MERCANTILE BANK CORP

Previous wording

The following discussion compares the financial condition of Mercantile Bank Corporation and its consolidated subsidiaries, including Mercantile Community Partners, LLC ("MCP") and Mercantile Bank (“our bank”) and its subsidiaries, including Mercantile Insurance Center, Inc. at March 31, 2024 and December 31, 2023 and the results of operations for the three months ended March 31, 2024 and March 31, 2023. This discussion should be read in conjunction with the interim consolidated financial statements and footnotes included in this report. Unless the text clearly suggests otherwise, references in this report to “us,” “we,” “our” or “the company” include Mercantile Bank Corporation and its consolidated subsidiaries referred to above.

Current wording

The following discussion compares the financial condition of Mercantile Bank Corporation and its consolidated subsidiaries, including Mercantile Community Partners, LLC ("MCP") and Mercantile Bank (“our bank”) and its subsidiaries, including Mercantile Insurance Center, Inc. at June 30, 2024 and December 31, 2023 and the results of operations for the six months ended June 30, 2024 and June 30, 2023. This discussion should be read in conjunction with the interim consolidated financial statements and footnotes included in this report. Unless the text clearly suggests otherwise, references in this report to “us,” “we,” “our” or “the company” include Mercantile Bank Corporation and its consolidated subsidiaries referred to above.

Previous wording

Commercial loans increased $14.3 million during the first three months of 2024, providing for an annualized growth rate of about 2%. Multi-family and residential rental property loans increased $34.4 million, in large part reflecting draws on multi-family construction loans, while non-owner occupied commercial real estate (“CRE”) loans grew $9.9 million. Commercial and industrial loans declined $31.9 million, primarily reflecting paydowns on commercial lines of credit. As a percent of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 56.6% as of March 31, 2024, compared to 57.7% at December 31, 2023. The new commercial loan pipeline remains strong, and as of March 31, 2024, we had $345 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase.

Current wording

Commercial loans increased $118 million during the first six months of 2024, providing for an annualized growth rate of about 7%. Multi-family and residential rental property loans increased $56.8 million, in large part reflecting draws on multi-family construction loans, while non-owner occupied commercial real estate (“CRE”) loans grew $23.4 million, and commercial and industrial loans increased $21.2 million. As a percent of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 56.8% as of June 30, 2024, compared to 57.7% at December 31, 2023. The commercial loan pipeline remains strong, and as of June 30, 2024, we had $320 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase.

Previous wording

Residential mortgage loans increased $3.2 million during the first quarter of 2024, representing an annualized growth rate of about 2%. Residential mortgage loan originations totaled $79.9 million during the first quarter of 2024, of which almost 75% was originated with the intent to sell.

Current wording

Residential mortgage loans increased $12.2 million during the first six months of 2024, representing an annualized growth rate of about 3%. Residential mortgage loan originations totaled $203 million during the first six months of 2024, of which almost 75% were originated with the intent to sell.

Previous wording

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling 0.14% of total loans as of March 31, 2024. Accruing loans past due 30 to 89 days remain very low. Foreclosed properties, consisting of a former branch facility, totaled $0.2 million as of March 31, 2024. Gross loan charge-offs totaled less than $0.1 million during the first quarter of 2024, while recoveries of prior period loan charge-offs aggregated $0.4 million.

Current wording

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling 0.21% of total loans as of June 30, 2024. Accruing loans past due 30 to 89 days remain very low, and we had no foreclosed properties at quarter end. Gross loan charge-offs totaled less than $0.1 million during the first six months of 2024, while recoveries of prior period loan charge-offs aggregated $0.7 million.

Previous wording

Interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, averaged $150 million during the first quarter of 2024, compared to $31.1 million during the first quarter of 2023. The higher average balance primarily reflects an increase in deposits and our desire to maintain higher levels of on balance sheet liquidity.

Current wording

Interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, averaged $166 million during the first six months of 2024, compared to $48.1 million during the first six months of 2023. The higher average balance primarily reflects an increase in deposits and our desire to maintain higher levels of on balance sheet liquidity.

Previous wording

Total deposits increased $107 million during the first three months of 2024, providing for an annualized growth rate of about 11%. Growth in money market deposit accounts and time deposits more than offset a reduction in noninterest-bearing business checking accounts reflecting the customary level of customers’ tax and bonus payments and partnership distributions during the early part of each first quarter. Federal Home Loan Bank of Indianapolis (“FHLBI”) advances declined $20.8 million during the first quarter of 2024. Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $620 million, or about 13% of total funds, as of March 31, 2024.

Current wording

Total deposits increased $246 million during the first six months of 2024, providing for an annualized growth rate of about 13%. Growth in money market deposit accounts and local time deposits more than offset a reduction in business noninterest-bearing checking accounts reflecting the customary level of customers’ tax and bonus payments and partnership distributions during the early part of each first quarter. Federal Home Loan Bank of Indianapolis (“FHLBI”) advances declined $40.8 million during the first six months of 2024. Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $580 million, or about 12% of total funds, as of June 30, 2024.

Previous wording

During the first quarter of 2024 compared to the first quarter of 2023, interest income was up $16.3 million, while interest expense increased $17.3 million. As a result, net interest income declined $1.0 million for the comparative periods. Our net interest margin declined 54 basis points during the first quarter of 2024 compared to the same time period in 2023. Although our yield on earning assets increased 71 basis points during that time period, our cost of funds was up 125 basis points. While we experienced rapid growth in our earning asset yield during the period of March of 2022 through July of 2023 when the Federal Open Market Committee (“FOMC”) raised the targeted federal funds rate by 525 basis points, meaningful increases in our cost of funds did not begin to materialize until the latter part of 2022 when competition for deposit balances increased deposit rates and depositors began to move funds from no- and lower-costing deposit types to higher-costing deposit products. Our net interest margin peaked during the latter part of 2022 and early stages of 2023.

Current wording

Net interest income declined $0.5 million and $1.5 million during the second quarter and first six months of 2024, respectively, compared to the same prior-year time periods, reflecting the net impact of $13.0 million and $29.2 million increases in interest income and $13.5 million and $30.7 million increases in interest expense, during the respective periods. Our net interest margin declined 42 basis points and 48 basis points during the second quarter and first six months of 2024, respectively, compared to the same prior-year time periods. Although our yield on earning assets increased 46 basis points and 58 basis points, respectively, during those time periods, our cost of funds was up 88 basis points and 106 basis points, respectively. While we experienced rapid growth in our earning asset yield during the period of March of 2022 through July of 2023 when the Federal Open Market Committee (“FOMC”) raised the targeted federal funds rate by 525 basis points, meaningful increases in our cost of funds did not begin to materialize until the latter part of 2022 when competition for deposit balances increased deposit rates, and depositors began to move funds from no- and lower-costing deposit types to higher-costing deposit products. Our net interest margin peaked during the latter part of 2022 and early stages of 2023.

Previous wording

Noninterest income totaled $10.9 million during the first quarter of 2024, compared to $7.0 million during the first quarter of 2023. The higher level of noninterest income primarily stemmed from increases in all treasury management fee income categories, along with higher levels of mortgage banking and interest rate swap income, and revenue associated with a private equity investment. Benefit claims on bank owned life insurance policies totaled $0.7 million during the first quarter of 2024.

Current wording

Noninterest income totaled $9.7 million and $20.5 million during the second quarter and first six months of 2024, respectively, compared to $7.6 million and $14.6 million during the second quarter and first six months of 2023, respectively. The higher level of noninterest income during both time periods primarily stemmed from increases in service charges on deposit accounts, primarily reflecting growth in treasury management fees, and mortgage banking income. Growth in interest rate swap income benefited noninterest income during both time periods, while revenue associated with a private equity investment positively impacted noninterest income during the first six months of 2024. Benefit claims on bank owned life insurance policies were recorded during the first quarter of 2024.

Previous wording

Noninterest expense totaled $29.9 million during the first quarter of 2024, compared to $28.6 million during the same time period in 2023. The higher level of noninterest expense primarily resulted from increased compensation and benefit costs. Contributions to The Mercantile Bank Foundation ("Foundation") totaled $0.7 million during the first quarter of 2024.

Current wording

Noninterest expense totaled $29.7 million and $59.7 million during the second quarter and first six months of 2024, respectively, compared to $27.8 million and $56.4 million during the second quarter and first six months of 2023, respectively. The higher level of noninterest expense primarily resulted from increased compensation and benefit costs along with higher data processing expenses. Contributions to The Mercantile Bank Foundation ("Foundation") totaled $0.7 million during the first six months of 2024.

Previous wording

Our total assets increased $113 million during the first quarter of 2024, and totaled $5.47 billion as of March 31, 2024. Interest-earning deposits were up $125 million and total loans increased $18.2 million, while securities available for sale declined $7.9 million. Total deposits increased $107 million, while FHLBI advances decreased $20.8 million during the first quarter of 2024.

Current wording

Our total assets increased $249 million during the first six months of 2024, and totaled $5.60 billion as of June 30, 2024. Total loans increased $134 million, interest-earning deposits were up $75.6 million and securities available for sale grew $30.8 million. Total deposits increased $246 million, while FHLBI advances decreased $40.8 million during the first six months of 2024.

Previous wording

Commercial loans increased $14.3 million during the first quarter of 2024, providing for an annualized growth rate of about 2%. Multi-family and residential rental property loans increased $34.4 million, in large part reflecting draws on multi-family construction loans, while non-owner occupied CRE loans grew $9.9 million. Commercial and industrial loans declined $31.9 million, primarily reflecting paydowns on commercial lines of credit. As a percent of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 56.6% as of March 31, 2024, compared to 57.7% at December 31, 2023. Commercial loans totaled $3.43 billion, or 79.4% of total loans, as of March 31, 2024, compared to $3.42 billion, or 79.4% of total loans, as of December 31, 2023.

Current wording

Commercial loans increased $118 million during the first six months of 2024, providing for an annualized growth rate of about 7%. Multi-family and residential rental property loans increased $56.8 million, in large part reflecting draws on multi-family construction loans, while non-owner occupied CRE loans grew $23.4 million, and commercial and industrial loans increased $21.2 million. As a percent of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 56.8% as of June 30, 2024, compared to 57.7% at December 31, 2023. Commercial loans totaled $3.53 billion, or 79.6% of total loans, as of June 30, 2024, compared to $3.42 billion, or 79.4% of total loans, as of December 31, 2023.

Previous wording

As of March 31, 2024, we had $345 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase which we expect to be drawn over the next 12 to 18 months. Our current pipeline reports indicate continued strong commercial loan funding opportunities in future periods, including approximately $235 million in new lending commitments, a majority of which we expect to be accepted and funded over the next 12 to 18 months. Our commercial lenders also report ongoing additional opportunities they are currently discussing with existing and potentially new borrowers. We remain committed to prudent underwriting standards that provide for an appropriate yield and risk relationship, as well as concentration limits we have established within our commercial loan portfolio. Usage of existing commercial lines of credit averaged 40% during the first quarter of 2024, unchanged from the average during all of 2023.

Current wording

As of June 30, 2024, we had $320 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase, which we expect to be drawn over the next 12 to 18 months. Our current pipeline reports indicate continued strong commercial loan funding opportunities in future periods, including approximately $255 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 bankers also report ongoing additional opportunities they are currently discussing with existing and potentially new borrowers. We remain committed to prudent underwriting standards that provide for an appropriate yield and risk relationship, as well as concentration limits we have established within our commercial loan portfolio. Usage of existing commercial lines of credit averaged about 40% during the first six months of 2024, unchanged from the average during all of 2023.

Previous wording

Residential mortgage loans increased $3.2 million during the first quarter of 2024, representing an annualized growth rate of about 2%. Generally, we sell fixed rate residential mortgage loans to third-party investors, while we retain adjustable rate residential mortgage loans on our balance sheet. Residential mortgage loan originations totaled $79.9 million during the first quarter of 2024, of which almost 75% was originated with the intent to sell. Residential mortgage loan originations totaled $72.0 million during the first quarter of 2023, of which about 35% was originated with the intent to sell. In mid-2023, we altered our residential mortgage loan pricing strategy to encourage the borrower to select a fixed rate residential mortgage product that we could sell rather than selecting the adjustable rate residential mortgage product 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.

Current wording

Residential mortgage loans increased $12.2 million during the first six months of 2024, representing an annualized growth rate of about 3%. Residential mortgage loan originations totaled $203 million during the first six months of 2024, of which almost 75% were originated with the intent to sell. Residential mortgage loan originations totaled $190 million during the first six months of 2023, of which about 40% were originated with the intent to sell. In mid-2023, we altered our residential mortgage loan pricing strategy to encourage borrowers to select fixed rate residential mortgage 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.

Previous wording

Other consumer-related loans totaled $51.7 million, or 1.2% of total loans, at March 31, 2024, compared to $51.1 million, or 1.1% of total loans, as of December 31, 2023. We expect this loan portfolio segment to remain relatively stable in dollar amount but decline as a percentage of total loans in future periods as the commercial loan segment grows.

Current wording

Other consumer-related loans totaled $55.3 million, or 1.2% of total loans, at June 30, 2024, compared to $51.1 million, or 1.1% of total loans, as of December 31, 2023. We expect this loan portfolio segment to remain relatively stable in dollar amount but decline as a percentage of total loans in future periods as the commercial loan segment grows.

Previous wording

Nonperforming loans totaled $6.0 million, or 0.1% of total loans, as of March 31, 2024, compared to $3.4 million, or 0.1% of total loans, as of December 31, 2023. Nonperforming assets, comprised of nonaccrual loans, loans past due 90 days or more and accruing interest and foreclosed properties, totaled $6.2 million (0.1% of total assets) as of March 31, 2024, compared to $3.6 million (0.1% of total assets) as of December 31, 2023. The volume of nonperforming assets has remained under 0.3% of total assets since year-end 2015. Given the low levels of nonperforming loans and accruing loans 30 to 89 days delinquent, combined with what we believe are strong credit administration practices, we are pleased with the overall quality of the loan portfolio.

Current wording

Nonperforming loans totaled $9.1 million, or 0.2% of total loans, as of June 30, 2024, compared to $3.4 million, or 0.1% of total loans, as of December 31, 2023. Nonperforming assets, comprised of nonaccrual loans, loans past due 90 days or more and accruing interest and foreclosed properties, totaled $9.1 million (0.2% of total assets) as of June 30, 2024, compared to $3.6 million (0.1% of total assets) as of December 31, 2023. The volume of nonperforming assets has remained under 0.3% of total assets since year-end 2015. Given the low levels of nonperforming loans and accruing loans 30 to 89 days delinquent, combined with what we believe are strong credit administration practices, we are pleased with the overall quality of the loan portfolio.

Previous wording

During the first quarter of 2024, loan charge-offs totaled less than $0.1 million, while recoveries of prior period loan charge-offs equaled $0.4 million. We continue our collection efforts on charged-off loans and expect to record recoveries in future periods; however, given the nature of these efforts, it is not practical to forecast the dollar amount and timing of the recoveries.

Current wording

During the first six months of 2024, loan charge-offs totaled less than $0.1 million, while recoveries of prior period loan charge-offs equaled $0.7 million. We continue our collection efforts on charged-off loans and expect to record recoveries in future periods; however, given the nature of these efforts, it is not practical to forecast the dollar amount and timing of the recoveries.

Previous wording

The allowance equaled $51.6 million, or 1.19% of total loans, and 855% of nonperforming loans, as of March 31, 2024. As of March 31, 2024, the allowance was comprised of $49.1 million in general reserves relating to performing loans and $2.5 million in specific reserves on other loans, primarily nonperforming loans. Loans with an aggregate carrying value of $0.4 million as of March 31, 2024 had been subject to previous partial charge-offs aggregating $0.4 million over the past several years. As of March 31, 2024, there were no specific reserves allocated to loans that had been subject to a previous partial charge-off.

Current wording

The allowance equaled $55.4 million, or 1.25% of total loans and 607% of nonperforming loans, as of June 30, 2024. As of June 30, 2024, the allowance was comprised of $49.1 million in general reserves relating to performing loans and $6.3 million in specific reserves on other loans, primarily nonperforming loans. Loans with an aggregate carrying value of $0.3 million as of June 30, 2024 had been subject to previous partial charge-offs aggregating $0.3 million over the past several years. As of June 30, 2024, there were no specific reserves allocated to loans that had been subject to a previous partial charge-off.

Previous wording

The following table reflects the composition of our allowance for credit losses, nonaccrual loans, and net charge-offs as of and for the period ended March 31, 2024.

Current wording

The following table reflects the composition of our allowance for credit losses, nonaccrual loans, and net charge-offs as of and for the six months ended June 30, 2024.

Previous wording

Securities available for sale decreased $7.9 million during the first quarter of 2024, totaling $609 million as of March 31, 2024. There were no purchases of U.S. Government agency bonds during the first quarter of 2024, while proceeds from maturities aggregated $4.0 million. There were no purchases of U.S. Government agency guaranteed mortgage-backed securities during the first quarter of 2024, while proceeds from principal paydowns on U.S. Government agency guaranteed mortgage-backed securities aggregated $1.1 million. Purchases of municipal bonds totaled $0.6 million during the first quarter of 2024, while proceeds from matured municipal bonds totaled $0.2 million. At March 31, 2024, the portfolio was primarily comprised of U.S. Government agency bonds (63%), municipal bonds (32%) and U.S. Government agency guaranteed mortgage-backed securities (5.0%). 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 March 31, 2024 totaled $609 million, including a net unrealized loss of $67.1 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 any upcoming purchases to generally consist of U.S. Government agency bonds and municipal bonds, with the securities portfolio maintained at about 12% to 15% of total assets.

Current wording

Securities available for sale increased $30.8 million during the first six months of 2024, totaling $648 million as of June 30, 2024. Purchases of U.S. Government agency bonds during the first six months of 2024 aggregated $46.0 million, while proceeds from maturities totaled $10.0 million. There were no purchases of U.S. Government agency guaranteed mortgage-backed securities during the first six months of 2024, while proceeds from principal paydowns aggregated $1.6 million. Purchases of municipal bonds totaled $11.6 million during the first six months of 2024, while proceeds from matured municipal bonds aggregated $11.6 million. At June 30, 2024, the portfolio was primarily comprised of U.S. Government agency bonds (66%), municipal bonds (30%) and U.S. Government agency guaranteed mortgage-backed securities (4%). All of our securities are currently designated as available for sale, and are therefore stated at fair value. The fair value of securities designated as available for sale at June 30, 2024 totaled $648 million, including a net unrealized loss of $67.4 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 any upcoming purchases to generally consist of U.S. Government agency bonds and municipal bonds, with the securities portfolio maintained at about 12% to 15% of total assets.

Previous wording

FHLBI stock totaled $21.5 million as of March 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.

Current wording

FHLBI stock totaled $21.5 million as of June 30, 2024, unchanged from December 31, 2023. Our investment in FHLBI stock is necessary to engage in the FHLBI’s 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.

Previous wording

Interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, averaged $150 million during the first quarter of 2024, compared to $31.1 million during the first quarter of 2023. The higher average balance primarily reflects an increase in deposits and our desire to maintain higher levels of on balance sheet liquidity. Historically, we have maintained interest-earning deposits at approximately $75 million.

Current wording

Interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, averaged $166 million during the first six months of 2024, compared to $48.1 million during the first six months of 2023. The higher average balance primarily reflects an increase in deposits and our desire to maintain higher levels of on balance sheet liquidity. Historically, we have maintained interest-earning deposits at approximately $75.0 million.

Previous wording

Net premises and equipment equaled $50.8 million at March 31, 2024, compared to $50.9 million as of December 31, 2023. Depreciation expense totaled $1.6 million during the first quarter of 2024, while investments associated with renovations of existing facilities totaled $1.5 million.

Current wording

Net premises and equipment equaled $50.2 million at June 30, 2024, compared to $50.9 million as of December 31, 2023. Depreciation expense totaled $3.1 million during the first six months of 2024, while investments associated with renovations of existing facilities totaled $2.4 million.

Previous wording

Total deposits increased $107 million during the first quarter of 2024, providing for an annualized growth rate of about 11%. Growth in money market deposit accounts and time deposits more than offset a reduction in noninterest-bearing business checking accounts reflecting the customary level of customers’ tax and bonus payments and partnership distributions during the early part of each first quarter. Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $620 million, or about 13% of total funds, as of March 31, 2024, compared to $636 million, or about 14% of total funds, as of December 31, 2023.

Current wording

Total deposits increased $246 million during the first six months of 2024, providing for an annualized growth rate of about 13%. Growth in money market deposit accounts and local time deposits more than offset a reduction in business noninterest-bearing checking accounts reflecting the customary level of customers’ tax and bonus payments and partnership distributions during the early part of each first quarter. Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $580 million, or about 12% of total funds, as of June 30, 2024, compared to $636 million, or about 14% of total funds, as of December 31, 2023.

Previous wording

Noninterest-bearing deposits decreased $113 million during the first quarter of 2024, in large part reflecting the aforementioned customary level of customers’ tax and bonus payments and partnership distributions. Interest-bearing checking accounts declined $13.5 million, and savings deposits were down $3.0 million. Money market deposit accounts increased $180 million and local time deposits were up $50.9 million, primarily reflecting growth in deposits from existing customers and initial deposits from new customers.

Current wording

Noninterest-bearing deposits decreased $128 million during the first six months of 2024, in large part reflecting the aforementioned customary level of customers’ tax and bonus payments and partnership distributions in early 2024. Interest-bearing checking accounts increased $6.1 million, and savings deposits were down $16.0 million. Money market deposit accounts increased $311 million, and time deposits were up $71.9 million, primarily reflecting growth in deposits from existing customers and initial deposits from new customers.

Previous wording

Uninsured deposits totaled approximately $1.9 billion, or 47% of total deposits, as of March 31, 2024, compared to approximately $1.9 billion, or 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.

Current wording

Uninsured deposits totaled approximately $2.0 billion, or 49% of total deposits, as of June 30, 2024, compared to approximately $1.9 billion, or 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.

Previous wording

Securities sold under agreements to repurchase (“sweep accounts”) decreased $1.1 million during the first quarter of 2024, totaling $229 million as of March 31, 2024. The aggregate balance of sweep accounts is subject to relatively large daily fluctuations given the nature of the customers utilizing this product and the sizable balances that many of the customers maintain. The average balance of sweep accounts equaled $217 million during the first quarter of 2024, with a high balance of $247 million and a low balance of $166 million. Our sweep account program entails transferring collected funds from certain business noninterest-bearing checking accounts and savings deposits into overnight interest-bearing repurchase agreements. Such sweep accounts are not deposit accounts and are not afforded federal deposit insurance, and are accounted for as secured borrowings. All of our repurchase agreements are accounted for as secured borrowings.

Current wording

Securities sold under agreements to repurchase (“sweep accounts”) decreased $7.8 million during the first six months of 2024, totaling $222 million as of June 30, 2024. The aggregate balance of sweep accounts is subject to relatively large daily fluctuations given the nature of the customers utilizing this product and the sizable balances that many of the customers maintain. The average balance of sweep accounts equaled $221 million during the first six months of 2024, with a high balance of $258 million and a low balance of $166 million. Our sweep account program entails transferring collected funds from certain business noninterest-bearing checking accounts and savings deposits into overnight interest-bearing repurchase agreements. Such sweep accounts are not deposit accounts and are not afforded federal deposit insurance, and are accounted for as secured borrowings. All of our repurchase agreements are accounted for as secured borrowings.

Previous wording

FHLBI advances decreased $20.8 million during the first quarter of 2024, totaling $447 million as of March 31, 2024. Bullet advances aggregating $10.0 million were obtained during the first quarter of 2024, while bullet advance maturities aggregated $30.0 million. Payments on amortizing FHLBI advances totaled $0.8 million. Bullet FHLBI advances are generally obtained to provide funds for loan growth and are used to assist in managing interest rate risk, while amortizing FHLBI advances are generally acquired to match-fund specific longer-term fixed rate commercial loans, with the dollar amount and amortization structure of the underlying advances reflective of the associated commercial loans. FHLBI advances are collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on commercial real estate property loans, and substantially all other assets of our bank, under a blanket lien arrangement. Our borrowing line of credit as of March 31, 2024 totaled $908 million, with remaining availability based on collateral equaling $464 million.

Current wording

FHLBI advances decreased $40.8 million during the first six months of 2024, totaling $427 million as of June 30, 2024. Bullet advances aggregating $10.0 million were obtained during the first six months of 2024, while bullet advance maturities aggregated $50.0 million. Payments on amortizing FHLBI advances totaled $0.8 million. Bullet FHLBI advances are generally obtained to provide funds for loan growth and are used to assist in managing interest rate risk, while amortizing FHLBI advances are generally acquired to match-fund specific longer-term fixed rate commercial loans, with the dollar amount and amortization structure of the underlying advances reflective of the associated commercial loans. FHLBI advances are collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on commercial real estate property loans, and substantially all other assets of our bank, under a blanket lien arrangement. Our borrowing line of credit as of June 30, 2024 totaled $1.01 billion, with remaining availability based on collateral equaling $576 million.

Previous wording

Shareholders’ equity increased $14.5 million during the first quarter of 2024, equaling $537 million at March 31, 2024. Positively impacting shareholders’ equity during the first quarter was net income of $21.6 million, which was partially offset by the payment of a cash dividend totaling $5.5 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 $1.0 million. A $2.5 million after-tax decrease in the market value of our available for sale securities portfolio, reflecting an increase in market interest rates, negatively impacted shareholders’ equity during the first quarter of 2024.

Current wording

Shareholders’ equity increased $29.0 million during the first six months of 2024, equaling $551 million at June 30, 2024. Positively impacting shareholders’ equity during the first six months of 2024 was net income of $40.3 million, which was partially offset by the payment of cash dividends totaling $11.1 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 $2.5 million. A $2.8 million after-tax decrease in the market value of our available for sale securities portfolio, reflecting an increase in market interest rates, negatively impacted shareholders’ equity during the first six months of 2024.

Previous wording

To assist in providing needed funds and managing interest rate risk, we periodically obtain monies from wholesale funding sources. Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $620 million, or about 13% of total funds, as of March 31, 2024, compared to $636 million, or about 14% of total funds, as of December 31, 2023.

Current wording

To assist in providing needed funds and managing interest rate risk, we periodically obtain monies from wholesale funding sources. Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $580 million, or about 12% of total funds, as of June 30, 2024, compared to $636 million, or about 14% of total funds, as of December 31, 2023.

Previous wording

Sweep accounts decreased $1.1 million during the first quarter of 2024, totaling $229 million as of March 31, 2024. The aggregate balance of sweep accounts is subject to relatively large daily fluctuations given the nature of the customers utilizing this product and the sizable balances that many of the customers maintain. The average balance of sweep accounts equaled $217 million during the first quarter of 2024, with a high balance of $247 million and a low balance of $166 million. Our sweep account program entails transferring collected funds from certain business noninterest-bearing checking accounts and savings deposits into overnight interest-bearing repurchase agreements. Such sweep accounts are not deposit accounts and are not afforded federal deposit insurance, and are accounted for as secured borrowings. All of our repurchase agreements are accounted for as secured borrowings.

Current wording

Sweep accounts decreased $7.8 million during the first six months of 2024, totaling $222 million as of June 30, 2024. The aggregate balance of sweep accounts is subject to relatively large daily fluctuations given the nature of the customers utilizing this product and the sizable balances that many of the customers maintain. The average balance of sweep accounts equaled $221 million during the first six months of 2024, with a high balance of $258 million and a low balance of $166 million. Our sweep account program entails transferring collected funds from certain business noninterest-bearing checking accounts and savings deposits into overnight interest-bearing repurchase agreements. Such sweep accounts are not deposit accounts and are not afforded federal deposit insurance, and are accounted for as secured borrowings. All of our repurchase agreements are accounted for as secured borrowings.

Previous wording

Information regarding our repurchase agreements as of March 31, 2024 and during the first three months of 2024 is as follows:

Current wording

Information regarding our repurchase agreements as of June 30, 2024 and during the first six months of 2024 is as follows:

Previous wording

FHLBI advances decreased $20.8 million during the first quarter of 2024, totaling $447 million as of March 31, 2024. Bullet advances aggregating $10.0 million were obtained during the first quarter of 2024, while bullet advance maturities aggregated $30.0 million. Payments on amortizing FHLBI advances totaled $0.8 million. Bullet FHLBI advances are generally obtained to provide funds for loan growth and are used to assist in managing interest rate risk, while amortizing FHLBI advances are generally acquired to match-fund specific longer-term fixed rate commercial loans, with the dollar amount and amortization structure of the underlying advances reflective of the associated commercial loans. FHLBI advances are collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on commercial real estate property loans, and substantially all other assets of our bank, under a blanket lien arrangement. Our borrowing line of credit as of March 31, 2024 totaled $908 million, with remaining availability based on collateral equaling $464 million.

Current wording

FHLBI advances decreased $40.8 million during the first six months of 2024, totaling $427 million as of June 30, 2024. Bullet advances aggregating $10.0 million were obtained during the first six months of 2024, while bullet advance maturities aggregated $50.0 million. Payments on amortizing FHLBI advances totaled $0.8 million. Bullet FHLBI advances are generally obtained to provide funds for loan growth and are used to assist in managing interest rate risk, while amortizing FHLBI advances are generally acquired to match-fund specific longer-term fixed rate commercial loans, with the dollar amount and amortization structure of the underlying advances reflective of the associated commercial loans. FHLBI advances are collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on commercial real estate property loans, and substantially all other assets of our bank, under a blanket lien arrangement. Our borrowing line of credit as of June 30, 2024 totaled $1.01 billion, with remaining availability based on collateral equaling $576 million.

Previous wording

We also have the ability to borrow up to an aggregate $70.0 million on a daily basis through correspondent banks using established unsecured federal funds purchased lines of credit. We did not access these lines of credit during the first quarter of 2024. In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged $140 million during the first quarter of 2024. We also have a line of credit through the Discount Window of the Federal Reserve Bank of Chicago. Using certain municipal bonds as collateral, we could have borrowed up to $26.6 million as of March 31, 2024. We did not utilize this line of credit during the first quarter of 2024 or at any time during the previous 15 fiscal years, and do not plan to access this line of credit in future periods.

Current wording

We also have the ability to borrow up to an aggregate $70.0 million on a daily basis through correspondent banks using established unsecured federal funds purchased lines of credit. We did not access these lines of credit during the first six months of 2024. In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged $154 million during the first six months of 2024. We also have a line of credit through the Discount Window of the Federal Reserve Bank of Chicago. Using certain municipal bonds as collateral, we could have borrowed up to $25.7 million as of June 30, 2024. We did not utilize this line of credit during the first six months of 2024 or at any time during the previous 15 fiscal years, and do not plan to access this line of credit in future periods.

Previous wording

In addition to normal loan funding and deposit flow, we must maintain liquidity to meet the demands of certain unfunded loan commitments and standby letters of credit. As of March 31, 2024, we had a total of $2.06 billion in unfunded loan commitments and $19.5 million in unfunded standby letters of credit. Of the total unfunded loan commitments, $1.83 billion were commitments available as lines of credit to be drawn at any time as customers’ cash needs vary, and $235 million were for loan commitments generally expected to close and become funded within the next 12 to 18 months. We regularly monitor fluctuations in loan balances and commitment levels, and include such data in our overall liquidity management.

Current wording

In addition to normal loan funding and deposit flow, we must maintain liquidity to meet the demands of certain unfunded loan commitments and standby letters of credit. As of June 30, 2024, we had a total of $2.04 billion in unfunded loan commitments and $19.9 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 $255 million were for loan commitments generally expected to close and become funded within the next 12 to 18 months. We regularly monitor fluctuations in loan balances and commitment levels, and include such data in our overall liquidity management.

Previous wording

Shareholders’ equity increased $14.5 million during the first quarter of 2024, equaling $537 million at March 31, 2024. Positively impacting shareholders’ equity during the first quarter was net income of $21.6 million, which was partially offset by the payment of a cash dividend totaling $5.5 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 $1.0 million. A $2.5 million after-tax decrease in the market value of our available for sale securities portfolio, reflecting an increase in market interest rates, negatively impacted shareholders’ equity during the first quarter of 2024.

Current wording

Shareholders’ equity increased $29.0 million during the first six months of 2024, equaling $551 million at June 30, 2024. Positively impacting shareholders’ equity during the first six months of 2024 was net income of $40.3 million, which was partially offset by the payment of cash dividends totaling $11.1 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 $2.5 million. A $2.8 million after-tax decrease in the market value of our available for sale securities portfolio, reflecting an increase in market interest rates, negatively impacted shareholders’ equity during the first six months of 2024.

Previous wording

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 March 31, 2024, our bank’s total risk-based capital ratio was 13.8%, compared to 13.4% at December 31, 2023. Our bank’s total regulatory capital increased $18.3 million during the first quarter of 2024, in large part reflecting net income totaling $24.3 million, which was partially offset by cash dividends paid to us aggregating $7.3 million. Our bank’s total risk-based capital ratio was also impacted by a $9.4 million decrease in total risk-weighted assets. As of March 31, 2024, our bank’s total regulatory capital equaled $713 million, or $196 million in excess of the 10.0% minimum that is among the requirements to be categorized as “well capitalized.” Our and our bank’s capital ratios as of March 31, 2024 and December 31, 2023 are disclosed in Note 12 of the Notes to Consolidated Financial Statements.

Current wording

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 June 30, 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 $36.2 million during the first six months of 2024, in large part reflecting net income totaling $45.9 million, which was partially offset by cash dividends paid to us aggregating $14.6 million. Our bank’s total risk-based capital ratio was also impacted by a $94.7 million increase in total risk-weighted assets. As of June 30, 2024, our bank’s total regulatory capital equaled $731 million, or $204 million in excess of the 10.0% minimum that is among the requirements to be categorized as “well capitalized.” Our and our bank’s capital ratios as of June 30, 2024 and December 31, 2023 are disclosed in Note 12 of the Notes to Consolidated Financial Statements.

Previous wording

We recorded net income of $21.6 million, or $1.34 per basic and diluted share, for the first quarter of 2024, compared with net income of $21.0 million, or $1.31 per basic and diluted share, for the first quarter of 2023.

Current wording

We recorded net income of $18.8 million, or $1.17 per basic and diluted share, for the second quarter of 2024, compared with net income of $20.4 million, or $1.27 per basic and diluted share, for the second quarter of 2023. We recorded net income of $40.3 million, or $2.50 per basic and diluted share, for the first six months of 2024, compared with net income of $41.3 million, or $2.58 per basic and diluted share, for the first six months of 2023. Diluted earnings per share decreased $0.10, or 7.9%, during the second quarter of 2024, and $0.08, or 3.1%, during the first six months of 2024, compared with the respective prior-year periods.

Previous wording

The higher level of net income during the first quarter of 2024 compared to the respective 2023 period resulted from increased noninterest income, which more than offset decreased net interest income and higher overhead costs and provision expense. The growth in noninterest income mainly stemmed from increased mortgage banking income, treasury management fees, interest rate swap revenue, and bank owned life insurance income, along with profits generated from an investment in a private equity fund. The increase in bank owned life insurance income primarily resulted from the receipt of death benefit claims during the first three months of 2024. Net interest income declined as increased yields on, along with growth in, earning assets were more than offset by a higher cost of funds. The increase in overhead costs mainly reflected larger salary and benefit costs and contributions to the Foundation. The provision expense recorded during the first quarter of 2024 primarily reflected an individual allocation for a nonperforming commercial loan relationship, allocations necessitated by net loan growth, and a change in a commercial loan environmental factor.

Current wording

The lower levels of net income during the second quarter and first six months of 2024 compared to the respective 2023 periods primarily resulted from higher overhead costs and provisions for credit losses and decreased net interest income, which more than offset notable increases in noninterest income. The increase in noninterest expense during the 2024 periods mainly resulted from larger salary and data processing costs; increased contributions to the Foundation also contributed to the higher level of overhead costs during the first six months of 2024. The provision expense recorded during the 2024 periods primarily reflected individual allocations assigned to two different nonperforming nonreal-estate-related commercial loan relationships, with one each being recorded in the first quarter and second quarter, and allocations necessitated by net loan growth. Net interest income declined during the 2024 periods as higher yields on, along with growth in, earning assets were more than offset by an increased cost of funds. The growth in noninterest income during the 2024 periods mainly resulted from increased mortgage banking income and service charges on accounts; higher levels of payroll service fees, interest rate swap income, and gains on the sales of other real estate owned also contributed to the increased noninterest income during the periods. Revenue associated with a private equity investment and benefit claims on bank owned life insurance policies positively impacted noninterest income during the first six months of 2024.

Previous wording

Interest income during the first quarter of 2024 was $76.7 million, an increase of $16.2 million, or 26.8%, from the $60.5 million earned during the first quarter of 2023. The increase resulted from a higher yield on, and growth in, average earning assets. The yield on average earning assets was 6.06% during the first quarter of 2024, up from 5.35% during the respective 2023 period. The higher yield primarily resulted from an increased yield on loans, reflecting the rising interest rate environment. The yield on loans was 6.65% during the first three months of 2024, up from 5.90% during the respective prior-year period mainly due to higher interest rates on variable-rate commercial loans stemming from the FOMC significantly raising the targeted federal funds rate in an effort to curb elevated inflation levels. The FOMC increased the targeted federal funds rate by 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. Increased yields on securities and interest-earning deposits, reflecting the rising interest rate environment, along with a change in earning asset mix, comprised of a decrease in lower-yielding securities as a percentage of earning assets, also contributed to the higher yield on average earning assets. Average earning assets equaled $5.08 billion during the first quarter of 2024, up $496 million, or 10.8%, from the level of $4.59 billion during the first quarter of 2023; average loans were up $371 million, average interest-earning deposits grew $119 million, and average securities increased $6.5 million.

Current wording

Interest income during the second quarter of 2024 was $78.9 million, an increase of $13.0 million, or 19.7%, from the $65.9 million earned during the second quarter of 2023. The increase resulted from growth in, and a higher yield on, average earning assets. Average earning assets equaled $5.22 billion during the second quarter of 2024, up $502 million, or 10.7%, from the level of $4.72 billion during the second quarter of 2023; average loans were up $379 million, average interest-earning deposits grew $118 million, and average securities increased $6.0 million. The yield on average earning assets was 6.07% during the second quarter of 2024, up from 5.61% during the respective 2023 period. The higher yield primarily resulted from an increased yield on loans. The yield on loans was 6.64% during the second quarter of 2024, up from 6.19% during the second quarter of 2023 mainly due to higher interest rates on variable-rate commercial loans resulting from the FOMC raising the targeted federal funds rate in an effort to reduce elevated inflation levels. The FOMC increased the targeted federal funds rate by 75 basis points during the period of March 2023 through July 2023, during which time average variable-rate commercial loans represented approximately 68% of average total commercial loans. Increased yields on securities and interest-earning deposits, reflecting the rising interest rate environment, along with a change in earning asset mix, comprised of a decrease in lower-yielding securities as a percentage of earning assets, also contributed to the higher yield on average earning assets.

Previous wording

Interest expense during the first quarter of 2024 was $29.4 million, an increase of $17.3 million, or 143%, from the $12.1 million expensed during the first quarter of 2023. The increase is mainly attributable to a higher average weighted cost of interest-bearing liabilities, which rose from 1.72% during the first three months of 2023 to 3.27% during the respective current-year period primarily due to higher rates on deposits and borrowings. Reflecting the rising interest rate environment, the cost of interest-bearing, non-time deposits increased from 1.27% during the first quarter of 2023 to 2.61% during the first quarter of 2024, while the cost of time deposits increased from 2.29% to 4.60% during the respective periods. The higher cost of interest-bearing, non-time deposits mainly resulted from increased rates paid on money market and interest-bearing business checking accounts. A change in funding mix, primarily consisting of a decrease in noninterest-bearing and lower-cost deposits and an increase in higher-cost money market accounts and time deposits stemming from deposit migration and new deposit relationships, also contributed to the increased cost of funds. The cost of borrowed funds increased from 2.51% during the first quarter of 2023 to 3.51% during the first quarter of 2024 mainly due to higher costs of sweep accounts and FHLBI advances. The cost of sweep accounts increased from 0.84% during the first three months of 2023 to 3.06% during the first three months of 2024, while the cost of FHLBI advances increased from 2.12% to 2.92% during the respective periods, reflecting the rising interest rate environment. Growth in interest-bearing liabilities also contributed to the increase in interest expense during the first quarter of 2024 compared to the prior-year first quarter. Average interest-bearing liabilities totaled $3.61 billion during the current-year first quarter, compared to $2.86 billion during the first quarter of 2023, representing an increase of $746 million, or 26.1%.

Current wording

Interest expense during the second quarter of 2024 was $31.8 million, an increase of $13.4 million, or 73.2%, from the $18.4 million expensed during the second quarter of 2023. The increase is mainly attributable to a higher average weighted cost of interest-bearing liabilities, which rose from 2.37% during the second quarter of 2023 to 3.40% during the current-year second quarter primarily due to higher rates on deposits and borrowings. A change in funding mix, mainly consisting of a decrease in noninterest-bearing and lower-cost deposits and an increase in higher-cost money market accounts and time deposits stemming from deposit migration and new deposit relationships, also contributed to the increased cost of funds. Reflecting the rising interest rate environment, the cost of interest-bearing, non-time deposits increased from 1.85% during the second quarter of 2023 to 2.79% during the second quarter of 2024, while the cost of time deposits increased from 3.27% to 4.73% during the respective periods. The higher cost of interest-bearing, non-time deposits primarily resulted from increased rates paid on money market and interest-bearing business checking accounts. The cost of borrowed funds increased from 2.90% during the second quarter of 2023 to 3.56% during the second quarter of 2024 mainly due to higher costs of sweep accounts and FHLBI advances. The cost of sweep accounts increased from 1.45% during the second quarter of 2023 to 3.12% during the second quarter of 2024, while the cost of FHLBI advances increased from 2.68% to 2.96% during the respective periods, reflecting the rising interest rate environment. Growth in interest-bearing liabilities also contributed to the increase in interest expense during the second quarter of 2024 compared to the prior-year second quarter. Average interest-bearing liabilities totaled $3.76 billion during the second quarter of 2024, compared to $3.11 billion during the second quarter of 2023, representing an increase of $652 million, or 21.0%.