MERCANTILE BANK CORP

Previous wording

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,” “estimates,” “expects,” “intends,” “is likely,” “plans,” “projects,” “indicates,” “strategy,” “future,” “likely,” “may,” “should,” “will,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. We undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise.

Current wording

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.

Previous wording

Increased public and investor concern about climate change will likely continue to (1) generate more regional and/or national requirements to reduce greenhouse gas emissions; (2) increase energy efficiency and reduce carbon pollution; and (3) cause a shift to cleaner and more sustainable sources of energy which may be more expensive than using fossil fuels as an energy source. 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. We could also face indirect financial risks passed through the supply chain that could result in higher prices for resources, such as energy. Additionally, climate change may adversely impact the demand, prices, and availability of property and casualty insurance that insures our loan collateral. Due to significant economic variability associated with potential future changing climate conditions, we are unable to predict the impact climate change will have on us.

Current wording

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.

Previous wording

Our ESG 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 ESG Committee is a cross-functional management committee, led by the Chief Risk Officer, that assists us in: (1) setting general strategies relating to ESG matters; (2) developing, implementing, and monitoring initiatives and polices 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 2023. Highlights for 2023 included establishing Mercantile Community Partners LLC to facilitate low-income housing tax credits, hiring a fulltime Director of Learning to better develop our employees, engaging a new provider to improve our ESG data gathering and reporting, incorporating a member of our Bank’s Young Professional resource group as a member of the ESG Committee, and rolling out a new Green Mortgage Lending Program to support homeowners looking to make environmentally sustainable home improvements. Our bank also developed a Clawback Policy; an Insider Trading Policy; Corporate Governance Guidelines; an Anti-Bribery and Anti-Corruption Policy; and an Anti-Money Laundering, Bank Secrecy Act, Customer Identification and Due Diligence Programs Letter. These and our other policies (including our Vendor and Supplier Code of Conduct, Environmental Policy, Diversity, Equity and Inclusion Policy, Human Rights Policy, and Supplier Diversity Program Policy) are reviewed and approved by our Board of Directors at least annually and can be found on our website.

Current wording

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.

Previous wording

We recorded net income of $82.2 million, or $5.13 per basic and diluted share, for 2023, compared with net income of $61.1 million, or $3.85 per basic and diluted share, for 2022. Higher net interest income, stemming from an improved net interest margin and ongoing strong loan growth, combined with continued strength in asset quality metrics more than offset higher overhead costs.

Current wording

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.

Previous wording

Commercial loans increased $283 million, or approximately 9%, during 2023. Owner-occupied commercial real estate (“CRE”) loans grew $78.5 million, commercial and industrial loans increased $69.5 million, multi-family and residential rental property loans were up $66.1 million, nonowner-occupied CRE loans grew $56.5 million, and vacant land, land development, and residential construction loans increased $12.9 million. As a percentage of total commercial loans, commercial and industrial loans and owner-occupied CRE loans combined equaled 57.7% at December 31, 2023, compared to 58.2% at year-end 2022. The new commercial loan pipeline remains strong, and at December 31, 2023, we had $343 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase.

Current wording

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.

Previous wording

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling 0.08% of total loans as of December 31, 2023. Accruing loans past due 30 to 89 days remain very low, as did foreclosed property activity throughout 2023. 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.

Current wording

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.

Previous wording

Our total assets increased $481 million during 2023, and totaled $5.35 billion as of December 31, 2023. Total loans increased $387 million, securities available for sale were up $14.2 million, and interest-earning deposits grew $25.2 million. Total deposits increased $188 million, FHLBI advances were up $160 million, and shareholders’ equity grew $80.7 million.

Current wording

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.

Previous wording

Average earning assets equaled 94.4% of average total assets during 2023, compared to 94.3% during 2022. The loan portfolio continued to comprise a majority of earning assets, followed by securities and interest-earning deposits. Average total loans equaled 84.7% of average earning assets during 2023, compared to 77.8% in 2022, while average securities and interest-earning deposits comprised 13.1% and 2.2% of average earning assets during 2023 and 12.9% and 9.3% of average earning assets during 2022, respectively.

Current wording

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.

Previous wording

Our loan portfolio has historically been primarily comprised of commercial loans. Commercial loans increased $283 million, or approximately 9%, during 2023. Owner-occupied CRE loans grew $78.5 million, commercial and industrial loans increased $69.5 million, multi-family and residential rental property loans were up $66.1 million, nonowner-occupied CRE loans grew $56.5 million, and vacant land, land development, and residential construction loans increased $12.9 million. As a percentage of total commercial loans, commercial and industrial loans and owner-occupied CRE loans combined equaled 57.7% at December 31, 2023, compared to 58.2% at year-end 2022. We believe our commercial loan portfolio remains well diversified.

Current wording

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.

Previous wording

As of December 31, 2023, availability on commercial construction and development loans that are in the construction phase totaled $343 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 $270 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 have established within our commercial loan portfolio. Usage of existing commercial lines of credit was relatively stable during 2023 at approximately 40%, similar to that of 2022 but lower than our historical average of 47%.

Current wording

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.

Previous wording

Other consumer-related loans totaled $51.1 million, or 1.1% of total loans, at December 31, 2023. 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 and residential mortgage loan portfolios grow.

Current wording

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.

Previous wording

Nonperforming loans totaled $3.4 million, or 0.1% of total loans, as of December 31, 2023, compared to $7.7 million, or 0.2% of total loans, as of December 31, 2022. Nonperforming assets, comprised of nonaccrual loans, loans past due 90 days or more and accruing interest and foreclosed properties, totaled $3.6 million (0.1% of total assets) as of December 31, 2023, compared to $7.7 million (0.2% of total assets) as of December 31, 2022. The volume of nonperforming assets has remained under 0.3% of total assets since year-end 2015, and has averaged 0.1% over the past five 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.

Current wording

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.

Previous wording

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. During 2022, loan charge-offs totaled $0.3 million, while recoveries of prior period loan charge-offs equaled $1.0 million, providing for net loan recoveries of $0.7 million, or 0.02% of average total loans. 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.

Current wording

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.

Previous wording

The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of collateral, and timeliness of scheduled payments. We have a policy of requesting and reviewing periodic financial statements from commercial loan customers, and we have a disciplined and formalized review of the existence of collateral and its value. The primary risk element with respect to each residential mortgage loan and consumer loan is the timeliness of scheduled payments. We have a reporting system that monitors past due loans and have adopted policies to pursue creditors’ rights in order to preserve our collateral position.

Current wording

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.

Previous wording

The allowance equaled $49.9 million, or 1.16% of total loans, and over 1,400% of nonperforming loans, as of December 31, 2023. As of December 31, 2023, the allowance was comprised of $49.4 million in general reserves relating to performing loans and $0.5 million in specific reserves on other loans, primarily nonperforming loans. Loans with an aggregate carrying value of $0.4 million as of December 31, 2023 had been subject to previous partial charge-offs aggregating $0.4 million over the past several years. As of December 31, 2023, there were no specific reserves allocated to loans that had been subject to a previous partial charge-off.

Current wording

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.

Previous wording

Securities available for sale increased $14.2 million during 2023, totaling $617 million as of December 31, 2023. There were no purchases of U.S. Government agency bonds during 2023; proceeds from matured U.S. Government agency bonds totaled $12.0 million. There were no purchases of U.S. Government agency guaranteed mortgage-backed securities during 2023; principal paydowns on U.S. Government agency guaranteed mortgage-backed securities totaled $2.8 million. Purchases of municipal bonds totaled $19.9 million during 2023; proceeds from matured municipal bonds totaled $9.4 million. At December 31, 2023, 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%). 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, 2023 totaled $617 million, including a net unrealized loss of $63.9 million. The net unrealized loss equaled $82.7 million as of December 31, 2022. After we considered whether the securities were issued by the federal government or its agencies and whether downgrades by bond rating agencies had occurred, we determined that the unrealized losses were due to changing interest rate environments. 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 municipal bonds, with the securities portfolio maintained at about 10% to 12% of total assets.

Current wording

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.

Previous wording

FHLBI stock totaled $21.5 million as of December 31, 2023, compared to $17.7 million as of December 31, 2022. The $3.8 million increase reflects additional stock purchased in association with an increase in outstanding advances during 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 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.

Previous wording

Cash and due from bank balances averaged 1.2% of total assets during 2023, similar to the average level during 2022, and no significant changes are expected in future periods. Net premises and equipment equaled $50.9 million at December 31, 2023, representing a decrease of $0.5 million during 2023. In large part, aggregate investments in new and existing offices approximated depreciation expense. Other real estate owned as of December 31, 2023 equaled $0.2 million, and consisted of property associated with a former branch location.

Current wording

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.

Previous wording

Other assets equaled $126 million at December 31, 2023, reflecting an increase of $30.0 million during 2023. The increase is primarily associated with an aggregate $22.5 million investment in low-income housing tax credits.

Current wording

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.

Previous wording

Sweep accounts increased $35.4 million during 2023, totaling $230 million as of December 31, 2023. 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 many of the customers maintain. The average balance of sweep accounts equaled $204 million during 2023, with a high balance of $269 million and a low balance of $135 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.

Current wording

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.

Previous wording

FHLBI advances increased $160 million during 2023, totaling $468 million as of December 31, 2023. Bullet advances aggregating $240 million were obtained during 2023, consisting of $160 million to fund loan growth and $80.0 million to replace FHLBI bullet advance maturities. Payments on amortizing FHLBI advances totaled $0.4 million during 2023. FHLBI bullet 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 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 2023 totaled $903 million, with remaining availability based on collateral of $429 million.

Current wording

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.

Previous wording

Shareholders’ equity increased $80.7 million during 2023, totaling $522 million as of December 31, 2023. Positively impacting shareholders’ equity was net income of $82.2 million, while negatively affecting shareholders’ equity were cash dividends on our common stock totaling $21.0 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 $4.7 million. Positively impacting shareholders’ equity during 2023 was a $14.9 million decline in the after-tax net unrealized loss on available for sale securities.

Current wording

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.

Previous wording

We recorded net income of $82.2 million, or $5.13 per basic and diluted share, for 2023, compared to net income of $61.1 million, or $3.85 per basic and diluted share, for 2022. Diluted earnings per share increased $1.28, or 33.2%, during 2023 compared to 2022.

Current wording

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.

Previous wording

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 $272 million and $77.8 million, respectively, during 2023, providing for net interest income of $194 million. During 2022, interest income and interest expense equaled $182 million and $23.6 million, respectively, providing for net interest income of $158 million. In comparing 2023 with 2022, interest income increased 49.2%, interest expense was up 230%, and net interest income increased 22.3%. 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.

Current wording

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.

Previous wording

The $35.3 million increase in net interest income in 2023 compared to 2022 primarily resulted from an improved net interest margin and loan portfolio expansion. During 2023, the net interest margin equaled 4.05%, up from 3.33% during 2022 due to a higher yield on average earning assets, which more than offset an increase in the cost of funds. The yield on average earning assets was 5.68% during 2023, an increase from 3.82% during 2022. The higher yield on average earning assets primarily resulted from an increased yield on loans. The yield on loans was 6.25% during 2023, up from 4.50% during 2022 mainly due to higher interest rates on variable-rate commercial loans resulting from the FOMC substantially raising the targeted federal funds rate in an effort to reduce elevated inflation levels. The FOMC increased the targeted federal funds rate by 525 basis points during the period of March 2022 through July 2023, during which time average variable-rate commercial loans represented approximately 64% of average total commercial loans. Improved yields on other interest-earning assets and securities, reflecting the increased interest rate environment, and a change in earning asset mix, consisting of an increase in higher-yielding loans as a percentage of total earning assets, also contributed to the enhanced yield on earning assets. During 2023, earning assets averaged $4.78 billion, up slightly from $4.77 billion during 2022. Average loans increased $340 million, average other interest-earning assets declined $339 million, and average securities were up $13.5 million. The cost of funds rose from 0.49% in 2022 to 1.63% in 2023 primarily due to higher costs of deposits and borrowings, stemming from the increased interest rate environment, and a change in funding mix, mainly consisting of a decrease in noninterest-bearing and lower-cost deposits and an increase in time deposits, reflecting deposit migration and new deposit relationships.

Current wording

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.

Previous wording

Interest income, which is primarily generated from the loan portfolio, increased $89.5 million during 2023 from that earned in 2022, totaling $272 million in 2023 compared to $182 million in 2022. The increase in interest income is mainly attributable to a higher yield on average earning assets and the positive impact of an increased level of average loans. During 2023 and 2022, earning assets had an average yield (tax equivalent-adjusted basis) of 5.68% and 3.82%, 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. Enhanced yields on other interest-earning assets and securities, reflecting the increased interest rate environment, and a change in earning asset mix, consisting of an increase in higher-yielding loans as a percentage of total earning assets, also contributed to the improved yield on average earning assets. Higher-yielding loans represented 84.7% of earning assets during 2023, up from 77.8% during 2022.

Current wording

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.

Previous wording

Interest income generated from the loan portfolio increased $86.3 million in 2023 compared to the level earned in 2022. An upturn in loan yield from 4.50% in 2022 to 6.25% in 2023 resulted in a $69.8 million increase in interest income, while growth in the loan portfolio during 2023 resulted in a $16.5 million increase in interest income. The improved yield on loans mainly resulted from a higher yield on commercial loans, which increased from 4.72% during 2022 to 6.84% during 2023 primarily due to the aforementioned FOMC rate increases.

Current wording

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.

Previous wording

Interest income generated from the securities portfolio increased $2.4 million in 2023 compared to the level earned in 2022. A rise in the yield on securities from 1.72% during 2022 to 2.06% during 2023 resulted in a $1.9 million increase in interest income, while growth in the average balance of the securities portfolio during 2023 resulted in an increase in interest income of $0.5 million. Interest income on other interest-earning assets increased $0.9 million in 2023 from the level earned in 2022; a higher yield on these balances resulted in an increase in interest income of $6.7 million, while a reduction in the average balance of these balances resulted in a decrease in interest income of $5.8 million.

Current wording

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.

Previous wording

Interest expense is generated from interest-bearing deposits and borrowed funds. Interest expense increased $54.2 million during 2023 from that expensed in 2022, totaling $77.8 million in 2023 compared to $23.6 million in 2022. An increase in the cost of interest-bearing liabilities from 0.82% during 2022 to 2.47% during 2023 resulted in an increase in interest expense of $49.5 million, while growth in the average balance of these liabilities during 2023 resulted in a $4.7 million increase in interest expense. During 2023, interest-bearing liabilities averaged $3.16 billion, representing an increase of $267 million, or 9.2%, from the $2.89 billion average during 2022; average interest-bearing deposits and borrowings were up $188 million and $78.9 million, respectively. During 2023 and 2022, interest-bearing liabilities had a weighted average rate of 2.47% and 0.82%, respectively. The higher average cost of interest-bearing liabilities mainly resulted from increased costs of deposit accounts. A higher cost of borrowings, along with a change in interest-bearing liability mix, also contributed to the increased average cost of interest-bearing liabilities.

Current wording

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.

Previous wording

A higher average rate paid on interest-bearing non-time deposits during 2023 resulted in a $28.8 million increase in interest expense, while growth of $5.4 million in the average balance of these deposits equated to a $0.4 million increase in interest expense. An increase in the average rate paid on time deposits during 2023 resulted in a $13.6 million increase in interest expense, while growth of $183 million in the average balance of these deposits resulted in a $2.6 million increase in interest expense. The $2.6 million increase in interest expense on short-term borrowings during 2023 almost exclusively stemmed from higher rates paid on sweep accounts. A higher average rate paid on FHLBI advances during 2023 resulted in a $2.6 million increase in interest expense, while growth of $71.2 million in the average balance of advances resulted in a $1.6 million increase in interest expense. During 2023, FHLBI advances totaling $240 million were obtained to augment on-balance sheet liquidity and offset loan expansion, seasonal deposit withdrawals, and wholesale fund maturities. The $2.0 million increase in interest expense on other borrowings almost completely resulted from an increased average rate paid on these borrowings.

Current wording

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.

Previous wording

Provisions for credit losses of $7.7 million and $6.6 million were recorded during 2023 and 2022, respectively. 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. The provision expense recorded during 2022 was necessitated by the net increase in required reserve levels stemming from changes to several environmental factors that largely reflected higher levels of inherent risk within the commercial loan and residential mortgage loan portfolios, loan growth, and increased specific reserves for certain distressed loan relationships. A higher reserve for residential mortgage loans reflecting slower principal prepayment rates also impacted provision expense during 2022. Sustained strength in loan quality metrics, including low levels of loan charge-offs, during 2023 and 2022 significantly mitigated the amount of additional reserves imposed by the previously mentioned factors. Economic forecasts were relatively stable during 2023 and 2022.

Current wording

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.

Previous wording

Noninterest expense during 2023 was $115 million, compared to $108 million during 2022. Overhead costs during 2023 included contributions to The Mercantile Bank Foundation (the “Foundation”), a loss on the sale of a former branch facility, and one-time employee benefit and facility-related costs totaling $1.8 million, while overhead costs during 2022 included contributions to the Foundation and a loss on the sale of a former branch facility totaling $1.8 million. Excluding these transactions, the increase in noninterest expense during 2023 primarily resulted from higher salary and benefit costs, largely reflecting annual merit pay increases, market adjustments, lower residential mortgage loan deferred salary costs, an increased bonus accrual, and higher health insurance claims, which more than offset reduced residential mortgage lender commissions and incentives mainly stemming from decreased loan production. The increase in overhead costs during 2023 also resulted from higher allocations to the reserve for unfunded loan commitments and increased levels of Federal Deposit Insurance Corporation (“FDIC”) deposit insurance premiums, interest rate swap collateral holding costs, and occupancy costs. The increase in FDIC deposit insurance premiums primarily resulted from an increased industry-wide assessment rate, while the higher occupancy costs mainly stemmed from increased rent expense attributable to office openings.

Current wording

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.

Previous wording

During 2023, we recorded income before federal income tax of $103 million and a federal income tax expense of $20.5 million, compared to income before federal income tax of $75.8 million and a federal income tax expense of $14.7 million during 2022. The $5.8 million increase in federal income tax expense in 2023 compared to 2022 primarily resulted from the higher level of income before federal income tax. In addition, our election to apply the proportional amortization method to our tax credit equity investments during 2023 resulted in $0.5 million in tax expense being recorded during the year. Amortization costs related to tax credit equity investments were included in noninterest expense in prior years. Our effective tax rate was 19.9% during 2023, compared to 19.4% during 2022. The tax credit equity investments-related tax election negatively impacted the effective tax rate in 2023, while the aforementioned bank owned life insurance death benefit claim, substantially all of which was nontaxable, positively impacted the effective tax rate in 2022.

Current wording

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.

Previous wording

Shareholders’ equity increased $80.7 million during 2023, totaling $522 million as of December 31, 2023. Positively impacting shareholders’ equity was net income of $82.2 million, while negatively affecting shareholders’ equity were cash dividends on our common stock totaling $21.0 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 $4.7 million. Positively impacting shareholders’ equity during 2023 was a $14.9 million decline in the after-tax net unrealized loss on available for sale securities.

Current wording

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.

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 December 31, 2023, our bank’s total risk-based capital ratio was 13.4%, compared to 13.7% at December 31, 2022. Our bank’s total regulatory capital increased $75.7 million during 2023, primarily reflecting the net impact of net income totaling $92.5 million and cash dividends paid to us aggregating $26.0 million. Our bank’s total risk-based capital ratio was also impacted by a $644 million increase in total risk-weighted assets, in large part reflecting growth within the commercial lending function. As of December 31, 2023, our bank’s total regulatory capital equaled $694 million, or approximately $177 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.”

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 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.”

Previous wording

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 sale 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.

Current wording

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.

Previous wording

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 $636 million, or 13.8% of combined deposits and borrowed funds as of December 31, 2023, compared to $308 million, or 7.3% of combined deposits and borrowed funds, as of December 31, 2022. We had $168 million in out-of-area deposits as of December 31, 2023, compared to none as of year-end 2022.

Current wording

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.

Previous wording

Securities sold under agreements to repurchase (“sweep accounts”) increased $35.4 million during 2023, totaling $230 million as of December 31, 2023. 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 many of the customers maintain. The average balance of sweep accounts equaled $204 million during 2023, with a high balance of $269 million and a low balance of $135 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.

Current wording

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.

Previous wording

FHLBI advances increased $160 million during 2023, totaling $468 million as of December 31, 2023. Bullet advances aggregating $240 million were obtained during 2023, consisting of $160 million to fund loan growth and $80.0 million to replace FHLBI bullet advance maturities. Payments on amortizing FHLBI advances totaled $0.4 million during 2023. FHLBI bullet 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 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 2023 totaled $903 million, with remaining availability based on collateral of $429 million.

Current wording

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.

Previous wording

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, with an average balance of $2.4 million during 2023. In contrast, our interest-earning deposit account at the Federal Reserve Bank of Chicago averaged $98.5 million during 2023. 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 $26.9 million at December 31, 2023. We have not utilized this line of credit in over ten years, and we do not plan to access this line of credit in future periods.

Current wording

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.