4. Mine Safety Disclosures](index=74&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company for the reported period - Not applicable[317](index=317&type=chunk) [Item 5. Other Information](index=74&type=section&id=Item%205.%20Other%20Information) This item is not applicable to the company for the reported period - Not applicable[318](index=318&type=chunk) [Item 6. Exhibits](index=75&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including Articles of Incorporation, Bylaws, Certifications, and Inline XBRL financial information - The report includes various exhibits such as Articles of Incorporation, Bylaws, Rule 13a-14(a) Certifications, Section 1350 Certifications, and Inline XBRL financial information[320](index=320&type=chunk) [Signatures](index=76&type=section&id=Signatures) The report was signed by Robert B. Kaminski, Jr. (President and CEO) and Charles E. Christmas (EVP, CFO, and Treasurer) on May 6, 2022 - The report was signed by Robert B. Kaminski, Jr. (President and CEO) and Charles E. Christmas (EVP, CFO, and Treasurer) on May 6, 2022[322](index=322&type=chunk)[323](index=323&type=chunk)

Mercantile Bank Corporation (NASDAQ:MBWM) Q1 2022 Earnings Conference Call April 19, 2022 10:00 AM ET Company Participants Kate Croft - Lambert, Investor Relations Robert Kaminski - President and Chief Executive Officer Charles Christmas - Executive Vice President and Chief Financial Officer Ray Reitsma - Chief Operating Officer and President of the Bank Conference Call Participants Brendan Nosal - Piper Sandler Daniel Tamayo - Raymond James Damon DelMonte - KBW Bryce Rowe - Hovde Group John Rodis - Janney ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2021 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000-26719 MERCANTILE BANK CORPORATION | (Exact name of registrant as specified in its charter) | | | --- | --- | | Michigan | 38-3 ...

Mercantile Bank Corporation (NASDAQ:MBWM) Q4 2021 Earnings Conference Call January 18, 2022 10:00 AM ET Company Participants Kate Croft - Lambert, IR Robert Kaminski - President & CEO Ray Reitsma - EVP, Chief Operating Officer & President of the Bank Charles Christmas - EVP & CFO Conference Call Participants Brendan Nosal - Piper Sandler & Co Damon DelMonte - Keefe, Bruyette & Woods Daniel Tamayo - Raymond James Disclaimer*: This transcript is designed to be used alongside the freely available audio recordi ...

Conference Call and Webcast Presentation Fourth Quarter 2021 Company Overview Forward-Looking Statements Forward-Looking Statements This news release contains statements or information that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," ...

[Financial Information](index=3&type=section&id=PART%20I.%20Financial%20Information) [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements for Mercantile Bank Corporation, including Balance Sheets, Income, Comprehensive Income, Equity, and Cash Flow statements, with detailed accounting notes [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) Total assets grew to **$4.96 billion** as of September 30, 2021, from **$4.44 billion** at year-end 2020, primarily funded by a significant increase in total deposits to **$3.87 billion** Consolidated Balance Sheet Highlights (Unaudited) | (In thousands) | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | **Total Assets** | **$4,964,412** | **$4,437,344** | | Total cash and cash equivalents | $825,361 | $626,006 | | Securities available for sale | $559,564 | $387,347 | | Loans, net | $3,276,286 | $3,155,503 | | **Total Liabilities** | **$4,512,134** | **$3,995,790** | | Total deposits | $3,868,991 | $3,411,553 | | **Total Shareholders' Equity** | **$452,278** | **$441,554** | [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) Net income increased to **$15.1 million** in Q3 2021 and **$47.4 million** for the nine months ended September 30, 2021, driven by higher net interest income, increased noninterest income, and a negative loan loss provision Income Statement Highlights (Unaudited) | (In thousands, except per share data) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net Interest Income | $91,528 | $90,397 | | Provision for loan losses | $(900) | $11,550 | | Total Noninterest Income | $43,587 | $30,839 | | Total Noninterest Expense | $77,519 | $72,579 | | **Net Income** | **$47,382** | **$30,056** | | **Diluted Earnings Per Share** | **$2.95** | **$1.85** | [Consolidated Statements of Cash Flows](index=11&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities was **$19.2 million** for the nine months ended September 30, 2021, with a **$199.4 million** net increase in cash and cash equivalents driven by strong financing activities Cash Flow Summary (Unaudited) | (In thousands) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash from operating activities | $19,169 | $16,306 | | Net cash for investing activities | $(316,436) | $(452,367) | | Net cash from financing activities | $496,622 | $756,921 | | **Net change in cash and cash equivalents** | **$199,355** | **$320,860** | [Notes to Consolidated Financial Statements](index=13&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail significant accounting policies, including COVID-19 impacts like PPP participation and CECL deferral, providing breakdowns of securities, loans, allowances, deposits, derivatives, and regulatory capital - The company has elected to postpone the adoption of the Current Expected Credit Loss (CECL) methodology to January 1, 2022, as permitted by the CARES Act and subsequent extensions, due to the high degree of uncertainty in economic forecasting during the pandemic[71](index=71&type=chunk)[83](index=83&type=chunk) - The company participated extensively in the Paycheck Protection Program (PPP), originating approximately **2,200 loans for $553 million** in the first round and **1,200 loans for $209 million** in the second, with a significant portion of these loans forgiven as of September 30, 2021[39](index=39&type=chunk)[41](index=41&type=chunk) - As of September 30, 2021, the company had no loans remaining in its commercial loan deferment program, with only **six retail borrowers** totaling **$0.5 million** remaining in the retail deferment program[46](index=46&type=chunk)[47](index=47&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=58&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the financial results for Q3 and the first nine months of 2021, highlighting strong net income growth driven by increased net interest income, noninterest income, and a negative loan loss provision, alongside significant asset and deposit growth [Financial Overview](index=62&type=section&id=Financial%20Overview) Net income significantly increased in Q3 2021 and for the first nine months, driven by core commercial loan growth, strong noninterest income, and a negative loan loss provision Key Performance Indicators | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Net Income | $15.1M | $10.7M | | Diluted EPS | $0.95 | $0.66 | | Loan Loss Provision | $1.9M | $3.2M | - Core commercial loans (excluding PPP) grew by **$298 million**, or about **16%** on an annualized basis, during the first nine months of 2021[216](index=216&type=chunk) - Excess liquidity from government stimulus and reduced spending negatively impacted the net interest margin by **40 to 45 basis points** during Q3 and the first nine months of 2021[219](index=219&type=chunk) [Financial Condition](index=64&type=section&id=Financial%20Condition) Total assets grew to **$4.96 billion** in the first nine months of 2021, fueled by deposit growth and core commercial loan expansion, while asset quality remained strong with nonperforming assets at **0.1%** of total assets Loan Portfolio Composition (in thousands) | Loan Type | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Commercial | $2,842,359 | $2,793,962 | | Total Retail | $471,350 | $399,508 | | **Total Loans** | **$3,313,709** | **$3,193,470** | | *PPP Loans (included in Commercial)* | *$116,000* | *$365,000* | - Nonperforming assets were very low at **$2.9 million** (**0.1% of total assets**) as of September 30, 2021, down from **$4.1 million** at year-end 2020[231](index=231&type=chunk) - The allowance for loan losses was **$37.4 million**, or **1.17% of total loans** excluding PPP loans, and covered nonperforming loans by over **1,300%** as of September 30, 2021[238](index=238&type=chunk) [Results of Operations](index=73&type=section&id=Results%20of%20Operations) Net income growth in 2021 was driven by increased net interest income despite margin compression, a negative loan loss provision, surging noninterest income from swaps and mortgage banking, and a moderate rise in noninterest expense Net Interest Margin Analysis | Period | Net Interest Income (Tax-Equiv) | Net Interest Margin | | :--- | :--- | :--- | | Q3 2021 | $31.2M | 2.71% | | Q3 2020 | $29.6M | 2.86% | | YTD 2021 | $91.7M | 2.76% | | YTD 2020 | $90.6M | 3.19% | - Noninterest income for the first nine months of 2021 was **$43.6 million**, a significant increase from **$30.8 million** in the prior year, boosted by a new interest rate swap program and a **$1.1 million** gain on a branch sale[292](index=292&type=chunk) - Noninterest expense for the first nine months of 2021 rose to **$77.5 million** from **$72.6 million** in 2020, primarily due to increased salaries, commissions, and a **$1.2 million** rise in health insurance costs[294](index=294&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=80&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate risk, managed via NII simulation analysis, which projects a **5.5%** increase in NII over the next twelve months if rates rise by **100 basis points** - The primary tool for managing interest rate risk is net interest income simulation analysis, which is considered more accurate than traditional GAP analysis[301](index=301&type=chunk) Net Interest Income Simulation (Next 12 Months) | Interest Rate Scenario | Dollar Change in NII | Percent Change in NII | | :--- | :--- | :--- | | Down 100 bps | $1,600,000 | 1.3% | | Up 100 bps | $6,700,000 | 5.5% | | Up 200 bps | $13,300,000 | 10.7% | | Up 300 bps | $19,700,000 | 16.0% | [Controls and Procedures](index=82&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective as of the end of the period[306](index=306&type=chunk) - No material changes were made to internal controls over financial reporting during the quarter ended September 30, 2021[307](index=307&type=chunk) [Other Information](index=83&type=section&id=PART%20II.%20Other%20Information) [Legal Proceedings](index=83&type=section&id=Item%201.%20Legal%20Proceedings) The company is not a party to any legal proceedings considered material to its financial condition - There are no current legal proceedings that are material to the company's financial condition[310](index=310&type=chunk) [Risk Factors](index=83&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors have been reported since the last annual or quarterly filings - No material changes in risk factors were reported since the last annual or quarterly filings[311](index=311&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=83&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company made no unregistered sales of equity securities in Q3 2021, repurchasing **288,863 shares for $8.9 million** under its authorized program, with **$8.4 million** remaining available Issuer Purchases of Equity Securities (Q3 2021) | Period | Total Shares Purchased | Average Price Paid Per Share | Total Cost (approx.) | | :--- | :--- | :--- | :--- | | July 1 – 31 | 114,412 | $30.62 | $3.5M | | August 1 – 31 | 81,884 | $31.96 | $2.6M | | September 1 – 30 | 92,567 | $30.54 | $2.8M | | **Total** | **288,863** | **$30.97** | **$8.9M** | - A new **$20.0 million** share repurchase program was authorized in May 2021, with **$8.4 million** remaining available under this program as of September 30, 2021[313](index=313&type=chunk)[315](index=315&type=chunk) [Defaults Upon Senior Securities](index=83&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable as there were no defaults upon senior securities [Mine Safety Disclosures](index=83&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable [Other Information](index=84&type=section&id=Item%205.%20Other%20Information) This item is not applicable [Exhibits](index=84&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL financial data

Financial Performance - Net income reached $474 million YTD, a 576% increase from the previous year[2] - Total revenue amounted to $1351 million YTD, driven by increased net interest income (NII) and strong noninterest income growth[2] - Noninterest income accounted for approximately 32% of total revenue, up from 25% in the prior year period, fueled by mortgage banking activities and swap fee income[2,23] - The efficiency ratio improved to 574% YTD, compared to 599% in the prior year period[2] Loan Portfolio - Net commercial loans (excluding PPP loans) experienced an annualized growth of 16% during the first nine months of 2021[2] - Core commercial loans increased by an annualized 25% in 3Q 2021, primarily driven by C&I (Commercial & Industrial) loans[2,30] - Total deposits reached $387 billion, supported by strong local deposit growth, with noninterest-bearing deposits comprising 43% of total deposits[2,38] Strategic Initiatives - The company is focused on expanding the usage of Treasury Management products and services[4] - The company aims to expand customer utilization of digital banking services[5] - The company is focused on cultivating new market growth utilizing knowledgeable staff along with digital products and services in Southeast, MI, Midland, MI, Petoskey, MI, and Cincinnati, OH[9]

PART I. Financial Information [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents Mercantile Bank Corporation's unaudited consolidated financial statements for June 30, 2021, and the three and six-month periods then ended, detailing balance sheets, income, comprehensive income, equity changes, cash flows, and accounting policies [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) As of June 30, 2021, total assets grew 7.2% to **$4,757,414 thousand**, driven by increased cash and securities, while liabilities rose to **$4,305,526 thousand** due to deposit growth, and equity increased to **$451,888 thousand** Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | | **Total Assets** | **4,757,414** | **4,437,344** | **7.2%** | | Total cash and cash equivalents | 759,531 | 626,006 | 21.3% | | Loans, net | 3,212,928 | 3,155,503 | 1.8% | | **Total Liabilities** | **4,305,526** | **3,995,790** | **7.8%** | | Total deposits | 3,671,271 | 3,411,553 | 7.6% | | **Total Shareholders' Equity** | **451,888** | **441,554** | **2.3%** | [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) Q2 2021 net income more than doubled to **$18,091 thousand** ($1.12 diluted EPS) from **$8,698 thousand** in Q2 2020, primarily due to a negative loan loss provision and higher noninterest income Key Income Statement Data (Unaudited) | Metric | Three Months Ended June 30, 2021 ($) | Three Months Ended June 30, 2020 ($) | Six Months Ended June 30, 2021 ($) | Six Months Ended June 30, 2020 ($) | | :--- | :--- | :--- | :--- | :--- | | **Net Interest Income** | $30,871,000 | $30,571,000 | $60,404,000 | $60,887,000 | | **Provision for loan losses** | ($3,100,000) | $7,600,000 | ($2,800,000) | $8,350,000 | | **Noninterest Income** | $14,556,000 | $10,984,000 | $28,019,000 | $17,534,000 | | **Noninterest Expense** | $26,192,000 | $23,216,000 | $51,309,000 | $46,156,000 | | **Net Income** | **$18,091,000** | **$8,698,000** | **$32,331,000** | **$19,370,000** | | **Diluted EPS** | **$1.12** | **$0.54** | **$2.00** | **$1.19** | - Cash dividends per share increased to **$0.29** in Q2 2021 from **$0.28** in Q2 2020, and to **$0.58** for the first six months of 2021 from **$0.56** in the same period of 2020[12](index=12&type=chunk) [Consolidated Statements of Comprehensive Income](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Comprehensive income for Q2 2021 rose to **$21,354 thousand** from **$9,990 thousand** in Q2 2020, driven by net income and securities gains, while the six-month figure was impacted by unrealized losses Comprehensive Income (Unaudited) | Metric | Three Months Ended June 30, 2021 ($) | Three Months Ended June 30, 2020 ($) | Six Months Ended June 30, 2021 ($) | Six Months Ended June 30, 2020 ($) | | :--- | :--- | :--- | :--- | :--- | | **Net Income** | $18,091,000 | $8,698,000 | $32,331,000 | $19,370,000 | | **Other comprehensive income/(loss), net of tax** | $3,263,000 | $1,292,000 | ($3,980,000) | $2,390,000 | | **Comprehensive Income** | **$21,354,000** | **$9,990,000** | **$28,351,000** | **$21,760,000** | [Consolidated Statements of Changes in Shareholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders%27%20Equity) Shareholders' equity increased to **$451,888 thousand** by June 30, 2021, driven by **$32,331 thousand** in net income, partially offset by share repurchases, dividends, and AOCI changes - For the six months ended June 30, 2021, key changes to shareholders' equity included: **+$32,331 thousand** Net Income, **-$10,850 thousand** Share Repurchases, **-$9,200 thousand** Cash Dividends, and **-$3,980 thousand** in AOCI change[20](index=20&type=chunk) - The company repurchased **346,910** shares for **$10,850 thousand** in the first six months of 2021[20](index=20&type=chunk) [Consolidated Statements of Cash Flows](index=11&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For H1 2021, net cash from financing was **$306,096 thousand**, investing used **$194,750 thousand**, and operating provided **$22,179 thousand**, resulting in a **$133,525 thousand** increase in cash and equivalents Net Cash Flow Summary (Six Months Ended June 30) | Cash Flow Activity | 2021 ($ thousands) | 2020 ($ thousands) | | :--- | :--- | :--- | | Net cash (for) from operating activities | 22,179 | (12,389) | | Net cash for investing activities | (194,750) | (412,048) | | Net cash from financing activities | 306,096 | 661,933 | | **Net change in cash and cash equivalents** | **133,525** | **237,496** | [Notes to Consolidated Financial Statements](index=13&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section details accounting policies and financial data, covering COVID-19 impacts, PPP, CECL deferral, securities, loans, allowance for loan losses, deposits, borrowings, derivatives, fair value, and regulatory capital - The company has elected to postpone the adoption of the Current Expected Credit Loss (CECL) methodology to January 1, 2022, as permitted by the Consolidated Appropriations Act, 2021[45](index=45&type=chunk)[83](index=83&type=chunk) - Under the Paycheck Protection Program (PPP), the company originated approximately **2,200** loans totaling **$553,000 thousand** in the first round and **1,200** loans totaling **$209,000 thousand** in the second round. As of June 30, 2021, forgiveness had been processed for **$487,000 thousand** and **$29,200 thousand**, respectively[39](index=39&type=chunk)[41](index=41&type=chunk) - The company's loan deferment programs in response to COVID-19 have wound down significantly. As of June 30, 2021, no commercial loans and only **six** retail loans (totaling **$500 thousand**) remained in the deferment program, down from a peak of nearly **750** commercial borrowers with **$719,000 thousand** in loans[46](index=46&type=chunk)[47](index=47&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=58&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial condition and operations, highlighting the positive impact of a negative loan loss provision and strong noninterest income on Q2 and H1 2021 earnings, alongside COVID-19 effects, asset quality, liquidity, capital, and interest rate risk management - Net income for Q2 2021 was **$18,091 thousand** (**$1.12**/share), up from **$8,698 thousand** (**$0.54**/share) in Q2 2020. For H1 2021, net income was **$32,331 thousand** (**$2.00**/share), up from **$19,370 thousand** (**$1.19**/share) in H1 2020[212](index=212&type=chunk) - The improved performance in 2021 was primarily due to a negative loan loss provision of **$3,100 thousand** in Q2 2021 (vs. a **$7,600 thousand** expense in Q2 2020) and increased noninterest income, which offset higher noninterest expenses[215](index=215&type=chunk)[276](index=276&type=chunk) - Excess liquidity from government stimulus and reduced spending negatively impacted the net interest margin by **35 to 40 basis points** during Q2 and H1 2021[216](index=216&type=chunk)[254](index=254&type=chunk) [Financial Condition](index=64&type=section&id=MD%26A_Financial_Condition) Total assets grew by **$320,000 thousand** to **$4,757,414 thousand** in H1 2021, driven by core commercial loan growth and increased deposits, while asset quality remained strong with nonperforming assets at **0.1%** - Core commercial loans grew approximately **11%** on an annualized basis in the first six months of 2021[222](index=222&type=chunk) - Nonperforming assets decreased to **$3,200 thousand** at June 30, 2021, from **$4,100 thousand** at year-end 2020[230](index=230&type=chunk) - The allowance for loan losses was **$35,900 thousand**, or over **1,300%** of nonperforming loans, as of June 30, 2021[238](index=238&type=chunk) - Total local deposits have increased by **$1,080,000 thousand** since December 31, 2019, with noninterest-bearing checking accounts growing by **$696,000 thousand**[258](index=258&type=chunk) [Results of Operations](index=73&type=section&id=MD%26A_Results_of_Operations) Net income significantly increased in Q2 and H1 2021, driven by a negative loan loss provision and higher noninterest income, despite stable net interest income and rising noninterest expenses Net Interest Margin Analysis | Period | Net Interest Margin | Impact of Excess Liquidity | | :--- | :--- | :--- | | Q2 2021 | 2.76% | -37 bps | | Q2 2020 | 3.17% | N/A | | H1 2021 | 2.76% | -37 bps | | H1 2020 | 3.38% | N/A | - A negative loan loss provision of **$3,100 thousand** was recorded in Q2 2021, mainly due to an improved economic outlook, compared to a **$7,600 thousand** provision expense in Q2 2020 related to the COVID-19 pandemic[244](index=244&type=chunk)[291](index=291&type=chunk) - Noninterest income in Q2 2021 increased by **$3,600 thousand** YoY, driven by a new interest rate swap program (**$1,500 thousand** fee income), a gain on branch sale (**$1,100 thousand**), and higher credit/debit card income[219](index=219&type=chunk)[293](index=293&type=chunk) - Noninterest expense increased by **$3,000 thousand** in Q2 2021 YoY, primarily due to higher compensation costs, including bonus accruals, health insurance, and a lower level of deferred salary expense from PPP originations[295](index=295&type=chunk) [Liquidity](index=71&type=section&id=MD%26A_Liquidity) The company maintains strong liquidity via local deposits and liquid assets, with wholesale funds at **10.0%** of total funding and significant access to additional liquidity, including **$407,000 thousand** in FHLBI borrowing capacity - Wholesale funds totaled **$425,000 thousand**, or **10.0%** of combined deposits and borrowed funds, as of June 30, 2021[263](index=263&type=chunk) - As of June 30, 2021, the company had remaining FHLBI borrowing availability of **$407,000 thousand**[260](index=260&type=chunk)[266](index=266&type=chunk) - Unfunded loan commitments totaled **$1,470,000 thousand** and standby letters of credit totaled **$26,200 thousand** as of June 30, 2021[268](index=268&type=chunk) [Capital Resources](index=73&type=section&id=MD%26A_Capital_Resources) Shareholders' equity increased to **$452,000 thousand** in H1 2021, driven by net income despite share repurchases and dividends, with capital ratios remaining well above regulatory minimums - The company repurchased approximately **347,000** shares for **$10,900 thousand** in the first six months of 2021. A new **$20,000 thousand** repurchase program was authorized in May 2021[271](index=271&type=chunk) - As of June 30, 2021, the bank's total regulatory capital was **$478,000 thousand**, which is **$110,000 thousand** in excess of the **10.0%** minimum required to be categorized as 'well capitalized'[273](index=273&type=chunk) - The company believes it meets all capital adequacy requirements under the fully phased-in BASEL III rules[272](index=272&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=80&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company manages interest rate risk primarily through NII simulation, projecting NII increases in rising rate scenarios and slight decreases in falling rates, while GAP analysis indicates short-term liability sensitivity Net Interest Income Simulation (Next 12 Months) | Interest Rate Scenario | Dollar Change in NII ($ thousands) | Percent Change in NII | | :--- | :--- | :--- | | Down 100 bps | ($500) | (0.4%) | | Up 100 bps | $6,800 | 5.7% | | Up 200 bps | $12,500 | 10.5% | | Up 300 bps | $18,100 | 15.2% | - The company's primary interest rate risk measurement technique is net interest income simulation analysis, which it believes is more accurate than GAP analysis[303](index=303&type=chunk) - The GAP analysis as of June 30, 2021, shows a cumulative asset-liability gap of (**$493,500 thousand**) within one year, representing **-10.4%** of total assets, indicating liability sensitivity in the short term[301](index=301&type=chunk) [Controls and Procedures](index=82&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report[308](index=308&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[309](index=309&type=chunk) PART II. Other Information [Legal Proceedings](index=83&type=section&id=Item%201.%20Legal%20Proceedings) The company is not a party to any current legal proceedings deemed material to its financial condition, individually or in aggregate - The company reports that any legal proceedings it is involved in are incidental to its business and not material to its financial condition[312](index=312&type=chunk) [Risk Factors](index=83&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors from the 2020 Form 10-K, except for updated disclosure on the LIBOR transition and its potential impact on income, expenses, and loan values - A key risk factor highlighted is the uncertainty surrounding the replacement of LIBOR with an alternative reference rate, such as SOFR, which could adversely affect interest income or expense[314](index=314&type=chunk)[315](index=315&type=chunk) - The Bank's Libor Transition Committee is actively managing the transition, but the ultimate impact on funding costs, loan portfolios, and business remains uncertain[316](index=316&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=83&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company made no unregistered equity sales in Q2 2021, but authorized a new **$20,000 thousand** share repurchase program in May, under which **228,649** shares were repurchased for **$7,300 thousand** in Q2 - A new **$20,000 thousand** share repurchase program was authorized on May 27, 2021[318](index=318&type=chunk) Issuer Purchases of Equity Securities (Q2 2021) | Period | Total Shares Purchased | Average Price Paid Per Share ($) | Approx. Dollar Value Remaining Under Plan ($ thousands) | | :--- | :--- | :--- | :--- | | April 1 – 30 | 60,858 | $32.14 | $4,333 | | May 1 – 31 | 83,780 | $32.27 | $1,629 | | June 1 – 30 | 84,011 | $31.59 | $17,346 | | **Total** | **228,649** | **$31.99** | **$17,346** | [Defaults Upon Senior Securities](index=84&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section is not applicable to the current report [Mine Safety Disclosures](index=84&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section is not applicable to the current report [Other Information](index=84&type=section&id=Item%205.%20Other%20Information) This section is not applicable to the current report [Exhibits](index=85&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and financial statements in Inline XBRL format

Financial Data and Key Metrics Changes - The company reported net income of $18.1 million or $1.12 per diluted share for Q2 2021, compared to $8.7 million or $0.54 per diluted share for Q2 2020, and year-to-date net income totaled $32.3 million or $2 per diluted share, up from $19.4 million or $1.19 per diluted share in the same period last year [37][10][11] - Interest income on loans declined due to FOMC rate cuts and a low interest rate environment, with total interest income down $1.4 million year-over-year for Q2 2021 [38][39] - Net interest income increased by $0.3 million in Q2 2021 compared to Q2 2020, but was down $0.5 million year-to-date [41] - The company recorded a negative provision expense of $3.1 million in Q2 2021, compared to a provision expense of $7.6 million in Q2 2020 [42][43] Business Line Data and Key Metrics Changes - Core commercial loan growth year-to-date was $135 million, with an annualized growth rate of 11% and a quarterly growth rate of 8% [22][23] - Mortgage banking income was $7.7 million, with purchase activity representing 61% of originations in Q2 2021, a significant increase from 21% in the same quarter last year [31][32] - Noninterest income for Q2 2021 was $14.6 million, up 33% from the prior year, driven by mortgage banking and other fee income sources [30] Market Data and Key Metrics Changes - Total local deposits increased by $276 million or 8% during the first six months of 2021, and are up $1.1 billion or 42% since year-end 2019 [52] - The company expects elevated levels of overnight deposits to continue, impacting net interest margin negatively [53] Company Strategy and Development Direction - The company remains focused on acquiring new customers and servicing existing ones, leveraging strategic initiatives to increase market share [13][14] - Digital delivery and technology investments are prioritized to meet evolving client needs and enhance operational efficiency [18][19] - The company plans to continue its stock buyback program, having repurchased about 229,000 shares for $7.3 million in Q2 2021 [56][57] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about future performance due to the reopening of the Michigan economy and improvements in economic conditions [7][10] - The company is closely monitoring COVID-19 developments while prioritizing health and safety [9] - Management indicated that while they expect some modest erosion in net interest margin, they are confident in the overall trajectory of the business [74][75] Other Important Information - The company plans to adopt the CECL model on January 1, 2022, with a projected reserve balance under CECL methodology expected to be about $6.6 million lower than the current incurred loss methodology [44][90] - Overhead costs increased by $3.0 million in Q2 2021 compared to the prior year, primarily due to salary and benefit costs [47][48] Q&A Session Summary Question: What drove the strong commercial loan growth this quarter? - Management attributed the growth to the pandemic and the PPP program, which allowed them to support both existing and new clients effectively [64][65] Question: What is the outlook for the margin? - Management expects modest erosion in the core margin over the next couple of quarters, projecting a margin closer to 2.65% to 2.70% for the remainder of the year [74][75] Question: What are the expectations for loan loss provisions going forward? - Management anticipates net loan growth will require some level of reserves, but they expect any reserve release to be larger than what would be needed for new credits [78][85] Question: Can you quantify the pipeline relative to prior periods? - The commercial pipeline remains strong and similar to the first two quarters, while the mortgage pipeline has recovered to equal prior levels [97] Question: How will the remaining repurchase authorization be utilized? - Management views the repurchase authorization as opportunistic, driven by stock price levels [99][102] Question: What are the expectations for PPP loan forgiveness? - Management noted that forgiveness applications are inconsistent, but they expect a significant portion of remaining loans to be forgiven by the end of the year [132][134]

| --- | --- | --- | --- | --- | |-------|------------------------------------------|-------|-------|-------| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | CONFERENCE CALL AND WEBCAST PRESENTATION | | | | | | SECOND QUARTER 2021 | | | | Forward-LookingStatements presentation contains statements or information that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. F ...