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 ...

[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 Mercantile Bank Corporation's unaudited consolidated financial statements, including balance sheets, income, comprehensive income, equity, and cash flow statements, with detailed accounting policy notes [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) Total assets increased to **$4.71 billion** by March 2021, driven by loan and securities growth, with liabilities rising due to increased deposits Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | **Total Assets** | **$4,710,354** | **$4,437,344** | | Total cash and cash equivalents | $652,344 | $626,006 | | Loans, net | $3,325,675 | $3,155,503 | | Securities available for sale | $434,257 | $387,347 | | **Total Liabilities** | **$4,269,111** | **$3,995,790** | | Total deposits | $3,644,962 | $3,411,553 | | Federal Home Loan Bank advances | $394,000 | $394,000 | | **Total Shareholders' Equity** | **$441,243** | **$441,554** | [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) Net income rose to **$14.2 million** in Q1 2021, driven by strong mortgage banking income, despite a slight decline in net interest income Consolidated Income Statement Highlights (in thousands, except per share data) | Account | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net interest income | $29,533 | $30,317 | | Provision for loan losses | $300 | $750 | | Total noninterest income | $13,463 | $6,550 | | Total noninterest expenses | $25,117 | $22,940 | | **Net income** | **$14,239** | **$10,673** | | **Diluted earnings per share** | **$0.87** | **$0.65** | - Mortgage banking income was a key driver of noninterest income growth, increasing from **$2.6 million** in Q1 2020 to **$8.8 million** in Q1 2021[14](index=14&type=chunk) [Consolidated Statements of Comprehensive Income](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Comprehensive income decreased to **$7.0 million** in Q1 2021, primarily due to unrealized losses on available-for-sale securities Consolidated Comprehensive Income (in thousands) | Account | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net income | $14,239 | $10,673 | | Other comprehensive income (loss), net of tax | $(7,243) | $1,098 | | **Comprehensive income** | **$6,996** | **$11,771** | [Consolidated Statements of Changes in Shareholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders%27%20Equity) Shareholders' equity slightly declined to **$441.2 million** due to unrealized losses, share repurchases, and dividends, partially offset by net income - During Q1 2021, the company repurchased **118,261 shares** for **$3.5 million** and paid cash dividends of **$0.29 per common share**, totaling **$4.6 million**[19](index=19&type=chunk) [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Cash and cash equivalents increased by **$26.3 million** in Q1 2021, with financing inflows offsetting operating and investing outflows Net Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net cash for operating activities | $(1,421) | $(9,778) | | Net cash for investing activities | $(237,925) | $(2,293) | | Net cash from financing activities | $265,684 | $15,059 | | **Net change in cash and cash equivalents** | **$26,338** | **$2,988** | [Notes to Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Detailed notes cover accounting policies, COVID-19 impact, PPP, loan and securities portfolios, deposits, and regulatory capital adequacy - The company has elected to postpone the adoption of the Current Expected Credit Loss (CECL) methodology until **January 1, 2022**, as permitted by the CARES Act and subsequent extensions[37](index=37&type=chunk)[64](index=64&type=chunk)[76](index=76&type=chunk) - As of March 31, 2021, the company had originated approximately **1,100 second-draw PPP loans** totaling **$203 million** and had processed forgiveness on approximately **1,600 first-draw loans** totaling **$302 million**[32](index=32&type=chunk)[34](index=34&type=chunk) - Loan payment deferment programs established in response to COVID-19 have seen significant reduction in participation, with only **two commercial borrowers ($1.8 million)** and **ten retail borrowers ($0.8 million)** remaining as of March 31, 2021[39](index=39&type=chunk) - The company entered into an agreement to sell its Hastings, Michigan branch to Lake Trust Credit Union, with an expected closing date of **May 14, 2021**[77](index=77&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=50&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 2021 financial performance, highlighting net income growth from mortgage banking, strong asset quality, deposit growth, and net interest margin compression [Financial Condition](index=55&type=section&id=Financial%20Condition) Total assets reached **$4.71 billion** in Q1 2021, driven by loan and securities growth, while asset quality remained strong with low nonperforming assets Loan Portfolio Composition (in thousands) | Loan Type | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Commercial | $2,967,215 | $2,793,962 | | Total Retail | $397,155 | $399,508 | | **Total Loans** | **$3,364,370** | **$3,193,470** | - Nonperforming assets decreased to **$3.2 million (0.1% of total assets)** at March 31, 2021, from **$4.1 million** at year-end 2020[218](index=218&type=chunk) - The allowance for loan losses stood at **$38.7 million**, representing **1,385% of nonperforming loans** as of March 31, 2021[226](index=226&type=chunk) [Liquidity and Capital Resources](index=63&type=section&id=Liquidity%20and%20Capital%20Resources) Strong liquidity is maintained through significant deposit growth and borrowing capacity, with capital ratios well above regulatory minimums - As of March 31, 2021, the company had **$373 million** in remaining borrowing availability from the FHLBI and **$70.0 million** in unsecured federal funds lines[246](index=246&type=chunk)[252](index=252&type=chunk) - During Q1 2021, the company repurchased approximately **118,000 shares** for **$3.5 million** under its **$20 million** stock repurchase program announced in May 2019[257](index=257&type=chunk) Bank Capital Ratios | Ratio | March 31, 2021 | Well Capitalized Minimum | | :--- | :--- | :--- | | Total risk-based capital | 13.3% | 10.0% | | Tier 1 capital (to risk weighted assets) | 12.2% | 8.0% | | Common equity tier 1 | 12.2% | 6.5% | | Tier 1 capital (to average assets) | 9.5% | 5.0% | [Results of Operations](index=65&type=section&id=Results%20of%20Operations) Net income increased to **$14.2 million** in Q1 2021, driven by noninterest income growth, despite net interest margin compression Net Interest Margin Analysis | Metric | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Net Interest Income (tax-equivalent) | $29,593,000 | $30,377,000 | | Average Earning Assets | $4,329,412,000 | $3,359,591,000 | | **Net Interest Margin** | **2.77%** | **3.63%** | - Excess on-balance sheet liquidity negatively impacted the net interest margin by **44 basis points** during Q1 2021[262](index=262&type=chunk) - Mortgage banking income surged to **$8.8 million** in Q1 2021, up nearly **235%** from **$2.6 million** in Q1 2020, driven by an **85% increase** in residential mortgage loan originations[271](index=271&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=69&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company manages interest rate risk through NII simulation, showing asset sensitivity with NII increasing by **4.9%** for a 100 bps rate hike Net Interest Income Sensitivity Analysis (as of March 31, 2021) | Interest Rate Scenario | Dollar Change in NII | Percent Change in NII | | :--- | :--- | :--- | | Down 100 bps | $(500,000) | (0.4%) | | Up 100 bps | $6,100,000 | 4.9% | | Up 200 bps | $11,100,000 | 9.0% | - The company's primary interest rate risk measurement technique is net interest income simulation analysis, which it believes is more accurate than traditional GAP analysis[280](index=280&type=chunk) [Controls and Procedures](index=71&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of March 31, 2021, with no material changes to internal controls - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by this report[285](index=285&type=chunk) [PART II. Other Information](index=72&type=section&id=PART%20II.%20Other%20Information) [Legal Proceedings](index=72&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently involved in any legal proceedings deemed material to its financial condition - The company is not involved in any material legal proceedings[289](index=289&type=chunk) [Risk Factors](index=72&type=section&id=Item%201A.%20Risk%20Factors) This section details risks from the LIBOR transition, including cessation timelines, alternative rates, and potential impacts on contracts and financial performance - The company faces risks from the planned cessation of U.S. dollar LIBOR, with most tenors being discontinued after **June 30, 2023**[290](index=290&type=chunk)[296](index=296&type=chunk)[299](index=299&type=chunk) - Federal banking agencies have encouraged supervised banks to cease using LIBOR as a reference rate in new contracts as soon as possible, but no later than **December 31, 2021**, to mitigate safety and soundness risks[297](index=297&type=chunk) [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) The company made no unregistered equity sales in Q1 2021, repurchasing **118,261 shares** for **$3.5 million** under its stock repurchase program Issuer Purchases of Equity Securities (Q1 2021) | Period | Total Shares Purchased | Average Price Paid Per Share | Total Cost (approx.) | | :--- | :--- | :--- | :--- | | January | 13,740 | $28.46 | $391,000 | | February | 58,394 | $28.78 | $1,681,000 | | March | 46,127 | $31.78 | $1,466,000 | | **Total** | **118,261** | **$29.91** | **$3,538,000** | - As of the end of Q1 2021, approximately **$6.3 million** remained available under the company's stock repurchase program[307](index=307&type=chunk)

Mercantile Bank Corporation (NASDAQ:MBWM) Q1 2021 Earnings Conference Call April 20, 2021 10:00 AM ET Company Participants Tyler Deur - Lambert, Investor Relations Bob Kaminski - President and CEO Chuck Christmas - Executive Vice President and CFO Ray Reitsma - President, Mercantile Bank, Michigan Conference Call Participants Brendan Nosal - Piper Sandler Damon DelMonte - KBW David Long - Raymond James Bryce Rowe - Hovde Group John Rodis - Janney Operator Good morning. And welcome to the Mercantile Bank Cor ...

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Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 | Title of each class | Trading Symbol(s) | Name of each exchange on which registered | | --- | --- | --- | | Common Stock | MBWM | The Nasdaq Stock Market LLC | 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, 2020 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ...

| --- | --- | --- | |-------|------------------------------------------|-------| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | CONFERENCE CALL AND WEBCAST PRESENTATION | | | | FOURTH QUARTER 2020 | | Forward-LookingStatements This presentation contains comments or information that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any such comments are based on current expectations that involve a number ...

Financial Data and Key Metrics Changes - The company reported net income of $14.1 million, or $0.87 per diluted share for Q4 2020, compared to $13.3 million, or $0.81 per diluted share for Q4 2019 [25] - Full year 2020 net income totaled $44.1 million or $2.71 per diluted share, down from $49.5 million or $3.01 per diluted share in 2019 [25] - Provision expense for Q4 2020 was $2.5 million, compared to a negative $0.7 million in Q4 2019, reflecting the impact of the pandemic [28][30] Business Line Data and Key Metrics Changes - The total loan portfolio decreased to $134 million during the quarter, with a reduction in the C&I portfolio of $176 million, impacted by $189 million of PPP forgiveness [17] - Mortgage banking income increased significantly, with Q4 2020 non-interest income at $14.3 million, up 96% from the prior year [21] - Mortgage loan originations totaled $219 million in Q4 2020, a 100% increase from $111 million in Q4 2019 [38] Market Data and Key Metrics Changes - The company experienced a strong performance in mortgage banking, driven by a higher level of refinance activity due to historically low rates [21] - Non-performing assets totaled $4.1 million or 0.9% of total assets at December 31, 2020, indicating strong asset quality [18] - The yield on loans was up 31 basis points during Q4 2020 compared to Q3 2020, but down 67 basis points compared to Q4 2019 [33] Company Strategy and Development Direction - The company is focused on digital delivery and branch optimization to enhance customer engagement [13] - Strategic initiatives include opening mortgage lending centers in new markets to boost market share and revenue [11] - The company is committed to environmental, social, and governance (ESG) practices, including diversity and community support initiatives [14][15] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's strong asset quality and capital position despite uncertainties from the pandemic [42] - The outlook for 2021 will be influenced by economic conditions, asset quality, and PPP forgiveness activity [41] - Management noted that they will not provide earnings guidance due to the high degree of uncertainty [41] Other Important Information - The company reinstated its stock buyback program during Q4 2020 after pausing it in March due to the pandemic [7] - The Tier 1 leverage capital ratio was 9.8% and the total risk-based capital ratio was 13.8% as of year-end 2020, indicating a well-capitalized position [40] Q&A Session Summary Question: State of hotel, restaurant, and entertainment industries - Management noted that these industries are still heavily impacted but have shown slight improvement compared to the depths of the pandemic [45] Question: Reserve coverage outlook - Management indicated that the provision for 2021 is expected to be much lower than in 2020, relying on strong asset quality metrics [46][47] Question: Margin impact from PPP loan forgiveness - The forgiveness payments added about 25 basis points to the margin for Q4 2020, while excess liquidity negatively impacted the margin by about 40 basis points [57] Question: Core expense run rate for 2021 - Management suggested a reasonable increase in core expenses of about 1.5% to 2% from 2020 levels [59] Question: New swap fee income program - Management confirmed that the swap fee income program is a new focus and will be incorporated into future income projections [62] Question: Thoughts on recent bank M&A activity - Management expressed that disruptions in the market could provide opportunities for the company to strengthen its position [64]

[PART I. Financial Information](index=2&type=section&id=PART%20I.%2E%20Financial%20Information) [Item 1. Financial Statements](index=2&type=section&id=Item%201%2E%20Financial%20Statements) The unaudited consolidated financial statements for Mercantile Bank Corporation as of September 30, 2020, detail significant asset, loan, and deposit growth, driven by PPP, and increased loan loss provisions reflecting COVID-19 uncertainty [Consolidated Balance Sheets](index=2&type=section&id=Consolidated%20Balance%20Sheets) Total assets increased to **$4.42 billion** as of September 30, 2020, primarily due to a **$494 million** rise in net loans (PPP-driven) and **$315 million** in cash, while total deposits grew by **$682 million** Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2020 | Dec 31, 2019 | Change | | :--- | :--- | :--- | :--- | | **Total Assets** | **$4,420,610** | **$3,632,915** | **+21.7%** | | Total cash and cash equivalents | $554,591 | $233,731 | +137.3% | | Loans, net | $3,314,972 | $2,832,778 | +17.0% | | **Total Liabilities** | **$3,988,710** | **$3,216,354** | **+24.0%** | | Total deposits | $3,372,034 | $2,690,384 | +25.3% | | Federal Home Loan Bank advances | $394,000 | $354,000 | +11.3% | | **Total Shareholders' Equity** | **$431,900** | **$416,561** | **+3.7%** | [Consolidated Statements of Income](index=3&type=section&id=Consolidated%20Statements%20of%20Income) Net income for Q3 and YTD 2020 declined to **$10.7 million** and **$30.1 million**, respectively, driven by higher loan loss provisions and lower net interest income, partially offset by strong mortgage banking income Key Income Statement Data (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $29,509 | $31,605 | $90,397 | $93,366 | | Provision for loan losses | $3,200 | $700 | $11,550 | $2,450 | | Noninterest Income | $13,307 | $6,676 | $30,839 | $19,643 | | Noninterest Expense | $26,423 | $22,027 | $72,579 | $65,944 | | **Net Income** | **$10,686** | **$12,600** | **$30,056** | **$36,139** | | **Diluted EPS** | **$0.66** | **$0.77** | **$1.85** | **$2.20** | - Mortgage banking income significantly drove noninterest income, increasing to **$9.5 million** in Q3 2020 from **$2.9 million** in Q3 2019, and to **$19.7 million** for the nine-month period from **$5.3 million** in the prior year[13](index=13&type=chunk) [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended September 30, 2020, net cash from operating activities was **$16.3 million**, while investing activities used **$452.4 million**, and financing activities generated a strong **$756.9 million** inflow, resulting in a **$320.9 million** net increase in cash Cash Flow Summary - Nine Months Ended Sep 30 (in thousands) | Cash Flow Category | 2020 | 2019 | | :--- | :--- | :--- | | Net cash from operating activities | $16,306 | $20,133 | | Net cash for investing activities | ($452,367) | ($165,543) | | Net cash from financing activities | $756,921 | $298,594 | | **Net change in cash and cash equivalents** | **$320,860** | **$153,184** | [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide detailed explanations of accounting policies and financial components, emphasizing the impact of COVID-19, **$555 million** in PPP loans, loan deferment programs, and the postponement of CECL adoption - The company originated approximately **2,200 PPP loans** totaling **$555 million**, with associated net origination fees of approximately **$15.0 million** being accreted into interest income[73](index=73&type=chunk) - Commercial loan payment deferments peaked at **$719 million** in mid-July, significantly decreasing to only **$7.0 million** by October 30, 2020[54](index=54&type=chunk)[55](index=55&type=chunk) - The company postponed the adoption of the Current Expected Credit Loss (CECL) methodology, as permitted by the CARES Act, due to economic uncertainty from the pandemic[58](index=58&type=chunk)[81](index=81&type=chunk) Loan Portfolio Composition (in thousands) | Loan Class | Sep 30, 2020 | Dec 31, 2019 | % Change | | :--- | :--- | :--- | :--- | | Commercial and industrial (incl. PPP) | $1,321,419 | $846,551 | +56.1% | | Real estate – owner occupied | $549,364 | $579,003 | -5.1% | | Real estate – non-owner occupied | $878,897 | $835,346 | +5.2% | | 1-4 family mortgages | $348,460 | $339,749 | +2.6% | | **Total Loans** | **$3,350,544** | **$2,856,667** | **+17.3%** | - Total nonperforming loans increased to **$4.1 million** as of September 30, 2020, from **$2.3 million** at December 31, 2019[97](index=97&type=chunk) - The company's bank was categorized as "well capitalized" as of September 30, 2020, with a Common equity tier 1 capital ratio of **12.5%** against a **6.5%** requirement[158](index=158&type=chunk)[161](index=161&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=53&type=section&id=Item%202%2E%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial performance and condition, highlighting strong balance sheet growth from PPP and deposits, compressed net interest margin, increased loan loss provisions, and robust noninterest income from mortgage refinancing [Coronavirus Pandemic](index=55&type=section&id=Coronavirus%20Pandemic) This section details the company's response to the COVID-19 pandemic, including originating **$555 million** in PPP loans, implementing loan deferment programs that have significantly declined, and delaying CECL adoption under the CARES Act - The company originated approximately **2,200 PPP loans** totaling **$555 million**, with net origination fees of about **$15.0 million**[190](index=190&type=chunk) - Commercial loan deferments peaked at **$719 million** in mid-July but decreased to only **$7.0 million** by October 30, 2020, indicating a significant number of borrowers have resumed payments[196](index=196&type=chunk) [Financial Condition](index=58&type=section&id=Financial%20Condition) Total assets grew by **$788 million** to **$4.42 billion** in the first nine months of 2020, driven by increased loans (including PPP) and deposits, with strong asset quality and an increased allowance for loan losses of **$35.6 million** - Commercial loans increased by **$497 million** in the first nine months of 2020, primarily due to **$555 million** in PPP loan originations, partially offset by a **$109 million** reduction in commercial line of credit balances[202](index=202&type=chunk)[209](index=209&type=chunk) - Nonperforming assets were **$4.7 million**, or **0.1%** of total assets, as of September 30, 2020[218](index=218&type=chunk) - The allowance for loan losses increased to **$35.6 million**, equal to **1.27%** of total loans (excluding PPP loans) and over eight times the level of nonperforming loans as of September 30, 2020[228](index=228&type=chunk) [Liquidity and Capital Resources](index=65&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintained strong liquidity with significant deposit growth and reduced wholesale funding, while shareholders' equity increased to **$432 million**, and the stock repurchase program was suspended to preserve capital - The stock repurchase program was suspended in March 2020 to preserve capital amid the pandemic, with no shares repurchased in Q2 or Q3 2020, and **$10.1 million** remaining under authorization[166](index=166&type=chunk)[264](index=264&type=chunk) - The bank's total risk-based capital ratio was **13.5%** as of September 30, 2020, with total regulatory capital of **$446 million**, exceeding the "well capitalized" requirement by **$116 million**[266](index=266&type=chunk) [Results of Operations](index=67&type=section&id=Results%20of%20Operations) Net income declined in Q3 and YTD 2020 due to higher loan loss provisions and a compressed net interest margin of **2.86%**, partially offset by a **99.3%** increase in Q3 noninterest income from record mortgage banking activity Net Interest Margin Analysis | Period | Net Interest Margin | Yield on Earning Assets | Cost of Interest-Bearing Liabilities | | :--- | :--- | :--- | :--- | | Q3 2020 | 2.86% | 3.45% | 0.99% | | Q3 2019 | 3.71% | 4.73% | 1.52% | - The loan loss provision was **$3.2 million** in Q3 2020 and **$11.6 million** for the first nine months of 2020, significantly higher than prior year periods, reflecting economic uncertainty from the COVID-19 pandemic[289](index=289&type=chunk) - Noninterest income in Q3 2020 increased **99.3%** year-over-year, driven by a surge in mortgage banking income due to high refinance activity[291](index=291&type=chunk) - Noninterest expense rose **20.0%** in Q3 2020 compared to Q3 2019, primarily due to higher compensation costs from mortgage originator commissions and a catch-up bonus accrual[293](index=293&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=72&type=section&id=Item%203%2E%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate risk, managed via NII simulation modeling, which indicates an asset-sensitive balance sheet where a gradual **100 basis point** rate increase is projected to increase NII by **3.9%**, while a decrease reduces it by **0.5%** Net Interest Income Sensitivity Analysis (as of Sep 30, 2020) | Interest Rate Scenario (Gradual change over 12 months) | Dollar Change in NII | Percent Change in NII | | :--- | :--- | :--- | | Rates down 100 bps | ($600,000) | (0.5%) | | Rates up 100 bps | $4,740,000 | 3.9% | | Rates up 200 bps | $9,240,000 | 7.5% | | Rates up 300 bps | $13,700,000 | 11.2% | [Item 4. Controls and Procedures](index=74&type=section&id=Item%204%2E%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[312](index=312&type=chunk) [PART II. Other Information](index=75&type=section&id=PART%20II%2E%20Other%20Information) [Legal Proceedings](index=75&type=section&id=Item%201%2E%20Legal%20Proceedings) The company is not a party to any legal proceedings considered material to its financial condition - The company reports no material legal proceedings incidental to its business[315](index=315&type=chunk) [Risk Factors](index=75&type=section&id=Item%201A%2E%20Risk%20Factors) No material changes in risk factors were reported from previous disclosures in the company's Annual Report on Form 10-K for 2019 and Form 10-Q for Q1 2020 - No material changes in risk factors were reported from previous disclosures[316](index=316&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=75&type=section&id=Item%202%2E%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company made no unregistered sales of equity securities in Q3 2020, and its stock repurchase program, with **$10.1 million** remaining authorization, was temporarily suspended in March 2020 to preserve capital amid the COVID-19 pandemic - The company temporarily ceased stock repurchases in late March 2020 to preserve capital amid the Coronavirus Pandemic, with no shares repurchased in Q3 2020[318](index=318&type=chunk) Issuer Purchases of Equity Securities (Q3 2020) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Maximum Dollar Value that May Yet Be Purchased Under the Plan | | :--- | :--- | :--- | :--- | | July 1 – 31 | 0 | N/A | $10,135,000 | | August 1 – 31 | 0 | N/A | $10,135,000 | | September 1 – 30 | 0 | N/A | $10,135,000 | | **Total** | **0** | **N/A** | **$10,135,000** | [Other Items (Defaults, Mine Safety, Other Info)](index=75&type=section&id=Items%203,%204,%205) Items 3 (Defaults Upon Senior Securities), 4 (Mine Safety Disclosures), and 5 (Other Information) are all reported as not applicable - No disclosures were required for Defaults Upon Senior Securities, Mine Safety, or Other Information[320](index=320&type=chunk)[321](index=321&type=chunk)[322](index=322&type=chunk)