MERCBANK.COM
2024
ANNUAL REPORT
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002CSNF6F3
Annual Meeting
Mercantile Bank Corporation’s Annual Meeting of Shareholders
will be held virtually on Thursday, May 22, 2025 at 9:00 am EDT
Corporation Headquarters
310 Leonard Street NW, Grand Rapids, MI 49504
616.406.3000 or 800.453.8700
www.mercbank.com
Legal Counsel
Dickinson Wright, PLLC
500 Woodward Avenue, Suite 4000, Detroit, MI 48226
www.dickinson-wright.com
Independent Registered Public Accountants
634 Front Street NW, Suite 400, Grand Rapids, MI 49504
Plante & Moran, PLLC
www.plantemoran.com
Common Stock Listing
NASDAQ Global Select Market Symbol: MBWM
Stock Registrar and Transfer Agent
Computershare Investor Services
P.O. Box 43006, Providence, RI 02940-3006
Shareholder Inquiries 800.733.5001
www.computershare.com/investor
SEC Form 10-K
Copies of the Corporation’s Annual Report on Form 10-K,
as filed with the Securities and Exchange Commission,
are available to shareholders without charge upon written request.
Please mail your request to:
Charles E. Christmas
Mercantile Bank Corporation
310 Leonard Street NW
Grand Rapids, MI 49504
MercBank
@mercbank
company/merc-bank
mercbank.com
• Cash Dividends: 6.0% CAGR
• Tangible Book Value per Share: 8.4% CAGR
Mercantile Bank’s strong performance continues
to support a well-capitalized regulatory position,
with a total risk-based capital ratio of 13.9% and
approximately $214 million more than the 10%
minimum threshold required to be categorized as
a “well-capitalized” institution at year-end 2024.
The success of Mercantile is attributed to the
dedicated efforts of our employees and the
support of our incredible customer base. We are
deeply grateful for both groups. Our customers
are the reason for our existence, and we strive to
provide them with the best possible experience
as they work with us to achieve their dreams and
aspirations. Our committed colleagues make these
experiences possible, distinguishing Mercantile
from our competitors. While buildings and products
may be similar, it is our people who create the
unique culture of our Bank. This culture drives our
approach, philosophy, and processes, resulting in
positive customer experiences daily.
Community is a core element of our culture, and in
2024, we strengthened the communities we serve
through the following tangible actions:
• Our giving program awarded over $1 million
to organizations who provide support to our
communities.
• Our volunteer program saw 574 Mercantile
employees contributing over 27,500 hours
of community service with nearly 1,000
organizations.
• Mercantile employees served as directors on
more than 300 boards.
• We conducted over 400 financial education
classes, reaching more than 4,300 adults and
children.
• We administered four Federal Home Loan
Bank of Indianapolis Affordable Housing
Grants totaling more than $3.5 million, which
supported the development of 91 housing
units for individuals at or below 80% of area
median income.
• We made 116 community development loans
totaling more than $480 million.
As we conclude 2024, we express our gratitude
to our shareholders, customers, and employees
for their support throughout the year. As we enter
2025, we pledge to continue adhering to the
principles of excellence that have characterized
our history.
Ray Reitsma
President and CEO
Mercantile Bank Corporation
A letter to our Shareholders.
Since opening our doors in 1997, Mercantile
Bank has consistently demonstrated unwavering
commitment to excellence, which has driven our
strong financial performance. This commitment,
shared by our entire team, has resulted in solid
financial results for our shareholders, continued
investment in our communities, and a strong culture
for our employees.
In 2024, Mercantile delivered net income of $79.6
million for our shareholders, driven by outstanding
performance in the following areas:
• Significant local deposit growth of more than
20%, enabling customers to build resources
for their goals and dreams.
• Nearly 9% growth in commercial loans,
supporting our existing customers’ expansion
and attracting new customers to Mercantile’s
value proposition.
• A 62% increase in mortgage banking
income despite relatively high interest
rates, supporting the American Dream of
homeownership.
• A 38% increase in treasury management
income, ensuring security and safety for
our customers’ ongoing cash management
needs.
• Low levels of nonperforming assets
representing only nine basis points of total
assets at year-end.
• Well controlled overhead costs representing
slightly more than 2% of total assets and
resulting in an efficiency ratio of 54% as
we practiced stewardship over entrusted
resources.
Twenty twenty-four marked another successful
year in our long history of building value for our
shareholders. Over the last five years, Mercantile
has posted strong compounded annual growth
rates (CAGR) in key categories including:
• Total Loans: 10.0% CAGR
• Total Deposits: 11.8% CAGR
• Earnings per Share: 10.4% CAGR
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, 2024
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
(State or other jurisdiction of incorporation or organization)
310 Leonard Street NW, Grand Rapids, Michigan
(Address of principal executive offices)
38-3360865
(I.R.S. Employer Identification No.)
49504
(Zip Code)
(616) 406-3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock
Trading Symbol(s)
MBWM
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging
growth company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer ☐
Non-accelerated filer ☐
Accelerated filer ☒
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes Oxley Act (15 USC.7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Yes ☒ No ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing
reflect the correction of an error to previously issued financial statements. Yes ☐ No ☒
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any
of the registrant’s executive officers during the relevant recovery period pursuant to Section 240.10D-1(b). Yes ☐ No ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate value of the common equity held by non-affiliates (persons other than directors and executive officers) of the registrant, computed by reference to
the closing price of the common stock as of the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $634 million. As
of February 28, 2025, there were issued and outstanding 16,230,912 shares of the registrant’s common stock.
Portions of the Company’s proxy statement for the Annual Meeting of Shareholders to be held May 22, 2025 are incorporated by reference into Part III of this report.
Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2024.
Additionally, portions of the Annual Report are incorporated by reference in this Form 10-K in response to Items within Part II.
DOCUMENTS INCORPORATED BY REFERENCE
F-1
Item 1.
Business.
The Company
PART I
Mercantile Bank Corporation is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the
“Bank Holding Company Act”). Unless the text clearly suggests otherwise, references to “us,” “we,” “our,” or “the company” include
Mercantile Bank Corporation and its wholly-owned subsidiaries. As a bank holding company, we are subject to regulation by the Board of
Governors of the Federal Reserve System (the “Federal Reserve Board”). We were organized on July 15, 1997, under the laws of the State of
Michigan, primarily for the purpose of holding all of the stock of Mercantile Bank (“our bank”), and of such other subsidiaries as we may
acquire or establish. Our bank commenced business on December 15, 1997. During the third quarter of 2013, we filed an election to become
a financial holding company, which election became effective April 14, 2014. Mercantile Insurance Center, Inc. (“our insurance company”),
a subsidiary of our bank, commenced operations during 2002 to offer insurance products. Mercantile Community Partners ("MCP"),
our subsidiary, began operations during 2023 to invest in community development tax credit investments. Our expenses have generally been
paid using cash dividends from our bank. Our principal source of future operating funds is expected to be dividends from our bank.
Our Bank
Our bank is a state banking company that operates under the laws of the State of Michigan, pursuant to a charter issued by the
Michigan Department of Insurance and Financial Services. Our bank’s deposits are insured to the maximum extent permitted by law by the
Federal Deposit Insurance Corporation (“FDIC”). Our bank, through its 43 office locations, provides commercial banking services primarily
to small- to medium-sized businesses and retail banking services. Our bank’s main office is located in Grand Rapids, Michigan, and our
operations are centered around the West and Central portions of Michigan. We also have banking offices located in the metropolitan Detroit,
Michigan area, Traverse City, Michigan, Petoskey, Michigan, Saginaw, Michigan, and Midland, Michigan. Our bank makes secured and
unsecured commercial, construction, mortgage and consumer loans, and accepts checking, savings and time deposits. Our bank owns
11 automated teller machines ("ATM") and 33 video banking machines at a majority of our office locations that participate in the
ACCEL/EXCHANGE and PLUS regional network systems, as well as other ATM networks throughout the country. Our bank also enables
customers to conduct certain loan and deposit transactions by personal computer and through mobile applications. Courier service is provided
to certain commercial customers, and safe deposit boxes are available at a vast majority of our office locations. Our bank does not have trust
powers.
Our Insurance Company
Our insurance company acquired an existing shelf insurance agency effective April 15, 2002. An Agency and Institution Agreement
was entered into among our insurance company, our bank and Hub International for the purpose of providing programs of mass marketed
personal lines of insurance. Insurance product offerings include private passenger automobile, homeowners, personal inland marine, boat
owners, recreational vehicle, dwelling fire, umbrella policies, small business and life insurance products, all of which are provided by and
written through companies that have appointed Hub International as their agent. To date, we have not provided the insurance products noted
above and currently have no plans to do so.
Our Trusts
We have five business trusts that are wholly-owned subsidiaries of Mercantile Bank Corporation but are not consolidated. Each of
the trusts was formed to issue preferred securities that were sold in private sales, as well as to sell common securities to Mercantile Bank
Corporation. The proceeds from the preferred and common securities sales were used by the trusts to purchase floating rate notes issued by
Mercantile Bank Corporation. The rates of interest, interest payment dates, call features and maturity dates of each floating rate note are
identical to its respective preferred securities. The net proceeds from the issuance of the floating rate notes were used for a variety of
purposes, including contributions to our bank as capital to provide support for asset growth and the funding of stock repurchase programs and
certain acquisitions. The only significant assets of our trusts are the floating rate notes, and the only significant liabilities of our trusts are the
preferred securities. The floating rate notes are categorized on our Consolidated Balance Sheets as subordinated debentures, and the interest
expense is recorded on our Consolidated Statements of Income under interest expense on other borrowings.
2
Effect of Government Monetary Policies
Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States Government,
its agencies, and the Federal Reserve Board. The Federal Reserve Board’s monetary policies have had, and will likely continue to have, an
important impact on the operating results of commercial banks through its power to implement national monetary policy in order to, among
other things, curb inflation, maintain or encourage employment, and mitigate economic recessions. The policies of the Federal Reserve Board
have a major effect upon the levels of bank loans, investments and deposits through its open market operations in United States Government
securities, and through its regulation of, among other things, the discount rate on borrowings of member banks. It is not possible to predict
the nature and impact of future changes in monetary and fiscal policies.
Regulation and Supervision
Banks and bank holding companies, like many other financial institutions, are regulated under a variety of federal and state statutes
and the regulations that implement those statutes. These statutes include, among others, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”), the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”), the Truth in
Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Expedited Funds Availability
Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, the USA PATRIOT Act, the FACT Act, the Gramm-
Leach-Bliley Act, the Sarbanes Oxley Act, the Bank Secrecy Act, electronic funds transfer laws, redlining laws, predatory lending laws,
antitrust laws, environmental laws, money laundering laws, privacy laws, state usury statutes, and statutes relating to fiduciaries. Our growth
and earnings performance may be impacted by the statutes administered by, and the regulations and policies of, various governmental
regulatory authorities. Those regulatory authorities include, but are not limited to, the Federal Reserve Board, the FDIC, the Michigan
Department of Insurance and Financial Services, the Internal Revenue Service and state taxing authorities. The effect of such statutes,
regulations and policies, and any changes thereto, may significantly impact our business which cannot necessarily be predicted.
As a registered bank holding company under the Bank Holding Company Act, we are required to file an annual report with the
Federal Reserve Board and such additional information as the Federal Reserve Board may require. We are also subject to periodic
examinations by the Federal Reserve Board.
The Bank Holding Company Act limits the activities of bank holding companies to banking and the management of banking
organizations and to certain permitted non-banking activities. The permitted non-banking activities generally include those limited activities
that the Federal Reserve Board has determined, by order or regulation as of the day prior to enactment of the Gramm-Leach-Bliley Act, to be
so closely related to banking as to be a proper incident to banking. These permitted non-banking activities include, among other things:
operating a mortgage company, finance company, or factoring company; performing certain data processing operations; providing certain
investment and financial advice; acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout,
nonoperating basis; and providing discount securities brokerage services for customers. Neither we nor any of our subsidiaries engage in any
of the non-banking activities listed above.
On April 14, 2014, our election to become a financial holding company, as permitted by the Bank Holding Company Act, as
amended by Title I of the Gramm-Leach-Bliley Act, was accepted and made effective by the Federal Reserve Board. In order to maintain our
status as a financial holding company, we and our bank must satisfy statutory requirements regarding capitalization, management and
compliance with the Community Reinvestment Act. As a financial holding company, we are permitted to engage in a broader range of
activities under the Bank Holding Company Act that are permitted for bank holding companies. Those expanded activities include any
activity which the Federal Reserve Board (in certain instances in consultation with the Department of the Treasury) determines, by order or
by regulation, to be financial in nature or incidental to such financial activity, or to be complementary to a financial activity, and not to pose a
substantial risk to the safety and soundness of depository institutions or the financial system generally. Such expanded activities that have
been previously approved by the Federal Reserve Board include, among others: insuring, guaranteeing, or indemnifying against loss, harm,
damage, illness, disability or death, or issuing annuities, and acting as principal, agent or broker for such purposes; providing financial,
investment or economic advisory services, including advising a mutual fund; and underwriting, dealing in, or making a market in securities.
While our insurance company is permitted to engage in the insurance agency activities described above by virtue of our financial holding
company status, neither we nor any of our subsidiaries currently engage in these expanded activities.
3
Our bank is subject to restrictions imposed by federal and state laws and regulations. Among other things, these restrictions limit the
transactions our bank conducts with us, our other subsidiaries or other affiliates, limit our securities borrowing or lending, derivatives, and
repurchase transactions with us, our other subsidiaries or other affiliates, limit investments in stock or other securities that we issue, limit the
taking of such stock or securities as collateral for loans to any borrower, and limit acquisitions of assets or services from, and sales of certain
types of assets to, us, our other subsidiaries or other affiliates. Michigan banking laws place additional restrictions on various aspects of
banking, including branching, payment of dividends, and loan interest rates, in addition to capital and surplus requirements. Federal law
restricts our ability to borrow from our bank by limiting the aggregate amount we may borrow and by requiring that all loans to us be secured
in designated amounts by specified forms of collateral.
With respect to the acquisition of banking organizations, we are generally required to obtain the prior approval of the Federal
Reserve Board before we can acquire all or substantially all of the assets of any bank, or acquire ownership or control of any voting shares of
any bank or bank holding company, if, after the acquisition, we would own or control more than 5% of the voting shares of the bank or bank
holding company. Acquisitions of banking organizations across state lines are subject to additional restrictions imposed by federal and state
laws and regulations.
The scope of regulations and supervision of various aspects of our business have expanded as a result of the adoption in July, 2010
of the Dodd-Frank Act, and may continue to expand as the result of implementing regulations being adopted by federal regulators. However,
on May 24, 2018, EGRRCPA amended certain provisions of the Dodd-Frank Act to tailor them to the specific circumstances of various
categories of financial institutions and transactions. Many of the statutes and regulations under which we and our bank operate may change in
the future, which may significantly impact our business.
Competition
We face substantial competition in all phases of our operations from a variety of different competitors. We compete for deposits,
loans and other financial services with numerous Michigan-based and national and regional banks, savings banks, thrifts, credit unions and
other financial institutions as well as with other entities that provide financial services. Some of the financial institutions and financial service
organizations with whom we compete are not subject to the same degree of regulation as we are. Many of our primary competitors have been
in business for many years, have established customer bases, are larger, have substantially higher lending limits than we do, and offer larger
branch networks and other services which we do not. Most of these same entities have greater capital resources than we do, which, among
other things, may allow them to price their services at levels more favorable to the customer and to provide larger credit facilities than we do.
Under specified circumstances (that have been modified by the Dodd-Frank Act and EGRRCPA), securities firms and insurance companies
that elect to become financial holding companies under the Bank Holding Company Act may acquire banks and other financial institutions.
Federal and state banking law affects the competitive environment in which we conduct our business. The financial services industry is also
likely to become more competitive as further technological advances enable more companies to provide financial services. We also face new
competition as a result of expansion into new markets.
Human Capital
As of December 31, 2024, we employed 648 full-time and 34 part-time persons. Our human capital is the most valuable asset we
have, and we believe embracing human diversity makes us a better financial institution. The collective sum of the individual differences, life
experiences, knowledge, inventiveness, innovation, self-expression, unique capabilities and talent that our employees invest in their work
represents a significant part of not only our culture, but our reputation and our achievements as well. We embrace and encourage our
employees’ differences in age, color, disability, ethnicity, family or marital status, gender identity or expression, language, national origin,
physical and mental ability, political affiliation, race, religion, sexual orientation, socio-economic status, veteran status and other
characteristics that make our employees unique.
Talent Acquisition. We hire people who connect with, listen to and deliver the best solutions to customers and team
members. Through a personalized and systematic recruiting process, our experienced team of Human Resources Business Partners are
devoted to working with Hiring Managers and matching candidate skills and experience to a position where they can thrive. Hiring long-
term successful team members is critical to our success. We believe our successful hiring practices are reflected in our annual turnover rate
of 10%, which is consistently below our peers.
4
Employee Safety and Health. The prioritization of our people is reflected in the robust employee benefits and compensation
packages offered to our staff, including health and wellness insurance plans and incentives, a 401(k) plan with matching contributions,
dedicated internship programs for young professionals in finance and business, and employee stock ownership plan participation, as well as
clothing, home office and fitness equipment interest-free loans. Approximately 87% of our eligible employees participate in our medical
benefit plans, which include a health savings account plan in which we pay the full monthly premiums. We offer our employees generous
paid time off for vacations, holidays, sick time and bereavement, along with pay-it-forward initiatives and paid volunteer time. In addition,
with obstacles in maintaining balance between work responsibilities and personal time, we have enabled staff to pursue a safe and healthy
work-life balance by increasing paid time off benefits for our employees.
Climate Change
We define sustainability as the leveraging of combined abilities to ensure our ongoing impact on people and the environment, and
our success is always focused on upholding long-lasting, positive results. From an efficient branch footprint to utilizing the latest technology,
we are continuously focused on seeking new and better ways to be more productive with our time and energy while remaining good stewards
of the resources with which we are entrusted. In each of our facilities, we follow LEED green certification guidelines wherever practical,
evaluating all facilities for opportunities to incorporate energy efficient updates and space planning for new construction, renovations or
expansion projects. All of our new construction and renovation projects include low-flow devices as well as LED lighting to enhance our
efficiency of utility usage. Over the past five years, we have reduced our use of natural gas by 35% and electricity by 40%. All renovation
and expansion projects involve the donation of former office furniture to non-profit organizations.
We continue to strive for the reduction of mail and paper usage through the promotion of customer eStatement adoption. The
eStatement adoption rate continues to grow, and we were approaching above 61% adoption at year-end 2024. Our online accounts payable
system has also enabled us to significantly reduce paper and printing, and saves time. Every effort is made to recycle all paper, and we
continue to offer community paper shredding events. Additionally, we have implemented recycling stations at all of our office locations to
divert cardboard, plastic and metal items from landfills. Water bottle refill stations also aid to reduce plastic bottle usage.
Our Sustainability Committee supports our ongoing commitment to environmental, health and safety, corporate social
responsibility, corporate governance, sustainability, and other public policy matters relevant to our organization. The Sustainability
Committee is a cross-functional management committee, with oversight from the Governance and Nominating Committee and the Board of
Directors, that assists us in: (1) setting general strategies relating to ESG matters; (2) developing, implementing, and monitoring initiatives
and policies based on those strategies; (3) recommending communications with employees, investors, and shareholders with respect to ESG
matters; and (4) monitoring and assessing developments relating to, and improving our understanding of, ESG matters. The committee met
three times during 2024. Highlights for 2024 included expanding the impact of Mercantile Community Partners LLC to facilitate low-income
housing tax credits, completion and posting of the 2024 Corporate Sustainability Report, hiring a fulltime Director of Enterprise Excellence
at the end of 2024 to oversee all ongoing ESG and sustainability efforts, implementation of a sustainability reporting platform, increased
support of first-time home buyers mortgage programs, and over 27,500 hours of volunteering in the community completed by employees.
Our bank maintains a Clawback Policy; an Insider Trading Policy; Code of Ethics; Corporate Governance Guidelines; an Anti-Bribery and
Anti-Corruption Policy; an Anti-Money Laundering, Bank Secrecy Act, Customer Identification and Due Diligence Programs Letter; Vendor
and Supplier Code of Conduct; Environmental Policy; Human Rights Policy; and Supplier Diversity Program Policy, which are reviewed and
approved by our Board of Directors at least annually and can be found on our website.
5
Lending Policy
As a routine part of our business, we make loans to businesses and individuals located within our market areas. Our lending policy
states that the function of the lending operation is twofold: to provide a means for the investment of funds at a profitable rate of return with an
acceptable degree of risk, and to meet the credit needs of the creditworthy businesses and individuals who are our customers. We recognize
that in the normal business of lending, some losses on loans will be inevitable and should be considered a part of the normal cost of doing
business.
Our lending policy anticipates that priorities in extending loans will be modified from time to time as interest rates, market
conditions and competitive factors change. The policy sets forth guidelines on a nondiscriminatory basis for lending in accordance with
applicable laws and regulations. The policy describes various criteria for granting loans, including the ability to pay; the character of the
customer; evidence of financial responsibility; purpose of the loan; knowledge of collateral and its value; terms of repayment; source of
repayment; payment history; and economic conditions.
The lending policy further limits the amount of funds that may be loaned against specified types of real estate collateral. For certain
loans secured by real estate, the policy requires an appraisal of the property offered as collateral by a state-certified independent appraiser.
The policy also provides general guidelines for loan to value for other types of collateral, such as accounts receivable and machinery and
equipment. In addition, the policy provides general guidelines as to environmental analysis, loans to employees, executive officers and
directors, problem loan identification, maintenance of an allowance for credit losses, loan review and grading, mortgage and consumer
lending, and other matters relating to our lending practices.
The Board of Directors has delegated significant lending authority to officers of our bank. The Board of Directors believes this
empowerment, supported by our strong credit culture and the significant experience of our commercial lending staff, enables us to be
responsive to our customers. The loan policy specifies lending authority for our lending officers with amounts based on the experience level
and ability of each lender. Our loan officers and loan managers are generally able to approve loans ranging from $0.25 million to $2.5
million. We have established higher approval limits for our bank’s President and Chief Executive Officer and Chief Lending Officer, ranging
from $4.0 million up to $10.0 million. These lending authorities, however, are typically used only in rare circumstances where timing is of
the essence. Loan requests exceeding $5.0 million require approval by the Officers Loan Committee, and loan requests exceeding $15.0
million, up to the legal lending limit of $101.4 million, require approval by our bank’s Board of Directors. We generally apply an in-house
lending limit that is significantly less than our bank’s legal lending limit.
Lending Activity
Commercial Loans. Our commercial lending group originates commercial loans primarily in our market areas. Our commercial
lenders have extensive commercial lending experience, with most having at least ten years’ experience. Loans are originated for general
business purposes, including working capital, accounts receivable financing, machinery and equipment acquisition, and commercial real
estate financing, including new construction and land development.
In most instances, commercial line of credit facilities have terms ranging from 12 to 24 months with floating rates tied to the Wall
Street Journal Prime Rate or 30-Day Secured Overnight Funding Rate (“SOFR”). Commercial term loans secured by real estate are generally
at a floating rate tied to the Wall Street Journal Prime Rate or 30-Day SOFR. Since the fourth quarter of 2020, a fixed rate option for
commercial term loans secured by real estate is generally not offered for loans over $2.5 million; instead, customers are offered participation
in our back-to-back interest rate swap program to achieve a desired fixed rate. For loans under $2.5 million, we offer a rate primarily equal to
the commensurate cost of funds using Federal Home Loan Bank of Indianapolis (“FHLBI”) advance rates as a proxy and a credit spread as
indicated by the credit rating we assign. Commercial term loans secured by real estate generally balloon within five years, with payments
based on amortizations ranging from 10 to 25 years. Commercial term loans secured by non-real estate collateral are generally at a floating
rate tied to the Wall Street Journal Prime Rate or 30-Day SOFR, or a fixed rate primarily equal to the commensurate cost of funds using
FHLBI advance rates as a proxy and a credit spread as indicated by the credit rating we assign, and generally mature and fully amortize
within three to seven years.
We evaluate many aspects of a commercial loan transaction in order to minimize credit and interest rate risk. Underwriting includes
an assessment of the management, products, markets, cash flow, capital, income and collateral of the borrowing entity. This analysis includes
a review of the borrower’s historical and projected financial results. Appraisals are generally required to be performed by state-certified
independent appraisers where real estate is the primary collateral, and in some cases, where equipment is the primary collateral. In certain
situations, for creditworthy customers, we may accept title reports instead of requiring lenders’ policies of title insurance.
We have no material foreign loans, and only limited exposure to companies engaged in energy producing and agricultural-related
activities.
6
Commercial Real Estate loans. Commercial real estate loans, consisting of non-owner occupied, owner occupied, multi-family and
residential rental, and vacant land, land development, and residential construction loans, totaled 52.6% and 50.2% of our total loans as
of December 31, 2024 and 2023, respectively. We also adhere to the FDIC’s commercial real estate lending concentration guidelines
specified in the Joint Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices. Total
commercial real estate loans (as defined in the guidance) represented 256% and 247% of total regulatory capital as of December 31, 2024 and
2023, respectively, with both ratios being below the maximum guideline of 300%.
Commercial real estate lending involves more risk than residential lending because loan balances are typically greater and
repayment is dependent upon the borrower’s business operations. We attempt to minimize the risks associated with these transactions by
generally limiting our commercial real estate lending to owner operated properties and to owners of non-owner occupied properties who have
established profitable histories and satisfactory tenant structures. In many cases, risk is further reduced by requiring personal guarantees,
limiting the amount of credit to any one borrower to an amount considerably less than our legal lending limit and avoiding certain types of
commercial real estate financings.
Risks of repayment can arise from general downward shifts in the valuations of specific property types often driven by changes in
demand and other economic factors, which could further influence cash flows associated with the borrower and/or the underlying property.
To mitigate these risks, we actively monitor market conditions in the markets we originate loans. The majority of our commercial real estate
portfolio is located within our primary geographic footprint within the state of Michigan. As of December 31, 2024 and 2023, 90.7% and
90.3%, respectively, of our commercial real estate loans were for projects located within the state of Michigan. Loans made outside the state
of Michigan are usually to customers located or headquartered within our footprint doing business in other states.
The following table presents the composition of the commercial real estate portion of the total loan portfolio as of December 31, 2024 and
2023:
(Dollars in thousands)
Real estate – owner occupied
Industrial
Automotive
Office
Retail
Medical Office
Restaurants
Other
Subtotal
Real estate – non-owner occupied
Office
Retail
Industrial
Assisted Living
Hotel
Other
Subtotal
December 31, 2024
December 31, 2023
Balance
%
Balance
$
364,327
109,408
66,354
63,303
33,997
32,946
78,502
748,837
265,774
249,239
315,867
102,480
152,591
42,453
1,128,404
7.9% $
2.4
1.4
1.4
0.7
0.7
1.8
16.3
5.8
5.4
6.9
2.2
3.3
0.9
24.5
347,923
117,076
72,498
46,202
34,641
30,482
68,845
717,667
271,448
256,338
233,503
131,426
100,594
42,375
1,035,684
Vacant land, land development, and residential construction
Real estate – multi-family and residential rental
Total
66,936
475,819
2,419,996
$
1.5
10.3
52.6% $
74,753
332,609
2,160,713
%
8.1%
2.7
1.7
1.1
0.8
0.7
1.6
16.7
6.3
6.0
5.4
3.1
2.3
1.0
24.1
1.7
7.7
50.2%
7
Single-Family Residential Real Estate Loans. We originate single-family residential real estate loans in our market areas, generally
according to secondary market underwriting standards. Loans not conforming to those standards are made in certain circumstances. Single-
family residential real estate loans provide borrowers with a fixed or adjustable interest rate with terms up to 30 years, with the fixed interest
rate loans generally sold to various investors.
Consumer Loans. We originate various types of consumer loans, including new and used automobile and boat loans, credit cards
and overdraft protection lines of credit for our checking account customers. Consumer loans generally have shorter terms and higher interest
rates and usually involve more credit risk than single-family residential real estate loans because of the type and nature of the collateral. Our
bank has a home equity line of credit program. Home equity lines of credit are generally secured by either a first or second mortgage on the
borrower’s primary residence. The program provides revolving credit at a rate tied to the Wall Street Journal Prime Rate.
We believe our consumer loans are underwritten carefully, with a strong emphasis on the amount of the down payment, credit
quality, employment stability and monthly income of the borrower. These loans are generally repaid on a monthly repayment schedule with
the source of repayment tied to the borrower’s periodic income. In addition, consumer lending collections are dependent on the borrower’s
continuing financial stability, and are thus likely to be adversely affected by job loss, illness and personal bankruptcy. In many cases,
repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance
because of depreciation of the underlying collateral. We believe that the generally higher yields earned on consumer loans compensate for the
increased credit risk associated with such loans, and that consumer loans are important to our efforts to serve the credit needs of the
communities and customers that we serve.
Loan Portfolio Quality
We utilize a comprehensive grading system for our commercial loans, whereby all commercial loans are graded on a ten grade
rating system. The rating system utilizes standardized grade paradigms that analyze several critical factors such as cash flow, operating
performance, financial condition, collateral, industry condition and management. All commercial loans are graded at inception and reviewed
at various intervals.
Our independent loan review program is primarily responsible for the administration of the grading system and ensuring adherence
to established lending policies and procedures. The loan review program is an integral part of maintaining our strong asset quality culture.
The loan review function works closely with senior management, although it functionally reports to the Board of Directors. Using a risk-
based approach to selecting credits for review, our loan review program covered approximately 69% of total commercial loans outstanding
during 2024. In addition, a random sampling of retail loans is reviewed each quarter. Our watch list credits are reviewed monthly by our
Board of Directors and our Watch List Committee, the latter of which is comprised of senior level officers from the administration, lending
and loan review functions.
Loans are placed in a nonaccrual status when, in our opinion, uncertainty exists as to the ultimate collection of all principal and
interest. As of December 31, 2024, loans placed in nonaccrual status totaled $5.7 million, or 0.1% of total loans, compared to $3.4 million, or
0.1% of total loans, at December 31, 2023. We had no loans past due 90 days or more and still accruing interest at year-end 2024 or 2023.
Additional information relative to the loan portfolio is incorporated by reference to Management’s Discussion and Analysis of
Financial Condition and Results of Operations (“Management’s Discussion and Analysis”) and Note 3 of the Notes to Consolidated Financial
Statements in this Annual Report.
Allowance for Credit Losses
The allowance is maintained at a level we believe is adequate to absorb estimated credit losses identified and expected in the loan
portfolio. Our evaluation of the adequacy of the allowance is an estimate based on past loan loss experience, the nature and volume of the
loan portfolio, information about specific borrower situations and estimated collateral values, guidance from bank regulatory agencies, and
assessments of the impact of current and anticipated economic conditions on the loan portfolio. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off. Credit losses are charged
against the allowance when we believe the uncollectibility of a loan is likely. The balance of the allowance represents our best estimate, but
significant downturns in circumstances relating to loan quality or economic conditions could result in a requirement for an increased
allowance in the future. Likewise, an upturn in loan quality or improved economic conditions may result in a decline in the required
allowance in the future. In either instance, unanticipated changes could have a significant impact on the allowance and operating results. The
allowance is increased through a provision charged to operating expense. Uncollectible loans are charged-off through the allowance, while
recoveries of loans previously charged-off are added to the allowance.
Additional detail regarding the allowance is incorporated by reference to Management’s Discussion and Analysis and Note 3 of the
Notes to Consolidated Financial Statements included in this Annual Report.
8
Investments
Bank Holding Company Investments. The principal investments of our bank holding company are the investments in the common
stock of our bank, the common securities of our trusts, and the community development tax credit investments made by MCP. Other funds of
our bank holding company may be invested from time to time in various debt instruments.
Subject to the limitations of the Bank Holding Company Act, we are also permitted to make portfolio investments in equity
securities and to make equity investments in subsidiaries engaged in a variety of non-banking activities, which include real estate-related
activities such as community development, real estate appraisals, arranging equity financing for commercial real estate, and owning and
operating real estate used substantially by our bank or acquired for its future use. MCP invests as a limited liability member in real estate
entities engaged in community development. Our bank holding company has no plans at this time to make directly any other types of equity
investments at the bank holding company level. Our Board of Directors may, however, alter the investment policy at any time without
shareholder approval.
Our Bank’s Investments. Our bank may invest its funds in a wide variety of debt instruments and may participate in the federal
funds market with other depository institutions. Subject to certain exceptions, our bank is prohibited from investing in equity securities.
Among the equity investments permitted for our bank under various conditions and subject in some instances to amount limitations, are
shares of a subsidiary insurance agency, mortgage company, real estate company, or Michigan business and industrial development company,
such as our insurance company. Under another such exception, in certain circumstances and with prior notice to or approval of the FDIC, our
bank could invest up to 10% of its total assets in the equity securities of a subsidiary corporation engaged in the acquisition and development
of real property for sale or the improvement of real property by construction or rehabilitation of residential or commercial units for sale or
lease. Our bank has no present plans to make such an investment. Real estate acquired by our bank in satisfaction of or foreclosure upon
loans may be held by our bank for specified periods. Our bank is also permitted to invest in such real estate as is necessary for the convenient
transaction of its business. Our bank’s Board of Directors may alter our bank’s investment policy without shareholder approval at any time.
Additional detail and information relative to the securities portfolio is incorporated by reference to Management’s Discussion and
Analysis and Note 2 of the Notes to Consolidated Financial Statements included in this Annual Report.
Available Information
We maintain an internet website at www.mercbank.com. We make available on or through our website, free of charge, our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practical after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission. We do not intend the address of our website to be an active link or to
otherwise incorporate the contents of our website into this Annual Report.
9
Item 1A. Risk Factors.
The following risk factors could affect our business, financial condition or results of operations. These risk factors should be
considered in connection with evaluating the forward-looking statements contained in this Annual Report because they could cause the actual
results and conditions to differ materially from those projected in forward-looking statements. Before you buy our common stock, you should
know that investing in our common stock involves risks, including the risks described below. The risks that are highlighted here are not the
only ones we face. If the adverse matters referred to in any of the risks actually occur, our business, financial condition or operations could be
adversely affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business
We are subject to interest rate risk.
Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors
that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in
particular, the Federal Reserve Board. Generally speaking, increases in the targeted federal funds rate positively impact our net interest
income. In contrast, higher interest rates generally have a negative impact on both the housing market, by reducing refinancing activity and
new home purchases, and the U.S. economy.
We principally manage interest rate risk by managing the volume and mix of our earning assets and funding liabilities. Changes in
monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the
amount of interest we pay on deposits and borrowings, but these changes could also affect: (1) our ability to originate and/or sell loans and
obtain deposits; (2) the fair value of our financial assets and liabilities, which could negatively impact shareholders’ equity, and our ability to
realize gains from the sale of such assets; (3) our ability to obtain and retain deposits in competition with other available investment
alternatives; (4) the ability of our borrowers to repay adjustable or variable rate loans; and (5) the average duration of our investment
securities portfolio and other interest-earning assets. If the interest rates paid on deposits and borrowings increase at a faster rate than the
interest received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could
also be adversely affected if the interest rates received on loans and other investments decline more rapidly than the interest rates paid on
deposits and other borrowings. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable
to manage interest rate risk effectively, our business, financial condition and results of operations could be materially affected.
We are subject to liquidity risk.
Our banking operations require liquidity to meet our deposit and debt obligations as they come due. There are many potential
factors that could reduce our access to liquidity sources, including higher interest rate environments, tightening fiscal policy, a downturn in
the U.S. economy, difficult credit markets or adverse regulatory actions. Our access to deposits may also be affected by the liquidity needs of
our depositors. A substantial majority of our liabilities are demand, savings, interest checking and money market deposits, which are payable
on demand or upon several days' notice, while by comparison, a substantial portion of our assets are loans, which cannot be called or sold in
the same time frame. We may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of
our depositors sought to withdraw their accounts, regardless of the reason. Our access to deposits may be negatively impacted by, among
other factors, periods of low interest rates or higher interest rates which could promote increased competition for deposits, including from
new financial technology competitors, or provide customers with alternative investment options. Additionally, negative news about us or the
banking industry in general could negatively impact market and/or customer perceptions of our company, which could lead to a loss of
depositor confidence and an increase in deposit withdrawals, particularly among those with uninsured deposits. Furthermore, as we and other
regional banking organizations experienced in 2023, the failure of other financial institutions may cause deposit outflows as customers spread
deposits among several different banks so as to maximize their amount of FDIC insurance, move deposits to banks deemed "too big to fail"
or remove deposits from the banking system entirely. As of December 31, 2024, approximately 54% of our deposits were uninsured, and we
rely on these deposits for liquidity. A failure to maintain adequate liquidity could have a material adverse effect on our business, financial
condition and results of operations.
10
Unfavorable economic, geopolitical conflicts and other political conditions could adversely affect our business, financial condition or
results of operations.
Our results of operations could be adversely affected by general conditions in the local, national, and global economies, financial
markets and political conditions. Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay
principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we
offer, is highly dependent upon the business environment in the markets where we operate. A favorable business environment is generally
characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and
investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by a decline in
economic growth both in the U.S. and internationally; declines in business activity or investor or business confidence; limitations on the
availability of or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters;
global pandemics, trade policies and tariffs; or a combination of these or other factors. In addition, financial markets and global supply chains
may be adversely affected by the current or anticipated impact of global wars/military conflicts, terrorism or other geopolitical events. A
weak or declining economy or political disruption, including any international trade disputes, could also strain our manufacturers or
suppliers, possibly resulting in supply disruptions, or cause our customers to delay making payments for our products and services. Any of
the foregoing could seriously harm our business, and we cannot anticipate all of the ways in which the political or economic climate and
financial market conditions could seriously harm our business.
Significant declines in the value of commercial real estate could adversely impact us.
Approximately 63% of our total commercial loans, or about 52% of our total loans, relate to commercial real estate. Commercial
real estate lending involves more risk than residential lending because loan balances are typically greater and repayment is dependent upon
the borrower’s business operations. Stressed economic conditions may reduce the value of commercial real estate and strain the financial
conditions of our commercial real estate borrowers, especially in the land development and non-owner occupied commercial real estate
segments of our loan portfolio. Those difficulties could adversely affect us and could produce losses and other adverse effects on our
business. Additionally, in recent years, commercial real estate markets have been particularly impacted by the economic disruption resulting
from the COVID-19 pandemic. The COVID-19 pandemic has also been a catalyst for the evolution of various remote work options that have
impacted the long-term performance of some types of office properties within our commercial real estate portfolio. Accordingly, the federal
banking regulatory agencies have expressed concerns about weaknesses in the current commercial real estate market. Failures in our risk
management policies, procedures and controls could adversely affect our ability to manage this portfolio going forward and could result in an
increased rate of delinquencies in, and increased losses from, this portfolio, which, accordingly, could have a material adverse effect on our
business, financial condition and results of operations.
Market volatility may adversely affect us.
The capital and credit markets may experience volatility and disruption. In some cases, the markets have produced downward
pressure on stock prices and credit availability for certain issuers without apparent regard to those issuers’ underlying financial strength.
Future levels of market disruption and volatility may have an adverse effect, which may be material, on our ability to access capital and on
our business, financial condition and results of operations.
Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.
We face substantial competition in all phases of our operations from a variety of different competitors. Our future growth and
success will depend on our ability to compete effectively in this highly competitive environment. We compete for deposits, loans and other
financial services with numerous Michigan-based and national and regional banks, thrifts, credit unions and other financial institutions as
well as other entities that provide financial services, including securities firms and mutual funds. Some of the financial institutions and
financial service organizations with which we compete are not subject to the same degree of regulation as we are. Many of our competitors
have been in business for many years, have established customer bases, are larger, have substantially higher lending limits than we do and
offer larger branch networks and other services which we do not, including trust and international banking services. Most of these entities
have greater capital and other resources than we do, which, among other things, may allow them to price their services at levels more
favorable to the customer and to provide larger credit facilities than we do. This competition may limit our growth or earnings. Under
specified circumstances (that have been modified by the Dodd-Frank Act and EGRRCPA), securities firms and insurance companies that
elect to become financial holding companies under the Bank Holding Company Act may acquire banks and other financial institutions.
Federal banking law affects the competitive environment in which we conduct our business. The financial services industry is also likely to
become more competitive as further technological advances enable more companies to provide financial services. These technological
advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties.
Our risk management systems may fall short of their intended objectives.
We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of separate but
complementary financial, credit, operational, compliance and legal reporting systems, internal controls, management review processes and
other mechanisms. Our risk management process seeks to balance our ability to profit from investing or lending positions with our exposure
to potential losses. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the
judgments that accompany their application cannot anticipate every economic and financial outcome or the specifics and timing of such
outcomes. Thus, we may, in the course of our activities, incur losses.
11
We may not be able to successfully adapt to evolving industry standards and market pressures.
Our success depends, in part, on our ability to adapt products and services to evolving industry standards. There is increasing
pressure to provide products and services at lower prices. This can reduce net interest income and noninterest income from fee-based
products and services. In addition, the widespread adoption of new technologies could require us to make substantial capital expenditures to
modify or adapt existing products and services or develop new products and services. We may not be successful in introducing new products
and services in response to industry trends or developments in technology, or those new products may not achieve market acceptance. As a
result, we could lose business, be forced to price products and services on less advantageous terms to retain or attract clients, or be subject to
cost increases. As a result, our business, financial condition, or results of operations may be adversely affected.
Our inability to execute or integrate potential future acquisitions successfully could impede us from realizing all of the benefits of the
acquisitions, which could weaken our operations.
In addition to pursuing organic growth, we may also pursue strategic acquisition opportunities that we believe will fit our core
philosophy and culture, enhance our profitability and provide appropriate risk-adjusted returns. These acquisition opportunities could be
material to our business and involve a number of risks, including the following:
° intense competition from other banking organizations and other acquirers for potential merger candidates drives market pricing;
° time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions may
divert human and capital resources without producing the desired returns;
° estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution
or assets are inherently complex and may be inaccurate;
° potential exposure to unknown or contingent liabilities of targets; and
° regulatory time frames for review of applications may limit the number and frequency of transactions we may be able to
consummate.
If we are unable to successfully integrate potential future acquisitions, we could be impeded from realizing all of the benefits of
those acquisitions and could weaken our business operations. The integration process may disrupt our business and, if implemented
ineffectively, may preclude realization of the full benefits expected by us and could harm our results of operations. In addition, the overall
integration of the combining companies may result in unanticipated problems, expenses, liabilities and competitive responses, and may cause
our stock price to decline. The difficulties of integrating an acquisition include, among others:
° unanticipated issues in integration of information, communications and other systems;
° unanticipated incompatibility of logistics, marketing and administrative methods;
° maintaining employee morale and retaining key employees;
° integrating the business cultures of both companies;
° preserving important strategic client relationships;
° coordinating geographically diverse organizations; and
° consolidating corporate and administrative infrastructures and eliminating duplicative operations.
Finally, even if the operations of an acquisition are integrated successfully, we may not realize the full benefits of the acquisition,
including the synergies, cost savings or growth opportunities we expect. These benefits may not be achieved within the anticipated time
frame as well.
Our inability to overcome these risks could have an adverse effect on our ability to implement our business strategy, which, in turn,
could have an adverse effect on our business, financial condition and results of operations.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other
financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We
have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial
industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services
industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Even routine
funding transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be
exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the
financial instrument exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of
operations.
12
Our credit losses could increase and our allowance may not be adequate to cover actual loan losses.
As the risk of nonpayment of loans is inherent in all lending activities, we maintain allowances for credit losses on loans, securities
and off-balance sheet credit exposures. Regardless, nonpayment, when it occurs, may have a materially adverse effect on our earnings and
overall financial condition as well as the value of our common stock. Our focus on commercial lending may result in a larger concentration of
loans to small businesses. As a result, we may assume different or greater lending risks than other banks. We make various assumptions and
judgments about the collectibility of our loan portfolio and provide an allowance for credit losses based on several factors. If our assumptions
are wrong, our allowance may not be sufficient to cover our losses, which would have an adverse effect on our operating results. The actual
amounts of future provisions for credit losses cannot be determined at this time and may exceed the amounts of past provisions. Any increase
in the allowance for credit losses on loans, securities and/or off-balance sheet credit exposures will result in a decrease in net income and,
possibly, capital, and may have a material adverse effect on our business, financial condition and results of operations.
We rely heavily on our management and other key personnel, and the loss of any of them may adversely affect our operations.
We are and will continue to be dependent upon the services of our management team, including our executive officers and our other
senior managers. The unanticipated loss of our executive officers, or any of our other senior managers, could have an adverse effect on our
growth and performance.
In addition, we continue to depend on our key commercial loan officers. Several of our commercial loan officers are responsible, or
share responsibility, for generating and managing a significant portion of our commercial loan portfolio. Our success can be attributed in
large part to the relationships these officers as well as members of our management team have developed and are able to maintain with our
customers as we continue to implement our community banking philosophy. The loss of any of these commercial loan officers could
adversely affect our loan portfolio and performance, and our ability to generate new loans. Many of our key employees have signed
agreements with us agreeing not to compete with us in one or more of our markets for specified time periods if they leave employment with
us. However, we may not be able to effectively enforce such agreements.
Some of the other financial institutions in our markets also require their key employees to sign agreements that preclude or limit
their ability to leave their employment and compete with them or solicit their customers. These agreements make it more difficult for us to
hire loan officers with experience in our markets who can immediately solicit their former or new customers on our behalf.
Direct and indirect effects of climate change may adversely affect us.
Climate change presents immediate and long-term risks to us and to our customers and communities, with risks expected to increase
over time. Climate change refers to risk of life and property damage occurring due to naturally occurring events induced by human behavior
and can manifest in the form of physical risk and indirect risk. Physical risk refers to results of severe weather, such as floods, hurricanes,
rising sea levels, fires and water availability. Indirect risk refers to how changes in regulation, conscious consumer choices, competition for
sustainable products, and reduced demand for goods or services that produce significant green-house gas emissions may impact the results
and operations of a company. Physical effects of climate change to our offices, branches or personnel could have an immediate adverse effect
on our operations and financial condition, whereas indirect consequences may result in increased expenditures to comply with climate-related
regulations.
Similarly, physical effects could have a severe impact on the business and operations of our customers and vendors. Furthermore,
consumer choices and shareholder demands could require our customers to invest more in cleaner energy manufacturing and procurement
and to compete with innovative new products that generate lower emissions, which may or may not be successful. If our customers are not
able to keep up with evolving climate change effects, it could ultimately have an adverse effect on our business and results of operations.
Lastly, like other financial institutions, we also run a reputational risk of financing businesses that are responsible for significant green-house
gas emissions or are related to carbon-based energy sources. While our risk management framework monitors various types of risks and
applies risk mitigation techniques including for environmental risks, and while we have been conscious of our own carbon footprint and have
established a Sustainability Committee, introduction of new climate-related legislation and related compliance costs as well as the
unpredictable effects of climate change on us or our customers could have a negative impact on our business, financial condition and results
of operations, even if temporary in nature.
13
Failure to meet the rapidly changing ESG expectations or standards, or achieve our ESG goals, could adversely affect our business,
results of operations, financial condition or stock price.
There are rapidly changing discussions and regulations surrounding ESG matters, including greenhouse gas emissions,
sustainability and climate-related risks; diversity, equity and inclusion; responsible sourcing and supply chain; human rights and social
responsibility; and corporate governance and oversight. Given our commitment to ESG, we actively manage these issues and have
established and publicly announced certain goals, commitments and targets which we may refine or even expand further in the future. These
goals, commitments and targets reflect our current plans and aspirations and are not guarantees that we will be able to achieve them. Evolving
stakeholder expectations and our efforts and ability to manage these issues, provide updates on them and accomplish our goals, commitments
and targets present numerous operational, regulatory, reputational, financial, legal and other risks, any of which may be outside of our control
or could have a material adverse impact on our business, including on our reputation and stock price. Further, there is uncertainty around the
accounting standards and climate-related disclosures associated with emerging laws and reporting requirements and the related costs to
comply with the emerging regulations.
Changes in SOFR could adversely affect the amount of interest that accrues on SOFR-linked instruments.
Effective January 1, 2022, we replaced the 30-Day Libor Rate with the CME Term SOFR Rate for all new floating rate commercial
loan commitments. On or about June 30, 2023, all commercial loans tied to the 30-Day Libor Rate converted to an equivalent fallback SOFR
Rate. Because SOFR is published by the Federal Reserve Bank of New York ("FRBNY") based on data received from other sources, we have
no control over its determination, calculation or publication. There can be no assurance that SOFR will not be discontinued or fundamentally
altered in a manner that is materially adverse to the interests of investors in SOFR-linked instruments. If the manner in which SOFR is
calculated is changed, that change may result in a change in the amount of interest that accrues on the SOFR-linked instruments. In addition,
the interest rate on SOFR-linked instruments may for any day not be adjusted for any modification or amendments to SOFR for that day that
the FRBNY may publish if the interest rate for that day has already been determined prior to such determination. There is no assurance that
changes in SOFR could not have a material adverse effect on the yield on, value of, and market for SOFR-linked instruments, which could
have a material adverse effect on our business.
Further, SOFR is a relatively new interest rate, and the FRBNY or any successor, as administrator of SOFR, may make
methodological or other changes that could change the value of SOFR, including changes related to the methodology by which SOFR is
calculated, eligibility criteria applicable to the transactions used to calculate SOFR or timing related to the publication of SOFR. If the
manner in which SOFR is calculated is changed, the change may result in a reduction of the amount of interest payable on loans we have
made to customers, which could have a material adverse effect on our business. The administrator of SOFR may withdraw, modify, suspend
or discontinue the calculation or dissemination of SOFR in its sole discretion and without notice, and has no obligation to consider the
interests of investors in calculating, withdrawing, modifying, amending, suspending or discontinuing SOFR.
Our accounting policies and methods are the basis for how we prepare our consolidated financial statements, and they require
management to make estimates about matters that are inherently uncertain.
Accounting policies and processes are fundamental to how we record and report our financial condition and results of operations.
We must exercise judgment in selecting and applying many of these accounting policies and processes so they comply with U.S. GAAP. In
some cases, we must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under
the circumstances, yet may result in our reporting materially different results than would have been reported under a different alternative.
We have identified certain accounting policies as being critical because they require us to make difficult, subjective or complex
judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different
assumptions or estimates. We have established detailed policies and control procedures that are intended to ensure these critical accounting
estimates and judgments are well controlled and applied consistently. In addition, the policies and procedures are intended to ensure that the
process for changing methodologies occurs in an appropriate manner. Because of the uncertainty surrounding management’s judgments and
the estimates pertaining to these matters, we cannot guarantee that we will not be required to adjust accounting policies or restate prior period
financial statements. For additional information, see “Critical Accounting Estimates” beginning on page F-3 of this Annual Report and “Note
1 – Summary of Significant Accounting Policies” beginning on page F-36 of this Annual Report.
14
We continually encounter technological change, and we may have fewer resources than our competitors to continue to invest in
technological improvements.
The banking industry is undergoing technological changes with frequent introductions of new technology-driven products and
services, such as those related to artificial intelligence, automation and algorithms. In addition to better serving customers, the effective use of
technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to
address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience
as well as create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in
technological improvements than we do. There can be no assurance that we will be able to effectively implement new technology-driven
products and services or be successful in marketing these products and services to our customers. In addition, our implementation of certain
new technologies, such as those related to artificial intelligence, automation and algorithms, in our business processes may have unintended
consequences due to their limitations or our failure to use them effectively. Failure to successfully manage technological changes could have
a material adverse effect on our business, financial condition and results of operations.
Damage to our reputation could materially harm our business.
Our relationship with many of our clients is predicated upon our reputation as a fiduciary and a service provider that adheres to the
highest standards of ethics, service quality and regulatory compliance. Adverse publicity, regulatory actions, litigation, operational failures,
the failure to meet client expectations and other issues with respect to one or more of our businesses could materially and adversely affect our
reputation, our ability to attract and retain clients or our sources of funding for the same or other businesses. Preserving and enhancing our
reputation also depends on maintaining systems and procedures that address known risks and regulatory requirements, as well as our ability
to identify and mitigate additional risks that arise due to changes in our businesses and the marketplaces in which we operate, the regulatory
environment and client expectations. If any of these developments has a material effect on our reputation, our business will suffer.
Our business is subject to operational risks.
We, like most financial institutions, are exposed to many types of operational risks, including the risk of fraud by employees or
outsiders, unauthorized transactions by employees or operational errors. To date, we have not experienced a significant compromise,
significant data loss or any material financial losses related to cybersecurity attacks, but our systems and those of our customers and third-
party service providers are under constant threat, and it is possible that we could experience a significant event in the future. Operational
errors may include clerical or record keeping errors or those resulting from faulty or disabled computer or telecommunications systems.
Given our volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully corrected. Our
necessary dependence upon automated systems to record and process our transaction volume may further increase the risk that technical
system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect.
We may also be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control,
including, for example, computer viruses or electrical or telecommunications outages, which may give rise to losses in service to customers
and to loss or liability to us. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations
to us, or will be subject to the same risk of fraud or operational errors by their respective employees as are we, and to the risk that our or our
vendors’ business continuity and data security systems prove not to be adequate. We also face the risk that the design of our controls and
procedures proves inadequate or is circumvented, causing delays in detection or errors in information. Although we maintain a system of
controls designed to keep operational risks at appropriate levels, there can be no assurance that we will not suffer losses from operational
risks in the future that may be material in amount.
15
We face the risk of cyber-attack to our computer systems.
In the ordinary course of business, we collect and store sensitive data, including proprietary business information and personally
identifiable information of our customers and employees in systems and on networks. The secure processing, maintenance and use of this
information is critical to our operations. To date, we have not experienced a significant compromise, significant data loss or any material
financial losses related to cybersecurity attacks, but our systems and those of our customers and third-party service providers are under
constant threat, and it is possible that we could experience a significant event in the future. Cybersecurity threats include unauthorized access,
loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses or other
malicious code, cyber-attacks and other events. Remote working of employees introduces additional potential cybersecurity risks due to the
use of home networks, video conferencing and other remote work technologies over which we do not have as much control as our internal
systems.
Cyber threats may derive from human error, fraud or malice on the part of employees or third parties, or may result from accidental
technological failure. We cannot assure that such breaches, failures or interruptions will not occur or, if they do occur, that they will be
adequately addressed by us or the third parties on which we rely. We may not be insured against all types of losses as a result of third-party
failures, and insurance coverage may be inadequate to cover all losses resulting from breaches, systems failures or other disruptions. If one or
more of these events occurs, it could result in the disclosure of confidential client information, damage to our reputation with our clients and
the market, additional costs to us (such as repairing systems or adding new personnel or protection technologies), regulatory penalties and
financial losses, to both us and our clients and customers. Such events could also cause interruptions or malfunctions in our operations (such
as the lack of availability of our online banking system), as well as the operations of our clients, customers or other third parties. Risks and
exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and
sophistication of these threats, as well as due to the expanding use of internet banking, mobile banking and other technology-based products
and services by us and our customers. Although we maintain safeguards to protect against these risks, there can be no assurance that we will
not suffer losses in the future that may be material in amount.
Cybersecurity risks and disclosures are increasingly regulated by various government agencies, including federal and state bank
regulatory agencies and the Securities and Exchange Commission. Failure to observe such guidance may result in supervisory identification
of unsafe or unsound practices or other deficiencies in risk management or other areas that do not constitute violations of law or regulation.
Regulatory Risks
We are subject to significant government regulation, and any regulatory changes may adversely affect us.
The banking industry is subject to extensive regulation, supervision and legal requirements under both federal and state law that
govern almost all aspects of our operations. These regulations are primarily intended to protect customers, the federal deposit insurance fund,
and the stability of the U.S. financial system, not our creditors or shareholders. Existing state and federal banking laws subject us to
substantial limitations with respect to our activities, including the making of loans, the purchase of securities, the payment of dividends and
many other aspects of our business. Some of these laws may benefit us, others may increase our costs of doing business, or otherwise
adversely affect us and create competitive advantages for others. Regulations affecting banks and financial services companies undergo
continuous change, which may be accelerated by changes in the administration of federal and state governments, and we cannot predict the
ultimate effect of these changes, which could have a material adverse effect on our profitability or financial condition. Federal economic and
monetary policy may also affect our ability to attract deposits, make loans and achieve satisfactory interest spreads. The implementation,
amendment or repeal of federal financial services laws or regulations may limit our business opportunities, impose additional costs on us,
impact our revenues or the value of our assets, or otherwise adversely affect our business, financial condition or results of operations.
16
Minimum capital requirements may adversely affect our ability (and that of our bank) to pay cash dividends, reduce our
profitability, or otherwise adversely affect our business, financial condition or results of operations.
We are subject to extensive capital regulations imposed by federal and state banking regulations. These regulations, among other
things, establish minimum requirements to qualify as a “well-capitalized” institution. If our bank were to fail to maintain its status of “well-
capitalized” under the applicable regulatory capital regulations, we may lose our status as a financial holding company and be subjected to a
consent agreement requiring us to bring our bank back to a “well-capitalized” status. Such an agreement may impose restrictions on our
activities. If we were to fail to enter into such an agreement, or fail to comply with the terms of such agreement, the Federal Reserve may
impose more severe restrictions on our activities, including requiring us to cease and desist activities permitted under the Bank Holding
Company Act of 1956. The regulatory environment is constantly evolving, with requirements frequently being introduced or amended. It is
possible that increases in regulatory capital requirements and changes in how regulatory capital is calculated could require us to increase our
capital levels by issuing additional securities that qualify as regulatory capital, thus potentially diluting our existing shareholders, or by taking
other actions, such as selling assets, in order to maintain required capital ratios. We may be unable to sell some of our assets, or we may have
to sell assets at a discount from market value, either of which could adversely affect our results of operations, cash flow and financial
condition.
Risks Related to Our Stock
Issuance of debt securities or sales of our common stock or other securities may dilute the value of our common stock.
We have issued both trust preferred securities and subordinated notes. In the event of our liquidation, the holders of our debt
securities would receive a distribution of our available assets before distributions are made to holders of our common stock. In many
situations, our Board of Directors has the authority, without any vote of our shareholders, to issue shares of our authorized but unissued
preferred or common stock, including shares authorized and unissued under our equity incentive plans. In the future, we may issue additional
debt or equity securities, through public or private offerings, in order to raise additional capital. Any such issuance of equity securities would
dilute the percentage of ownership interest of existing shareholders and may dilute the per share book value of the common stock. In addition,
option holders under our stock-based incentive plans may exercise their options at a time when we would otherwise be able to obtain
additional equity capital on more favorable terms.
We may need to raise additional capital in the future, and such capital may not be available when needed or at all.
We may need or want to raise additional capital in the future by issuing debt or equity securities to provide us with sufficient capital
resources and liquidity to meet our commitments and business needs, particularly if our asset quality or earnings were to deteriorate
significantly. Our ability to raise additional capital will depend on, among other things, conditions in the capital markets at that time, which
are outside of our control, and our financial performance. Economic conditions and any loss of confidence in financial institutions generally
may increase our cost of funding and limit access to certain customary sources of capital.
There can be no assurance that capital will be available on acceptable terms or at all. Any occurrence that may limit our access to
the capital markets, such as a decrease in our credit rating or a decline in the confidence of equity or debt purchasers, or counterparties
participating in the capital markets, may adversely affect our capital costs and our ability to raise capital and, potentially, our liquidity. Also,
if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and
would have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could
have a materially adverse effect on our business, financial condition and results of operations.
17
Our Articles of Incorporation, By-laws, the corporate laws of the State of Michigan, and federal banking laws contain provisions that
may discourage or prevent a takeover of our company and reduce any takeover premium.
Our Articles of Incorporation, By-laws, the corporate laws of the State of Michigan, and federal banking laws include provisions
which are designed to provide our Board of Directors with time to consider whether a hostile takeover offer is in our and our shareholders’
best interest. These provisions, however, could discourage potential acquisition proposals and could delay or prevent a change in control. The
provisions also could diminish the opportunities for a holder of our common stock to participate in tender offers, including tender offers at a
price above the then-current market price for our common stock. These provisions could also prevent transactions in which our shareholders
might otherwise receive a premium for their shares over then-current market prices, and may limit the ability of our shareholders to approve
transactions that they may deem to be in their best interest.
The Michigan Business Corporation Act contains provisions intended to protect shareholders and prohibit or discourage various
types of hostile takeover activities. In addition to these provisions and the provisions of our Articles of Incorporation and By-laws, federal
banking laws require the Federal Reserve Board’s approval prior to acquiring “control” of a bank holding company. All of these provisions
may delay or prevent a change in control without action by our shareholders and could adversely affect the price of our common stock.
There is a limited trading market for our common stock.
The price of our common stock has been, and will likely continue to be, subject to fluctuations based on, among other things,
economic and market conditions for bank holding companies and the stock market in general, as well as changes in investor perceptions of
our company. The issuance of new shares of our common stock also may affect the market for our common stock.
Our common stock is traded on the Nasdaq Global Select Market under the symbol “MBWM.” The development and maintenance
of an active public trading market depends upon the existence of willing buyers and sellers, the presence of which is beyond our control.
While we are a publicly traded company, the volume of trading activity in our stock is still relatively limited. Even if a more active market
develops, there can be no assurance that such a market will continue, or that our shareholders will be able to sell their shares at or above the
price at which they acquired shares.
The value of securities in our investment securities portfolio may be negatively affected by disruptions in securities markets.
Prices and volumes of transactions in the nation’s securities markets can be affected suddenly by economic crises, or by other
national or international crises, such as national disasters, acts of war or terrorism, changes in commodities markets, or instability in foreign
governments. Disruptions in securities markets may detrimentally affect the value of securities that we hold in our investment portfolio, such
as through reduced valuations due to the perception of heightened credit and liquidity risks. There can be no assurance that declines in market
value associated with these disruptions will not result in a loss in principal value of these assets, which would lead to accounting charges that
could have a material adverse effect on our net income and capital levels.
Item 1B. Unresolved Staff Comments
We have received no written comments regarding our periodic or current reports from the staff of the Securities and Exchange
Commission that were issued 180 days or more before the end of our 2024 fiscal year and that remain unresolved.
18
Item 1C. Cybersecurity
Risk Management and Strategy
Our enterprise risk management program is designed to identify, assess, and mitigate risks across various aspects of our company, including financial,
operational, regulatory, reputational, and legal. Cybersecurity is a critical component of this program given the increasing reliance on technology and potential of
cyber threats. Our Chief Information Security Officer (the "CISO") is primarily responsible for this cybersecurity component and is a key member of the risk
management organization, reporting directly to the Senior Management Team (“SMT”) and our Tech Oversight Committee. Our Tech Oversight Committee
includes members of our Board and management. Our CISO has served in this capacity for more than a decade and maintains multiple certifications issued by the
Information Systems Audit and Control Association ("ISACA") and the SANS Institute. As part of our overall enterprise risk management program, we maintain
both an Information & Cyber Security Program Policy (“ICSPP”) and Information & Cyber Security Incident Response Policy (“ICSIRP”).
Our ICSPP is overseen by the SMT, which is responsible for designating the CISO. The CISO is responsible for leading company-wide cybersecurity
strategy, policy, standards, architecture, and processes. The CISO is charged with all logical security related matters, which include but are not limited to,
PC/server security, network security, internet security, and database and application security. Our ICSIRP is based on applicable federal and state laws as well as
cybersecurity incident response best practices. The purpose of the ICSIRP is to define procedures for reporting and responding to cybersecurity incidents. It
creates objectives for actionable procedures that can be measured, evaluated, scaled and revised as necessary for each specific incident. These objectives include
maximizing the effectiveness of our company's operations through an established plan of action and assigning responsibilities to appropriate personnel and/or
third-party contractors.
Our company has engaged a third-party managed detection and response company to monitor the security of our information systems around-the-
clock, including intrusion detection and response, and to provide instantaneous alerting should a cybersecurity event occur. If a cybersecurity threat or
cybersecurity incident is identified through our company's information systems, the CISO and Incident Response Team (“IRT”) will take immediate steps to
mitigate the threat and assess any damages. Upon report from the CISO, the SMT will evaluate the materiality of the cybersecurity threat or cybersecurity incident
to determine if any public disclosures are required under the Security and Exchange Commission’s cybersecurity disclosure rule. If deemed necessary, third-party
consultants, legal counsel, and assessors will be engaged to evaluate the materiality assessment.
Our company has training and awareness programs designed to educate its employees about cybersecurity risks and how to protect our company, our
customers and themselves from cyber-attacks and to keep its employees informed about cybersecurity threats and how to stay safe online, including secure access
practice, phishing schemes, remote work and response to suspicious activities.
Our cybersecurity program interfaces with other functional areas within our company, including but not limited to, our company's business segments
and information technology, legal, risk, human resources and internal audit departments, as well as external third-party partners, to identify and understand
potential cybersecurity threats. We regularly assess and update our processes, procedures and management techniques in light of ongoing cybersecurity
developments.
Recognizing the complexity and evolving nature of cybersecurity threats, we also engage with a range of external experts, including cybersecurity
assessors, consultants, and auditors in evaluating and testing our risk management systems. These partnerships enable our company to leverage specialized
knowledge and insights, ensuring its cybersecurity strategies and processes remain at the forefront of industry best practices. Our company's collaboration with
these third parties includes regular audits, testing, threat assessments and consultation on security enhancements.
To date, risks from cybersecurity threats or incidents have not materially affected our company. However, the sophistication of and risks from
cybersecurity threats and incidents continue to increase, and the preventative actions that we have taken and continue to take to reduce the risk of cybersecurity
threats and incidents and protect our systems and information may not successfully protect against all cybersecurity threats and incidents. For more information on
how cybersecurity risk could materially affect our company's business strategy, results of operations, or financial condition, please refer to Item 1A Risk Factors.
Governance
Our company recognizes the importance of safeguarding company and customer information. Therefore, the Board of Directors recognizes that the
protection of this information ranks as one of our highest priorities. The Board of Directors is responsible for reviewing and approving the ICSPP and ICSIRP at
least annually and monitoring material risks facing our company. The Board recently added a member who possesses specialized expertise in cybersecurity
matters. Director Sara A. Schmidt currently serves as chief information security officer for US Foods and executive sponsor of the West Michigan Cyber Security
Consortium.
The Board has tasked the SMT with overseeing efforts to develop, implement and maintain an effective information and cybersecurity program. The
SMT designates the CISO who also serves as the IRT leader. As part of its oversight responsibilities, the Board of Directors is responsible for discussing with the
SMT our company’s major risk exposures, such as cybersecurity, and the steps management has taken to monitor and control those exposures, including our risk
assessment and risk management policies. The Board of Directors also monitors our compliance with legal and regulatory requirements and the risks associated
therewith. On a regular basis, our Tech Oversight Committee reviews with the SMT significant areas of risk exposure involving cybersecurity.
At the direction of the SMT, the CISO and IRT monitor internal and external cybersecurity threats and review and revise our company’s cybersecurity
defenses on an ongoing basis. The CISO, together with other members of the IRT, bring a wealth of expertise to their respective roles, including expertise in
security technologies; designing and implementing security strategies; security standards such as NIST, ISO, COBIT and ITIL; and risk management and incident
response. The CISO prepares reports on IT general controls and cybersecurity metrics for the SMT and Tech Oversight Committee periodically. The Board of
Directors meets with the CISO periodically to discuss cybersecurity.
19
Item 2.
Properties.
Our headquarters is located in our bank’s main office facility in Grand Rapids, Michigan. Our bank operates 43 banking offices
primarily concentrated throughout Western and Central Michigan, most of which are full-service facilities. We also have banking offices
located in the metropolitan Detroit, Michigan area, Traverse City, Michigan, Petoskey, Michigan, Saginaw, Michigan, and Midland,
Michigan. We have larger banking facilities in Kalamazoo, Lansing, Mt. Pleasant and West Branch. The remaining banking offices generally
range in size from 1,200 to 3,200 square feet, based on the location and number of employees located at the facility. All of our banking
offices are owned by our bank except for ten that are rented under various operating lease agreements. In addition, certain functions operate
out of our standalone facility located in Alma, Michigan.
We consider our properties and equipment to be well maintained, in good operating condition and capable of accommodating
current growth forecasts. However, we may choose to add branch locations to expand our presence in current markets and/or in new markets
or, alternatively, to consolidate, close or relocate branches if we believe it would be beneficial to our overall performance.
Item 3.
Legal Proceedings.
From time to time, we may be involved in various legal proceedings that are incidental to our business. In the opinion of
management, we are not a party to any legal proceedings that are material to our financial condition, either individually or in the aggregate.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information and Holders
Our common stock is traded on the Nasdaq Global Select Market under the symbol “MBWM.” At February 28, 2025, there were
approximately 1,200 record holders of our common stock. In addition, we estimate that there were approximately 7,000 beneficial owners of
our common stock who own their shares through brokers or banks.
Dividend Policy
The following table shows the high and low sales prices for our common stock as reported by the Nasdaq Global Select Market for
the periods indicated and the quarterly cash dividends paid by us during those periods.
2024
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2023
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Dividend
$
$
$
$
42.82
41.11
51.21
52.98
37.00
31.56
36.73
41.93
$
$
34.25
33.46
38.02
40.85
29.39
23.89
26.95
30.12
0.35
0.35
0.36
0.36
0.33
0.33
0.34
0.34
20
Holders of our common stock are entitled to receive dividends that the Board of Directors may declare from time to time. We may
only pay dividends out of funds that are legally available for that purpose. We are a financial holding company and substantially all of our
assets are held by our bank. Our ability to pay dividends to our shareholders depends primarily on our bank’s ability to pay dividends to us.
Dividend payments and extensions of credit to us from our bank are subject to legal and regulatory limitations, generally based on capital
levels and current and retained earnings, imposed by law and regulatory agencies with authority over our bank. The ability of our bank to pay
dividends is also subject to its profitability, financial condition, capital expenditures and other cash flow requirements. In addition, under the
terms of our subordinated debentures, we would be precluded from paying dividends on our common stock if an event of default has
occurred and is continuing under the subordinated debentures, or if we exercised our right to defer payments of interest on the subordinated
debentures, until the deferral ended.
We and our bank are subject to regulatory capital requirements administered by state and federal banking agencies. Failure to meet
the various capital requirements can initiate regulatory action that could have a direct material effect on our financial statements. Our ability
to pay cash and stock dividends or repurchase equity securities is subject to limitations under various laws and regulations and to prudent and
sound banking practices.
On January 11, 2024, our Board of Directors declared a cash dividend on our common stock in the amount of $0.35 per share that
was paid on March 13, 2024 to shareholders of record as of March 1, 2024. On April 11, 2024, our Board of Directors declared a cash
dividend on our common stock in the amount of $0.35 per share that was paid on June 19, 2024 to shareholders of record as of June 7, 2024.
On July 11, 2024, our Board of Directors declared a cash dividend on our common stock in the amount of $0.36 per share that was paid on
September 18, 2024 to shareholders of record as of September 6, 2024. On October 10, 2024, our Board of Directors declared a cash dividend
on our common stock in the amount of $0.36 per share that was paid on December 18, 2024 to shareholders of record as of December 6,
2024.
On January 12, 2023, our Board of Directors declared a cash dividend on our common stock in the amount of $0.33 per share that
was paid on March 15, 2023 to shareholders of record as of March 3, 2023. On April 13, 2023, our Board of Directors declared a cash
dividend on our common stock in the amount of $0.33 per share that was paid on June 14, 2023 to shareholders of record as of June 2, 2023.
On July 13, 2023, our Board of Directors declared a cash dividend on our common stock in the amount of $0.34 per share that was paid on
September 13, 2023 to shareholders of record as of September 1, 2023. On October 12, 2023, our Board of Directors declared a cash dividend
on our common stock in the amount of $0.34 per share that was paid on December 13, 2023 to shareholders of record as of December 1,
2023.
On January 16, 2025, our Board of Directors declared a cash dividend on our common stock in the amount of $0.37 per share that
will be paid on March 19, 2025 to shareholders of record as of March 7, 2025.
Issuer Purchases of Equity Securities
On May 27, 2021, we announced that our Board of Directors had authorized a program to repurchase up to $20.0 million of our
common stock from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable
regulations. The actual timing, number and value of shares repurchased under the program will be determined by management in its
discretion and will depend on a number of factors, including the market price of our stock, general market and economic conditions, our
capital position, financial performance and alternative uses of capital, and applicable legal requirements. The program may be discontinued at
any time. No shares were repurchased during 2023 or 2024. Historically, stock repurchases have been funded from cash dividends paid to us
from our bank. Additional repurchases may be made in future periods under the authorized plan or a new plan, which would also likely be
funded from cash dividends paid to us from our bank. As of December 31, 2024, repurchases aggregating $6.8 million were available to be
made under the current repurchase program.
21
Repurchases made during the fourth quarter of 2024 are detailed in the table below. The approximate dollar value that may yet be
purchased under the plans or programs is presented in thousands.
(c) Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
(d) Maximum
Number of
Shares or
Approximate
Dollar Value
that May Yet
Be
Purchased
Under the
Plans or
Programs
0
0
0
0
$
$
6,818
6,818
6,818
6,818
(a) Total
Number of
Shares
Purchased
(b) Average
Price Paid
Per Share
0
0
0
0
$ NA
NA
NA
$ NA
Period
October 1 – 31
November 1 – 30
December 1 – 31
Total
22
Shareholder Return Performance Graph
Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on our common
stock (based on the last reported sales price of the respective year) with the cumulative total return of the Nasdaq Composite Index and the
KBW Nasdaq Bank Index from December 31, 2019 through December 31, 2024. The following is based on an investment of $100 on
December 31, 2019 in our common stock, the Nasdaq Composite Index and the KBW Nasdaq Bank Index, with dividends reinvested where
applicable.
Index
Mercantile Bank Corporation
NASDAQ Composite Index
KBW NASDAQ Bank Index
Item 6.
Reserved.
12/31/19
100.00
100.00
100.00
12/31/20
77.96
144.92
89.69
Period Ending
12/31/21
104.30
177.06
124.06
12/31/22
103.42
119.45
97.52
12/31/23
130.12
172.77
96.65
12/31/24
148.38
223.87
132.60
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis included in this Annual Report is incorporated here by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information under the heading “Market Risk Analysis” included in this Annual Report is incorporated here by reference.
23
Item 8.
Financial Statements and Supplementary Data.
The Consolidated Financial Statements, the Notes to Consolidated Financial Statements and the Reports of Independent Registered
Public Accounting Firms included in this Annual Report are incorporated here by reference.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
As of December 31, 2024, an evaluation was performed under the supervision of and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls
and procedures. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded
that our disclosure controls and procedures were effective as of December 31, 2024.
There have been no significant changes in our internal control over financial reporting during the year ended December 31, 2024,
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f). There are inherent limitations in the effectiveness of any system of internal control. Accordingly,
even an effective system of internal control can provide only reasonable assurance with respect to financial statement preparation.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2024. This
evaluation was based on criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation under the
COSO framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2024. Refer
to page F-27 for management’s report. The Reports of the Independent Registered Public Accounting Firms included in this Annual Report
are incorporated here by reference.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information presented under the captions “Information About Our Directors,” “Information About Our Executive Officers,”
“Section 16(a) Beneficial Ownership Reporting Compliance”, “Corporate Governance – Code of Ethics and Insider Trading Policy”, and
"Board Committees -- Audit Committee" in the definitive Proxy Statement of Mercantile Bank Corporation for our May 22, 2025 Annual
Meeting of Shareholders (the “Proxy Statement”), a copy of which will be filed with the Securities and Exchange Commission before April
30, 2025, is incorporated here by reference.
Item 11. Executive Compensation.
The information presented under the captions “Executive Compensation,” “Corporate Governance – Compensation Committee
Interlocks and Insider Participation” and “Compensation Committee Report” in the Proxy Statement is incorporated here by reference.
24
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information presented under the caption “Stock Ownership of Certain Beneficial Owners and Management” in the Proxy
Statement is incorporated here by reference.
Equity Compensation Plan Information
The following table summarizes information, as of December 31, 2024, relating to compensation plans under which equity
securities are authorized for issuance.
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
(a)
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
(b)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
(c)
0
0
0
$
$
$
0
0
0
383,133 (1)
0
383,133
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
(1) These securities are available under the Stock Incentive Plan of 2023. Incentive awards may include, but are not limited to, stock options,
restricted stock, stock appreciation rights and stock awards.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information presented under the captions “Transactions with Related Persons” and “Corporate Governance – Director
Independence” in the Proxy Statement is incorporated here by reference.
Item 14.
Principal Accountant Fees and Services.
The information presented under the caption “Audit Committee Matters -- Principal Accountant Fees and Services” in the Proxy
Statement is incorporated here by reference.
25
Item 15. Exhibits and Financial Statement Schedules
PART IV
(a) (1)
Mercantile Bank Corporation and its subsidiaries are filed as part of this report:
Financial Statements. The following financial statements and reports of the independent registered public accounting firms of
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets --- December 31, 2024 and 2023
Consolidated Statements of Income for each of the three years in the period ended December 31, 2024
Consolidated Statements of Comprehensive Income (Loss) for each of the three years in the period ended December 31, 2024
Consolidated Statements of Changes in Shareholders’ Equity for each of the three years in the period ended December 31, 2024
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2024
Notes to Consolidated Financial Statements
The Consolidated Financial Statements, the Notes to Consolidated Financial Statements, and the Reports of Independent Registered
Public Accounting Firms listed above are incorporated by reference in Item 8 of this report.
(2)
Financial Statement Schedules
Not applicable.
(b)
Exhibits:
The Exhibit Index immediately preceding the Signatures Page hereto is incorporated by reference under this item.
(c)
Financial Statements Not Included In Annual Report
Not applicable.
Item 16.
Form 10-K Summary
None.
26
MERCANTILE BANK CORPORATION
FINANCIAL INFORMATION
December 31, 2024 and 2023
F-1
MERCANTILE BANK CORPORATION
FINANCIAL INFORMATION
December 31, 2024 and 2023
CONTENTS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS (PCAOB ID 166, PLANTE & MORAN, PLLC,
GRAND RAPIDS, MICHIGAN) (PCAOB ID 243, BDO USA, P.C., GRAND RAPIDS, MICHIGAN)
REPORT BY MERCANTILE BANK CORPORATION’S MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
F-23
F-27
F-28
F-29
F-30
F-31
F-34
F-36
F-2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion and other portions of this Annual Report contain forward-looking statements that are based on management’s
beliefs, assumptions, current expectations, estimates, and projections about the financial services industry, the economy, and our company.
Words such as “anticipates,” “believes,” "could," “estimates,” “expects,” “intends,” “plans,” “projects,” “indicates,” “strategy,” “future,”
“likely,” “may,” “should,” “will,” and variations of such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future
Factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and
outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. We undertake no obligation to
update, amend, or clarify forward-looking statements, whether as a result of new information, future events (whether anticipated or
unanticipated), or otherwise.
Future Factors include, among others, adverse changes in interest rates and interest rate relationships; increasing rates of inflation and slower
growth rates; significant declines in the value of commercial real estate; market volatility; demand for products and services; climate impacts;
labor markets; the degree of competition by traditional and non-traditional financial services companies; changes in banking regulation or
actions by bank regulators; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; potential
cyber-attacks, information security breaches, and other criminal activities; litigation liabilities; governmental and regulatory policy changes;
the outcomes of existing or future contingencies; trends in customer behavior as well as their ability to repay loans; changes in local real
estate values; damage to our reputation resulting from adverse publicity, regulatory actions, litigation, operational failures, and the failure to
meet client expectations and other facts; changes in the national and local economies, and unstable political and economic environments; and
risk factors described in our annual report on Form 10-K for the year ended December 31, 2024. These are representative of the Future
Factors that could cause a difference between an ultimate actual outcome and a forward-looking statement.
Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Form 10-K can be found in
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2023.
CRITICAL ACCOUNTING ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“Management’s Discussion and Analysis”) is
based on Mercantile Bank Corporation’s consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Our critical accounting estimates are highly
dependent upon subjective or complex judgments and assumptions, and changes in such may have a significant impact on the financial
statements, just as actual results may differ. We have reviewed the application of our critical accounting estimates with the Audit Committee
of our Board of Directors.
F-3
Allowance For Credit Losses (“allowance”): The allowance is maintained at a level we believe is adequate to absorb estimated credit losses
identified and expected in the loan portfolio. Our evaluation of the adequacy of the allowance is an estimate based on historical credit loss
experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values,
guidance from bank regulatory agencies, and assessments of the impact of current and anticipated economic conditions on the loan
portfolio. While historical credit loss experience provides the basis for the estimation of expected credit losses, our qualitative model
adjusts for risk factors that are not inherently considered in the quantitative modeling process, but are nonetheless relevant in assessing the
expected credit losses within the loan portfolio. These adjustments may increase or decrease the estimate of expected credit losses based upon
the assessed level of risk for each qualitative factor. The various risks that may be considered in making qualitative adjustments include,
among other things, the impact of (i) changes in lending policies and procedures, (ii) changes in the nature and volume of the loan portfolio
and in the terms of loans, (iii) changes in the experience, ability and depth of lending management and staff, (iv) changes in the volume and
severity of past due loans, nonaccrual loans and adversely classified loans, (v) changes in the quality of the credit review function, (vi)
changes in the value of underlying collateral dependent loans, (vii) existence and effect of any concentrations of credit and any changes in
such, and (viii) effect of other factors such as competition and legal and regulatory requirements.
Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should
be charged-off. Credit losses are charged against the allowance when we believe the uncollectibility of a loan is likely. The balance of the
allowance represents our best estimate, but significant downturns in circumstances relating to loan quality or economic conditions could
result in a requirement for an increased allowance in the future. Likewise, an upturn in loan quality or improved economic conditions may
result in a decline in the required allowance in the future. In either instance, unanticipated changes could have a significant impact on the
allowance and operating results. The allowance is increased through a provision charged to operating expense. Uncollectible loans are
charged-off through the allowance, while recoveries of loans previously charged-off are added to the allowance.
See Note 1 – Significant Accounting Policies in the Notes to our Consolidated Financial Statements in this Form 10-K for additional
information on our estimation process and methodology related to the allowance. See also Note 3 – Loans and Allowance for Credit Losses
in the Notes to our Consolidated Financial Statements in this Form 10-K for further information regarding our loan portfolio and allowance.
Mortgage Servicing Rights: Mortgage servicing rights are recognized as assets based on the allocated fair value of retained servicing rights
on loans sold. Servicing rights are carried at the lower of amortized cost or fair value and are expensed in proportion to, and over the period
of, estimated net servicing income. We utilize a discounted cash flow model to determine the value of our servicing rights. The valuation
model utilizes mortgage loan prepayment speeds, the remaining lives of the mortgage loan pools, delinquency rates, our cost to service loans,
and other factors to determine the cash flow that we will receive from servicing each grouping of loans. These cash flows are then discounted
based on current interest rate assumptions to arrive at the fair value of the right to service those loans. Impairment is evaluated quarterly
based on the fair value of the servicing rights, using groupings of the underlying loans classified by interest rates. Any impairment of a
grouping is reported as a valuation allowance.
F-4
Goodwill: Accounting rules require us to determine the fair value of all the assets and liabilities of an acquired entity, and to record their fair
value on the date of acquisition. We employ a variety of means in determining fair value, including the use of discounted cash flow analysis,
market comparisons and projected future revenue streams. For those items for which we conclude that we have the appropriate expertise to
determine fair value, we may choose to use our own calculation of fair value. In other cases, where the fair value is not readily determined,
consultation with outside parties is used to determine fair value. Once valuations have been determined, the net difference between the price
paid for the acquired entity and the fair value of the balance sheet is recorded as goodwill. Goodwill is assessed at least annually for
impairment, with any such impairment recognized in the period identified. A more frequent assessment is performed if there are material
changes in the market place or within the organizational structure.
INTRODUCTION
This Management’s Discussion and Analysis should be read in conjunction with the consolidated financial statements contained in this
Annual Report. This discussion provides information about the consolidated financial condition and results of operations of Mercantile Bank
Corporation and its consolidated subsidiaries, Mercantile Bank (“our bank”) and Mercantile Community Partners LLC ("MCP"), and
Mercantile Insurance Center, Inc. (“our insurance company”), a subsidiary of our bank. Unless the text clearly suggests otherwise, references
to “us,” “we,” “our,” or “the company” include Mercantile Bank Corporation and its wholly-owned subsidiaries referred to above.
CLIMATE CHANGE
The potential impact of climate changes on our operations and the needs of our customers remains uncertain. Scientists have proposed that
the impacts of climate change could include changes in rainfall patterns, water shortages, changes to the water levels of lakes and other
bodies of water, changing storm patterns and intensities, and changing temperature levels. These changes could be severe and vary by
geographic location. Climate change may also affect the occurrence of certain natural events, the incidence and severity of which are
inherently unpredictable, and may impact our borrowers or the value of our loan collateral.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE MATTERS
Our Sustainability Committee supports our ongoing commitment to environmental, health and safety, corporate social responsibility,
corporate governance, sustainability, and other public policy matters relevant to our organization. The Sustainability Committee is a cross-
functional management committee, with oversight from the Governance and Nominating Committee and the Board of Directors, that assists
us in: (1) setting general strategies relating to ESG matters; (2) developing, implementing, and monitoring initiatives and policies based on
those strategies; (3) recommending communications with employees, investors, and shareholders with respect to ESG matters; and (4)
monitoring and assessing developments relating to, and improving our understanding of, ESG matters. The committee met three times during
2024. Highlights for 2024 included expanding the impact of Mercantile Community Partners LLC to facilitate low-income housing tax
credits, the completion and posting of the 2024 Corporate Sustainability Report, hiring a fulltime Director of Enterprise Excellence at the end
of 2024 to oversee all ongoing ESG and sustainability efforts, implementation of a sustainability reporting platform, increased support of
first-time home buyers mortgage programs, and over 27,500 hours of volunteering in the community completed by employees. Our bank
maintains a Clawback Policy; an Insider Trading Policy; Code of Ethics; Corporate Governance Guidelines; an Anti-Bribery and Anti-
Corruption Policy; an Anti-Money Laundering, Bank Secrecy Act, Customer Identification and Due Diligence Programs Letter; Vendor and
Supplier Code of Conduct; Environmental Policy; Human Rights Policy; and Supplier Diversity Program Policy; these policies are reviewed
and approved by our Board of Directors at least annually and can be found on our website.
F-5
FINANCIAL OVERVIEW
We recorded net income of $79.6 million, or $4.93 per basic and diluted share, for 2024, compared with net income of $82.2 million, or
$5.13 per basic and diluted share, for 2023. While noninterest income increased during 2024, net income was negatively impacted by
expected lower net interest income and higher noninterest expenses.
Commercial loans increased $292 million, or approximately 9%, during 2024. Multi-family and residential rental property loans were up
$143 million, nonowner-occupied commercial real estate (“CRE”) loans grew $92.7 million, commercial and industrial loans increased $32.7
million, and owner-occupied CRE loans were up $31.2 million, while vacant land, land development, and residential construction loans
decreased $7.8 million. As a percentage of total commercial loans, commercial and industrial loans and owner-occupied CRE loans
combined equaled 54.9% at December 31, 2024, compared to 57.7% at year-end 2023. The new commercial loan pipeline remains strong,
and at December 31, 2024, we had $245 million in unfunded loan commitments on commercial construction and development loans that are
in the construction phase.
Residential mortgage loans decreased $9.8 million, or approximately 1%, during 2024. Residential mortgage loan originations totaled $485
million during 2024, compared to $386 million in 2023. Approximately 78% of the residential mortgage loans originated during 2024 were
done so with the intent to sell, compared to about 53% in 2023. The increases in volume of loans originated and percentage of loans sold had
a positive impact on mortgage banking income.
The overall quality of our loan portfolio remains strong, with nonperforming loans equaling 0.12% of total loans as of December 31,
2024. Accruing loans past due 30 to 89 days remain low, with little foreclosed property activity throughout 2024. Loan charge-offs totaled
$3.8 million during 2024, while recoveries of prior period loan charge-offs totaled $0.9 million, providing for net loan charge-offs of $2.9
million, or 0.06% of average total loans, for the year.
Interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, are used to
manage daily liquidity needs and interest rate risk sensitivity. The average balance of these funds equaled $237 million during 2024,
compared to $107 million in 2023. The higher average balance primarily reflects an increase in deposits associated with our strategic
initiative to lower the loan-to-deposit ratio.
F-6
Total deposits increased $797 million during 2024, providing for a growth rate of approximately 20%. A majority of the growth was in
money market and time deposit products. Federal Home Loan Bank of Indianapolis (“FHLBI”) advances declined $80.8 million during
2024. Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $537 million, or about 10% of total funds, as of
December 31, 2024.
Net interest income decreased $2.5 million during 2024 compared to 2023. Interest income was up $50.1 million, in large part reflecting
$569 million of growth in average earning assets and a 34 basis point increase in the yield on average earning assets. Interest expense was up
$52.6 million, primarily reflecting $699 million growth in average interest-bearing liabilities and a 91 basis point increase in the cost of
interest-bearing liabilities.
We recorded a credit loss provision expense of $7.4 million during 2024, compared to $7.7 million during 2023. The provision expense
recorded during 2024 was generally necessitated by increased required reserve levels stemming from loan growth, slower residential
mortgage loan prepayment speeds and specific allocations for two nonperforming nonreal-estate-related commercial loan relationships.
Noninterest income increased $8.2 million during 2024 compared to 2023, primarily reflecting higher mortgage banking income and service
charges on deposit accounts, the latter stemming from growth in treasury management fees. Growth in payroll service income and revenue
associated with a private equity investment also benefited noninterest income during 2024, as well as benefit claims on bank owned life
insurance policies.
Noninterest expense increased $10.5 million during 2024 compared to 2023. Aggregate salary and benefit costs grew $9.1 million, primarily
reflecting annual merit pay increases, market adjustments, higher bonus/incentive accruals and residential mortgage lender commissions,
lower residential mortgage loan deferred salary costs and increased medical insurance expenses. Increased data processing costs were also
recorded during 2024, largely reflecting higher transaction volumes and software support costs, along with the introduction of new treasury
management products and services.
FINANCIAL CONDITION
Our total assets increased $699 million during 2024, and totaled $6.05 billion as of December 31, 2024. Total loans increased $297 million,
securities available for sale were up $113 million and interest-earning deposits grew $276 million. Total deposits increased $797 million and
shareholders’ equity grew $62.4 million, while securities sold under agreements to repurchase (“sweep accounts) decreased $108 million and
FHLBI advances declined $80.8 million.
F-7
Earning Assets
Average earning assets equaled 94.4% of average total assets during both 2024 and 2023. The loan portfolio continued to comprise a
majority of earning assets, followed by securities and interest-earning deposits. Average total loans equaled 82.9% of average earning assets
during 2024, compared to 84.7% in 2023, while average securities and interest-earning deposits comprised 12.7% and 4.4% of average
earning assets during 2024 and 13.1% and 2.2% of average earning assets during 2023, respectively.
Our loan portfolio has historically been primarily comprised of commercial loans. Commercial loans increased $292 million, or
approximately 9%, during 2024. Multi-family and residential rental property loans were up $143 million, nonowner-occupied CRE loans
grew $92.7 million, commercial and industrial loans increased $32.7 million, and owner-occupied CRE loans were up $31.2 million, while
vacant land, land development, and residential construction loans decreased $7.8 million. As a percentage of total commercial loans,
commercial and industrial loans and owner-occupied CRE loans combined equaled 54.9% at December 31, 2024, compared to 57.7% at year-
end 2023. We believe our commercial loan portfolio remains well diversified.
As of December 31, 2024, availability on commercial construction and development loans that are in the construction phase totaled $245
million, with most of the funds expected to be drawn over the next 12 to 18 months. Our current pipeline reports indicate continued strong
commercial loan funding opportunities in future periods, including $296 million in new lending commitments, a majority of which we expect
to be accepted and funded over the next 12 to 18 months. Our commercial lenders also report additional opportunities they are currently
discussing with existing borrowers and potential new customers. We remain committed to prudent underwriting standards that provide for an
appropriate yield and risk relationship, as well as concentration limits we established within our commercial loan portfolio. Usage of existing
commercial lines of credit was relatively stable during 2024 at approximately 42%, a small increase from 2023 but similar to our historical
average.
Residential mortgage loans decreased $9.8 million, or approximately 1%, during 2024. Residential mortgage loan originations totaled $485
million during 2024, compared to $386 million in 2023. Approximately 78% of the residential mortgage loans originated during 2024 were
done so with the intent to sell, compared to about 53% in 2023. In mid-2023, we altered our residential mortgage loan pricing strategy to
encourage borrowers to select fixed rate residential loan products that we could sell rather than selecting adjustable rate residential mortgage
loan products that we had to fund on our balance sheet. The strategy not only provided for less residential mortgage loans being funded on
our balance sheet, but also resulted in higher mortgage banking income. The increased volume of loans originated also benefited mortgage
banking income.
Other consumer-related loans totaled $65.9 million, or 1.4% of total loans, at December 31, 2024. We expect this loan portfolio segment to
remain relatively steady in dollar amount but decline as a percent of total loans in future periods as the commercial loan segment grows.
F-8
The following table presents total loans outstanding as of December 31, 2024, according to scheduled repayments of principal on fixed rate
loans and repricing frequency on variable rate loans. Floating rate commercial loans that are currently at interest rate floors are treated as
fixed rate loans and are reflected using maturity date and not repricing frequency.
(Dollars in thousands)
Construction and land development
Real estate - residential properties
Real estate - multi-family properties
Real estate - commercial properties
Commercial and industrial
Consumer
Total loans
Fixed rate loans
Floating rate loans
Total loans
Less Than
One Year
One Through
Five Years
Five Through
Fifteen Years
$
$
$
$
493,943
122,966
101,441
1,199,248
1,081,485
3,083
3,002,166
191,657
2,810,509
3,002,166
$
$
$
$
60,290
368,758
59,203
470,710
133,725
8,985
1,101,671
720,696
380,975
1,101,671
$
$
$
$
23,428
387,649
1,956
57,174
25,072
1,665
496,944
216,332
280,612
496,944
$
$
$
$
Total
577,661
879,373
162,600
1,727,132
1,240,282
13,733
4,600,781
1,128,685
3,472,096
4,600,781
Our credit policies establish guidelines to manage credit risk and asset quality. These guidelines include loan review and early identification
of problem loans to provide effective loan portfolio administration. The credit policies and procedures are meant to minimize the risk and
uncertainties inherent in lending. In following these policies and procedures, we must rely on estimates, appraisals and evaluations of loans
and the possibility that changes in these items could occur quickly because of changing economic conditions or other factors. Identified
problem loans, which exhibit characteristics (financial or otherwise) that could cause the loans to become nonperforming or require
restructuring in the future, are included on the internal loan watch list. Senior management and the Board of Directors review this list
regularly. Market value estimates of collateral on nonperforming loans, as well as on foreclosed and repossessed assets, are reviewed
periodically. We have a process in place to monitor whether value estimates at each quarter-end are reflective of current market
conditions. Our credit policies establish criteria for obtaining appraisals and determining internal value estimates. We may also adjust
outside and internal valuations based on identifiable trends within our markets, such as recent sales of similar properties or assets, listing
prices, and offers received. In addition, we may discount certain appraised and internal value estimates to address distressed market
conditions.
Nonperforming loans totaled $5.7 million, or 0.12% of total loans, as of December 31, 2024, compared to $3.4 million, or 0.08% of total
loans, as of December 31, 2023. Accruing loans past due 30 to 89 days remain low, with little foreclosed property activity throughout
2024. The volume of nonperforming assets has remained under 0.3% of total assets since year-end 2015, and has averaged 0.1% over the
past six years. Given the low level of nonperforming loans and accruing loans 30 to 89 days delinquent, combined with what we believe are
strong credit administration practices, we are pleased with the overall quality of the loan portfolio.
Loan charge-offs totaled $3.8 million during 2024, while recoveries of prior period loan charge-offs totaled $0.9 million, providing for net
loan charge-offs of $2.9 million, or 0.06% of average total loans, for the year. Loan charge-offs totaled $0.9 million during 2023, while
recoveries of prior period loan charge-offs totaled $0.8 million, providing for net loan charge-offs of $0.1 million, or less than 0.01% of
average total loans, for the year. We continue our collection efforts on charged-off loans, and we expect to record recoveries in future
periods; however, given the nature of these efforts, it is not practical to forecast the dollar amount and timing of the recoveries.
F-9
The following table reflects the composition of our allowance for credit losses, nonaccrual loans, and net charge-offs as of and for the year ended December 31, 2024.
(Dollars in thousands)
Commercial:
Commercial and industrial
Vacant land, land development and
residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and
residential rental
Total commercial
Retail:
1-4 family mortgages
Other consumer
Total retail
Allowance
for Credit
Losses
Total Loans
Allowance
for Credit
Losses to
Total Loans
Nonaccrual
Loans
Nonaccrual
Loans to
Total Loans
Allowance
for Credit
Losses to
Nonaccrual
Loans
Net Charge-
Offs
Net Charge-
Offs to
Average
Loans
$
11,165
$
1,287,308
0.87% $
2,725
0.21%
409.72% $
3,385
0.27%
367
7,671
10,919
3,667
33,789
18,702
1,936
20,638
66,936
748,837
1,128,404
475,819
3,707,304
827,597
65,880
893,477
0.55
1.02
0.97
0.77
0.91
2.26
2.94
2.31
0
42
0
0
2,767
2,975
0
2,975
NA
5,742
0
0.01
0
0
0.07
0.36
0
0.33
NA
18,264.29
NA
NA
1,221.14
628.64
NA
693.71
NA
0.12%
NA
948.35% $
(5)
(171)
0
(15)
3,194
(190)
(144)
(334)
NA
2,860
(0.01)
(0.02)
0
(0.00)
0.09
(0.02)
(0.25)
(0.04)
NA
0.06%
Unallocated
Total
27
54,454
NA
4,600,781
$
$
NA
1.18% $
The following table reflects the composition of our allowance for credit losses, nonaccrual loans, and net charge-offs as of and for the year ended December 31, 2023.
Allowance
for Credit
Losses
Total Loans
Allowance
for Credit
Losses to
Total Loans
Nonaccrual
Loans
Nonaccrual
Loans to
Total Loans
Allowance
for Credit
Losses to
Nonaccrual
Loans
Net Charge-
Offs
Net Charge-
Offs to
Average
Loans
$
7,441
$
1,254,586
0.59% $
249
0.02%
2,988.35% $
384
7,186
9,852
3,184
28,047
18,986
2,881
21,867
74,753
717,667
1,035,684
332,609
3,415,299
837,406
51,053
888,459
0.51
1.00
0.95
0.96
0.82
2.27
5.64
2.46
0
70
0
0
319
3,096
0
3,096
NA
3,415
0
0.01
0
0
0.01
0.37
0
0.35
NA
10,265.71
NA
NA
8,792.16
613.24
NA
706.30
NA
0.08%
NA
1,461.61% $
30
(35)
(17)
0
(26)
(48)
(18)
98
80
NA
32
0.00%
(0.05)
(0.00)
0
(0.01)
(0.00)
(0.00)
0.19
0.01
NA
0.00%
Unallocated
Total
0
49,914
NA
4,303,758
$
$
NA
1.16% $
The following table reflects the composition of our allowance for loan losses, nonaccrual loans, and net charge-offs as of and for the year ended December 31, 2022.
Allowance
for Credit
Losses
Total Loans
Allowance
for Credit
Losses to
Total Loans
Nonaccrual
Loans
Nonaccrual
Loans to
Total Loans
Allowance
for Credit
Losses to
Nonaccrual
Loans
Net Charge-
Offs
Net Charge-
Offs to
Average
Loans
$
10,203
$
1,185,083
0.86% $
6,024
0.51%
169.37% $
490
5,914
9,242
2,191
28,040
14,027
160
14,187
61,873
639,192
979,214
266,468
3,131,830
755,036
29,753
784,789
0.79
0.93
0.94
0.82
0.90
1.86
0.54
1.81
0
248
0
0
6,272
1,456
0
1,456
NA
7,728
0
0.04
0
0
0.20
0.19
0
0.19
NA
2,384.68
NA
NA
447.07
963.39
NA
974.38
NA
0.20%
NA
546.66% $
(46)
25
(51)
0
(43)
(115)
(562)
(56)
(618)
NA
(733)
(0.00)%
0.05
(0.01)
0
(0.02)
(0.00)
(0.09)
(0.19)
(0.05)
NA
(0.02)%
Unallocated
Total
19
42,246
NA
3,916,619
$
$
NA
1.08% $
F-10
(Dollars in thousands)
Commercial:
Commercial and industrial
Vacant land, land development and
residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and
residential rental
Total commercial
Retail:
1-4 family mortgages
Other consumer
Total retail
(Dollars in thousands)
Commercial:
Commercial and industrial
Vacant land, land development and
residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and
residential rental
Total commercial
Retail:
1-4 family mortgages
Home equity and other
Total retail
The following table depicts the ratio of our allowance to nonperforming loans:
Ratio of allowance to nonperforming loans
12/31/24
12/31/23
12/31/22
948.3%
1,461.7%
546.7%
The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of collateral, and the
timeliness of scheduled payments. We have a policy of requesting and reviewing periodic financial statements from commercial loan
customers, and we have a disciplined and formalized review of the existence of collateral and its value. The primary risk element with
respect to each residential mortgage loan and consumer loan is the timeliness of scheduled payments. We have a reporting system that
monitors past due loans and have adopted policies to pursue creditors’ rights in order to preserve our collateral position.
See Note 1 - Significant Accounting Policies in this Form 10-K for further detailed descriptions of our estimation process and methodology
related to the allowance. See also Note 3 - Loans and Allowance for Credit Losses in this Form 10-K for further information regarding our
loan portfolio and allowance.
The allowance equaled $54.5 million, or 1.18% of total loans, and over 900% of nonperforming loans, as of December 31, 2024. The
allowance was comprised of $52.3 million in general reserves relating to performing loans and $2.2 million in specific reserves on other
loans, primarily nonperforming loans, at year-end 2024. Loans with an aggregate carrying value of $1.1 million as of December 31, 2024
had been subject to previous partial charge-offs aggregating $4.0 million over the past several years, including $3.8 million during 2024. As
of December 31, 2024, there were no specific reserves allocated to loans that had been subject to a previous partial charge-off.
Although we believe the allowance is adequate to absorb loan losses in our originated loan portfolio as they arise, there can be no assurance
that we will not sustain loan losses in any given period that could be substantial in relation to, or greater than, the size of the allowance.
Securities available for sale increased $113 million during 2024, totaling $730 million as of December 31, 2024. Purchases of U.S.
Government agency bonds during 2024 aggregated $143 million, while proceeds from matured U.S. Government agency bonds totaled $44.0
million. There were no purchases of U.S. Government agency guaranteed mortgage-backed securities during 2024; principal paydowns on
U.S. Government agency guaranteed mortgage-backed securities totaled $3.4 million. Purchases of municipal bonds totaled $31.1 million
during 2024; proceeds from matured municipal bonds totaled $14.4 million. At December 31, 2024, the portfolio was primarily comprised of
U.S. Government agency bonds (68%), municipal bonds (29%), and U.S. Government agency guaranteed mortgage-backed securities
(3%). All of our securities are currently designated as available for sale and are therefore stated at fair value. The fair value of securities
designated as available for sale at December 31, 2024 totaled $730 million, including a net unrealized loss of $63.1 million. The net
unrealized loss equaled $63.9 million as of December 31, 2023. After we considered whether the securities were issued by the federal
government or its agencies and whether downgrades by bond rating agencies had occurred, we determined that the unrealized losses were due
to changing interest rate environments. We maintain the securities portfolio at levels to provide adequate pledging and secondary liquidity
for our daily operations. In addition, the securities portfolio serves a primary interest rate risk management function. We expect upcoming
purchases to generally consist of U.S. Government agency and municipal bonds, with the securities portfolio maintained at about 12% to 15%
of total assets.
Market values on our U.S. Government agency bonds, mortgage-backed securities issued or guaranteed by U.S. Government agencies, and
municipal bonds are generally determined on a monthly basis with the assistance of a third-party vendor. Evaluated pricing models that vary
by type of security and incorporate available market data are utilized. Standard inputs include issuer and type of security, benchmark yields,
reported trades, broker/dealer quotes, and issuer spreads. The market value of certain non-rated securities issued by relatively small
municipalities generally located within our markets is estimated at carrying value. We believe our valuation methodology provides for a
reasonable estimation of market value, and that it is consistent with the requirements of accounting guidelines.
FHLBI stock totaled $21.5 million as of December 31, 2024, unchanged from December 31, 2023. Our investment in FHLBI stock is
necessary to engage in their advance and other financing programs. We have regularly received quarterly cash dividends, and we expect a
cash dividend will continue to be paid in future quarterly periods.
F-11
The following table shows by class of maturities as of December 31, 2024 the amounts and weighted average yields (on a fully taxable-
equivalent basis) of investment securities:
(Dollars in thousands)
Obligations of U.S. Government agencies:
One year or less
Over one through five years
Over five through ten years
Over ten years
Obligations of states and political subdivisions:
One year or less
Over one through five years
Over five through ten years
Over ten years
Mortgage-backed securities
Other investments
Totals
Carrying
Value
Average
Yield
$
46,902
236,304
202,066
10,309
495,581
9,871
68,316
79,742
50,974
208,903
25,368
500
0.74%
1.91
2.82
4.28
2.22
2.01
2.60
3.08
4.40
3.19
2.13
8.87
$
730,352
2.50%
Interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, are used to
manage daily liquidity needs and interest rate risk sensitivity. The average balance of these funds equaled $237 million during 2024,
compared to $107 million in 2023. The higher average balance primarily reflects an increase in deposits associated with our strategic
initiative to lower the loan-to-deposit ratio.
Non-Earning Assets
Cash and due from bank balances averaged 1.1% of total assets during 2024, similar to the average level during 2023, with no significant
changes expected in future periods. Net premises and equipment equaled $53.4 million at December 31, 2024, representing an increase of
$2.5 million during 2024. Aggregate investments in new and existing offices totaled $8.5 million, while depreciation expense aggregated
$6.0 million. We had no other real estate owned as of December 31, 2024.
Other assets equaled $148 million at December 31, 2024, reflecting an increase of $22.8 million from year-end 2023. The growth is
primarily associated with an aggregate $13.6 million increase in low-income housing and historical tax credit investments and a $7.0 million
purchase of additional bank owned life insurance.
F-12
Source of Funds
Total deposits increased $797 million, or over 20%, during 2024, and totaled $4.70 billion at December 31, 2024. Local deposits increased
$816 million, while out-of-area deposits declined $18.7 million, during 2024. Sweep accounts decreased $108 million, and FHLBI advances
declined $80.8 million. Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $537 million, or about 10% of total
funds, as of December 31, 2024.
Money market, local time deposit and interest-bearing checking accounts increased $559 million, $178 million and $103 million,
respectively, during 2024, largely reflecting growth in deposits from existing customers and initial deposits from new customers stemming
from our strategic initiative to grow local deposits to lower the loan-to-deposit ratio. Savings deposits declined $40.7 million, primarily
reflecting transfers to higher-paying money market and time deposit products. Noninterest-bearing checking accounts grew $16.9 million;
however, that includes a business deposit of approximately $90 million made near the end of 2024 that was withdrawn in early 2025. On an
average basis, noninterest-bearing checking accounts declined $199 million during 2024 compared to 2023, largely reflecting transfers to
higher-paying deposit accounts.
Uninsured deposits totaled approximately $2.5 billion, or about 54% of total deposits, as of December 31, 2024, compared to approximately
$1.9 billion, or about 48% of total deposits, as of December 31, 2023. The uninsured amounts are estimates based on the methodologies and
assumptions we use for regulatory reporting requirements. Our level of uninsured deposits, which has remained relatively stable as a
percentage of total deposits, is generally higher than industry averages given our focus on commercial lending.
The balance of certificates of deposit exceeding the FDIC insured limit and their maturity profile as of December 31, 2024 are as follows:
(Dollars in thousands)
Up to three months
Three months to six months
Six months to twelve months
Over twelve months
Total certificates of deposit
$
$
140,465
87,214
204,484
27,800
459,963
Sweep accounts declined $108 million during 2024, totaling $122 million as of December 31, 2024. The aggregate balance of this funding
type can be subject to relatively large daily fluctuations given the nature of the customers utilizing this product and the sizable balances that
several of the customers maintain. In addition, we had one customer withdraw a large amount of funds near the end of 2024 that were
returned in early 2025. The average balance of sweep accounts equaled $225 million during 2024 with a high balance of $278 million and a
low balance of $118 million. Our sweep account program entails transferring collected funds from certain business noninterest-bearing
checking accounts to overnight interest-bearing repurchase agreements. Such repurchase agreements are not deposit accounts and are not
afforded federal deposit insurance. All of our sweep accounts are accounted for as secured borrowings.
F-13
FHLBI advances declined $80.8 million during 2024, totaling $387 million as of December 31, 2024. Bullet advances aggregating $10.0
million were obtained during 2024, while bullet advance maturities aggregated $90.0 million. Payments on amortizing advances totaled $0.8
million during 2024. Bullet advances are generally obtained to provide funds for loan growth and are used to assist in managing interest rate
risk, while amortizing advances are generally acquired to match-fund specific longer-term fixed rate commercial loans, with the dollar
amount and amortization structure of the underlying advances reflective of the associated commercial loans. Advances are collateralized by
residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on certain commercial real
estate property loans, and substantially all other assets of our bank under a blanket lien arrangement. Our borrowing line of credit at year-end
2024 totaled $1.0 billion, with remaining availability based on collateral of $634 million.
Shareholders’ equity increased $62.4 million during 2024, totaling $585 million as of December 31, 2024. Positively impacting
shareholders’ equity was net income of $79.6 million, while negatively affecting shareholders’ equity were cash dividends on our common
stock totaling $22.5 million. Activity relating to the issuance and sale of common stock through various stock-based compensation programs
and our dividend reinvestment plan positively impacted shareholders’ equity by a total of $4.6 million. Positively impacting shareholders’
equity during 2024 was a $0.7 million decline in the after-tax net unrealized loss on available for sale securities.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023
Summary
We recorded net income of $79.6 million, or $4.93 per basic and diluted share, for 2024, compared to net income of $82.2 million, or $5.13
per basic and diluted share, for 2023. Diluted earnings per share decreased $0.20, or 3.9%, during 2024 compared to 2023.
The decrease in net income during 2024 compared to 2023 reflected increased noninterest expense and lower net interest income, which more
than offset higher noninterest income and a reduced provision for credit losses. Noninterest expense was up in 2024 primarily due to
increased salary and benefit and data processing costs. Net interest income declined during 2024 as growth in earning assets, most notably in
loans, and a higher yield on earning assets were more than offset by growth in interest-bearing liabilities and an increased cost of funds. The
provision expense recorded during 2024 and 2023 included allocations necessitated by net loan growth, slower residential mortgage loan
prepayment rates and the associated extended average life of the portfolio, and changes in environmental factors. Individual allocations
created for two deteriorated commercial loan relationships also contributed to the provision expense recorded during 2024. Noninterest
income increased significantly during 2024, largely reflecting growth in mortgage banking income, treasury management fees, bank owned
life insurance income, and payroll services fees, along with revenue associated with an investment in a private equity fund.
Net Interest Income
Net interest income, the difference between revenue generated from earning assets and the interest cost of funding those assets, is our primary
source of earnings. Interest income (adjusted for tax-exempt income) and interest expense totaled $321 million and $130 million, respectively,
during 2024, providing for net interest income of $191 million. During 2023, interest income and interest expense equaled $272 million and
$77.8 million, respectively, providing for net interest income of $194 million. In comparing 2024 with 2023, interest income increased 18.5%,
interest expense was up 67.6%, and net interest income decreased 1.3%. The level of net interest income is primarily a function of asset size,
as the weighted average interest rate received on earning assets is greater than the weighted average interest cost of funding sources; however,
factors such as types and levels of assets and liabilities, the interest rate environment, interest rate risk, asset quality, liquidity, and customer
behavior also impact net interest income as well as the net interest margin. The $2.5 million decline in net interest income in 2024 compared
to 2023 resulted from a decreased net interest margin, which more than offset an increase in earning assets, particularly in loans.
During 2024, the net interest margin equaled 3.58%, down from 4.05% during 2023 due to a higher cost of funds, which more than offset an
increase in the yield on average earning assets. The cost of funds rose from 1.63% in 2023 to 2.44% in 2024 mainly due to higher costs of
deposits and borrowed funds, largely reflecting the impact of a rising interest rate environment. A change in funding mix, primarily
consisting of a decrease in average noninterest-bearing and lower-cost deposits and an increase in average higher-cost money market
accounts and time deposits, also contributed to the higher cost of funds. The increases in money market accounts and time deposits stemmed
from new deposit relationships, growth in existing deposit relationships, and deposit migration. The yield on average earning assets was
6.02% during 2024, an increase from 5.68% during the prior year. The higher yield primarily resulted from an increased yield on loans. The
yield on loans was 6.61% during 2024, up from 6.25% during 2023 mainly due to higher interest rates on variable-rate commercial loans
stemming from the Federal Reserve’s Federal Open Market Committee (“FOMC”) raising the targeted federal funds rate in an effort to
reduce elevated inflation levels and a significant level of commercial loans being originated over the past 24 months in the higher interest rate
environment. The FOMC increased the targeted federal funds rate by 100 basis points during the period of February 2023 through July 2023,
during which time average variable-rate commercial loans represented approximately 65% of average total commercial loans. The positive
impact of the rate hikes was partially mitigated by the FOMC’s lowering of the targeted federal funds rate by 100 basis points during the last
four months of 2024. An improved yield on securities, reflecting the increased interest rate environment, also contributed to the enhanced
yield on average earning assets. During 2024, earning assets averaged $5.35 billion, up $569 million, or 11.9%, from $4.78 billion during
2023. Average loans increased $386 million, average interest-earning deposits were up $131 million, and average securities grew $52.6
million.
F-14
The following table depicts the average balance, interest earned and paid, and weighted average rate of our assets, liabilities, and
shareholders’ equity during 2024, 2023, and 2022. The subsequent table portrays the dollar amount of change in interest income and interest
expense of interest-earning assets and interest-bearing liabilities, respectively, segregated between change due to volume and change due to
rate. Tax-exempt securities interest income and yield for 2024, 2023, and 2022 have been computed on a tax equivalent basis using a
marginal tax rate of 21.0%. Securities interest income was increased by $0.2 million in 2024, 2023, and 2022 for this non-GAAP, but
industry standard, adjustment. These adjustments equated to increases in our net interest margin of less than one basis point during all three
years.
(Dollars in thousands)
2024
Years ended December 31,
2023
2022
Taxable securities
Tax-exempt securities
Total securities
Average
Balance
Interest
$ 522,102 $ 11,911
4,363
16,274
157,313
679,415
Average
Rate
Average
Balance
2.28% $ 478,759 $
2.77
2.40
148,082
626,841
Interest
9,041
3,903
12,944
Average
Rate
Average
Balance
1.89% $ 486,093 $
2.64
2.06
127,272
613,365
Interest
7,603
2,974
10,577
Loans
Interest-earning deposits
Total earning assets
4,432,671
237,272
5,349,358
293,163
12,305
321,742
6.61
5.19
6.02
4,046,815
106,515
4,780,171
253,108
5,546
271,598
6.25
5.21
5.68
3,706,505
445,236
4,765,106
166,848
4,654
182,079
Allowance for credit
losses
Cash and due from banks
Other non-earning assets
(54,396)
60,223
312,470
(45,590)
61,797
267,315
(36,993)
75,213
251,466
Total assets
$5,667,655
$5,063,693
$5,054,792
Average
Rate
1.56%
2.34
1.72
4.50
1.05
3.82
Interest-bearing checking
accounts
Savings deposits
Money market accounts
Time deposits
Total interest-bearing
deposits
Short-term borrowings
Federal Home Loan Bank
advances
Other borrowings
Total interest-bearing
liabilities
Noninterest checking
accounts
Other liabilities
Total liabilities
Average equity
Total liabilities and
equity
Net interest income
Rate spread
Net interest margin
$ 666,814 $
244,387
1,279,559
867,391
9,493
368
50,596
40,938
1.42% $ 605,220 $
0.15
3.95
4.72
310,940
899,927
567,988
5,740
392
29,149
20,163
0.95% $ 518,357 $
0.13
3.24
3.55
404,284
888,047
385,338
1,926
105
4,071
3,935
3,058,151
101,395
3.32
2,384,075
55,444
2.33
2,196,026
10,037
224,897
7,717
430,767
140,352
13,018
8,286
3.43
3.02
5.90
206,728
2,847
425,363
139,195
11,367
8,155
1.38
2.67
5.86
200,561
294
354,136
137,737
7,125
6,139
3,854,167
130,416
3.38
3,155,361
77,813
2.47
2,888,460
23,595
0.37%
0.03
0.46
1.02
0.46
0.15
2.01
4.46
0.82
1,174,082
84,862
5,113,111
554,544
$5,667,655
1,372,840
58,465
4,586,666
477,027
$5,063,693
1,694,857
37,617
4,620,934
433,858
$5,054,792
$191,326
$193,785
$158,484
2.64%
3.58%
3.21%
4.05%
3.00%
3.33%
F-15
(Dollars in thousands)
Increase (decrease) in interest income
Taxable securities
Tax exempt securities
Loans
Interest-earning deposits
Net change in tax-equivalent interest
income
Increase (decrease) in interest expense
Interest-bearing checking deposits
Savings deposits
Money market accounts
Time deposits
Short-term borrowings
Federal Home Loan Bank advances
Other borrowings
Net change in interest expense
Years ended December 31,
Total
2024 over 2023
Volume
Rate
Total
2023 over 2022
Volume
Rate
$
$
2,870
460
40,055
6,759
$
1,787
(668)
24,998
6,781
$
1,083
1,128
15,057
(22)
$
1,438
929
86,260
892
(761) $
1,260
16,457
(5,802)
2,199
(331)
69,803
6,694
50,144
32,898
17,246
89,519
11,154
78,365
3,753
(24)
21,447
20,775
4,870
1,651
131
52,603
634
(92)
14,079
12,784
271
146
68
27,890
3,119
68
7,368
7,991
4,599
1,505
63
24,713
3,814
287
25,078
16,228
2,553
4,242
2,016
54,218
372
(30)
55
2,607
9
1,612
66
4,691
3,442
317
25,023
13,621
2,544
2,630
1,950
49,527
Net change in tax-equivalent net interest
income
$
(2,459) $
5,008
$
(7,467) $
35,301
$
6,463
$
28,838
Interest income, which is primarily generated from the loan portfolio, increased $50.1 million during 2024 from that earned in 2023, totaling
$321 million in 2024 compared to $272 million in 2023. The increase in interest income is attributable to growth in, and a higher yield on,
average earning assets. During 2024 and 2023, earning assets had an average yield (tax equivalent-adjusted basis) of 6.02% and 5.68%,
respectively. The improved yield on average earning assets primarily resulted from an increased yield on loans, mainly reflecting higher
interest rates on variable-rate commercial loans stemming from the previously mentioned FOMC rate hikes. An enhanced yield on
securities, reflecting the increased interest rate environment, also contributed to the improved yield on average earning assets.
Interest income generated from the loan portfolio increased $40.1 million in 2024 compared to the level earned in 2023. Growth in the loan
portfolio during 2024 resulted in a $25.0 million increase in interest income, while an upturn in loan yield from 6.25% in 2023 to 6.61% in
2024 resulted in a $15.1 million increase in interest income. The higher yield on loans primarily resulted from an improved yield on
commercial loans, which increased from 6.84% during 2023 to 7.13% during 2024 mainly due to the aforementioned FOMC rate increases
and a significant level of commercial loans being originated in the past 24 months in the higher interest rate environment. An improved yield
on residential mortgage loans, reflecting the increasing interest rate environment, also contributed to the higher yield on loans.
F-16
Interest income generated from the securities portfolio increased $3.3 million in 2024 compared to the level earned in 2023. A rise in the
yield on securities from 2.06% during 2023 to 2.40% during 2024 resulted in a $2.2 million increase in interest income, while growth in the
average balance of the securities portfolio during 2024 resulted in an increase in interest income of $1.1 million. Reflecting a higher average
balance, interest income on interest-earning deposits increased $6.8 million in 2024 from the level earned in 2023. The growth in average
securities and interest-earning deposits during 2024 compared to 2023 primarily reflected the success of our strategic initiatives to grow local
deposits and decrease our loan-to-deposit ratio.
Interest expense is generated from interest-bearing deposits and borrowed funds. Interest expense increased $52.6 million during 2024 from
that expensed in 2023, totaling $130 million in 2024 compared to $77.8 million in 2023. Growth in the average balance of interest-bearing
liabilities during 2024 compared to 2023 resulted in a $27.9 million increase in interest expense, while a rise in the cost of these liabilities
from 2.47% during 2023 to 3.38% during 2024 resulted in an increase in interest expense of $24.7 million. During 2024, interest-bearing
liabilities averaged $3.85 billion, representing an increase of $699 million, or 22.1%, from the $3.16 billion average during 2023; average
interest-bearing deposits and borrowings were up $674 million and $24.7 million, respectively. The higher average cost of interest-bearing
liabilities mainly resulted from increased costs of deposit accounts. An increased cost of borrowings, along with a change in interest-bearing
liability mix, also contributed to the higher average cost of interest-bearing liabilities. The cost of interest-bearing non-time deposit accounts
increased from 1.94% during 2023 to 2.76% during 2024, primarily reflecting a change in mix, consisting of an increase in higher-paying
money market accounts, and higher interest rates paid on business money market and checking accounts, reflecting the increased interest rate
environment. The cost of time deposits rose from 3.55% during 2023 to 4.72% during 2024 mainly due to higher rates paid on local time
deposits, reflecting the increased interest rate environment. The cost of borrowed funds increased from 2.90% during 2023 to 3.65% during
2024, primarily reflecting higher costs of sweep accounts and FHLBI advances stemming from the increased interest rate
environment. Average higher-cost money market accounts and time deposits represented an increased percentage of average interest-bearing
liabilities during 2024 compared to 2023, with the growth in these deposits reflecting new deposit relationships, increases in existing deposit
relationships, and deposit migration.
Growth in the average balance of interest-bearing non-time deposits during 2024 compared to 2023 resulted in a $14.6 million increase in
interest expense, while a higher average rate paid on these deposits during 2024 equated to a $10.6 million increase in interest expense. An
increase in the average balance of time deposits during 2024 compared to 2023 resulted in a $12.8 million increase in interest expense, while
a higher average rate paid on these deposits during 2024 resulted in an $8.0 million increase in interest expense. A higher average rate paid
on short-term borrowings during 2024 resulted in a $4.6 million increase in interest expense, while growth in the average balance of these
borrowings equated to a $0.3 million increase in interest expense. An increased average rate paid on FHLBI advances during 2024 resulted
in a $1.5 million increase in interest expense, while growth in the average balance of advances resulted in a $0.2 million increase in interest
expense. The $0.1 million increase in interest expense on other borrowings resulted almost evenly from growth in, and a higher average rate
paid on, these borrowings.
Provision for Credit Losses
Provisions for credit losses of $7.4 million and $7.7 million were recorded during 2024 and 2023, respectively. The provision expense
recorded during 2024 mainly reflected allocations necessitated by net loan growth, individual allocations made for two deteriorated
commercial loan relationships, changes in qualitative factors, and an increased allocation stemming from slower prepayments speeds on
residential mortgage loans, which were partially offset by lower loan loss rates. The provision expense recorded during 2023 primarily
reflected allocations necessitated by net loan growth, slower residential mortgage loan prepayment rates and the associated extended average
life of the portfolio, and changes in environmental factors reflecting heightened inherent risk in the commercial construction loan portfolio.
Sustained strength in loan quality metrics, including low levels of loan charge-offs, during 2024 and 2023 significantly mitigated the amount
of additional reserves imposed by the previously mentioned factors. Economic forecasts were relatively stable during 2024 and 2023.
Noninterest Income
Noninterest income totaled $40.4 million during 2024, compared to $32.1 million during 2023. Noninterest income during 2024 included
bank owned life insurance death benefit claims and gains on the sales of other real estate owned totaling $0.7 million and $0.4, respectively,
while noninterest income during 2023 included gains on the sales of other real estate owned totaling $0.4 million. Excluding these
transactions, noninterest income increased $7.5 million, or 23.8%, in 2024 compared to 2023. The growth mainly reflected increases in
mortgage banking income, treasury management fees, and payroll service fees, along with revenue generated from an investment in a private
equity fund. The higher level of mortgage banking income primarily resulted from increases in the percentage of loans originated with the
intent to sell, which equaled approximately 78% in 2024 compared to approximately 53% in 2023, and total loan originations, which were up
approximately 25% in 2024 compared to 2023. The increase in treasury management fees in large part reflected customers’ expanded use of
cash management products and services. The growth in noninterest income related to these factors was partially offset by a decline in interest
rate swap income mainly stemming from reduced borrower demand in light of shifting future interest rate expectations. Credit and debit card
income declined marginally in 2024 compared to 2023; when adjusting for the receipt of a one-time payment from our vendor in association
with a contract renewal in 2023, credit and debit card income was up slightly in 2024.
F-17
Noninterest Expense
Noninterest expense during 2024 was $126 million, compared to $115 million during 2023. Overhead costs during 2024 included
contributions to The Mercantile Bank Foundation (the “Foundation”) totaling $1.7 million, while overhead costs during 2023 included
contributions to the Foundation, a write-down of a former branch facility, and one-time employee benefit and facility-related costs totaling
$1.8 million. Excluding these transactions, the increase in noninterest expense during 2024 primarily resulted from larger salary and benefit
costs, reflecting annual merit pay increases, market adjustments, higher residential mortgage lender commissions and incentives, lower
residential mortgage loan deferred salary costs, an increased bonus accrual and associated payroll taxes, higher health insurance claims, and
increased 401(k) matching contributions. The increase in residential mortgage lender commissions and incentives mainly stemmed from a
higher level of loan production. Increased data processing costs, primarily reflecting higher transaction volume and software support costs,
also contributed to the rise in noninterest expense during 2024. A reduced credit reserve for unfunded loan commitments, along with lower
levels of interest rate swap credit reserves and collateral holding costs, core deposit intangible asset amortization expense, and occupancy
costs, during 2024 partially mitigated the increases in overhead costs noted above. The decrease in occupancy costs mainly reflected lower
building rent stemming from branch-related efficiency initiatives.
Federal Income Tax Expense
During 2024, we recorded income before federal income tax of $98.3 million and a federal income tax expense of $18.7 million, compared to
income before federal income tax of $103 million and a federal income tax expense of $20.5 million during 2023. The $1.8 million decrease
in federal income tax expense in 2024 compared to 2023 primarily resulted from the lower level of income before federal income tax. We
recorded net benefits from investments in tax credit structures of $0.2 million and $0.1 million during 2024 and 2023, respectively. The
aforementioned bank owned life insurance death benefit claims, substantially all of which were nontaxable, positively impacted the effective
tax rate in 2024.
CAPITAL RESOURCES
Shareholders’ equity increased $62.4 million during 2024, totaling $585 million as of December 31, 2024. Positively impacting
shareholders’ equity was net income of $79.6 million, while negatively affecting shareholders’ equity were cash dividends on our common
stock totaling $22.5 million. Activity relating to the issuance and sale of common stock through various stock-based compensation programs
and our dividend reinvestment plan positively impacted shareholders’ equity by a total of $4.6 million. Positively impacting shareholders’
equity during 2024 was a $0.7 million decline in the after-tax net unrealized loss on available for sale securities.
We and our bank are subject to regulatory capital requirements administered by state and federal banking agencies. Failure to meet the
various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. As of December
31, 2024, our bank’s total risk-based capital ratio was 13.9%, compared to 13.4% at December 31, 2023. Our bank’s total regulatory capital
increased $64.7 million during 2024, primarily reflecting the net impact of net income totaling $89.6 million and cash dividends paid to us
aggregating $29.1 million. Our bank’s total risk-based capital ratio was also impacted by a $272 million increase in total risk-weighted
assets, in large part reflecting growth within the commercial lending function. As of December 31, 2024, our bank’s total regulatory capital
equaled $759 million, or approximately $214 million in excess of the amount necessary to attain the 10.0% minimum total risk-based capital
ratio, which is among the requirements to be categorized as “well capitalized.”
We maintain a stock repurchase program, which is discussed in Part II, Item 5 “Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities” in this Annual Report.
F-18
LIQUIDITY
Liquidity is measured by our ability to raise funds through deposits, borrowed funds, capital or cash flow from the repayment of loans and
securities. These funds are used to fund loans, meet deposit withdrawals, and operate our company. Liquidity is essential to our
business. An inability to maintain sufficient funds through deposits, borrowings, the sales of assets, and other sources could have a material
adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that
affect us specifically or the financial services industry in general. Liquidity is primarily achieved through local and out-of-area deposits and
liquid assets such as securities available for sale, matured and called securities, federal funds sold, and interest-earning deposit
balances. Asset and liability management is the process of managing the balance sheet to achieve a mix of earning assets and liabilities that
maximizes profitability, while providing adequate liquidity.
To assist in providing needed funds, we have regularly obtained monies from wholesale funding sources. Wholesale funds, comprised of
deposits from customers outside of our market areas and advances from the FHLBI, totaled $537 million, or 10.3% of combined deposits and
borrowed funds as of December 31, 2024, compared to $636 million, or 13.8% of combined deposits and borrowed funds, as of December
31, 2023.
Sweep accounts declined $108 million during 2024, totaling $122 million as of December 31, 2024. The aggregate balance of this funding
type can be subject to relatively large daily fluctuations given the nature of the customers utilizing this product and the sizable balances that
several of the customers maintain. In addition, we had one customer withdraw a large amount of funds near the end of 2024 that were
returned in early 2025. The average balance of sweep accounts equaled $225 million during 2024, with a high balance of $278 million and a
low balance of $118 million. Our sweep account program entails transferring collected funds from certain business noninterest-bearing
checking accounts to overnight interest-bearing repurchase agreements. Such repurchase agreements are not deposit accounts and are not
afforded federal deposit insurance. All of our sweep accounts are accounted for as secured borrowings.
Information regarding our repurchase agreements as of December 31, 2024 and during 2024 is as follows:
(Dollars in thousands)
Outstanding balance at December 31, 2024
Weighted average interest rate at December 31, 2024
Maximum daily balance twelve months ended December 31, 2024
Average daily balance for twelve months ended December 31, 2024
Weighted average interest rate for twelve months ended December 31, 2024
$
$
$
121,521
2.17%
278,227
224,878
3.43%
FHLBI advances declined $80.8 million during 2024, totaling $387 million as of December 31, 2024. Bullet advances aggregating $10.0
million were obtained during 2024, while bullet advance maturities aggregated $90.0 million. Payments on amortizing advances totaled $0.8
million during 2024. Bullet advances are generally obtained to provide funds for loan growth and are used to assist in managing interest rate
risk, while amortizing advances are generally acquired to match-fund specific longer-term fixed rate commercial loans, with the dollar
amount and amortization structure of the underlying advances reflective of the associated commercial loans. Advances are collateralized by
residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on certain commercial real
estate property loans, and substantially all other assets of our bank under a blanket lien arrangement. Our borrowing line of credit at year-end
2024 totaled $1.0 billion, with remaining availability based on collateral of $634 million.
We also have the ability to borrow up to $70.0 million on a daily basis through correspondent banks using established unsecured federal
funds purchased lines of credit; the average balance of these funds was less than $0.1 million during 2024. In contrast, our interest-earning
deposit account at the Federal Reserve Bank of Chicago averaged $221 million during 2024. We have a line of credit through the Discount
Window of the Federal Reserve Bank of Chicago. Based on pledged municipal bonds, we could have borrowed up to $153 million at
December 31, 2024. We have not utilized this line of credit in over 15 years, and we do not plan to access this line of credit in future periods.
F-19
The following table reflects, as of December 31, 2024, significant fixed and determinable contractual obligations to third parties by payment
date, excluding accrued interest:
(Dollars in thousands)
Deposits without a stated maturity
Time Deposits
Short-term borrowings
Federal Home Loan Bank advances
Subordinated debentures
Subordinated notes
Other borrowed money
Premises and equipment leases
One Year
or Less
One to
Three Years
Three to
Five Years
Over
Five Years
$
$
3,741,150
880,166
121,521
80,862
0
0
0
1,053
$
0
67,974
0
181,838
0
0
0
2,256
$
0
9,076
0
102,001
0
0
0
1,727
$
0
0
0
22,382
50,330
89,314
1,280
1,037
Total
3,741,150
957,216
121,521
387,083
50,330
89,314
1,280
6,073
In addition to normal loan funding and deposit flow, we must maintain liquidity to meet the demands of certain unfunded loan commitments
and standby letters of credit. At December 31, 2024, we had a total of $2.07 billion in unfunded loan commitments and $26.5 million in
unfunded standby letters of credit. Of the total unfunded loan commitments, $1.78 billion were commitments available as lines of credit to
be drawn at any time as customers’ cash needs vary, and $296 million were for loan commitments generally expected to be accepted and
become funded within the next 12 to 18 months. We regularly monitor fluctuations in loan balances and commitment levels, and include
such data in our liquidity management.
The following table depicts our loan commitments at the end of the past three years:
(Dollars in thousands)
12/31/24
12/31/23
12/31/22
Commercial unused lines of credit
Unused lines of credit secured by 1-4 family residential properties
Credit card unused lines of credit
Other consumer unused lines of credit
Commitments to make loans
Standby letters of credit
Total
$
$
1,488,782
84,298
172,273
33,892
295,566
26,491
$
1,557,429
74,120
142,096
50,063
270,403
19,393
1,283,703
71,972
123,687
75,747
329,646
23,539
$
2,101,302
$
2,113,504
$
1,908,294
We monitor our liquidity position and funding strategies on an ongoing basis, but recognize that unexpected events, economic or market
conditions, reductions in earnings performance, declining capital levels, or situations beyond our control could cause liquidity
challenges. While we believe it is unlikely that a funding crisis of any significant degree is likely to materialize, we have developed a
comprehensive contingency funding plan that provides a framework for meeting liquidity disruptions.
MARKET RISK ANALYSIS
Our primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk and inflation risk. All of our transactions are
denominated in U.S. dollars with no specific foreign exchange exposure. We have only limited agricultural-related loan assets and therefore
have no significant exposure to changes in commodity prices. Any impact that changes in foreign exchange rates and commodity prices
would have on interest rates is assumed to be insignificant. Interest rate risk is the exposure of our financial condition to adverse movements
in interest rates.
Inflation risk is the risk that the values of assets or income from investments will be worth less in the future as inflation decreases the value of
money. During 2022 and 2023, there was a pronounced rise in inflation. As a result, the FOMC significantly increased interest rates in an
effort to combat inflation. As inflation increased, the value of our investment securities, particularly those with fixed rates and longer
maturities, declined. In addition, inflation increased salary and benefit costs, as well as the costs of goods and services we use in our business
operations, such as electricity and other utilities, which increased our noninterest expenses. Furthermore, our customers were also affected
by inflation and the rising costs of goods and services used in their households and businesses.
Inflationary pressures started to ease during 2024, prompting the FOMC to lower interest rates by an aggregate 100 basis points during the
last four months of the year. The lower interest rate environment positively impacted the value of our investment securities. However,
inflation levels remain above the FOMC’s stated goal and interest rates remain higher than they were prior to 2022. Higher than traditional
cost increases continue throughout the economy, but at lower levels than experienced in 2022 and 2023.
We derive our income primarily from the excess of interest collected on interest-earning assets over the interest paid on interest-bearing
liabilities. The rates of interest we earn on our assets and owe on our liabilities generally are established contractually for a period of
time. Since market interest rates change over time, we are exposed to lower profitability if we cannot adapt to interest rate
changes. Accepting interest rate risk can be an important source of profitability and shareholder value; however, excessive levels of interest
rate risk could pose a significant threat to our earnings and capital base. Accordingly, effective risk management that maintains interest rate
risk at prudent levels is essential to our safety and soundness.
F-20
Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control interest rate risk and
the quantitative level of exposure. Our interest rate risk management process seeks to ensure that appropriate policies, procedures,
management information systems, and internal controls are in place to maintain interest rate risk at prudent levels with consistency and
continuity. In evaluating the quantitative level of interest rate risk, we assess the existing and potential future effects of changes in interest
rates on our financial condition, including capital adequacy, earnings, liquidity, and asset quality.
We use two interest rate risk measurement techniques. The first, which is commonly referred to as GAP analysis, measures the difference
between the dollar amounts of interest-sensitive assets and liabilities that will be refinanced or repriced during a given time period. A
significant repricing gap could result in a negative impact to the net interest margin during periods of changing market interest rates.
The following table depicts our GAP position as of December 31, 2024:
(Dollars in thousands)
Assets:
Loans (1)
Securities available for sale (2)
Interest-earning deposits
Mortgage loans held for sale
Allowance for credit losses
Other assets
Total assets
Liabilities:
Interest-bearing deposits
Short-term borrowings
Federal Home Loan Bank advances
Other borrowed money
Noninterest-bearing deposits
Other liabilities
Total liabilities
Shareholders' equity
Total liabilities & shareholders' equity
Net asset (liability) GAP
Cumulative GAP
Within
Three
Months
Three to
Twelve
Months
One to
Five
Years
After
Five
Years
$ 2,824,782
7,465
331,519
15,824
0
0
$ 3,179,590
2,754,505
121,521
20,862
51,610
0
0
2,948,498
0
$ 2,948,498
$
$
231,092
231,092
$
$
$
$
$
177,385
49,998
500
0
0
0
227,883
602,288
0
60,000
0
0
0
662,288
0
662,288
(434,405)
(203,313)
$ 1,101,669
306,376
4,000
0
0
0
$ 1,412,045
77,050
0
283,838
89,314
0
0
450,202
0
450,202
961,843
$
$
$
$
$
$
$
496,945
366,513
0
0
0
0
863,458
0
0
22,383
0
0
0
22,383
0
22,383
841,075
758,530
$ 1,599,605
Total
$ 4,600,781
730,352
336,019
15,824
(54,454)
423,639
$ 6,052,161
3,433,843
121,521
387,083
140,924
1,264,523
119,741
5,467,635
584,526
$ 6,052,161
Percent of cumulative GAP to total assets
3.8%
(3.4)%
12.5%
26.4%
(1) Floating rate loans that are currently at interest rate floors are treated as fixed rate loans and are reflected using maturity date and not
repricing frequency.
(2) Mortgage-backed securities are categorized by expected maturities based upon prepayment trends as of December 31, 2024.
F-21
The second interest rate risk measurement used is commonly referred to as net interest income simulation analysis. We believe that this
methodology provides a more accurate measurement of interest rate risk than the GAP analysis, and therefore, it serves as our primary
interest rate risk measurement technique. The simulation model assesses the direction and magnitude of variations in net interest income
resulting from potential changes in market interest rates.
Key assumptions in the model include prepayment speeds on various loan and investment assets; cash flows and maturities of interest-
sensitive assets and liabilities; and changes in market conditions impacting loan and deposit volume and pricing. These assumptions are
inherently uncertain and subject to fluctuation and revision in a dynamic environment; therefore, the model cannot precisely estimate net
interest income or exactly predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated
results due to timing, magnitude, and frequency of interest rate changes and changes in market conditions and our strategies, among other
factors.
We conducted multiple simulations as of December 31, 2024, in which it was assumed that changes in market interest rates occurred ranging
from up 300 basis points to down 400 basis points in equal quarterly instalments over the next twelve months. The following table reflects the
suggested dollar and percentage changes in net interest income over the next twelve months in comparison to the $222 million in net interest
income projected using our balance sheet amounts and anticipated replacement rates as of December 31, 2024. The resulting estimates are
generally within our policy parameters established to manage and monitor interest rate risk.
(Dollars in thousands)
Interest Rate Scenario
Interest rates down 400 basis points
Interest rates down 300 basis points
Interest rates down 200 basis points
Interest rates down 100 basis points
Interest rates up 100 basis points
Interest rates up 200 basis points
Interest rates up 300 basis points
Dollar Change
In Net
Interest Income
Percent Change
In Net
Interest Income
$
(33,000)
(21,500)
(14,200)
(6,800)
7,000
13,800
20,300
(14.9)%
(9.7)
(6.4)
(3.1)
3.2
6.2
9.1
In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including: the
growth, composition, and absolute levels of loans, deposits, and interest-earning deposits and interest-bearing liabilities; level of
nonperforming assets; economic and competitive conditions; potential changes in lending, investing, and deposit gathering strategies; client
preferences; and other factors.
F-22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Mercantile Bank Corporation
Grand Rapids, Michigan
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Mercantile Bank Corporation (the “Company”) as of December 31, 2024
and December 31, 2023, the related statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years
in the two-year period ended December 31, 2024, and the related notes (collectively referred to as the “ consolidated financial statements”).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2024 and December 31, 2023, and the results of its operations and its cash flows for each of the years in the
two-year period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the
Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report
dated March 3, 2025 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for the consolidated financial statements. Our responsibility is to express an opinion on the
Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that
was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to
the consolidated financial statements, and (2) involved our especially challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to
which it relates.
Allowance for Credit Losses – General Reserve
As described in Notes 1 and 3 to the consolidated financial statements, management’s estimate of the allowance for credit losses (ACL) at
December 31, 2024, includes a reserve on collectively evaluated loans. The reserve on collectively evaluated loans is based on the bank’s
historical loss rate adjusted for changes in macroeconomic conditions and qualitative factors. The reserve is based on an institution-specific
historical average loss rate applied over the remaining life of loans. During each reporting period, management considers the need to adjust
the historical loss rates to reflect the extent to which they expect current conditions and reasonable and supportable economic forecasts to
differ from the conditions that existed for the period over which the historical loss information was determined. Management’s adjustment for
qualitative factors is based on the impact of changes in lending policies and procedures, changes in the nature and volume of the loan
portfolio, changes in the experience, ability and depth of lending management and staff, changes in the volume and severity of past due loans,
nonaccrual loans and adversely classified loans, changes in the quality of the credit review function, changes in the value of underlying
collateral dependent loans, existence and effect of any concentrations of credit and any changes in such, effect of other factors such as
competition and legal and regulatory requirements, and historical loss rate information.
F-23
Significant judgment was required by management in the selection and measurement of qualitative factor adjustments. Accordingly,
performing audit procedures to evaluate the Company’s estimated ACL involved a high degree of auditor judgment and required significant
effort, including the involvement of professionals with specialized skill and knowledge.
Our audit procedures related to the Company’s estimate of the ACL included, but were not limited to, the following:
● We tested the design and operating effectiveness of management's controls over the determination of the qualitative factor
adjustments.
● We obtained an understanding of management's process for determining the need for qualitative factor adjustments, identifying
appropriate factors, and measuring the direction and magnitude of the adjustment.
● We evaluated management's rationale for determining qualitative adjustments were relevant and warranted for each loan segment
and assessed the measurement of qualitative factor adjustments applied by management.
● Where applicable, we tested the accuracy and completeness of data used by management in the measurement of qualitative factor
adjustments or vouched factors to relevant external data sources.
● We assessed changes in qualitative factors against overall trends in credit quality within the Company and broader trends within the
industry and local and national economies to evaluate reasonableness of management’s qualitative factor adjustments.
/s/ Plante & Moran, PLLC
Plante & Moran, PLLC
We have served as the Company’s auditor since 2023.
Grand Rapids, Michigan
March 3, 2025
F-24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Mercantile Bank Corporation
Grand Rapids, Michigan
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting as of December 31, 2024 of Mercantile Bank Corporation (the "Company"),
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the “COSO framework”). In our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2024, based on the criteria established in the COSO framework.
We also have audited the accompanying consolidated balance sheets of the Company as of December 31, 2024 and 2023, the related
consolidated statements of income, comprehensive income (loss), stockholders' equity, and cash flows for each of the years in the two-year
period ended December 31, 2024, and the related notes (collectively referred to as the “consolidated financial statements”), in accordance
with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”). Our report dated March 3, 2025,
expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Report by Mercantile Bank Corporation’s
Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with U.S. federal securities laws and applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
/s/ Plante & Moran, PLLC
Plante & Moran, PLLC
We have served as the Company’s auditor since 2023.
Grand Rapids, Michigan
March 3, 2025
F-25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Mercantile Bank Corporation
Grand Rapids, Michigan
Opinion on the Consolidated Financial Statements
We have audited the accompanying income and comprehensive income (loss), changes in shareholders’ equity, and cash flows for the year
ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the results of the Company’s operations and its cash flows for the
year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and
measurement of credit losses as of January 1, 2022 due to the adoption of ASC Topic 326, Financial Instruments – Credit Losses.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that our audit provides a reasonable basis for our opinion.
/s/ BDO USA, P.C.
BDO USA, P.C.
We served as the Company's auditor from 2006 to 2023.
Grand Rapids, Michigan
March 3, 2023
F-26
REPORT BY MERCANTILE BANK CORPORATION’S MANAGEMENT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective system of internal control over financial reporting that is designed to
produce reliable financial statements presented in conformity with generally accepted accounting principles. There are inherent limitations in
the effectiveness of any system of internal control. Accordingly, even an effective system of internal control can provide only reasonable
assurance with respect to financial statement preparation.
Management assessed the Company’s system of internal control over financial reporting that is designed to produce reliable financial
statements presented in conformity with generally accepted accounting principles as of December 31, 2024. This assessment was based on
criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December
31, 2024, Mercantile Bank Corporation maintained an effective system of internal control over financial reporting that is designed to produce
reliable financial statements presented in conformity with generally accepted accounting principles based on those criteria.
The Company’s independent auditors have issued an audit report on the effectiveness of the Company’s internal control over financial
reporting as found on page F-25.
Mercantile Bank Corporation
/s/ Raymond E. Reitsma
Raymond E. Reitsma
President and Chief Executive Officer
/s/ Charles E. Christmas
Charles E. Christmas
Executive Vice President, Chief Financial Officer and Treasurer
F-27
MERCANTILE BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2024 and 2023
(Dollars in thousands)
ASSETS
Cash and due from banks
Interest-earning deposits
Total cash and cash equivalents
Securities available for sale
Federal Home Loan Bank stock
Mortgage loans held for sale
Loans
Allowance for credit losses
Loans, net
Premises and equipment, net
Bank owned life insurance
Goodwill
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing
Interest-bearing
Total deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Subordinated debentures
Subordinated notes
Accrued interest and other liabilities
Total liabilities
Commitments and contingent liabilities (Note 12)
Shareholders' equity
$
$
$
2024
2023
$
56,991
336,019
393,010
730,352
21,513
15,824
4,600,781
(54,454)
4,546,327
53,427
93,839
49,473
148,396
70,408
60,125
130,533
617,092
21,513
18,607
4,303,758
(49,914)
4,253,844
50,928
85,668
49,473
125,566
6,052,161
$
5,353,224
$
1,264,523
3,433,843
4,698,366
121,521
387,083
50,330
89,314
121,021
5,467,635
1,247,640
2,653,278
3,900,918
229,734
467,910
49,644
88,971
93,902
4,831,079
Preferred stock, no par value; 1,000,000 shares authorized; 0 shares outstanding at December
31, 2024 and December 31, 2023
Common stock, no par value; 40,000,000 shares authorized; 16,146,374 shares outstanding at
December 31, 2024 and 16,125,662 shares outstanding at December 31, 2023
Retained earnings
Accumulated other comprehensive gain/(loss)
Total shareholders’ equity
0
0
299,705
334,646
(49,825)
584,526
295,106
277,526
(50,487)
522,145
Total liabilities and shareholders’ equity
$
6,052,161
$
5,353,224
See accompanying notes to consolidated financial statements.
F-28
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2024, 2023 and 2022
(Dollars in thousands, except per share data)
Interest income
Loans, including fees
Securities, taxable
Securities, tax-exempt
Interest-earning deposits
Total interest income
Interest expense
Deposits
Short-term borrowings
Federal Home Loan Bank advances
Subordinated debentures and other borrowings
Total interest expense
Net interest income
Provision for credit losses
$
2024
2023
2022
293,163
11,911
4,123
12,305
321,502
101,395
7,717
13,018
8,286
130,416
191,086
7,400
$
$
253,108
9,041
3,663
5,546
271,358
55,444
2,847
11,367
8,155
77,813
166,848
7,603
2,734
4,654
181,839
10,037
294
7,125
6,139
23,595
193,545
158,244
7,700
6,550
Net interest income after provision for credit losses
183,686
185,845
151,694
Noninterest income
Service charges on deposit and sweep accounts
Mortgage banking activities
Credit and debit card fees
Interest rate swap program fees
Payroll processing
Earnings on bank owned life insurance
Other income
Total noninterest income
Noninterest expense
Salaries and benefits
Occupancy
Furniture and equipment rent, depreciation and maintenance
Data processing
Advertising
FDIC insurance costs
Charitable foundation contributions
Other expense
Total noninterest expense
Income before federal income tax expense
Federal income tax expense
Net income
Earnings per common share:
Basic
Diluted
6,842
12,301
8,821
3,210
3,058
2,555
3,602
40,389
77,924
8,643
3,716
13,772
1,604
2,497
1,708
15,925
125,789
98,286
18,693
4,954
7,595
8,914
3,946
2,509
1,500
2,725
32,143
68,801
9,150
3,464
11,618
1,565
2,258
666
17,767
115,289
102,699
20,482
79,593
$
82,217
$
5,952
8,664
8,216
3,488
2,178
1,678
1,901
32,077
65,124
8,362
3,614
12,359
1,445
1,239
1,514
14,324
107,981
75,790
14,727
61,063
4.93
4.93
$
$
5.13
5.13
$
$
3.85
3.85
$
$
$
See accompanying notes to consolidated financial statements.
F-29
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 2024, 2023 and 2022
(Dollars in thousands)
Net income
2024
2023
2022
$
79,593
$
82,217
$
61,063
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale
Total other comprehensive income (loss)
Tax effect of unrealized holding gains (losses) on securities available for
sale
Total tax effect of other comprehensive income (loss)
Other comprehensive income (loss), net of tax effect
836
836
(174)
(174)
662
18,804
18,804
(3,950)
(3,950)
14,854
(77,990)
(77,990)
16,378
16,378
(61,612)
Comprehensive income (loss)
$
80,255
$
97,071
$
(549)
See accompanying notes to consolidated financial statements.
F-30
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years ended December 31, 2024, 2023 and 2022
(Dollars in thousands except per share amounts)
Preferred
Stock
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(Loss)
Total
Shareholders’
Equity
Balances, January 1, 2022
$
0
$
285,752
$
174,536
$
(3,729) $
456,559
Adoption of ASU 2016-13
316
Employee stock purchase plan (1,388 shares)
Dividend reinvestment plan (25,941 shares)
Stock option exercises, net (1,355 shares)
Stock grants to directors for retainer fees (11,166
shares)
Stock-based compensation expense
Cash dividends ($1.26 per common share)
Net income for 2022
Change in net unrealized gain/(loss) on securities
available for sale, net of tax effect
45
867
36
359
3,377
(19,602)
61,063
316
45
867
36
359
3,377
(19,602)
61,063
(61,612)
(61,612)
Balances, December 31, 2022
$
0
$
290,436
$
216,313
$
(65,341) $
441,408
See accompanying notes to consolidated financial statements.
F-31
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
Years ended December 31, 2024, 2023 and 2022
(Dollars in thousands except per share amounts)
Preferred
Stock
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(Loss)
Total
Shareholders’
Equity
Balances, January 1, 2023
$
0
$
290,436
$
216,313
$
(65,341) $
441,408
Employee stock purchase plan (1,410 shares)
Dividend reinvestment plan (27,306 shares)
Stock grants to directors for retainer fees (11,529
shares)
Stock-based compensation expense
Cash dividends ($1.34 per common share)
Net income for 2023
Change in net unrealized gain/(loss) on securities
available for sale, net of tax effect
45
891
350
3,384
(21,004)
82,217
45
891
350
3,384
(21,004)
82,217
14,854
14,854
Balances, December 31, 2023
$
0
$
295,106
$
277,526
$
(50,487) $
522,145
See accompanying notes to consolidated financial statements.
F-32
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
Years ended December 31, 2024, 2023 and 2022
(Dollars in thousands except per share amounts)
Preferred
Stock
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(Loss)
Total
Shareholders’
Equity
Balances, January 1, 2024
$
0
$
295,106
$
277,526
$
(50,487) $
522,145
Employee stock purchase plan (1,194 shares)
Dividend reinvestment plan (19,684 shares)
Stock grants to directors for retainer fees (11,316
shares)
Stock-based compensation expense
Cash dividends ($1.40 per common share)
Net income for 2024
Change in net unrealized gain/(loss) on securities
available for sale, net of tax effect
50
810
423
3,316
(22,473)
79,593
50
810
423
3,316
(22,473)
79,593
662
662
Balances, December 31, 2024
$
0
$
299,705
$
334,646
$
(49,825) $
584,526
See accompanying notes to consolidated financial statements.
F-33
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2024, 2023 and 2022
(Dollars in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash from operating activities:
$
Depreciation and amortization
Provision for credit losses
Deferred income tax benefit
Stock-based compensation expense
Stock grants to directors for retainer fees
Proceeds from sales of mortgage loans held for sale
Origination of mortgage loans held for sale
Net gain on sales of mortgage loans held for sale
Loss from sale of mortgage loans
Net gain from sales and valuation write-downs of foreclosed assets
Net (gain) loss from sale and write-downs on former bank premises
Net (gain) loss from sales and disposals of premises and equipment
Earnings on bank owned life insurance
Net (gain) loss on instruments designated at fair value and related derivatives
Net change in:
Accrued interest receivable
Other assets
Accrued interest and other liabilities
Net cash from operating activities
Cash flows from investing activities
Purchases of securities available for sale
Proceeds from maturities, calls and repayments of securities available for sale
Loan originations and payments, net
Proceeds from sale of mortgage loans
Proceeds from Federal Home Loan Bank stock redemption
Purchases of Federal Home Loan Bank stock
Purchases of bank owned life insurance
Proceeds from bank owned life insurance death benefits claim
Purchases of premises and equipment and lease activity
Proceeds from sales of former bank premises
Proceeds from sales of foreclosed assets
Net cash for investing activities
Cash flows from financing activities
Net (decrease) increase in time deposits
Net (decrease) increase in all other deposits
Net (decrease) increase in securities sold under agreements to repurchase
Proceeds from Federal Home Loan Bank advances
Maturities of Federal Home Loan Bank advances
Net proceeds from subordinated notes issuance
Proceeds from stock option exercises, net of cashless exercises
Employee stock purchase plan
Dividend reinvestment plan
Payment of cash dividends to common shareholders
Net cash (for) from financing activities
2024
2023
2022
79,593
$
82,217
$
61,063
10,505
7,400
(397)
3,316
423
384,784
(370,201)
(11,800)
112
(290)
(83)
13
(2,555)
(203)
(1,595)
(25,797)
27,893
101,118
(173,618)
61,777
(309,834)
9,839
0
0
(7,000)
1,357
(8,530)
283
290
(425,436)
159,727
637,721
(108,213)
10,000
(90,827)
0
0
50
810
(22,473)
586,795
11,496
7,700
(2,036)
3,384
350
196,217
(204,727)
(6,532)
0
(419)
2
471
(1,500)
257
(4,330)
(30,189)
14,252
66,613
(19,941)
24,142
(387,283)
0
0
(3,792)
(3,500)
0
(6,687)
598
531
(395,932)
422,781
(234,674)
35,394
240,000
(80,353)
0
0
45
891
(21,004)
363,080
12,945
6,550
(1,353)
3,377
359
237,779
(217,030)
(8,197)
0
(69)
275
(36)
(1,678)
(45)
(6,165)
(437)
32,524
119,862
(107,011)
17,984
(462,427)
0
281
0
(4,500)
628
(3,017)
2,994
69
(554,999)
(57,189)
(313,193)
(3,123)
28,263
(94,000)
14,645
36
45
867
(19,602)
(443,251)
See accompanying notes to consolidated financial statements.
F-34
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 2024, 2023 and 2022
(Dollars in thousands)
2024
2023
2022
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flows information
Cash paid during the year for:
Interest
Federal income taxes
Noncash financing and investing activities:
Transfers from loans to foreclosed assets
Transfers from bank premises to other real estate owned
Transfers from premises and equipment to other assets
$
$
262,477
130,533
393,010
129,228
21,400
$
$
0
0
0
$
$
33,761
96,772
130,533
72,024
24,850
112
800
0
(878,388)
975,160
96,772
21,765
11,200
0
0
2,847
See accompanying notes to consolidated financial statements.
F-35
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the accounts of Mercantile Bank Corporation (“Mercantile”) and
its subsidiaries, Mercantile Bank (“our bank”) and Mercantile Community Partners LLC ("MCP"), and of Mercantile Insurance Center, Inc.
(“our insurance company”), a subsidiary of our bank, after elimination of significant intercompany transactions and accounts.
Mercantile has five separate business trusts: Mercantile Bank Capital Trust I, Firstbank Capital Trust I, Firstbank Capital Trust II, Firstbank
Capital Trust III and Firstbank Capital Trust IV (“our trusts”). Our trusts were formed to issue trust preferred securities. We issued
subordinated debentures to our trusts in return for the proceeds raised from the issuance of the trust preferred securities. Our trusts are not
consolidated, but instead we report the subordinated debentures issued to the trusts as liabilities.
Nature of Operations: Mercantile was incorporated on July 15, 1997 to establish and own the bank based in Grand Rapids, Michigan. Our
bank began operations on December 15, 1997. We completed the merger of Firstbank Corporation (“Firstbank”), a Michigan corporation
with approximately $1.5 billion in total assets and 46 branch locations, into Mercantile as of June 1, 2014.
Mercantile is a financial holding company whose principal activity is the ownership and management of our bank. Our bank is a community-
based financial institution. Our bank’s primary deposit products are checking, savings, and term certificate accounts, and its primary lending
products are commercial loans, residential mortgage loans, and instalment loans. Substantially all loans are secured by specific items of
collateral, including business assets, real estate or consumer assets. Commercial loans are expected to be repaid from cash flow from
operations of businesses. Real estate loans are secured by commercial or residential real estate. We have no material foreign loans or
significant overdraft balances. Our bank’s loan accounts and retail deposits are primarily with customers located in the communities in which
we have bank office locations. As an alternative source of funds, our bank has also issued certificates of deposit to depositors outside of its
primary market areas.
Our insurance company acquired an existing shelf insurance agency effective April 15, 2002. An Agency and Institution Agreement was
entered into among our insurance company, our bank and Hub International for the purpose of providing programs of mass marketed
personal lines of insurance. Insurance product offerings include private passenger automobile, homeowners, personal inland marine, boat
owners, recreational vehicle, dwelling fire, umbrella policies, small business and life insurance products, all of which are provided by and
written through companies that have appointed Hub International as their agent. To date, we have not provided the insurance products noted
above and currently have no plans to do so.
We have evaluated subsequent events for potential recognition and/or disclosure through the date these financial statements were issued.
Operating Segments: We conduct our operations through a single business segment, which derives interest and noninterest income through
our banking products and services and investment securities. All of our income relates to our operations in the United States.
Pursuant to Financial Accounting Standards Codification 280, Segment Reporting, operating segments represent components of an enterprise
for which separate financial information is available that is regularly evaluated by the chief operating decision makers in determining how to
allocate resources and assessing performance.
Our chief operating decision makers, which include our Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer,
evaluate interest and noninterest income streams and credit losses from our various products and services, while expense activities, including
interest expense and noninterest expense, are managed, and financial performance is evaluated, on a Company-wide basis. As a result,
detailed profitability information for each interest and noninterest income stream is not used by our chief operating decision makers to
allocate resources or in assessing performance. Rather, our chief operating decision makers use consolidated net income to assess
performance by comparing it to and monitoring against budgeted and prior year results. This information is used to manage resources to drive
business and net income growth, including investment in key strategic priorities, as well as determine our ability to return capital to
shareholders. Segment assets represent total assets on our Consolidated Balance Sheets and segment net income represents net income on our
Consolidated Statements of Income.
(Continued)
F-36
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of
America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for credit losses and the fair
value measurements are particularly subject to change.
Cash and Cash Equivalents and Cash Flow Reporting: Cash and cash equivalents include cash on hand, demand deposits with other financial
institutions, short-term investments and federal funds sold. Cash flows are reported net for customer loan and deposit transactions, interest-
earning deposits invested with other financial institutions and short-term borrowings with maturities of 90 days or less.
Debt Securities: Debt securities classified as held to maturity are carried at amortized cost when management has the positive intent and
ability to hold them to maturity. Debt securities available for sale consist of bonds which might be sold prior to maturity due to a number of
factors, including changes in interest rates, prepayment risks, yield, availability of alternative investments or liquidity needs. Debt securities
classified as available for sale are reported at their fair value. For available for sale debt securities in an unrealized loss position, we first
assess whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of the amortized
cost basis. If either of the criteria regarding intent or requirement to sell is met, the debt security’s amortized cost basis is written down to fair
value through income with the establishment of an allowance. For debt securities available for sale that do not meet the aforementioned
criteria, we evaluate whether any decline in fair value is due to credit loss factors. In making this assessment, we consider any changes to the
rating of the security by a rating agency and adverse conditions specifically related to the issuer of the security, among other factors. If this
assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the
amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a
credit loss exists and an allowance is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost
basis. Any impairment that has not been recorded through an allowance is recognized in other comprehensive income.
Changes in the allowance are recorded as provisions for (or reversal of) credit loss expense. Losses are charged against the allowance when
the collectability of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
At December 31, 2024, there was no allowance related to the available for sale debt securities portfolio.
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums and discounts on securities are amortized
or accreted on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are
anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Accrued interest receivable on available for sale debt securities totaling $3.6 million and $2.6 million at December 31, 2024 and 2023,
respectively, was reported in other assets on the Consolidated Balance Sheets. Management has made the accounting policy election to
exclude accrued interest receivable on available for sale securities from the estimate of credit losses as accrued interest is written off in a
timely manner when deemed uncollectible.
(Continued)
F-37
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Federal Home Loan Bank Stock: Our bank owns stock of the Federal Home Loan Bank of Indianapolis ("FHLBI"). The FHLBI is a
governmental sponsored entity that requires banks to invest in their nonmarketable stock as a condition of membership. FHLBI members are
required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLBI
stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.
The ability to redeem the shares owned is dependent on the redemption practice of the FHLBI. Dividends are recorded in income on the ex-
dividend date.
Loans: Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal
balance outstanding adjusted for partial charge-offs and the allowance, net of deferred loan fees and costs. Interest income on loans is
accrued over the term of the loans primarily using the simple interest method based on the principal balance outstanding. Accrued interest is
included in other assets in the Consolidated Balance Sheets. Loan origination fees and certain direct costs incurred to extend credit are
deferred and amortized over the term of the loan or loan commitment period as an adjustment to the related loan yield.
Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and
recognized in interest income using the level-yield method without anticipating prepayments. Net unamortized deferred loan costs amounted
to $2.2 million and $2.4 million at December 31, 2024 and 2023, respectively.
Interest income on commercial loans and mortgage loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-
secured and in process of collection. Consumer and credit card loans are typically charged off no later than when they are 120 days past due.
Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if
collection of principal and interest is considered doubtful. All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return
to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future
payments are reasonably assured.
Commercial Loan Participations: As part of our credit risk administration practices and to manage exposure limits, we engage in commercial
loan participations with other financial institutions from time-to-time. In all instances, the commercial loans are participated at par with no
loan yield adjustments; therefore, no gain or loss on sale, or servicing right, is recorded. We retain a large portion of the loan exposure and
continue to service the lending relationship. Commercial loan participations aggregated $48.6 million and $46.7 million as of December 31,
2024 and 2023, respectively.
(Continued)
F-38
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair
value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and
charged to earnings. Mortgage loans held for sale are generally sold with servicing rights retained. Gains and losses on sales of mortgage
loans are based on the difference between the selling price and the carrying value of the related mortgage loan sold, which is reduced by the
cost allocated to the servicing right. We generally lock in the sale price to the purchaser of the mortgage loan at the same time we make an
interest rate commitment to the borrower.
Year-end mortgage loans held for sale were as follows:
(Dollars in thousands)
Mortgage loans held for sale
Less: Allowance to adjust to lower of cost or market
Mortgage loans held for sale, net
2024
2023
15,824
0
15,824
$
$
18,607
0
18,607
$
$
Mortgage Loan Derivatives: We enter into forward contracts and interest rate lock commitments in the ordinary course of business, which are
accounted for as derivatives. The derivatives are not designated as hedges and are carried at fair value. The net gain or loss on derivatives is
included in mortgage banking activities in the Consolidated Statements of Income. The net balance of mortgage loan derivatives aggregated
to an asset of $0.1 million at December 31, 2024 and a liability of less than $0.1 million as of December 31, 2023.
(Continued)
F-39
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage Banking Activities: Mortgage loan servicing rights are recognized as assets based on the allocated value of retained servicing rights
on mortgage loans sold. Mortgage loan servicing rights are carried at the lower of amortized cost or fair value and are expensed in proportion
to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights using groupings of
the underlying mortgage loans as to interest rates. Any impairment of a grouping is reported as a valuation allowance.
Servicing fee income is recorded for fees earned for servicing mortgage loans. The fees are based on a contractual percentage of the
outstanding principal or a fixed amount per loan and are recorded as income when earned. Amortization of mortgage loan servicing rights is
netted against mortgage loan servicing income and recorded in mortgage banking activities in the Consolidated Statements of Income.
Accounting for mortgage servicing rights is based on the class of mortgage servicing rights. We have identified four classes of mortgage
servicing rights based on the initial term of the underlying mortgage loans: 10 years, 15 years, 20 years and 30 years. We distinguish between
these classes based on the differing sensitivities to the change in value from changes in mortgage interest rates. Mortgage servicing rights are
initially recorded at fair value, and then are accounted for using the amortization method. Netted against mortgage banking income, mortgage
servicing rights amortization expense is reported as noninterest income in the Consolidated Statements of Income. Mortgage servicing rights
amortization is determined by amortizing the mortgage servicing rights balance in proportion to, and over the period of, the estimated future
net servicing income of the underlying mortgage loans.
Interest rate risk, prepayment risk and default risk are inherent in mortgage servicing rights valuations. Interest rate changes largely drive
prepayment rates. Refinance activity generally increases as interest rates decline. A significant decrease in interest rates beyond expectation
could cause a decline in the value of mortgage servicing rights. On the contrary, borrowers are less likely to refinance or prepay their
mortgage loans if interest rates increase, which would extend the duration of the underlying mortgage loans and the associated mortgage
servicing rights value would likely rise. Because of these risks, discount rates and prepayment speeds are used to estimate the fair value of
mortgage servicing rights.
Troubled Debt Restructurings: The accounting guidance for troubled debt restructurings by creditors in Subtopic 310-40, Receivables –
Troubled Debt Restructurings by Creditors was eliminated upon our adoption of ASU No. 2022-02 Financial Instruments – Credit Losses
(Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which was effective January 1, 2023. ASU No. 2022-02 eliminated
troubled debt restructurings recognition and measurement guidance and, instead, requires that entities evaluate (consistent with the
accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan.
In accordance with previous accounting guidance, loans modified as troubled debt restructurings were, by definition, considered to be
impaired loans. Impairment for these loans were measured on a loan-by-loan basis. Certain loans modified as troubled debt restructurings
may have been previously measured for impairment under a general allowance methodology (i.e., pooling), thus at the time the loan
was modified as a troubled debt restructuring, the allowance may have been impacted by the difference between the results of these two
measurement methodologies. Loans modified as troubled debt restructurings that subsequently default were factored into the determination
of the allowance in the same manner as other defaulted loans. Our bank has chosen to continue to individually assess loans previously
identified as troubled debt restructurings for allowance for credit losses purposes; thus, there was no change to the allowance for credit losses
upon adoption.
(Continued)
F-40
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Credit Losses (“allowance”): The allowance is a valuation account that is deducted from the loans’ amortized cost basis to
present the net amount expected to be collected on the loans. The allowance is increased by provision expense and decreased by charge-offs,
net of recoveries of amounts previously charged-off. Loans are charged-off against the allowance when we believe the uncollectibility of a
loan balance is confirmed. The allowance is measured on a collective pool basis when similar risk characteristics exist and on an individual
basis when a loan exhibits unique risk characteristics that differentiate the loan from other loans within the loan segments. Loan segments are
further discussed in Note 3 - Loans and Allowance for Credit Losses.
The “remaining life methodology” is utilized for substantially all loan pools. This non-discounted cash flow approach projects an estimated
future amortized cost basis based on current loan balance and repayment terms. Our historical loss rate is then applied to future loan balances
at the instrument level based on remaining contractual life adjusted for amortization, prepayment and default to develop a baseline lifetime
loss. The baseline lifetime loss is adjusted for changes in macroeconomic conditions over the reasonable and supportable forecast and
reversion periods via a series of macroeconomic forecast inputs, such as gross domestic product, unemployment rates, interest rates, credit
spreads, stock market volatility and property price indices, to quantify the impact of current and forecasted economic conditions on expected
loan performance.
Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses. The forecast period represents
the time frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental
factors that are expected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the
contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult
or may not be possible in later periods. The contractual term generally excludes potential extensions, renewals and modifications.
Subsequent to the end of the forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in
relation to then current economic conditions as well as any developing loan loss activity and resulting historical data. We are not required to
develop and use our own economic forecast model, and elect to utilize economic forecasts from third-party providers that analyze and
develop forecasts of the economy for the entire United States at least quarterly.
During each reporting period, we also consider the need to adjust the historical loss rates as determined to reflect the extent to which we
expect current conditions and reasonable and supportable economic forecasts to differ from the conditions that existed for the period over
which the historical loss information was determined. These qualitative adjustments may increase or decrease our estimate of expected future
credit losses.
Our qualitative factors include:
o
o
o
o
o
o
o
o
o
Changes in lending policies and procedures
Changes in the nature and volume of the loan portfolio and in the terms of loans
Changes in the experience, ability and depth of lending management and other relevant staff
Changes in the volume and severity of past due loans, nonaccrual loans and adversely classified loans
Changes in the quality of the loan review program
Changes in the value of underlying collateral dependent loans
Existence and effect of any concentrations of credit and any changes in such
Effect of other factors such as competition and legal and regulatory requirements
Local or regional conditions that depart from the conditions and forecasts for the entire country
The estimation of future credit losses should reflect consideration of all significant factors that affect the collectibility of the loan portfolio at
each evaluation date. While our methodology considers both the historical loss rates as well as the traditional qualitative factors, there may be
instances or situations where additional qualitative factors need to be considered. Effective January 1, 2022, we established a historical loss
information factor to address the relatively low level of loan losses during the look-back period.
(Continued)
F-41
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accrued interest receivable on loans totaling $17.3 million and $16.9 million as of December 31, 2024 and 2023, respectively, is included in
other assets on the Consolidated Balance Sheets. We elected not to measure an allowance for accrued interest receivable and instead elected
to reverse interest income on loans that are placed on nonaccrual status, which is generally when the loan becomes 90 days past due, or
earlier if we believe the collection of interest is doubtful. We believe this policy results in the timely reversal of uncollectible interest.
Identified problem loans, which exhibit characteristics (financial or otherwise) that could cause the loans to become nonperforming or require
restructuring in the future, are included on an internal watch list. Senior management and the Board of Directors review this list regularly. In
some cases, we may determine that an individual loan exhibits unique risk characteristics that differentiate the loan from other loans within
the loan segments. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective
evaluation. Specific reserve allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts
owed and collateral deficiencies, among other things.
For individually analyzed loans that are deemed to be collateral dependent loans, we adopted the practical expedient to measure the
allowance based on the fair value of collateral. The allowance is calculated on an individual loan basis based on the shortfall between the fair
value of the loan’s collateral and its recorded principal balance. If the fair value of the collateral exceeds the recorded principal balance, no
allowance is required. Fair value estimates of collateral on individually analyzed loans, as well as on foreclosed and repossessed assets, are
reviewed periodically. We also have a process in place to monitor whether value estimates at each quarter-end are reflective of current market
conditions. Our credit policies establish criteria for obtaining appraisals and determining internal value estimates. We may also adjust outside
and internal valuations based on identifiable trends within our markets, such as recent sales of similar properties or assets, listing prices and
offers received. In addition, we may discount certain appraised and internal value estimates to address distressed market conditions.
We are also required to consider expected credit losses associated with loan commitments over the contractual period in which we are
exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-
balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheets and is increased or decreased via other
noninterest expense on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will
occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the
same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected
to be funded.
(Continued)
F-42
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been surrendered.
Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from our bank and put presumptively
beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) our bank does not
maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to
unilaterally cause the holder to return specific assets. Our transfers of financial assets are generally limited to commercial loan participations
sold and residential mortgage loans sold in the secondary market.
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and
related components are depreciated using the straight-line method with useful lives ranging from 5 to 33 years. Furniture, fixtures and
equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years. Maintenance, repairs and minor
alterations are charged to current operations as expenditures occur and major improvements are capitalized. Premises and equipment are
reviewed for impairment when events indicate their carrying amount may not be recoverable based on future undiscounted cash flows. If
impaired, the assets are recorded at the lower of carrying value or fair value.
Foreclosed Assets: Assets acquired through or in lieu of foreclosure are initially recorded at their estimated fair value net of estimated selling
costs, establishing a new cost basis. If fair value subsequently declines, a valuation allowance is recorded through noninterest expense, as are
collection and operating costs after acquisition. We had no foreclosed assets as of December 31, 2024. Foreclosed assets, included in other
assets in the Consolidated Balance Sheets, totaled $0.2 million as of December 31, 2023.
Bank Owned Life Insurance: Our bank has purchased life insurance policies on certain key officers. Bank owned life insurance is recorded at
its cash surrender value, or the amount that can be realized. Increases in the net cash surrender value of the policies, as well as insurance
proceeds received, are recorded as noninterest income on the Consolidated Statements of Income and are not subject to income taxes.
Goodwill: The acquisition method of accounting requires that assets and liabilities acquired in a business combination to be recorded at fair
value as of the acquisition date. The valuation of assets and liabilities often involves estimates based on third-party valuations or internal
valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective. This typically results
in goodwill, the amount by which the cost of net assets acquired in a business combination exceeds their fair value, which is subject to
impairment testing at least annually. We review goodwill for impairment on an annual basis as of October 1 or more often if events or
circumstances indicate that it is more-likely-than-not that the fair value of a reporting unit is below its carrying value. Based on our annual
impairment analysis of goodwill as of October 1, it was determined that the fair value was in excess of its respective carrying value as of
October 1, 2024; therefore, goodwill is considered not impaired.
Repurchase Agreements: Our bank sells certain securities under agreements to repurchase. The agreements are treated as collateralized
financing transactions, with the obligations to repurchase the securities sold reflected as liabilities and the securities underlying the
agreements remaining in assets in the Consolidated Balance Sheets.
(Continued)
F-43
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial Instruments and Loan Commitments: Financial instruments include off-balance-sheet credit instruments, such as commitments to
make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the
exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Instruments, such as standby letters of credit, that are considered financial guarantees are recorded at fair value. Reserves for unfunded
commitments are recorded as an other liability on our Consolidated Balance Sheets.
Stock-Based Compensation: Compensation cost for equity-based awards is measured on the grant date based on the fair value of the award
on that date and recognized over the requisite service period, net of estimated forfeitures. Fair value of stock option awards is estimated using
a closed option valuation (Black-Scholes) model. Fair value of restricted stock awards is based upon the quoted market price of the common
stock on the date of grant.
Revenue from Contracts with Customers: We record revenue from contracts with customers in accordance with Accounting Standards
Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, we must identify the contract with a
customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the
performance obligations in the contract, and recognize revenue when (or as) we satisfy a performance obligation. Significant revenue has not
been recognized in the current reporting period that results from performance obligations satisfied in previous periods.
Our primary sources of revenue are derived from interest and dividends earned on loans, securities and other financial instruments that are
not within the scope of Topic 606. We have evaluated the nature of our contracts with customers and determined that further disaggregation
of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income
was not necessary.
We generally satisfy our performance obligations on contracts with customers as services are rendered, and the transaction prices are
typically fixed and charged either on a periodic basis (generally monthly) or based on activity. Because performance obligations are satisfied
as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects
the determination of the amount and timing of revenue from contracts with customers.
The following table depicts our sources of noninterest income presented in the Consolidated Statements of Income for the years ended
December 31, 2024, 2023 and 2022 that are scoped within Topic 606:
(Dollars in thousands)
2024
2023
2022
Service charges on deposit and sweep accounts
Credit and debit card fees
Payroll processing
Customer service fees
$
$
6,842
8,821
3,058
797
$
4,954
8,914
2,509
801
5,952
8,216
2,178
852
Service Charges on Deposit and Sweep Accounts: We earn fees from deposit and sweep customers for account maintenance, transaction-
based and overdraft services. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the
month reflecting the period over which we satisfy the performance obligation. Transaction-based fees, which include services such as stop
payment and returned item charges, are recognized at the time the transaction is executed as that is the point in time we fulfill the customer
request. Service charges on deposit and sweep accounts are withdrawn from the customer account balance.
(Continued)
F-44
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Credit and Debit Card Fees: We earn interchange income on our cardholder debit and credit card usage. Interchange income is primarily
comprised of fees whenever our debit and credit cards are processed through card payment networks such as Visa. Interchange fees from
cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction
processing services provided to the cardholder.
Payroll Processing Fees: We earn fees from providing payroll processing services for our commercial clients. Fees are assessed for
processing weekly or bi-weekly payroll files, reports and documents, as well as year-end tax-related files, reports and documents. Fees are
recognized and collected as payroll processing services are completed for each payroll run and year-end processing activities.
Customer Service Fees: We earn fees by providing a variety of other services to our customers, such as wire transfers, check ordering, sales
of cashier checks and money orders, and rentals of safe deposit boxes. Generally, fees are recognized and collected daily, concurrently with
the point in time we fulfill the customer request. Safe deposit box rentals are on annual contracts, with fees generally earned at the time of the
contract signing or renewal. Customer service fees are recorded as other noninterest income on our Consolidated Statements of Income.
Advertising Costs: Advertising costs are expensed as incurred.
Income Taxes: Income tax expense is the total of the current year income tax due or refundable, the change in deferred income tax assets and
liabilities, and any adjustments related to unrecognized tax benefits. Deferred income tax assets and liabilities are recognized for the tax
consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates
applicable to future years. A valuation allowance, if needed, reduces deferred income tax assets to the amount expected to be realized.
Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other
assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments
and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing on- and off-balance sheet financial instruments do not include the value
of anticipated future business or the values of assets and liabilities not considered financial instruments.
Earnings Per Share: Basic earnings per share is based on the weighted average number of common shares and participating securities
outstanding during the period. Diluted earnings per share include the dilutive effect of additional potential common shares issuable under our
stock-based compensation plans using the treasury stock method. Our unvested stock awards, which contain non-forfeitable rights to
dividends whether paid or unpaid (i.e., participating securities), are included in the number of shares outstanding for both basic and diluted
earnings per share calculations. In the event of a net loss, our unvested stock awards are excluded from the calculations of both basic and
diluted earnings per share.
Comprehensive Income (Loss): Comprehensive income (loss) consists of net income and other comprehensive income (loss). Accumulated
other comprehensive gain/(loss) includes unrealized gains and losses on securities available for sale. Accumulated other comprehensive
gain/(loss) was comprised of the following as of December 31, 2024, 2023 and 2022:
(Dollars in thousands)
2024
2023
2022
Unrealized gains (losses) on securities available for sale
Tax effect
Accumulated other comprehensive gain/(loss)
$
$
(63,070) $
13,245
(49,825) $
(63,906) $
13,419
(50,487) $
(82,710)
17,369
(65,341)
(Continued)
F-45
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Derivatives: Derivative financial instruments are recognized as assets or liabilities at fair value. The accounting for changes in the fair value
of derivatives depends on the use of the derivatives and whether the derivatives qualify for hedge accounting. Used as part of our asset and
liability management to help manage interest rate risk, our derivatives have historically generally consisted of interest rate swap agreements
that qualified for hedge accounting. We do not use derivatives for trading purposes. Changes in the fair value of derivatives that are
designated, for accounting purposes, as a hedge of the variability of cash flows to be received on various assets and liabilities and are
effective are reported in other comprehensive income. They are later reclassified into earnings in the same periods during which the hedged
transaction affects earnings and are included in the line item in which the hedged cash flows are recorded. If hedge accounting does not
apply, changes in the fair value of derivatives are recognized immediately in current earnings as interest income or expense. We had no
derivative instruments designated as hedges as of December 31, 2024 and 2023.
Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. We do not believe there are any such
matters outstanding that would have a material effect on the financial statements.
Recent Accounting Changes Adopted: ASU No. 2023-07, Segment Reporting (Topic 323): Improvements to Reportable Segment
Disclosures. This ASU enhances disclosures of significant segment expenses by requiring entities to disclose significant segment expenses
regularly provided to the chief operating decision maker, extend certain annual disclosures to interim periods, and permit more than one
measure of segment profit or loss to be reported under certain conditions. This ASU took effect for annual reporting periods beginning after
December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. We have adopted the standard and included
the required disclosures in our financial statements.
ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU modifies the rules on income tax
disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations
before income tax expense or benefit (separated between domestic and foreign) and (3) income tax expense or benefit from continuing
operations (separated by federal, state and foreign). This ASU also requires entities to disclose their income tax payments to international,
federal, state and local jurisdictions, among other changes. This ASU takes effect in reporting periods beginning after December 15, 2024,
with early adoption permitted. We have adopted the standard and included the required disclosures in our financial statements.
(Continued)
F-46
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 2 – SECURITIES
The amortized cost and fair value of available for sale securities and the related pre-tax gross unrealized gains and losses recognized in
accumulated other comprehensive gain/(loss) were as follows at year-end 2024 and 2023:
(Dollars in thousands)
2024
U.S. Government agency debt obligations
Mortgage-backed securities
Municipal general obligation bonds
Municipal revenue bonds
Other investments
2023
U.S. Government agency debt obligations
Mortgage-backed securities
Municipal general obligation bonds
Municipal revenue bonds
Other investments
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
$
$
542,676
31,696
187,484
31,066
500
793,422
442,496
35,168
172,126
30,708
500
680,998
$
$
$
$
131
4
513
89
0
737
0
20
1,924
262
0
2,206
$
$
$
$
(47,226) $
(6,332)
(7,827)
(2,422)
0
(63,807) $
(52,000) $
(5,715)
(6,190)
(2,207)
0
(66,112) $
495,581
25,368
180,170
28,733
500
730,352
390,496
29,473
167,860
28,763
500
617,092
Securities with unrealized losses at year-end 2024 and 2023, aggregated by investment category and length of time that individual securities
have been in a continuous loss position, are as follows:
(Dollars in thousands)
Description of Securities
2024
U.S. Government agency debt
obligations
Mortgage-backed securities
Municipal general obligation bonds
Municipal revenue bonds
Other investments
2023
U.S. Government agency debt
obligations
Mortgage-backed securities
Municipal general obligation bonds
Municipal revenue bonds
Other investments
Less than 12 Months
Fair
Value
Unrealized
Loss
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
$
$
$
$
113,942
194
63,387
2,840
0
180,363
0
114
1,109
1,506
0
2,729
$
$
$
$
2,379
1
1,117
28
0
3,525
0
0
6
8
0
14
$
$
$
$
361,171
24,865
92,153
21,865
0
500,054
390,496
28,749
106,171
20,602
0
546,018
$
$
$
$
44,847
6,331
6,710
2,394
0
60,282
52,000
5,715
6,184
2,199
0
66,098
$
$
$
$
475,113
25,059
155,540
24,705
0
680,417
390,496
28,863
107,280
22,108
0
548,747
$
$
$
$
47,226
6,332
7,827
2,422
0
63,807
52,000
5,715
6,190
2,207
0
66,112
(Continued)
F-47
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 2 – SECURITIES (Continued)
We evaluate securities in an unrealized loss position at least quarterly. Consideration is given to the financial condition of the issuer, and the
intent and ability we have to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair
value. For those debt securities whose fair value is less than their amortized cost basis, we also consider our intent to sell the security,
whether it is more likely than not that we will be required to sell the security before recovery and if we do not expect to recover the entire
amortized cost basis of the security. In analyzing an issuer’s financial condition, we may consider whether the securities are issued by the
federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s
financial condition.
At December 31, 2024, 843 debt securities with estimated fair values totaling $680 million had unrealized losses aggregating $63.8 million.
At December 31, 2023, 641 debt securities with estimated fair values totaling $549 million had unrealized losses aggregating $66.1 million.
At December 31, 2024, unrealized losses aggregating $53.6 million were attributable to bonds issued or guaranteed by agencies of the U.S.
federal government, while unrealized losses totaling $10.2 million were associated with bonds issued by state-based municipalities. After
considering the issuers of the bonds and taking into account the fact that no municipal issuer had been subject to a credit rating downgrade by
bond credit rating agencies, we determined that the unrealized losses were due to changing interest rate environments. As we do not intend to
sell our debt securities before recovery of their cost basis and we believe it is more likely than not that we will not be required to sell our debt
securities before recovery of the cost basis, no unrealized losses are deemed to represent credit losses.
The amortized cost and fair values of debt securities at December 31, 2024, by maturity, are shown in the following table. The contractual
maturity is utilized for U.S. Government agency debt obligations and municipal bonds. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due
at a single maturity date, primarily mortgage-backed securities, are shown separately.
(Dollars in thousands)
Due in one year or less
Due from one to five years
Due from five to ten years
Due after ten years
Mortgage-backed securities
Other investments
Amortized
Cost
Fair
Value
$
$
57,905
325,614
314,543
63,164
31,696
500
793,422
$
$
56,773
304,620
281,808
61,283
25,368
500
730,352
No securities were sold during the last three years.
Securities issued by the State of Michigan and all its political subdivisions had a combined amortized cost of $219 million and $203 million
at December 31, 2024 and December 31, 2023, respectively, with estimated market values of $209 million and $197 million at the respective
dates. We had no securities issued by all other states and their political subdivisions as of December 31, 2024 or December 31, 2023. Total
securities of any other specific issuer, other than the U.S. Government and its agencies and the State of Michigan and all its political
subdivisions, did not exceed 10% of shareholders’ equity.
The carrying value of U.S. Government agency debt obligations and mortgage-backed securities that are pledged to secure repurchase
agreements was $122 million and $230 million at December 31, 2024 and 2023, respectively. The carrying value of U.S. Government agency
debt obligations that are pledged to secure specific customer deposits was $11.7 million as of December 31, 2024. We had no U.S.
Government agency debt obligations pledged to specific customer deposits as of December 31, 2023. Investments in FHLBI stock are
restricted and may only be resold to, or redeemed by, the issuer.
(Continued)
F-48
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES
Commercial loans are divided among five segments based primarily on collateral type, risk characteristics, and primary and secondary
sources of repayment. These segments are then further stratified based on the commercial loan grade that is assigned using our standard loan
grading paradigm. Retail loans are divided into one of two groups based on risk characteristics and source of repayment. Our allowance for
credit loss pools are consistent with those used for loan note disclosure purposes.
Our loan portfolio segments as of December 31, 2024 were as follows:
o
Commercial Loans
■ Commercial and Industrial: Risks to this loan category include industry concentration and the practical limitations
associated with monitoring the condition of the collateral which often consists of inventory, accounts receivable, and
other non-real estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general
economic conditions and other events can cause cash flows to fall to levels insufficient to service debt.
■ Owner Occupied Commercial Real Estate: Risks to this loan category include industry concentration and the inability
to monitor the condition of the collateral. Declines in general economic conditions and other events can cause cash
flows to fall to levels insufficient to service debt. Also, declines in real estate values and lack of suitable alternative
use for the properties are risks for loans in this category.
■ Non-Owner Occupied Commercial Real Estate: Loans in this category are susceptible to declines in occupancy rates,
business failure, and general economic conditions. Also, declines in real estate values and lack of suitable alternative
use for the properties are risks for loans in this category.
■ Multi-Family and Residential Rental: Risks to this loan category include industry concentration and the inability to
monitor the condition of the collateral. Loans in this category are susceptible to weakening general economic
conditions and increases in unemployment rates, as well as market demand and supply of similar property and the
resulting impact on occupancy rates, market rents, cash flow, and income-based real estate values. Also, the lack of a
suitable alternative use for the properties is a risk for loans in this category.
■ Vacant Land, Land Development and Residential Construction: Risks common to commercial construction loans are
cost overruns, changes in market demand for property, inadequate long-term financing arrangements, and declines in
real estate values. Residential construction loans are susceptible to those same risks as well as those associated with
residential mortgage loans. Changes in market demand for property could lead to longer marketing times resulting in
higher carrying costs, declining values, and higher interest rates.
o
Retail Loans
■
1-4 Family Mortgages: Residential mortgage loans are susceptible to weakening general economic conditions and
increases in unemployment rates and declining real estate values.
■ Other Consumer Loans: Risks common to these loans include regulatory risks, unemployment, and changes in local
economic conditions as well as the inability to monitor collateral consisting of personal property.
During 2023, we changed the segmentation of credit cards to business customers from other consumer loans to commercial and industrial
loans. This division of the credit card balances was done to better align the risk characteristics of the portfolio, which include the customer
type and source of repayment. Credit cards to business customers totaled $19.1 million and $17.8 million as of December 31, 2024 and
2023, respectively. We also changed the segmentation of home equity lines of credit from 1-4 family mortgage loans to other consumer
loans during the year ended December 31, 2023. Home equity lines of credit share many of the same risk characteristics of both segments,
however, losses are primarily driven by a lack of underlying collateral value during distressed situations as many of the loans are in a
second lien position, and thus, best segmented within the other consumer portfolio. Home equity lines of credit totaled $52.0 million and
$38.1 million as of December 31, 2024 and 2023, respectively.
(Continued)
F-49
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Year-end loans disaggregated by class of loan within the loan portfolio segments were as follows:
(Dollars in thousands)
Commercial:
Commercial and industrial
Vacant land, land development, and
residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and
residential rental
Total commercial
Retail:
1-4 family mortgages
Other consumer loans
Total retail
December 31, 2024
%
Balance
December 31, 2023
%
Balance
Percent
Increase
(Decrease)
$
1,287,308
28.0% $
1,254,586
29.2%
2.6%
66,936
748,837
1,128,404
475,819
3,707,304
827,597
65,880
893,477
1.5
16.3
24.5
10.3
80.6
18.0
1.4
19.4
74,753
717,667
1,035,684
332,609
3,415,299
837,406
51,053
888,459
1.7
16.7
24.1
7.7
79.4
19.5
1.1
20.6
(10.5)
4.3
9.0
43.1
8.5
(1.2)
29.0
0.6
Total loans
$
4,600,781
100.0% $
4,303,758
100.0%
6.9%
Concentrations within the loan portfolio were as follows at year end:
(Dollars in thousands)
Commercial real estate loans to lessors of non-residential
buildings
2024
2023
Percentage
of
Loan
Portfolio
Balance
Percentage
of
Loan
Portfolio
Balance
$
822,402
17.9% $
754,611
17.5%
(Continued)
F-50
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
An age analysis of past due loans is as follows as of December 31, 2024:
(Dollars in thousands)
Commercial:
Commercial and industrial
Vacant land, land development, and
residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and
residential rental
Total commercial
Retail:
1-4 family mortgages
Other consumer loans
Total retail
30 – 59
Days
Past Due
60 – 89
Days
Past Due
Greater
Than 89
Days
Past Due
Total
Past Due
Current
Total
Loans
Recorded
Balance >
89
Days and
Accruing
$
5
$
12
0
0
0
17
2,365
112
2,477
0
0
0
0
0
0
713
0
713
$
864
$
869
$1,286,439
$1,287,308
$
0
0
0
0
864
182
0
182
12
0
0
0
881
66,924
748,837
1,128,404
66,936
748,837
1,128,404
475,819
3,706,423
475,819
3,707,304
3,260
112
3,372
824,337
65,768
890,105
827,597
65,880
893,477
0
0
0
0
0
0
0
0
0
0
Total past due loans
$
2,494
$
713
$
1,046
$
4,253
$4,596,528
$4,600,781
$
(Continued)
F-51
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
An age analysis of past due loans is as follows as of December 31, 2023:
30 – 59
Days
Past Due
60 – 89
Days
Past Due
Greater
Than 89
Days
Past Due
Total
Past Due
Current
Total
Loans
Recorded
Balance >
89
Days and
Accruing
(Dollars in thousands)
Commercial:
$
Commercial and industrial
Vacant land, land development, and
residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and
residential rental
Total commercial
Retail:
1-4 family mortgages
Other consumer loans
Total retail
$
4
0
0
0
0
4
934
97
1,031
0
0
0
0
0
0
145
0
145
$
249
$
253
$1,254,333
$1,254,586
$
0
70
0
0
319
38
0
38
0
70
0
0
323
74,753
717,597
1,035,684
74,753
717,667
1,035,684
332,609
3,414,976
332,609
3,415,299
1,117
97
1,214
836,289
50,956
887,245
837,406
51,053
888,459
Total past due loans
$
1,035
$
145
$
357
$
1,537
$4,302,221
$4,303,758
$
0
0
0
0
0
0
0
0
0
0
(Continued)
F-52
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Nonaccrual loans as of December 31, 2024 were as follows:
(Dollars in thousands)
With no allowance recorded:
Commercial:
Commercial and industrial
Vacant land, land development and residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
1-4 family mortgages
Other consumer loans
Total retail
Total with no allowance recorded
With an allowance recorded:
Commercial:
Commercial and industrial
Vacant land, land development and residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
1-4 family mortgages
Other consumer loans
Total retail
Total with an allowance recorded
Total nonaccrual loans:
Commercial
Retail
Total nonaccrual loans
Recorded
Principal
Balance
Related
Allowance
$
615
0
42
0
0
657
1,167
0
1,167
1,824
$
$
2,110
0
0
0
0
2,110
1,808
0
1,808
0
0
0
0
0
0
0
0
0
0
1,732
0
0
0
0
1,732
402
0
402
3,918
$
2,134
2,767
2,975
5,742
$
$
1,732
402
2,134
$
$
$
$
$
$
Nonaccrual loans represent the entire balance of collateral dependent loans. As of December 31, 2024 and 2023, all collateral dependent
loans were secured by real estate, with the exception of those classified as commercial and industrial, which were secured by accounts
receivable, inventory, and equipment. Interest income recognized on nonaccrual loans totaled $0.3 million in 2024, $0.2 million
in 2023 and less than $0.1 million in 2022, reflecting the collection of interest at the time of principal pay-off.
(Continued)
F-53
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Nonaccrual loans as of December 31, 2023 were as follows:
Recorded
Principal
Balance
Related
Allowance
$
$
$
$
$
$
$
0
0
70
0
0
70
2,272
0
2,272
2,342
$
$
249
0
0
0
0
249
824
0
824
1,073
$
319
3,096
3,415
$
$
0
0
0
0
0
0
0
0
0
0
1
0
0
0
0
1
240
0
240
241
1
240
241
(Dollars in thousands)
With no allowance recorded:
Commercial:
Commercial and industrial
Vacant land, land development and residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
1-4 family mortgages
Other consumer loans
Total retail
Total with no allowance recorded
With an allowance recorded:
Commercial:
Commercial and industrial
Vacant land, land development and residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
1-4 family mortgages
Other consumer loans
Total retail
Total with an allowance recorded
Total nonaccrual loans:
Commercial
Retail
Total nonaccrual loans
(Continued)
F-54
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Nonaccrual loans as of December 31, 2022 were as follows:
Recorded
Principal
Balance
Related
Allowance
$
249
0
0
0
0
249
1,064
0
1,064
1,313
$
$
5,775
0
248
0
0
6,023
392
0
824
0
0
0
0
0
0
0
0
0
0
2,051
0
32
0
0
2,083
200
0
240
9,415
$
2,283
6,272
1,456
7,728
$
$
2,083
200
2,283
$
$
$
$
$
$
(Dollars in thousands)
With no allowance recorded:
Commercial:
Commercial and industrial
Vacant land, land development and residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
1-4 family mortgages
Other consumer loans
Total retail
Total with no allowance recorded
With an allowance recorded:
Commercial:
Commercial and industrial
Vacant land, land development and residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
1-4 family mortgages
Other consumer loans
Total retail
Total with an allowance recorded
Total nonaccrual loans:
Commercial
Retail
Total nonaccrual loans
(Continued)
F-55
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Credit Quality Indicators. We utilize a comprehensive grading system for our commercial loans. All commercial loans are graded on a ten
grade rating system. The rating system utilizes standardized grade paradigms that analyze several critical factors such as cash flow, operating
performance, financial condition, collateral, industry condition and management. All commercial loans are reviewed and graded at inception
and, if appropriate, re-graded at various intervals thereafter. The risk assessment for retail loans is primarily based on the type of collateral.
Loans by credit quality indicators were as follows as of December 31, 2024:
Commercial credit exposure – credit risk profiled by internal credit risk grades:
(Dollars in thousands)
Internal credit risk grade groupings:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total commercial
Commercial
Vacant Land,
Land
Development,
and Residential
Construction
Commercial
and
Industrial
Commercial
Real Estate -
Owner
Occupied
Commercial
Real Estate -
Non-Owner
Occupied
Commercial
Real Estate -
Multi-Family
and Residential
Rental
$
$
629,851
637,183
20,274
1,287,308
$
$
25,191
41,740
5
66,936
$
$
466,400
275,506
6,931
748,837
$
$
432,244
688,178
7,982
1,128,404
$
$
173,109
302,100
610
475,819
Retail credit exposure – credit risk profiled by collateral type:
(Dollars in thousands)
Performing
Nonperforming
Total retail
Loans by credit quality indicators were as follows as of December 31, 2023:
Commercial credit exposure – credit risk profiled by internal credit risk grades:
Retail
1-4 Family
Mortgages
Retail
Other
Consumer Loans
$
$
824,622
2,975
827,597
$
$
65,880
0
65,880
(Dollars in thousands)
Internal credit risk grade groupings:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total commercial
Commercial
Vacant Land,
Land
Development,
and Residential
Construction
Commercial
and
Industrial
Commercial
Real Estate -
Owner
Occupied
Commercial
Real Estate -
Non-Owner
Occupied
Commercial
Real Estate -
Multi-Family
and Residential
Rental
$
$
724,156
505,807
24,623
1,254,586
$
$
34,944
39,719
90
74,753
$
$
468,339
248,802
526
717,667
$
$
451,019
573,771
10,894
1,035,684
$
$
172,455
147,903
12,251
332,609
Retail credit exposure – credit risk profiled by collateral type:
(Dollars in thousands)
Performing
Nonperforming
Total retail
Retail
1-4 Family
Mortgages
Retail
Other
Consumer Loans
$
$
834,310
3,096
837,406
$
$
51,053
0
51,053
(Continued)
F-56
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
All commercial loans are graded using the following criteria:
Grade 1.
“Exceptional” Loans with this rating contain very little, if any, risk.
Grade 2.
Grade 3.
Grade 4.
Grade 5.
Grade 6.
Grade 7.
Grade 8.
“Outstanding” Loans with this rating have excellent and stable sources of repayment and conform to bank policy and
regulatory requirements.
“Very Good” Loans with this rating have strong sources of repayment and conform to bank policy and regulatory
requirements. These are loans for which repayment risks are acceptable.
“Good” Loans with this rating have solid sources of repayment and conform to bank policy and regulatory requirements.
These are loans for which repayment risks are modest.
“Acceptable” Loans with this rating exhibit acceptable sources of repayment and conform with most bank policies and all
regulatory requirements. These are loans for which repayment risks are satisfactory.
“Monitor” Loans with this rating are considered to have emerging weaknesses which may include negative current cash
flow, high leverage, or operating losses. Generally, if further deterioration is observed, these credits will be downgraded to
the criticized asset report.
“Special Mention” Loans with this rating have potential weaknesses that deserve management’s close attention. If left
uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at some future
date.
“Substandard” Loans with this rating are inadequately protected by current sound net worth, paying capacity of the
obligor, or of the pledged collateral, if any. A Substandard loan normally has one or more well-defined weaknesses that
jeopardize the repayment of the debt. They are characterized by the distinct possibility of loss if the deficiencies are not
corrected.
Grade 9.
“Doubtful” Loans with this rating exhibit all the weaknesses inherent in the Substandard classification and where
collection or liquidation in full is highly questionable and improbable.
Grade 10.
“Loss” Loans with this rating are considered uncollectable, and of such little value that continuance as an active asset is
not warranted.
The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of collateral, and
timeliness of scheduled payments. We have a policy of requesting and reviewing periodic financial statements from commercial loan
customers and employ a disciplined and formalized review of the existence of collateral and its value. The primary risk element with respect
to each residential real estate loan and consumer loan is the timeliness of scheduled payments; loans 90 days or more past due are considered
nonperforming. We have a reporting system that monitors past due loans and have adopted policies to pursue creditors’ rights in order to
preserve our collateral position.
(Continued)
F-57
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table reflects loan balances as of December 31, 2024 based on year of origination:
(Dollars in thousands)
Commercial:
Commercial and Industrial:
2024
2023
2022
2021
2020
Prior
Term Total
Revolving
Loans
Grand
Total
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Current-period gross write-offs
$ 102,898
188,267
4,813
$ 295,978
0
$
$ 68,536
88,471
401
$ 157,408
0
$
$ 41,609
31,755
3,436
$ 76,800
0
$
$ 47,534
13,513
262
$ 61,309
0
$
$
9,551
3,298
69
$ 12,918
3,741
$
$
8,412
2,019
0
$ 10,431
0
$
$ 278,540
327,323
8,981
$ 614,844
3,741
$
$ 351,311
309,860
11,293
$ 672,464
9
$
$ 629,851
637,183
20,274
$ 1,287,308
3,750
$
Vacant Land, Land Development and
Residential Construction:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Current-period gross write-offs
Real Estate – Owner Occupied:
$
$
$
18,536
31,692
0
50,228
0
$
4,997
7,681
5
$ 12,683
0
$
$
$
$
610
1,855
0
2,465
0
$
$
$
645
49
0
694
0
$
$
$
177
0
0
177
0
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Current-period gross write-offs
$ 179,763
108,316
714
$ 288,793
0
$
$ 84,641
61,998
0
$ 146,639
0
$
$ 88,794
52,072
6,184
$ 147,050
0
$
$ 75,702
21,833
0
$ 97,535
0
$
$ 34,031
12,386
33
$ 46,450
0
$
$
$
$
$
$
$
226
463
0
689
0
$
$
$
25,191
41,740
5
66,936
0
$
$
$
0
0
0
0
0
$
$
$
25,191
41,740
5
66,936
0
3,469
5,611
0
9,080
0
$ 466,400
262,216
6,931
$ 735,547
0
$
$
0
13,290
0
$ 13,290
0
$
$ 466,400
275,506
6,931
$ 748,837
0
$
Real Estate – Non-Owner Occupied:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Current-period gross write-offs
$
84,773
194,634
7,982
$ 287,389
0
$
$ 79,911
220,681
0
$ 300,592
0
$
$ 76,468
84,897
0
$ 161,365
0
$
$ 93,034
91,569
0
$ 184,603
0
$
$ 84,355
85,828
0
$ 170,183
0
$
$ 13,703
10,569
0
$ 24,272
0
$
$ 432,244
688,178
7,982
$ 1,128,404
0
$
$
$
$
0
0
0
0
0
$ 432,244
688,178
7,982
$ 1,128,404
0
$
Real Estate – Multi-Family and
Residential Rental:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Current-period gross write-offs
Total Commercial
Current-period gross write-offs
Retail:
1-4 Family Mortgages:
Performing
Nonperforming
Total
Current-period gross write-offs
Other Consumer Loans:
Performing
Nonperforming
Total
Current-period gross write-offs
Total Retail
Current-period gross write-offs
$
16,271
81,919
47
98,237
$
0
$
$ 1,020,625
0
$
$ 46,870
174,468
0
$ 221,338
0
$
$ 838,660
0
$
$ 10,107
32,506
0
$ 42,613
0
$
$ 430,293
0
$
$ 62,744
4,559
0
$ 67,303
0
$
$ 411,444
0
$
$ 33,337
5,626
563
$ 39,526
0
$
$ 269,254
3,741
$
$
3,780
2,985
0
6,765
$
0
$
$ 51,237
0
$
$ 173,109
302,063
610
$ 475,782
0
$
$ 3,021,513
3,741
$
$
0
37
0
37
$
0
$
$ 685,791
9
$
$ 173,109
302,100
610
$ 475,819
0
$
$ 3,707,304
3,750
$
$
$
$
$
$
$
$
$
72,349
0
72,349
0
$ 122,718
89
$ 122,807
0
$
$ 307,161
1,626
$ 308,787
0
$
5,863
0
5,863
10
78,212
10
$
3,008
0
3,008
$
$
1
$ 125,815
1
$
$
1,428
0
1,428
$
$
19
$ 310,215
19
$
$ 203,052
439
$ 203,491
33
$
0
$
732
0
732
$
$
8
$ 204,223
41
$
$ 73,052
0
$ 73,052
0
$
$ 46,290
821
$ 47,111
0
$
$ 824,622
2,975
$ 827,597
33
$
$
$
$
0
0
0
0
$ 824,622
2,975
$ 827,597
33
$
$
361
0
361
$
$
0
$ 73,413
0
$
$
653
0
653
$
$
5
$ 47,764
5
$
$
12,045
0
12,045
$
$
43
$ 839,642
76
$
$ 53,835
0
$ 53,835
$
11
$ 53,835
11
$
$
65,880
0
65,880
$
$
54
$ 893,477
87
$
Grand Total
Current-period gross write-offs
$ 1,098,837
10
$
$ 964,475
1
$
$ 740,508
19
$
$ 615,667
41
$
$ 342,667
3,741
$
$ 99,001
5
$
$ 3,861,155
3,817
$
$ 739,626
20
$
$ 4,600,781
3,837
$
There were lines of credit with principal balances of $9.1 million as of December 31, 2023 that were converted to term loans during 2024.
(Continued)
F-58
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table reflects loan balances as of December 31, 2023 based on year of origination:
(Dollars in thousands)
Commercial:
Commercial and Industrial:
2023
2022
2021
2020
2019
Prior
Term Total
Revolving
Loans
Grand
Total
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Current-period gross write-offs
$ 103,531
174,668
3,671
$ 281,870
0
$
$ 79,883
57,979
2,122
$ 139,984
0
$
$ 90,107
20,075
277
$ 110,459
0
$
$ 20,577
18,361
0
$ 38,938
0
$
$
5,978
7,450
0
$ 13,428
0
$
Vacant Land, Land Development and
Residential Construction:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Current-period gross write-offs
Real Estate – Owner Occupied:
$
$
$
24,875
17,799
9
42,683
0
$
6,570
21,244
0
$ 27,814
0
$
$
$
$
1,108
138
0
1,246
0
$
$
$
2,110
2
0
2,112
0
$
$
$
0
40
0
40
0
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Current-period gross write-offs
$ 205,379
111,197
0
$ 316,576
0
$
$ 110,130
63,271
417
$ 173,818
14
$
$ 85,982
27,729
0
$ 113,711
0
$
$ 47,630
27,029
38
$ 74,697
0
$
$ 14,362
9,419
0
$ 23,781
0
$
$
$
$
$
$
$
$
$
$
9,160
119
0
9,279
0
$ 309,236
278,652
6,070
$ 593,958
0
$
$ 414,920
227,155
18,553
$ 660,628
218
$
$ 724,156
505,807
24,623
$ 1,254,586
218
$
281
496
81
858
0
$
$
$
34,944
39,719
90
74,753
0
$
$
$
0
0
0
0
0
$
$
$
34,944
39,719
90
74,753
0
2,908
439
71
3,418
40
$ 466,391
239,084
526
$ 706,001
54
$
$
1,948
9,718
0
$ 11,666
0
$
$ 468,339
248,802
526
$ 717,667
54
$
Real Estate – Non-Owner Occupied:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Current-period gross write-offs
$ 109,125
233,471
10,894
$ 353,490
0
$
$ 84,912
118,464
0
$ 203,376
0
$
$ 113,846
109,238
0
$ 223,084
0
$
$ 102,279
88,315
0
$ 190,594
0
$
$ 27,664
6,148
0
$ 33,812
0
$
$ 13,193
18,135
0
$ 31,328
0
$
$ 451,019
573,771
10,894
$ 1,035,684
0
$
$
$
$
0
0
0
0
0
$ 451,019
573,771
10,894
$ 1,035,684
0
$
Real Estate – Multi-Family and
Residential Rental:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Current-period gross write-offs
Total Commercial
Current-period gross write-offs
Retail:
1-4 Family Mortgages:
Performing
Nonperforming
Total
Current-period gross write-offs
Other Consumer Loans:
Performing
Nonperforming
Total
Current-period gross write-offs
Total Retail
Current-period gross write-offs
$
36,038
72,916
11,250
$ 120,204
0
$
$ 1,114,823
0
$
$ 28,512
55,964
0
$ 84,476
0
$
$ 629,468
14
$
$ 64,244
4,816
0
$ 69,060
0
$
$ 517,560
0
$
$ 35,129
9,372
1,001
$ 45,502
0
$
$ 351,843
0
$
$
4,883
2,699
0
7,582
$
0
$
$ 78,643
0
$
$
3,649
2,136
0
5,785
$
0
$
$ 50,668
40
$
$ 172,455
147,903
12,251
$ 332,609
0
$
$ 2,743,005
54
$
$
0
0
0
0
$
0
$
$ 672,294
218
$
$ 172,455
147,903
12,251
$ 332,609
0
$
$ 3,415,299
272
$
$ 133,823
108
$ 133,931
0
$
$ 332,098
1,728
$ 333,826
174
$
$ 231,842
305
$ 232,147
0
$
$ 82,002
0
$ 82,002
0
$
$ 10,515
10
$ 10,525
0
$
$ 44,003
945
$ 44,948
240
$
$ 834,283
3,096
$ 837,379
414
$
$
$
$
27
0
27
0
$ 834,310
3,096
$ 837,406
414
$
$
5,138
0
5,138
$
$
3
$ 139,069
3
$
$
2,569
0
2,569
$
$
16
$ 336,395
190
$
$
1,664
0
1,664
$
$
0
$ 233,811
0
$
$
608
0
608
$
$
0
$ 82,610
0
$
$
651
0
651
$
$
0
$ 11,176
0
$
$
716
0
716
$
$
3
$ 45,664
243
$
$
11,346
0
11,346
$
$
22
$ 848,725
436
$
$ 39,707
0
$ 39,707
$
155
$ 39,734
155
$
$
51,053
0
51,053
$
$
177
$ 888,459
591
$
Grand Total
Current-period gross write-offs
$ 1,253,892
3
$
$ 965,863
204
$
$ 751,371
0
$
$ 434,453
0
$
$ 89,819
0
$
$ 96,332
283
$
$ 3,591,730
490
$
$ 712,028
373
$
$ 4,303,758
863
$
There were lines of credit with principal balances of $6.4 million as of December 31, 2022 that were converted to term loans during 2023.
(Continued)
F-59
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
We use a migration to loss methodology to determine historical loss rates for commercial loans given the comprehensive loan grading
process employed by our bank for over two decades, while an open pool approach is best suited for retail loans given the smaller dollar size
of the segments. A baseline loss rate is produced at each reporting date for each loan portfolio segment using bank-specific loan charge-off
and recovery data over a defined historical look-back period. The look-back period represents the number of data periods that will be used to
calculate a baseline loss rate for each loan portfolio segment. We determined that the look-back period commencing on January 1, 2011
through the reporting date was reasonable and appropriate for the calculation of historical loss rates for both December 31, 2024 and 2023.
Our historical loss rate is then applied to future loan balances at the instrument level based on remaining contractual life adjusted for
amortization, prepayment and default to develop a baseline lifetime loss. Our prepayment speed assumptions are developed at the loan
segment level based upon the consideration of all relevant data in which we believe will impact anticipated customer behavior including
changes in interest rates, economic conditions, and underlying property valuations. For the commercial loan portfolio segments, we assumed
a 2% prepayment speed as of both December 31, 2024 and 2023 as we deemed there to be no considerable changes from historical
experience. For the retail 1-4 family mortgage and retail other consumer portfolios, we decreased the prepayment speed from 9.0% as of
December 31, 2023 to 7.8% as of December 31, 2024. This decrease extended the average lives of the portfolios in which the loss rates were
applied, resulting in an increase to the allowance of $1.3 million. This change in assumption was driven by higher long-term interest rates and
the composition of the underlying portfolios.
During each reporting period, we also consider the need to adjust the historical loss rates as determined to reflect the extent to which we
expect current conditions and reasonable and supportable economic forecasts to differ from the conditions that existed for the period over
which the historical loss information was determined. These qualitative adjustments may increase or decrease our estimate of expected future
credit losses. As of December 31, 2024 and 2023, we used a one-year reasonable and supportable economic forecast period, with a six-month
straight-line reversion period for all loan segments. The economic forecasts used for our December 31, 2024 and 2023 allowance calculations
reflected allowance balance reductions of $2.2 million and $2.0 million, respectively.
Individual loans exhibiting unique risk characteristics, which differentiate the loans from other loans within the loan segments and are
evaluated for expected credit losses on an individual basis, totaled $7.4 million and $5.4 million as of December 31, 2024 and 2023,
respectively. Individual allowance allocations totaled $2.2 million and $0.4 million as of December 31, 2024 and 2023, respectively.
(Continued)
F-60
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The allowance for credit losses for the year ended December 31, 2024 is as follows:
Commercial
vacant land,
land
Commercial
real estate –
development Commercial Commercial multi-family
Commercial
and
industrial
and
residential
construction
real estate –
owner
occupied
real estate –
non-owner
occupied
and
residential
rental
1-4
family
mortgages
Other
consumer
loans
Unallocated
Total
$
7,441 $
384 $
7,186 $
9,852 $
3,184 $ 18,986 $
2,881 $
0 $49,914
(Dollars in
thousands)
Allowance for
credit losses:
Beginning
balance
Provision for
credit losses
Charge-offs
Recoveries
Ending balance
$
7,109
(3,750)
365
11,165 $
(22)
0
5
367 $
314
0
171
7,671 $
1,067
0
0
468
0
15
(474)
(33)
223
10,919 $
3,667 $ 18,702 $
(1,089)
(54)
198
1,936 $
7,400
27
(3,837)
0
0
977
27 $54,454
The allowance for credit losses for the year ended December 31, 2023 is as follows:
Commercial
vacant land,
land
Commercial
real estate –
development Commercial Commercial multi-family
Commercial
and
industrial
and
residential
construction
real estate –
owner
occupied
real estate –
non-owner
occupied
and
residential
rental
1-4
family
mortgages
Other
consumer
loans
Unallocated
Total
$
10,203 $
490 $
5,914 $
9,242 $
2,191 $ 14,027 $
160 $
19 $42,246
90
0
0
0
0
(697)
607
0
0
10,293
490
5,914
9,242
2,191
13,330
767
19
42,246
(2,822)
(218)
188
7,441 $
$
(141)
0
35
384 $
1,255
(54)
71
7,186 $
610
0
0
9,852 $
967
0
26
5,638
(414)
432
3,184 $ 18,986 $
2,212
(177)
79
2,881 $
7,700
(19)
(863)
0
0
831
0 $49,914
(Dollars in
thousands)
Allowance for credit
losses:
Beginning balance
Credit risk
reclassifications
Balances,
December 31,
2022 after
reclassifications
Provision for
credit losses
Charge-offs
Recoveries
Ending balance
(Continued)
F-61
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The allowance for credit losses for the year ended December 31, 2022 is as follows:
Commercial
vacant land,
land
Commercial
real estate –
development Commercial Commercial multi-family
Commercial
and
industrial
and
residential
construction
real estate –
owner
occupied
real estate –
non-owner
occupied
and
residential
rental
1-4
family
mortgages
Home
equity
and
other
Unallocated
Total
$
10,782 $
420 $
6,045 $
12,990 $
2,006 $
2,449 $
626 $
45 $35,363
(1,571)
(43)
(560)
(2,534)
(621)
5,395
(411)
(55)
(400)
946
(171)
217
10,203 $
$
138
(29)
4
490 $
378
(38)
89
5,914 $
(1,214)
0
0
9,242 $
763
0
43
5,621
(33)
595
2,191 $ 14,027 $
(111)
(21)
77
160 $
6,550
29
(292)
0
0
1,025
19 $42,246
(Dollars in thousands)
Allowance for
credit losses:
Beginning
balance
Adoption of
ASU 2016-13
Provision for
credit losses
Charge-offs
Recoveries
Ending balance
(Continued)
F-62
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table presents the period-end amortized cost basis of modifications to borrowers experiencing financial difficulty by type of
modification made during the year ended:
(Dollars in thousands)
Commercial:
Commercial and industrial
Vacant land, land development
and residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and
residential rental
Total commercial
Retail:
1-4 family mortgages
Other consumer loans
Total retail
Total loans
Interest Rate
Reduction
December 31, 2024
Term
Extension
Principal
Forgiveness
Interest Rate
Reduction
December 31, 2023
Term
Extension
Principal
Forgiveness
$
$
$
$
0
0
0
0
0
0
0
0
0
0
$
6,574
$
0
42
0
0
6,616
0
0
0
6,616
$
$
$
$
$
$
0
0
0
0
0
0
0
0
0
0
$
$
$
$
0
0
0
0
0
0
0
0
0
0
$
17,919
$
0
0
10,894
0
28,813
0
0
0
28,813
$
$
$
$
$
$
0
0
0
0
0
0
0
0
0
0
Loans listed under Term Extension were generally granted a series of short-term maturity extensions as part of the workout process and
associated forbearance agreement.
The following table presents the period-end amortized cost basis of loans that have been modified in the past twelve months to borrowers
experiencing financial difficulty by payment status and loan segment:
(Dollars in thousands)
Commercial:
Commercial and industrial
Vacant land, land development and residential construction
Real estate – owner occupied
Real estate – non-owner occupied
Real estate – multi-family and residential rental
Total commercial
Retail:
1-4 family mortgages
Other consumer loans
Total retail
Total loans
Current
30 – 89 Days
Past Due
90 + Days
Past Due
Total
$
$
$
$
6,574
0
42
0
0
6,616
0
0
0
6,616
$
$
$
$
0
0
0
0
0
0
0
0
0
0
$
$
$
$
0
0
0
0
0
0
0
0
0
0
$
$
$
$
6,574
0
42
0
0
6,616
0
0
0
6,616
(Continued)
F-63
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 4 - PREMISES AND EQUIPMENT, NET
Year-end premises and equipment were as follows:
(Dollars in thousands)
Land and improvements
Buildings
Furniture and equipment
Less: accumulated depreciation
Total premises and equipment
2024
2023
$
$
$
14,021
62,365
26,657
103,043
49,616
53,427
$
12,782
56,778
25,157
94,717
43,789
50,928
Depreciation expense totaled $6.0 million in 2024, 2023 and 2022.
We enter into facility leases in the normal course of business. As of December 31, 2024, we were under lease contracts for eleven of our
branch facilities. The leases have maturity dates ranging from November, 2025 through May, 2048, with a weighted average life of 8.8 years
as of December 31, 2024. All of our leases have multiple three- to five-year extensions; however, these were not factored in the lease
maturities and weighted average lease term as it is not reasonably certain we will exercise the options.
Leases are classified as either operating or finance leases at the lease commencement date, with all of our current leases determined to be
operating leases. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent
our right to use an underlying asset for the lease term, while lease liabilities represent our obligation to make lease payments arising from the
lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date at the estimated present value of lease payments
over the lease term. We use our incremental borrowing rate, on a collateralized basis, at lease commencement to calculate the present value of
lease payments. The weighted average discount rate for leases was 6.70% as of December 31, 2024.
The right-of-use assets, included in premises and equipment, net on our Consolidated Balance Sheets, and the lease liabilities, included in
other liabilities on our Consolidated Balance Sheets, totaled $4.4 million and $3.7 million as of December 31, 2024, and December 31, 2023,
respectively. As permitted by applicable accounting standards, we have elected not to recognize short-term leases with original terms of
twelve months or less on our Consolidated Balance Sheets. Total operating lease expense associated with the leases aggregated $1.6 million,
$2.0 million and $1.3 million in 2024, 2023 and 2022, respectively.
Future lease payments were as follows as of December 31, 2024:
(Dollars in thousands)
2025
2026
2027
2028
2029
Thereafter
Total undiscounted lease payments
Less effect of discounting
Present value of future lease payments (lease liability)
$
1,053
1,162
1,094
966
761
1,037
6,073
(1,655)
4,418
(Continued)
F-64
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 5 – MORTGAGE LOAN SERVICING
Mortgage loans serviced for others are not reported as assets on the Consolidated Balance Sheets. The year-end aggregate unpaid principal
balances of mortgage loans serviced for others were as follows:
(Dollars in thousands)
2024
2023
Mortgage loan portfolios serviced for:
Federal Home Loan Mortgage Corporation
Federal Home Loan Bank
Other
Total mortgage loans serviced for others
$
$
1,364,485
176,540
9,805
1,550,830
$
$
1,341,602
62,786
0
1,404,388
Custodial escrow balances, which are reported as deposits on the Consolidated Balance Sheets, maintained in connection with serviced loans
were $10.9 million and $10.1 million as of December 31, 2024 and 2023, respectively.
Activity for capitalized mortgage loan servicing rights, which are reported as other assets on the Consolidated Balance Sheets, during 2024
and 2023 was as follows:
(Dollars in thousands)
Balance at beginning of year
Additions
Amortized to expense
Balance at end of year
2024
2023
$
$
$
11,343
4,465
(3,333)
11,837
2,259
(2,753)
12,475
$
11,343
Mortgage servicing rights result from our mortgage loan origination activities. Late and ancillary fees, included as part of mortgage banking
income and reported as noninterest income in the Consolidated Statements of Income, aggregated less than $0.1 million during 2024 and
2023.
We determined that no valuation allowance was necessary as of December 31, 2024 or December 31, 2023. The estimated fair value of
mortgage servicing rights was $21.0 million and $19.3 million as of December 31, 2024 and 2023, respectively. The fair value of mortgage
servicing rights is estimated using a valuation model that calculates the present value of estimated future net servicing cash flows, taking into
consideration expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined
based on current market conditions. As of December 31, 2024, fair value was determined using a discount rate of 10.50%, a weighted
average constant prepayment rate of 7.81%, depending on the stratification of the specific right, and a weighted average delinquency rate of
0.68%. As of December 31, 2023, fair value was determined using a discount rate of 11.00%, a weighted average constant prepayment rate of
7.44%, depending on the stratification of the specific right, and a weighted average delinquency rate of 0.29%.
The weighted average amortization period was 8.7 years and 8.6 years as of December 31, 2024 and 2023, respectively.
(Continued)
F-65
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 6 – DEPOSITS
Deposits at year end are summarized as follows:
(Dollars in thousands)
Noninterest-bearing checking
Interest-bearing checking
Money market
Savings
Time, under $100,000
Time, $100,000 and over
Total local deposits
December 31, 2024
%
Balance
December 31, 2023
%
Balance
Percent
Increase
(Decrease)
$
1,264,523
738,291
1,516,436
221,900
207,534
599,983
4,548,667
26.9% $
15.7
32.3
4.7
4.4
12.8
96.8
1,247,640
635,790
957,434
262,566
175,741
453,366
3,732,537
32.1%
16.3
24.5
6.7
4.5
11.6
95.7
4.3
1.4%
16.1
58.4
(15.5)
18.1
32.3
21.9
(11.1)
Out-of-area time, $100,000 and over
149,699
3.2
168,381
Total deposits
$
4,698,366
100.0% $
3,900,918
100.0%
20.4%
Out-of-area time deposits consist of deposits obtained from depositors outside of our primary market areas exclusively through deposit
brokers.
The following table depicts the maturity distribution for time deposits at year end:
(Dollars in thousands)
In one year or less
In one to two years
In two to three years
In three to four years
In four to five years
Total certificates of deposit
2024
2023
$
$
$
880,165
53,660
14,315
2,301
6,775
657,307
61,454
22,830
54,486
1,411
957,216
$
797,488
(Continued)
F-66
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 6 – DEPOSITS (Continued)
The following table depicts the maturity distribution for time deposits with balances of $100,000 or more at year end:
(Dollars in thousands)
Up to three months
Three months to six months
Six months to twelve months
Over twelve months
Total certificates of deposit
2024
2023
$
$
$
218,666
185,327
291,179
54,510
167,535
127,344
210,915
115,953
749,682
$
621,747
Time deposits of more than $250,000 totaled $570 million and $477 million at year-end 2024 and 2023, respectively.
Deposit overdrafts, which are reported as loans on the Consolidated Balance Sheets, totaled $1.0 million and $0.3 million as of December 31,
2024 and 2023, respectively.
NOTE 7 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information regarding securities sold under agreements to repurchase at year end is summarized below:
(Dollars in thousands)
2024
2023
Outstanding balance at year end
Weighted average interest rate at year end
Average daily balance during the year
Weighted average interest rate during the year
Maximum daily balance during the year
$
$
$
121,521
2.17%
224,878
3.43%
278,227
$
$
$
229,734
3.17%
204,334
1.33%
269,324
Securities sold under agreements to repurchase (“repurchase agreements”) generally have original maturities of less than one year.
Repurchase agreements are treated as financings, and the obligations to repurchase securities sold are reflected as liabilities on our
Consolidated Balance Sheets. Repurchase agreements are secured by securities with an aggregate fair value equal to the aggregate
outstanding balance of the repurchase agreements. The securities, which are included in securities available for sale on our Consolidated
Balance Sheets, are held in safekeeping by a correspondent bank. Repurchase agreements are offered principally to certain large deposit
customers.
NOTE 8 - FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES
FHLBI bullet advances totaled $360 million at December 31, 2024, and were expected to mature at varying dates from January 2025 through
January 2029, with fixed rates of interest from 0.70% to 4.54% and averaging 3.10%. FHLBI bullet advances totaled $440 million at
December 31, 2023, and were expected to mature at varying dates from January 2024 through December 2028, with fixed rates of interest
from 0.55% to 5.05% and averaging 2.93%.
(Continued)
F-67
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 8 - FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES (Continued)
Maturities of FHLBI bullet advances as of December 31, 2024 were as follows:
(Dollars in thousands)
2025
2026
2027
2028
2029
Thereafter
$
80,000
80,000
100,000
90,000
10,000
0
FHLBI amortizing advances totaled $27.1 million and $27.9 million as of December 31, 2024 and 2023, respectively, with an average fixed
rate of 2.52% and maturities in 2042. FHLBI amortizing advances are obtained periodically to assist in managing interest rate risk associated
with certain longer-term fixed rate commercial loans, with annual principal payments that closely align with the scheduled amortization of
the underlying commercial loans.
Scheduled principal payments on FHLBI amortizing advances as of December 31, 2024 were as follows:
(Dollars in thousands)
2025
2026
2027
2028
2029
Thereafter
$
862
900
938
979
1,022
22,382
Each advance is payable at its maturity date, and is subject to a prepayment fee if paid prior to the maturity date. The advances are
collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on
commercial real estate property loans, and substantially all other assets of our bank under a blanket lien arrangement. Our borrowing line of
credit as of December 31, 2024 totaled $1.0 billion, with remaining availability based on collateral of $634 million.
NOTE 9 - FEDERAL INCOME TAXES
The consolidated income tax expense was as follows:
(Dollars in thousands)
Current expense
Deferred benefit
Tax expense
2024
2023
2022
$
$
19,090
(397)
18,693
$
$
22,518
(2,036)
20,482
$
$
16,080
(1,353)
14,727
(Continued)
F-68
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 9 - FEDERAL INCOME TAXES (Continued)
A reconciliation of the differences between the federal income tax expense recorded and the amount computed by applying the federal
statutory rate to income before income taxes were as follows:
(Dollars in thousands)
2024
2023
2022
Amount
Percent
Amount
Percent
Amount
Percent
Tax at statutory rate
Increase (decrease) from
Tax-exempt interest
Bank owned life insurance
Non-deductible expenses
Tax credits
Other
Tax expense
$
20,640
21.0% $
21,567
21.0% $
15,915
(1,027)
(529)
241
(266)
(366)
18,693
$
(1.0)
(0.5)
0.2
(0.3)
(0.4)
19.0% $
(862)
(303)
213
24
(157)
20,482
(0.8)
(0.3)
0.2
-
(0.2)
19.9% $
(695)
(334)
129
(262)
(26)
14,727
21.0%
(0.9)
(0.4)
0.2
(0.3)
-
19.6%
The statutory tax rate was 21% for 2024, 2023 and 2022.
Significant components of deferred tax assets and liabilities, included in other assets on our Consolidated Balance Sheets, as of December 31,
2024 and 2023 were as follows:
(Dollars in thousands)
Deferred income tax assets
Allowance for credit losses
Deferred compensation
Stock compensation
Nonaccrual loan interest income
Unrealized loss on securities
Lease liability
Other
Deferred tax asset
Deferred income tax liabilities
Depreciation
Prepaid expenses
Mortgage loan servicing rights
Deferred loan fees and costs
Right of use lease asset
Business combination adjustments
Other
Deferred tax liability
$
2024
2023
$
11,435
269
1,011
192
13,245
928
567
27,647
259
685
2,620
471
928
1,626
849
7,438
10,482
226
1,005
132
13,420
775
779
26,819
337
612
2,382
509
775
1,770
447
6,832
Total net deferred tax asset
$
20,209
$
19,987
A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefits
related to such assets will not be realized. We determined that no valuation allowance was required at year-end 2024 or 2023. We had no
unrecognized tax benefits at any time during 2024 or 2023 and do not anticipate any significant increase in unrecognized tax benefits during
2025. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is our policy to record such accruals
in our income tax accounts; no such accruals existed at any time during 2024 or 2023. Our U.S. federal income tax returns are no longer
subject to examination for all years before 2021.
(Continued)
F-69
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 10 – STOCK-BASED COMPENSATION
Stock-based compensation plans are used to provide directors and employees with an increased incentive to contribute to our long-term
performance and growth, to align the interests of directors and employees with the interests of our shareholders through the opportunity for
increased stock ownership and to attract and retain directors and employees. Stock-based compensation, reported as noninterest expense in
the Consolidated Statements of Income, totaled $3.3 million, $3.4 million and $3.4 million in 2024, 2023 and 2022, respectively. The Stock
Incentive Plan of 2020 was approved by shareholders in May, 2020, and was effectively replaced with the Stock Incentive Plan of 2023 that
was approved by shareholders in May, 2023.
Grants included on the following tables were made under the various Stock Incentive Plans as follows:
●
●
Stock Incentive Plan of 2020
o
Restricted stock grants in 2021 and 2022
Stock Incentive Plan of 2023
o
Restricted stock grants in 2023
In addition, stock grants to directors as retainer payments during the years 2020 through 2022 were from the Stock Incentive Plan of 2020,
while stock grants to directors as retainer payments during 2024 and 2023 were from the Stock Incentive Plan of 2023.
Under the Stock Incentive Plan of 2020 and the Stock Incentive Plan of 2023, incentive awards may include, but are not limited to, stock
options, restricted stock, stock appreciation rights and stock awards. Incentive awards that are stock options or stock appreciation rights are
granted with an exercise price not less than the closing price of our common stock on the date of grant. Price, vesting and expiration date
parameters are determined by Mercantile’s Compensation Committee on a grant-by-grant basis. No payments are required from employees
for restricted stock awards. The restricted stock awards granted during the years 2021 through 2023 fully vest after three years and, in the
case of performance-based restricted stock issued to executive officers in 2020 through 2023, are subject to the attainment of pre-determined
performance goals. At year-end 2024, there were approximately 383,000 shares authorized for future incentive awards.
A summary of restricted stock activity during the year ended December 31, 2024 is as follows:
Nonvested at beginning of year
Vested
Forfeited
Nonvested at end of year
Shares
355,890
(115,762)
(11,482)
228,646
$
$
Weighted
Average
Fair Value
34.18
32.02
34.09
35.84
(Continued)
F-70
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 10 – STOCK-BASED COMPENSATION (Continued)
Of the restricted stock shares granted in 2023 and 2022, a total of 25,239 shares and 26,112 shares, respectively, are performance-based
awards made to our Named Executive Officers at the target level and are subject to the attainment of pre-determined performance goals.
We periodically grant shares of common stock to our Corporate and Bank Board Directors for retainer payments with the related expense
being recorded over the period of the Directors' service, as summarized below:
Grant Year
2021
2022
2023
2024
Shares Granted
Total Cost
(in thousands)
$
10,489
11,166
11,529
11,316
344
359
350
423
Covered Period
June 1, 2021 - May 31, 2022
June 1, 2022 - May 31, 2023
June 1, 2023 - May 31, 2024
June 1, 2024 - May 31, 2025
NOTE 11 – RELATED PARTIES
Certain directors and executive officers of our bank, including their immediate families and companies in which they are principal owners,
were loan customers of our bank. At year-end 2024 and 2023, our bank had $20.4 million and $124 million in loan commitments to directors
and executive officers, of which $7.8 million and $89.5 million were outstanding at year-end 2024 and 2023, respectively, as reflected in the
following table.
(Dollars in thousands)
Beginning balance
New loans
Repayments
Effect of changes in related parties
Ending balance
2024
2023
$
$
$
89,507
1,898
(3,788)
(79,847)
92,660
3,221
(5,410)
(964)
7,770
$
89,507
Related party deposits and repurchase agreements totaled $17.9 million and $20.7 million at year-end 2024 and 2023, respectively.
(Continued)
F-71
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 12 – COMMITMENTS AND OFF-BALANCE-SHEET RISK
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our
customers. These financial instruments include commitments to extend credit and standby letters of credit. Loan commitments to extend
credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of
credit are conditional commitments issued by our bank to guarantee the performance of a customer to a third party. Commitments generally
have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized, if any, in the balance sheet. Our
maximum exposure to loan loss in the event of nonperformance by the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual notional amount of those instruments. We use the same credit policies in
making commitments and conditional obligations as we do for on-balance sheet instruments. Collateral, such as accounts receivable,
securities, inventory, and property and equipment, is generally obtained based on management’s credit assessment of the borrower.
We are required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to
credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet
credit exposures is reported as an other liability on our Consolidated Balance Sheets and is increased or decreased via other noninterest
expense on our Consolidated Statements of Income. The calculation includes consideration of the likelihood that funding will occur and
forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same
aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be
funded.
For commercial lines of credit, retail lines of credit and credit card average outstanding balances, we determined allowance requirements by
calculating the difference between the average percent outstanding of the funded commitments over the past several years to actual percent
outstanding at period end and applying the respective expected loss allocation factors to the difference as this difference represents the
average of unfunded commitments we expect to eventually be drawn upon. For commitments to make loans, we determine an allowance by
applying the expected loss allocation factor to the amount expected to fund. The calculated allowance aggregated $1.0 million and $1.3
million as of December 31, 2024 and 2023, respectively. We do not reserve for residential mortgage construction loans, as the loans are for
one year or less and draws are governed by the receipt and satisfactory review of contractor and subcontractor sworn statements, lien waivers
and title insurance company endorsements. Letters of credit are rarely drawn.
(Continued)
F-72
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 12 – COMMITMENTS AND OFF-BALANCE-SHEET RISK (Continued)
At year-end 2024 and 2023, the rates on existing off-balance sheet instruments were substantially equivalent to current market rates,
considering the underlying credit standing of the counterparties.
Our maximum exposure to credit losses for loan commitments and standby letters of credit outstanding at year end was as follows:
(Dollars in thousands)
Commercial unused lines of credit
Unused lines of credit secured by 1 – 4 family residential properties
Credit card unused lines of credit
Other consumer unused lines of credit
Commitments to make loans
Standby letters of credit
Total commitments
2024
2023
$
$
1,488,782
84,298
172,273
33,892
295,566
26,491
1,557,429
74,120
142,096
50,063
270,403
19,393
$
2,101,302
$
2,113,504
Commitments to make commercial loans generally reflect our binding obligations to existing and prospective customers to extend credit,
including line of credit facilities secured by accounts receivable and inventory, and term loans secured by either real estate or equipment.
In most instances, commercial line of credit facilities have terms ranging from 12 to 24 months with floating rates tied to the Wall Street
Journal Prime Rate or 30-Day SOFR. Commercial term loans secured by real estate are generally at a floating rates tied to the Wall Street
Journal Prime Rate or 30-Day SOFR. Since the fourth quarter of 2020, a fixed rate option for commercial term loans secured by real estate is
generally not offered for loans over $2.5 million; instead, customers are offered participation in our back-to-back interest rate swap program
to achieve a desired fixed rate. For loans under $2.5 million, we offer a rate primarily equal to the commensurate cost of funds using FHLBI
advance rates as a proxy and a credit spread as indicated by the credit rating we assign. Commercial term loans secured by real estate
generally balloon within five years, with payments based on amortizations ranging from 10 to 25 years. Commercial term loans secured by
non-real estate collateral are generally at a floating rate tied to the Wall Street Journal Prime Rate or 30-Day SOFR, or a fixed rate primarily
equal to the commensurate cost of funds using FHLBI advance rates as a proxy and a credit spread as indicated by the credit rating we assign,
and generally mature and fully amortize within three to seven years. Effective January 1, 2022, we replaced the 30-Day Libor Rate with 30-
Day SOFR for all new and renewing floating rate commercial loans and commitments. Commercial loans tied to the 30-Day Libor Rate
outstanding on June 30, 2023 converted to an equivalent fallback SOFR Rate.
The following standby letters of credit are considered financial guarantees under current accounting guidance. These instruments are carried
at fair value as an other liability on our Consolidated Balance Sheets. Standby letters of credit are generally cross collateralized with the
borrowers’ other loans with us, and are included in our borrower collateral analyses.
(Dollars in thousands)
December 31, 2024
December 31, 2023
Contract
Amount
Carrying
Value
Contract
Amount
Carrying
Value
Standby letters of credit
$
26,491
$
175
$
19,393
$
99
(Continued)
F-73
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 13 – BENEFIT PLANS
We have a 401(k) benefit plan that covers substantially all of our employees. The percent of our matching contributions to the 401(k) benefit
plan is determined annually by the Board of Directors. The matching contribution has been 5.00% since April 1, 2018. Matching
contributions, if made, are immediately vested. Our 2024, 2023 and 2022 matching 401(k) contributions charged to expense were
$2.6 million, $2.3 million and $2.2 million, respectively.
We have a deferred compensation plan in which all persons serving on the Board of Directors may defer all or portions of their annual
retainer and meeting fees, with distributions to be paid upon termination of service as a director or specific dates selected by the director. We
also have a non-qualified deferred compensation program in which selected officers may defer all or portions of salary and bonus payments.
The deferred amounts, which totaled $1.3 million and $1.1 million as of December 31, 2024 and 2023, respectively, are categorized as other
liabilities in the Consolidated Balance Sheets, and are paid interest at a rate equal to the Wall Street Journal Prime Rate. Interest expense was
less than $0.1 million during 2024, 2023, and 2022.
The Mercantile Bank Corporation Employee Stock Purchase Plan of 2014 is a non-compensatory plan intended to encourage full- and part-
time employees of Mercantile and its subsidiaries to promote our best interests and to align employees’ interests with the interests of our
shareholders by permitting employees to purchase shares of our common stock through regular payroll deductions. Shares are purchased on
the last business day of each calendar quarter at a price equal to the consolidated closing bid price of our common stock reported on The
Nasdaq Stock Market. A total of 250,000 shares of common stock may be issued under the existing plan; however, the number of shares may
be adjusted to reflect any stock dividends and other changes in our capitalization. The number of shares issued totaled 1,194 and 1,410 in
2024 and 2023, respectively. As of December 31, 2024, there were approximately 233,000 shares available under our current plan.
NOTE 14 – DERIVATIVES AND HEDGING ACTIVITIES
We are exposed to certain risks arising from both business operations and economic conditions. We principally manage the exposure to a
wide variety of operational risks through core business activities. Economic risks, including interest rate, liquidity and credit risk, are
primarily administered via the amount, sources and duration of assets and liabilities. Derivative financial instruments may also be used to
assist in managing economic risks.
Derivatives not designated as hedges are not speculative and result from a service provided to certain commercial loan borrowers. We
execute interest rate swaps with commercial banking customers desiring longer-term fixed rate loans, while simultaneously entering into
interest rate swaps with correspondent banks to offset the impact of the interest rate swaps with the commercial banking customers. The net
result is the desired floating rate loans and a minimization of the risk exposure of the interest rate swap transactions. These swap agreements
are cross collateralized with the underlying loans.
As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both
the commercial banking customer interest rate swaps and the offsetting interest rate swaps with the correspondent banks are recognized
directly to earnings. Fees paid to us by the correspondent banks are recognized as noninterest income on our Consolidated Statements of
Income on the settlement date.
(Continued)
F-74
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 14 – DERIVATIVES AND HEDGING ACTIVITIES (Continued)
The fair values of derivative instruments as of December 31, 2024, are reflected in the following table.
(Dollars in thousands)
Notional Amount
Balance Sheet Location
Fair Value
Derivative Assets
Interest rate swaps
Derivative Liabilities
Interest rate swaps
$
866,157
Other Assets
$
864,130
Other Liabilities
26,793
27,050
The effect of interest rate swaps that are not designated as hedging instruments resulted in expense of $0.1 million during the year ended
December 31, 2024 that was recorded in other noninterest expense on our Consolidated Statement of Income. We have master netting
arrangements with our correspondent banks that allow us to net receivables and payables. The netting agreement also allows us to net related
cash collateral received and transferred up to the fair value exposure amount. We have elected to not offset these transactions on the
Consolidated Balance Sheets. The netting of derivative instruments as of December 31, 2024 is presented in the following table.
(Dollars in thousands)
Derivative Assets
Interest rate swaps
Derivative Liabilities
Interest rate swaps
Gross Amounts Not Offset on the Consolidated
Balance Sheet
Cash
Collateral
Received or
posted
Financial
Instruments
Net Amount
Net Amounts
Recognized
$
26,793
$
3,064
$
19,040
$
4,689
27,050
2,915
1,640
22,495
(Continued)
F-75
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 14 – DERIVATIVES AND HEDGING ACTIVITIES (Continued)
The fair values of derivative instruments as of December 31, 2023, are reflected in the following table.
(Dollars in thousands)
Notional Amount
Balance Sheet Location
Fair Value
Derivative Assets
Interest rate swaps
Derivative Liabilities
Interest rate swaps
$
676,526
Other Assets
$
674,499
Other Liabilities
27,505
27,964
The effect of interest rate swaps that are not designated as hedging instruments resulted in income of less than $0.1 million during the year
ended December 31, 2023 that was recognized in other noninterest expense on our Consolidated Statement of Income. The netting of
derivative instruments as of December 31, 2023 is presented in the following table.
(Dollars in thousands)
Derivative Assets
Interest rate swaps
Derivative Liabilities
Interest rate swaps
Gross Amounts Not Offset on the Consolidated
Balance Sheet
Cash
Collateral
Received or
posted
Financial
Instruments
Net Amount
Net Amounts
Recognized
$
27,505
$
5,175
$
14,010
$
8,320
27,964
5,175
3,120
19,669
(Continued)
F-76
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 15 – FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount, estimated fair value and level within the fair value hierarchy of financial instruments were as follows at year end:
(Dollars in thousands)
Financial assets
Cash and cash equivalents
Securities available for sale
Federal Home Loan Bank stock
Loans, net
Mortgage loans held for sale
Accrued interest receivable
Interest rate swaps
Financial liabilities
Deposits
Securities sold under agreements to
repurchase
Federal Home Loan Bank advances
Subordinated debentures
Subordinated notes
Accrued interest payable
Interest rate swaps
Level in
Fair Value
Hierarchy
2024
2023
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Level 1
(1)
(2)
Level 3
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
$
$
393,010
730,352
21,513
4,546,327
15,824
21,401
26,793
$
393,010
730,352
21,513
4,558,628
16,047
21,401
26,793
$
130,533
617,092
21,513
4,253,844
18,607
19,806
27,505
130,533
617,092
21,513
4,191,644
19,027
19,806
27,505
4,698,366
4,541,896
3,900,918
3,814,778
121,521
387,083
50,330
89,314
10,201
27,050
121,521
374,499
50,336
81,825
10,201
27,050
229,734
467,910
49,644
88,971
9,012
27,964
229,734
454,857
49,653
77,218
9,012
27,964
(1) See Note 16 for a description of the fair value hierarchy as well as a disclosure of levels for classes of financial assets and liabilities.
(2)
It is not practical to determine the fair value of FHLBI stock due to transferability restrictions; therefore, fair value is estimated at
carrying amount.
Carrying amount is the estimated fair value for cash and cash equivalents, FHLBI stock, accrued interest receivable and payable, noninterest-
bearing checking accounts and securities sold under agreements to repurchase. Security fair values are based on market prices or dealer
quotes, and if no such information is available, on the rate and term of the security and information about the issuer. Fair value for loans is
based on an exit price model as required by ASU 2016-01, taking into account inputs such as discounted cash flows, probability of default
and loss given default assumptions. Fair value for deposit accounts other than noninterest-bearing checking accounts is based on discounted
cash flows using current market rates applied to the estimated life. The fair values of subordinated debentures, subordinated notes, and
FHLBI advances are based on current rates for similar financing. The fair values of interest rate swaps are based on discounted cash flows
using forecasted yield curves, along with insignificant unobservable inputs, such as borrower credit spreads. The fair value of other off-
balance sheet items is estimated to be nominal.
(Continued)
F-77
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 16 – FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for
the asset or liability, or in the absence of a principal market, the most advantageous market for the asset or liability. The price of the principal
(or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly
transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities
that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers
and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
We are required to use valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The
market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and
liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present
amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an
asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that
market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market
participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable,
meaning those that reflect our own estimates about the assumptions market participants would use in pricing the asset or liability based on the
best information available in the circumstances. In that regard, we utilize a fair value hierarchy for valuation inputs that gives the highest
priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value
hierarchy is as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that we have the ability to access as of the measurement
date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be derived
from or corroborated by observable market data by correlation or other means.
Level 3: Significant unobservable inputs that reflect our own estimates about the assumptions that market participants would use in pricing an
asset or liability.
The following is a description of our valuation methodologies used to measure and disclose the fair values of our financial assets and
liabilities on a recurring or nonrecurring basis:
Securities available for sale. Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based on
quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models. Level 2 securities
include U.S. Government agency debt obligations, mortgage-backed securities issued or guaranteed by U.S. Government agencies, and
municipal general obligation and revenue bonds. Level 3 securities include bonds issued by certain relatively small municipalities located
within our markets that have very limited marketability due to their size and lack of ratings from a recognized rating service. We carry these
bonds at historical cost, which we believe approximates fair value, unless our periodic financial analysis or other information that becomes
known to us necessitates an impairment. There was no such impairment as of December 31, 2024 or 2023. We have no Level 1 securities
available for sale.
(Continued)
F-78
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 16 – FAIR VALUE MEASUREMENTS (Continued)
Derivatives. We measure fair value utilizing models that use primarily market observable inputs, such as forecasted yield curves.
Insignificant unobservable inputs, such as borrower credit spreads, are also utilized.
Mortgage loans held for sale. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate
cost or market, as determined by outstanding commitments from investors, and are measured on a nonrecurring basis. Fair value is based on
independent quoted market prices, where applicable, or the prices for other mortgage whole loans with similar characteristics. As of
December 31, 2024 and 2023, we determined the fair value of our mortgage loans held for sale to be $16.0 million and $19.0 million,
respectively.
Loans. We do not record loans at fair value on a recurring basis. However, from time to time, we record nonrecurring fair value adjustments
to collateral dependent loans to reflect partial write-downs or specific reserves that are based on the observable market price or current
estimated value of the collateral. These loans are reported in the nonrecurring table below at initial recognition of significant borrower
distress and on an ongoing basis until recovery or charge-off. The fair values of distressed loans are determined using either the sales
comparison approach or income approach; respective unobservable inputs for the approaches consist of adjustments for differences between
comparable sales and the utilization of appropriate capitalization rates.
Foreclosed assets. At time of foreclosure or repossession, foreclosed and repossessed assets are adjusted to fair value less costs to sell upon
transfer of the loans to foreclosed and repossessed assets, establishing a new cost basis. We subsequently adjust estimated fair value of
foreclosed assets on a nonrecurring basis to reflect write-downs based on revised fair value estimates. The fair values of parcels of other real
estate owned are determined using either the sales comparison approach or income approach; respective unobservable inputs for the
approaches consist of adjustments for differences between comparable sales and the utilization of appropriate capitalization rates.
(Continued)
F-79
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 16 – FAIR VALUE MEASUREMENTS (Continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2024 are as follows:
(Dollars in thousands)
Available for sale securities
U.S. Government agency debt obligations
Mortgage-backed securities
Municipal general obligation bonds
Municipal revenue bonds
Other investments
Interest rate swaps
Total assets
Interest rate swaps
Total liabilities
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
0
0
0
0
0
0
0
0
0
$
$
$
495,581
25,368
179,777
28,733
500
26,793
756,752
27,050
27,050
$
$
$
0
0
393
0
0
0
393
0
0
Total
495,581
25,368
180,170
28,733
500
26,793
757,145
27,050
27,050
$
$
$
$
$
$
There were no sales, purchases or transfers in or out of Level 3 during 2024. The $0.1 million reduction in Level 3 municipal general
obligation bonds during 2024 reflects the scheduled maturities of such bonds.
The balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2023 are as follows:
(Dollars in thousands)
Available for sale securities
U.S. Government agency debt obligations
Mortgage-backed securities
Municipal general obligation bonds
Municipal revenue bonds
Other investments
Interest rate swaps
Total assets
Interest rate swaps
Total liabilities
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
0
0
0
0
0
0
0
0
0
$
$
$
390,496
29,473
167,347
28,763
500
27,505
644,084
27,964
27,964
$
$
$
0
0
513
0
0
0
513
0
0
Total
390,496
29,473
167,860
28,763
500
27,505
644,597
27,964
27,964
$
$
$
$
$
$
(Continued)
F-80
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 16 – FAIR VALUE MEASUREMENTS (Continued)
There were no sales, purchases or transfers in or out of Level 3 during 2023. The less than $0.1 million reduction in Level 3 municipal
general obligation bonds during 2023 reflects the scheduled maturities of such bonds.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The balances of assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2024 are as follows:
(Dollars in thousands)
Collateral dependent loans
Total
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
2,173
2,173
$
$
0
0
$
$
0
0
$
$
2,173
2,173
The balances of assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2023 are as follows:
(Dollars in thousands)
Collateral dependent loans
Foreclosed assets
Total
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
1,434
200
1,634
$
$
0
0
0
$
$
0
0
0
$
$
1,434
200
1,634
The carrying values are based on the estimated value of the property or other assets. Fair value estimates of collateral on collateral dependent
loans and foreclosed assets are review periodically. Our credit policies establish criteria for obtaining appraisals and determining internal
value estimates. We may also adjust outside appraisals and internal evaluations based on identifiable trends within our markets, such as sales
of similar properties or assets, listing prices and offers received. In addition, we may discount certain appraised and internal value estimates
to address current distressed market conditions. For real estate dependent loans and foreclosed assets, we assign a discount factor range of
25% to 50%, providing for a weighted average discount factor of 27.4%, for commercial-related properties, and a discount factor range of
25% to 35%, providing for a weighted average discount factor of 26.0%, for residential-related properties. In a vast majority of cases, we
assign a 10% discount factor for estimated selling costs.
(Continued)
F-81
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 17 – EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of common shares and participating securities outstanding during the
period. Diluted earnings per share include the dilutive effect of additional potential common shares issuable under our stock-based
compensation plans and are determined using the treasury stock method. Our unvested restricted shares, which contain non-forfeitable rights
to dividends whether paid or accrued (i.e., participating securities), are included in the number of shares outstanding for both basic and
diluted earnings per share calculations. In the event of a net loss, our unvested restricted shares are excluded from the calculation of both
basic and diluted earnings per share. Stock options for approximately 5,000 shares of common stock were antidilutive and were not included
in determining dilutive earnings per share in 2022.
The factors used in the earnings per share computation follow:
(Dollars in thousands, except share and per share amounts)
Basic
Net income attributable to common shares
Weighted average common shares outstanding
Basic earnings per common share
Diluted
Net income attributable to common shares
Weighted average common shares outstanding for basic earnings per
common share
Add: Dilutive effects of share-based awards
Average shares and dilutive potential common shares
Diluted earnings per common share
NOTE 18 – VARIABLE INTEREST ENTITIES
2024
2023
2022
79,593
$
82,217
$
61,063
16,130,696
16,015,678
15,859,889
4.93
79,593
$
$
5.13
82,217
$
$
3.85
61,063
16,130,696
16,015,678
15,859,889
0
0
12
16,130,696
16,015,678
15,859,901
4.93
$
5.13
$
3.85
$
$
$
$
Variable interest entities ("VIEs") are entities that either have a total equity investment that is insufficient to permit the entity to finance its
activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest
(i.e., ability to make significant decisions, through voting rights, right to receive the expected residual returns of the entity, and obligations to
absorb the expected losses of the entity). Variable interest entities can be structured as corporations, trusts, partnerships, or other legal
entities. We have relationships with certain variable interest entities related to the issuance of trust preferred securities and our tax credit
investments.
We have five business trusts that are wholly-owned subsidiaries of Mercantile, four of which were assumed by Mercantile in conjunction
with the Firstbank merger in 2014. A fair value discount of $15.0 million was recorded at the time of the merger, which is being amortized at
$0.7 million annually over the following 21.5 years, 11 of which are remaining. Each of the trusts was solely formed to issue preferred
securities that were sold in private sales. Through a small common stock investment, we own 100% of the voting equity shares of each trust.
The proceeds from the preferred securities and common stock sales were used by the trusts to purchase Floating Rate Notes issued by
Mercantile. The rates of interest, interest payment dates, call features and maturity dates of each Floating Rate Note are identical to its
respective Preferred Securities. The net proceeds from the issuance of the Floating Rate Notes were used for a variety of purposes, including
contributions to our bank as capital to provide support for asset growth and the funding of stock repurchase programs and certain
acquisitions.
The assets, liabilities, operations and cash flows of each trust are solely related to the issuance, administration and repayment of the preferred
securities held by third-party investors. We fully and unconditionally guarantee the obligations of each trust and are obligated to redeem the
junior subordinated debentures upon maturity. We do not consolidate the trusts as we are not the primary beneficiary of these entities because
our wholly-owned and indirect wholly-owned statutory subsidiaries do not have the power to direct the activities of the variable interest
entity that most significantly impact the variable interest entity’s economic performance and do not have an obligation to absorb losses or the
right to receive benefits that could potentially be significant to the variable interest entity. As such, we do not have a controlling financial
interest in the variable interest entities.
(Continued)
F-82
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 18 – VARIABLE INTEREST ENTITIES (Continued)
The only significant assets of our trusts are the Floating Rate Notes, and the only significant liabilities of our trusts are the Preferred
Securities. The Floating Rate Notes are categorized on our Consolidated Balance Sheets as subordinated debentures and the interest expense
is recorded on our Consolidated Statements of Income under interest expense on other borrowings.
On January 26, 2016, we closed on a repurchase of trust preferred securities that were auctioned as part of a pooled collateralized debt
obligation (“Fund”). The Fund owned $11.0 million of the $32.0 million in trust preferred securities that had been issued by Mercantile Bank
Capital Trust I. The $11.0 million in trust preferred securities was retired upon the repurchase, resulting in a commensurate reduction in the
related Floating Rate Junior Subordinate Note, leaving $21.0 million outstanding.
The following table depicts our five business trusts as of December 31, 2024:
(Dollars in thousands)
Trust Name
Mercantile Bank Capital Trust I
Firstbank Capital Trust I
Firstbank Capital Trust II
Firstbank Capital Trust III
Firstbank Capital Trust IV
Preferred
Securities
Outstanding
21,000
10,000
10,000
7,500
7,500
$
$
$
$
$
Interest Rate
Maturity Date
3 Month SOFR + 218 bps
September 16, 2034
3 Month SOFR + 199 bps
October 18, 2034
3 Month SOFR + 127 bps
3 Month SOFR + 135 bps
3 Month SOFR + 135 bps
April 7, 2036
July 30, 2037
July 30, 2037
MCP makes equity investments as a limited liability member in affordable housing projects utilizing the Low-Income Housing Tax Credit
(“LIHTC”) pursuant to Section 42 of the Internal Revenue Code. Our bank also invests in multi-investor funds, which in turn invest in
projects similar to that of MCP. The purpose of these investments is to achieve a satisfactory return on capital and to support our bank’s
community reinvestment initiatives. The activities of the limited liability entities include the identification, development, and operation of
multi-family housing that is leased to qualifying residential tenants generally within our bank’s primary geographic region. MCP also makes
equity investments via special purpose investment entities as a limited liability member in entities that receive Historic Tax Credits (“HTC”)
pursuant to Section 47 of the Internal Revenue Code. The purpose of these investments is the rehabilitation of historic buildings with the tax
credits provided to incent private investment in the historic cores of cities and towns.
The LIHTC and HTC investment entities are considered VIEs as MCP, or our bank, whomever is the holder of the equity investment at risk,
does not have the ability to direct the activities that most significantly affect the performance of the entity through voting rights or similar
rights. MCP, or our bank, could absorb losses that are significant to the underlying entities as it has a risk of loss for its capital contributions
and funding commitments to each. The general partners, or managing members, are considered the primary beneficiaries as managerial
functions give them the power to direct the activities that most significantly impact the entities’ economic performances, and the managing
members are exposed to all losses beyond MCP’s, or our bank’s, initial capital contributions and funding commitments.
Equity investments as a limited liability member in LIHTC and HTC investment entities, reported as other assets in the Consolidated Balance
Sheets, totaled $38.9 million and $25.7 million as of December 31, 2024 and 2023, respectively. Unfunded capital commitments, reported as
other liabilities in the Consolidated Financial Statements, totaled $34.4 million and $21.1 million as of December 31, 2024 and 2023,
respectively.
The following table summarizes quantitative information about our involvement in unconsolidated variable interest entities at year end:
(Dollars in thousands)
Aggregate
Assets
2024
Aggregate
Liabilities
Risk of Loss
Aggregate
Assets
2023
Aggregate
Liabilities
Trust preferred securities
$
58,074
$
56,000
$
2,074
$
58,074
$
56,000
$
Tax Credit Equity Investments
38,902
34,428
4,474
25,659
21,103
Risk of Loss
2,074
4,556
(Continued)
F-83
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 19 – SUBORDINATED NOTES
On December 15, 2021, we entered into Subordinated Note Purchase Agreements with certain institutional accredited investors pursuant to
which we issued and sold $75.0 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes (“Notes”). The
Notes have a stated maturity of January 30, 2032, and are redeemable by us at our option, in whole or in part, on or after January 30, 2027 on
any interest payment date at a redemption of price of 100% of the principal amount of the Notes being redeemed. The Notes are not subject to
redemption at the option of the holder. The Notes will bear interest at a fixed rate of 3.25% per year until January 29, 2027. Commencing on
January 30, 2027 and through the stated maturity date of January 30, 2032, the interest rate will reset quarterly at a variable rate equal to the
then-current Three-Month Term SOFR plus 212 basis points. On December 15, 2021, we injected $70.0 million of the issuance proceeds into
our bank as an increase to equity capital.
On January 14, 2022, we issued an additional $15.0 million of Notes to certain institutional accredited investors, reflecting an expansion of
the $75.0 million issuance completed on December 15, 2021. The additional $15.0 million issuance was completed on the same terms as the
prior offering and under the existing indenture. On January 14, 2022, we injected $15.0 million of the issuance proceeds into our bank as an
increase to equity capital.
Our unamortized debt issuance costs were $0.7 million and $1.0 million as of December 31, 2024 and 2023, respectively.
NOTE 20 - REGULATORY MATTERS
We are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under
regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components,
risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements
can initiate regulatory action that could have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If an
institution is not well capitalized, regulatory approval is required to accept brokered deposits. Subject to limited exceptions, no institution
may make a capital distribution if, after making the distribution, it would be undercapitalized. If an institution is undercapitalized, it is subject
to close monitoring by its principal federal regulator, its asset growth and expansion are restricted, and plans for capital restoration are
required. In addition, further specific types of restrictions may be imposed on the institution at the discretion of the federal regulator. At year-
end 2024 and 2023, our bank was in the well capitalized category under the regulatory framework for prompt corrective action. There are no
conditions or events since December 31, 2024 that we believe have changed our bank’s categorization.
(Continued)
F-84
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 20 - REGULATORY MATTERS (Continued)
Our actual capital levels and minimum required levels at year-end 2024 and 2023 were:
Actual
Minimum Required
for Capital
Adequacy Purposes
Minimum Required
to be Well
Capitalized Under
Prompt Corrective
Action Regulations
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
2024
Total capital (to risk
weighted assets)
Consolidated
Bank
$
777,857
759,146
14.2% $
13.9
439,031
435,793
8.0% $
8.0
NA
544,741
NA%
10.0
Tier 1 capital (to risk
weighted assets)
Consolidated
Bank
Common equity (to risk
weighted assets)
Consolidated
Bank
Tier 1 capital (to average
assets)
Consolidated
Bank
2023
Total capital (to risk
weighted assets)
Consolidated
Bank
Tier 1 capital (to risk
weighted assets)
Consolidated
Bank
Common equity (to risk
weighted assets)
Consolidated
Bank
Tier 1 capital (to average
assets)
Consolidated
Bank
633,134
703,737
584,879
703,737
633,134
703,737
11.5
12.9
10.7
12.9
10.6
11.9
329,274
326,845
246,955
245,134
238,934
237,447
6.0
6.0
4.5
4.5
4.0
4.0
NA
435,793
NA
354,082
NA
296,808
NA
8.0
NA
6.5
NA
5.0
$
710,905
694,431
13.7% $
13.4
415,841
414,019
8.0% $
8.0
NA
517,524
NA%
10.0
570,730
643,227
523,160
643,227
570,730
643,227
11.0
12.4
10.1
12.4
10.8
12.2
311,881
310,514
233,911
232,886
210,527
210,427
6.0
6.0
4.5
4.5
4.0
4.0
NA
414,019
NA
336,391
NA
263,034
NA
8.0
NA
6.5
NA
5.0
(Continued)
F-85
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 20 – REGULATORY MATTERS (Continued)
Under the final BASEL III capital rules that became effective on January 1, 2015, there is a requirement for a common equity Tier 1 capital
conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule.
Institutions that do not meet this required capital buffer will become subject to progressively more stringent limitations on the percentage of
earnings that can be paid out in cash dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive
management. The capital buffer requirement was phased in over three years beginning in 2016. The capital buffer requirement raised the
minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5% and the total capital ratio to 10.5% on a fully
phased-in basis on January 1, 2019. We believe that, as of December 31, 2024, our bank meets all capital adequacy requirements under the
BASEL III capital rules on a fully phased-in basis.
Federal and state banking laws and regulations place certain restrictions on the amount of dividends our bank can transfer to Mercantile and
on the capital levels that must be maintained. At year-end 2024, under the most restrictive of these regulations, our bank could distribute
$130 million to Mercantile as dividends without prior regulatory approval. Our and our bank’s ability to pay cash and stock dividends is
subject to limitations under various laws and regulations and to prudent and sound banking practices. On January 11, 2024, our Board of
Directors declared a cash dividend on our common stock in the amount of $0.35 per share that was paid on March 13, 2024 to shareholders of
record as of March 1, 2024. On April 11, 2024, our Board of Directors declared a cash dividend on our common stock in the amount of
$0.35 per share that was paid on June 19, 2024 to shareholders of record as of June 7, 2024. On July 11, 2024, our Board of Directors
declared a cash dividend on our common stock in the amount of $0.36 per share that was paid on September 18, 2024 to shareholders of
record as of September 6, 2024. On October 10, 2024, our Board of Directors declared a cash dividend on our common stock in the amount
of $0.36 per share that was paid on December 18, 2024 to shareholders of record as of December 6, 2024.
As of December 31, 2024, we had the ability to repurchase up to $6.8 million in common stock shares from time to time in open market
transactions at prevailing market prices or by other means in accordance with applicable regulations as part of a $20.0 million common stock
repurchase program announced in May 2021. No shares were repurchased during 2024 or 2023. Historically, stock repurchases have been
funded from cash dividends paid to us from our bank. Additional repurchases may be made in future periods under the authorized plan or a
new plan, which would also likely be funded from cash dividends paid to us from our bank. The actual timing, number and value of shares
repurchased will be determined by us in our discretion and will depend on a number of factors, including the stock price, capital position,
financial performance, general market and economic conditions, alternative uses of capital and applicable legal requirements.
Our consolidated capital levels as of December 31, 2024 and 2023 include $48.3 million and $47.6 million, respectively, of trust preferred
securities. Under applicable Federal Reserve guidelines, the trust preferred securities constitute a restricted core capital element. The
guidelines provide that the aggregate amount of restricted core capital elements that may be included in Tier 1 capital must not exceed 25%
of the sum of all core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability.
Our ability to include the trust preferred securities in Tier 1 capital in accordance with the guidelines is not affected by the provision of the
Dodd-Frank Act generally restricting such treatment, because (i) the trust preferred securities were issued before May 19, 2010, and (ii) our
total consolidated assets as of December 31, 2009 were less than $15.0 billion. At December 31, 2024 and 2023, all $48.3 million and
$47.6 million, respectively, of the trust preferred securities were included as Tier 1 capital of Mercantile.
(Continued)
F-86
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 21 – MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
(Dollars in thousands)
ASSETS
Cash and cash equivalents
Investments in subsidiaries
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Subordinated debentures
Subordinated notes
Shareholders’ equity
Total liabilities and shareholders’ equity
2024
2023
$
17,420
691,563
18,188
18,969
629,710
15,122
727,171
$
663,801
$
3,001
50,330
89,314
584,526
3,040
49,644
88,971
522,146
727,171
$
663,801
$
$
$
$
CONDENSED STATEMENTS OF INCOME
2024
2023
2022
(Dollars in thousands)
Income
Interest and dividends from subsidiaries
Total income
Expenses
Interest expense
Other operating expenses
Total expenses
Income before income tax benefit and equity in undistributed net
income of subsidiary
Federal income tax benefit
Equity in undistributed net income of subsidiary
Net income
Other comprehensive income (loss)
Comprehensive income (loss)
$
$
$
30,061
30,061
$
26,660
26,660
$
8,203
5,647
13,850
16,211
(3,240)
60,142
8,091
5,674
13,765
12,895
(2,858)
66,464
79,593
$
82,217
$
662
80,255
$
14,854
97,071
$
26,056
26,056
6,104
5,645
11,749
14,307
(2,535)
44,221
61,063
(61,612)
(549)
(Continued)
F-87
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024
NOTE 21 – MERCANTILE BANK CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash from operating
activities:
Equity in undistributed net income of subsidiary
Stock-based compensation expense
Stock grants to directors for retainer fees
Change in other assets
Change in other liabilities
Net cash from operating activities
Cash flows from investing activities
Net capital investment into subsidiaries
Net cash for investing activities
Cash flows from financing activities
Stock option exercises, net of cashless exercises
Employee stock purchase plan
Dividend reinvestment plan
Net proceeds from subordinated notes issuance
Repurchase of common shares
Cash dividends on common stock
Net cash for financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
2024
2023
2022
$
79,593
$
82,217
$
61,063
(60,142)
3,316
423
(4,116)
990
20,064
0
0
0
50
810
0
0
(22,473)
(21,613)
(1,549)
18,969
(66,464)
3,384
350
(128)
1,045
20,404
0
0
0
45
891
0
0
(21,004)
(20,068)
336
18,633
(44,221)
3,377
359
858
1,636
23,072
(15,000)
(15,000)
36
45
867
14,645
0
(19,602)
(4,009)
4,063
14,570
18,633
Cash and cash equivalents at end of period
$
17,420
$
18,969
$
NOTE 22 – SUBSEQUENT EVENTS
On January 16, 2025, our Board of Directors declared a cash dividend on our common stock in the amount of $0.37 per share that will be
paid on March 19, 2025 to shareholders of record as of March 7, 2025.
F-88
EXHIBIT NO.
EXHIBIT DESCRIPTION
EXHIBIT INDEX
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.2
10.3
Articles of Incorporation of Mercantile Bank Corporation, including all amendments thereto, incorporated by reference to
Exhibit 3.1 of our Form S-4 Registration Statement filed February 16, 2022
Our Amended and Restated By-laws dated as of February 26, 2015 are incorporated by reference to exhibit 3.1 to our
Current Report on Form 8-K filed February 26, 2015
Instruments defining the Rights of Security Holders – reference is made to Exhibits 3.1 and 3.2. In accordance with
Regulation S-K Item 601(b)(4), Mercantile Bank Corporation is not filing copies of instruments defining the rights of
holders of long-term debt because none of those instruments authorizes debt in excess of 10% of the total assets of
Mercantile Bank Corporation and its subsidiaries on a consolidated basis. Mercantile Bank Corporation hereby agrees to
furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
Subordinated indenture, dated December 15, 2021, by and between Mercantile Bank Corporation and Wilmington Trust,
National Association, as trustee, incorporated by reference to our Current Report on Form 8-K filed December 17, 2021
First Supplemental Indenture to Subordinated indenture, dated December 15, 2021, by and between Mercantile Bank
Corporation and Wilmington Trust, National Association, as trustee, incorporated by reference to our Current Report on
Form 8-K filed December 17, 2021
Form of 3.25% Fixed-to-Floating Rate Subordinated Note due 2032, incorporated by reference to our Current Report on
Form 8-K filed December 17, 2021
Form of Subordinated Note Purchase Agreement dated December 15, 2021, by and among Mercantile Bank Corporation
and the Purchasers, incorporated by reference to our Current Report on Form 8-K filed December 17, 2021
Form of Registration Rights Agreement dated December 15, 2021, by and among Mercantile Bank Corporation and the
Purchasers, incorporated by reference to our Current Report on Form 8-K filed December 17, 2021
Form of Mercantile Bank Split Dollar Agreement that has been entered into between our bank and each of Robert B.
Kaminski, Jr., Charles E. Christmas, and certain other officers of our bank is incorporated by reference to exhibit 10.33 of
our Form 10-K for the year ended December 31, 2005*
Mercantile Bank Corporation Employee Stock Purchase Plan of 2014 is incorporated by reference to exhibit 4(b) of our
Registration Statement on Form S-8 that became effective on June 27, 2014
Amended and Restated Employment Agreement of Robert B. Kaminski, Jr. dated November 29, 2018, effective December
31, 2018, incorporated by reference to exhibit 10.1 of our Form 8-K filed December 3, 2018*
EXHIBIT NO.
EXHIBIT DESCRIPTION
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
Amended and Restated Employment Agreement of Charles E. Christmas dated December 19, 2024, effective January 1, 2025,
incorporated by reference to exhibit 10.3 of our Form 8-K filed December 19, 2024*
Amended and Restated Employment Agreement of Raymond E. Reitsma dated December 19, 2024, effective January 1, 2025,
incorporated by reference to exhibit 10.2 of our Form 8-K filed December 19, 2024*
Amended and Restated Employment Agreement of Robert T. Worthington dated December 19, 2024, effective January 1, 2025,
incorporated by reference to exhibit 10.5 of our Form 8-K filed December 19, 2024*
Amended and Restated Employment Agreement of Brett E. Hoover dated December 19, 2024, effective January 1, 2025,
incorporated by reference to exhibit 10.4 of our Form 8-K filed December 19, 2024*
Amended and Restated Change in Control Agreement of Robert B. Kaminski, Jr. dated November 29, 2018, effective December
31, 2018, incorporated by reference to exhibit 10.6 of our Form 8-K filed December 3, 2018*
Amended and Restated Change in Control Agreement of Charles E. Christmas dated November 29, 2018, effective December 31,
2018, incorporated by reference to exhibit 10.7 of our Form 8-K filed December 3, 2018*
Amended and Restated Employment Agreement of Scott P. Setlock effective January 1, 2024, incorporated by reference to exhibit
10.3 of our Form 8-K filed June 3, 2024*
First Amendment to Amended and Restated Employment Agreement of Scott P. Setlock dated May 31, 2024, inco rporated by
reference to exhibit 10.4 of our Form 8-K filed June 3, 2024*
2023 Mercantile Executive Officer Bonus Plan, incorporated by reference to exhibit 10.1 of our Form 8-K filed June 22, 2023*
2024 Mercantile Executive Officer Bonus Plan, incorporated by reference to exhibit 10.1 of our Form 8-K filed July 11, 2024*
2024 Mercantile Bank Nonqualified Deferred Compensation Plan #2, incorporated by reference to exhibit 10.1 of our Form 8-K
filed with the SEC on November 25, 2024*
Second Amendment to the Mercantile Bank Amended and Restated Deferred Compensation Plan, incorporated by reference to
exhibit 10.2 of our Form 8-K filed with the SEC on November 25, 2024*
Mercantile Bank Rabbi Directed Trust Agreement, incorporated by reference to exhibit 10.3 of our Form 8-K filed with the SEC on
November 25, 2024*
Mercantile Bank Corporation Stock Incentive Plan of 2020, incorporated by reference to Appendix A to Mercantile’s Definitive
Proxy Statement on Schedule 14A filed April 9, 2020*
Mercantile Bank Corporation Stock Incentive Plan of 2023, incorporated by reference to exhibit 99 of our Form S-8 filed June 12,
2023*
Form of Performance-Based Restricted Stock Award Agreement, in connection with the Mercantile Bank Corporation Stock
Incentive Plan of 2020, incorporated by reference to exhibit 10.17 of our Form 10-K for the year ended December 31, 2020*
Form of Performance-Based Restricted Stock Award Agreement, in connection with the Mercantile Bank Corporation Stock
Incentive Plan of 2023, incorporated by reference to exhibit 10.1 of our Form 8-K filed February 6, 2025*
Form of Standard Restricted Stock Award Agreement, in connection with the Mercantile Bank Corporation Stock Incentive Plan of
2023, incorporated by reference to exhibit 10.2 of our Form 8-K filed on February 6, 2025*
10.22
Director Fee Summary*
14
19
21
23.1
23.2
31
32.1
32.2
97
Code of Ethics
Policy on Insider Trading
Subsidiaries of the Company
Consent of Plante & Moran, PLLC
Consent of BDO USA, P.C.
Rule 13a-14(a) Certifications
Section 1350 Chief Executive Officer Certification
Section 1350 Chief Financial Officer Certification
Clawback Policy
EXHIBIT NO. EXHIBIT DESCRIPTION
101
The following information from Mercantile’s Annual Report on Form 10-K for the year ended December 31, 2024, formatted in Inline XBRL
(eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated
Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated
Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Management contract or compensatory plan.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on March 3, 2025.
SIGNATURES
MERCANTILE BANK CORPORATION
/s/ Raymond E. Reitsma
Raymond E. Reitsma
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities indicated on March 3, 2025.
/s/ Michael S. Davenport
Michael S. Davenport, Director
/s/ Thomas D. Dickinson
Thomas D. Dickinson, Director
/s/ Michelle L. Eldridge
Michelle L. Eldridge, Director
/s/ Joseph D. Jones
Joseph D. Jones, Director
/s/ Robert B. Kaminski Jr.
Robert B. Kaminski Jr., Director
/s/ Richard D. MacDonald
Richard D. MacDonald, Director
/s/ Michael H. Price
Michael H. Price, Chairman of the Board
/s/ David B. Ramaker
David B. Ramaker, Director
/s/ Nelson F. Sanchez
Nelson F. Sanchez, Director
/s/ Sara A. Schmidt
Sara A. Schmidt, Director
/s/ Amy L. Sparks
Amy L. Sparks, Director
/s/ Shoran R. Williams
Shoran R. Williams, Director
/s/ Raymond E. Reitsma
Raymond E. Reitsma
Director, President and Chief Executive Officer
(principal executive officer)
/s/ Charles E. Christmas
Charles E. Christmas, Executive Vice President,
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
Annual Meeting
Mercantile Bank Corporation’s Annual Meeting of Shareholders
will be held virtually on Thursday, May 22, 2025 at 9:00 am EDT
Corporation Headquarters
310 Leonard Street NW, Grand Rapids, MI 49504
616.406.3000 or 800.453.8700
www.mercbank.com
Legal Counsel
Dickinson Wright, PLLC
500 Woodward Avenue, Suite 4000, Detroit, MI 48226
www.dickinson-wright.com
Independent Registered Public Accountants
Plante & Moran, PLLC
634 Front Street NW, Suite 400, Grand Rapids, MI 49504
www.plantemoran.com
Common Stock Listing
NASDAQ Global Select Market Symbol: MBWM
Stock Registrar and Transfer Agent
Computershare Investor Services
P.O. Box 43006, Providence, RI 02940-3006
Shareholder Inquiries 800.733.5001
www.computershare.com/investor
SEC Form 10-K
Copies of the Corporation’s Annual Report on Form 10-K,
as filed with the Securities and Exchange Commission,
are available to shareholders without charge upon written request.
Please mail your request to:
Charles E. Christmas
Mercantile Bank Corporation
310 Leonard Street NW
Grand Rapids, MI 49504
MercBank
@mercbank
company/merc-bank
mercbank.com
MERCBANK.COM
2024
ANNUAL REPORT
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