Quarterly Report for Quarter Ending March 31, 2025 (Form 10-Q)

MERCANTILE BANK CORPORATION

PART I --- FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited)

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS' EQUITY (Continued)

(Unaudited)

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to consolidated financial statements.

MERCANTILE BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

See accompanying notes to consolidated financial statements.

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The unaudited financial statements for the three months ended March 31, 2025 include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries. These subsidiaries include Mercantile Community Partners, LLC ("MCP") and Mercantile Bank ("our bank") and its subsidiaries, including Mercantile Insurance Center, Inc. These consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Item 303(b) of Regulation S-K and do not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP") for a complete presentation of our financial condition and results of operations. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair presentation of the results of operations for such periods. The results for the period ended March 31, 2025 should not be considered as indicative of results for a full year. For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form 10-K for the year ended December 31, 2024.

We have fiveseparate business trusts that were formed to issue trust preferred securities. Subordinated debentures were issued to the trusts in return for the proceeds raised from the issuance of the trust preferred securities. The trusts are not consolidated, but instead we report the subordinated debentures issued to the trusts as a liability.

Operating Segments:We conduct our operations through a single business segment, which derives interest and noninterest income through our banking products and services and investment securities. All of our income relates to our operations in the United States. Segment assets represent total assets on our Consolidated Balance Sheets and segment net income represents net income on our Consolidated Statements of Income.

Earnings Per Share: Basic earnings per share is based on the weighted average number of common shares and participating securities outstanding during the period. Diluted earnings per share include the dilutive effect of additional potential common shares issuable under our stock-based compensation plans and are determined using the treasury stock method. Our unvested restricted shares, which contain non-forfeitable rights to dividends whether paid or accrued (i.e., participating securities), are included in the number of shares outstanding for both basic and diluted earnings per share calculations. In the event of a net loss, our unvested restricted shares are excluded from the calculation of both basic and diluted earnings per share.

Approximately 278,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three months ended March 31, 2025. Approximately 327,000 unvested restricted shares were included in determining both basic and diluted earnings per share for the three months ended March 31, 2024.

Debt Securities: Debt securities classified as held to maturity are carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities available for sale consist of bonds which might be sold prior to maturity due to a number of factors, including changes in interest rates, prepayment risks, yield, availability of alternative investments or liquidity needs. Debt securities classified as available for sale are reported at their fair value. For available for sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the debt security's amortized cost basis is written down to fair value through income with the establishment of an allowance. For debt securities available for sale that do not meet the aforementioned criteria, we evaluate whether any decline in fair value is due to credit loss factors. In making this assessment, we consider any changes to the rating of the security by a rating agency and adverse conditions specifically related to the issuer of the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance is recognized in other comprehensive income (loss).

Changes in the allowance are recorded as provisions for (or reversals of) credit losses. Losses are charged against the allowance when the collectability of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2025, and December 31, 2024, there was no allowance related to the available for sale debt securities portfolio.

Interest income includes amortization of purchase premiums and accretion of discounts. Premiums on debt securities are amortized to the initial call date, if applicable, or to the maturity date, on the level-yield method. Discounts on debt securities are accreted to the maturity date on the level-yield method. Premiums and discounts on mortgage-backed securities are amortized or accreted based on anticipated prepayments on the level-yield method. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Federal Home Loan Bank of Indianapolis ("FHLBI") stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.

(Continued)

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans: Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Net unamortized deferred loan costs amounted to $2.3 million and $2.2 million at March 31, 2025, and December 31, 2024, respectively.

Interest income on commercial loans and mortgage loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer and credit card loans are typically charged off no later than when they are 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal and interest is considered doubtful.

Accrued interest is included in other assets in the Consolidated Balance Sheets. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. As of March 31, 2025 and December 31, 2024, we determined that the fair value of our mortgage loans held for sale totaled $15.5 million and $16.0 million, respectively.

Mortgage loans held for sale are generally sold with servicing rights retained. Gains and losses on sales of mortgage loans are based on the difference between the selling price, which includes a gain or loss on the interest rate commitment coverage position, and the carrying value of the related loan sold, which is reduced by the cost allocated to the servicing right. Market rate risk on interest rate commitments with borrowers prior to loan closing is mitigated through forward commitments referred to as to-be-announced mortgage-backed securities. These mortgage banking activities are not designated as hedges and are carried at fair value. The net gain or loss on mortgage banking derivatives, which is generally nominal in dollar amount, is included in the gain on sale of loans and recorded as part of mortgage banking income.

(Continued)

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Allowance for Credit Losses ("allowance"): The allowance is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. The allowance is increased by a provision for credit losses and decreased by charge-offs, net of recoveries of amounts previously charged-off. Loans are charged-off against the allowance when we believe the uncollectability of a loan balance is confirmed. The allowance is measured on a collective pool basis when similar risk characteristics exist and on an individual basis when a loan exhibits unique risk characteristic which differentiate the loan from other loans within the loan segments. Loan segments are further discussed in Note 3 - Loans and Allowance for Credit Losses.

The "remaining life methodology" is utilized for substantially all loan pools. This non-discounted cash flow approach projects an estimated future amortized cost basis based on current loan balance and repayment terms. Our historical loss rate is then applied to future loan balances at the instrument level based on remaining contractual life adjusted for amortization, prepayment and default to develop a baseline lifetime loss. The baseline lifetime loss is adjusted for changes in macroeconomic conditions over the reasonable and supportable forecast and reversion periods via a series of macroeconomic forecast inputs, such as gross domestic product, unemployment rates, interest rates, credit spreads, stock market volatility and property price indices, to quantify the impact of current and forecasted economic conditions on expected loan performance.

Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses. The forecast period represents the time frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental factors that are expected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult or may not be possible in later periods. The contractual term generally excludes potential extensions, renewals and modifications.

Subsequent to the end of the forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in relation to then current economic conditions as well as any developing loan loss activity and resulting historical data. We are not required to develop and use our own economic forecast model, and we elect to utilize economic forecasts from third-party providers that analyze and develop forecasts of the economy for the entire United States at least quarterly.

During each reporting period, we also consider the need to adjust the historical loss rates as determined to reflect the extent to which we expect current conditions and reasonable and supportable economic forecasts to differ from the conditions that existed for the period over which the historical loss information was determined. These qualitative adjustments may increase or decrease our estimate of expected future credit losses.

Our qualitative factors include:

o Changes in lending policies and procedures

o Changes in the nature and volume of the loan portfolio and in the terms of loans

o Changes in the experience, ability and depth of lending management and other relevant staff

o Changes in the volume and severity of past due loans, nonaccrual loans and adversely classified loans

o Changes in the quality of the loan review program

o Changes in the value of underlying collateral dependent loans

o Existence and effect of any concentrations of credit and any changes in such

o Effect of other factors such as competition and legal and regulatory requirements

o Local or regional conditions that depart from the conditions and forecasts for the entire country

(Continued)

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

The estimation of future credit losses should reflect consideration of all significant factors that affect the collectability of the loan portfolio at each evaluation date. While our methodology considers both the historical loss rates as well as the traditional qualitative factors, there may be instances or situations where additional qualitative factors need to be considered. Due to the relatively low level of loan losses during the look-back period, we have established a historical loss information factor that has been included in the qualitative factors that are included in the estimation of future credit losses in the periods presented.

We recorded a provision for credit losses of $2.1 million during the first three months of 2025. The provision for credit losses primarily reflected an increased allocation necessitated by changes to the economic forecast and loan growth.

Accrued interest receivable on loans totaling $17.2 million and $17.3 million as of March 31, 2025 and December 31, 2024, respectively, is included in other assetson the Consolidated Balance Sheets. We elected not to measure an allowance for accrued interest receivable and instead elected to reverse interest income on loans that are placed on nonaccrual status, which is generally when loans become 90 days past due, or earlier if we believe the collection of interest is doubtful. We believe this policy results in the timely reversal of uncollectable interest. Identified problem loans, which exhibit characteristics (financial or otherwise) that could cause the loans to become nonperforming or require restructuring in the future, are included on an internal watch list. Senior management and the Board of Directors review this list regularly. In some cases, we may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within the loan segments. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific reserve allocations of the allowance for credit losses are determined by analyzing the borrower's ability to repay amounts owed and collateral deficiencies, among other things.

For individually analyzed loans which are deemed to be collateral dependent loans, we adopted the practical expedient to measure the allowance based on the fair value of collateral. The allowance is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral and the recorded principal balance. If the fair value of the collateral exceeds the recorded principal balance, no allowance is required. Fair value estimates of collateral on individually analyzed loans, as well as on foreclosed and repossessed assets, are reviewed periodically. We also have a process in place to monitor whether value estimates at each quarter-end are reflective of current market conditions. Our credit policies establish criteria for obtaining appraisals and determining internal value estimates. We may also adjust outside and internal valuations based on identifiable trends within our markets, such as recent sales of similar properties or assets, listing prices and offers received. In addition, we may discount certain appraised and internal value estimates to address distressed market conditions.

We are also required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheets and is increased or decreased via other noninterest expense on our Consolidated Statements of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.

(Continued)

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Mortgage Banking Activities: Mortgage loans serviced for others totaled $1.56 billion and $1.55 billion as of March 31, 2025 and December 31, 2024, respectively. Mortgage loan servicing rights are recognized as assets based on the allocated value of retained servicing rights on mortgage loans sold and totaled $12.5 million as of both March 31, 2025 and December 31, 2024. Mortgage loan servicing rights are carried at the lower of amortized cost or fair value and are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights using groupings of the underlying mortgage loans as to interest rates. Any impairment of a grouping is reported as a valuation allowance. The fair value of mortgage servicing rights totaled $21.6 million and $21.0 million as of March 31, 2025 and December 31, 2024, respectively.

Servicing fee income is recorded for fees earned for servicing mortgage loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. Amortization of mortgage loan servicing rights is netted against mortgage loan servicing income and recorded in mortgage banking activities in the Consolidated Statements of Income.

Derivatives: Derivative financial instruments are recognized as assets or liabilities at fair value. The accounting for changes in the fair value of derivatives depends on the use of the derivatives and whether the derivatives qualify for hedge accounting. Used as part of our asset and liability management to help manage interest rate risk, our derivatives have generally consisted of interest rate swap agreements that qualified for hedge accounting. We do not use derivatives for trading purposes.

Changes in the fair value of derivatives that are designated, for accounting purposes, as a hedge of the variability of cash flows to be received on various assets and liabilities and are effective are reported in other comprehensive income (loss). They are later reclassified into earnings in the same periods during which the hedged transaction affects earnings and are included in the line item in which the hedged cash flows are recorded. If hedge accounting does not apply, changes in the fair value of derivatives are recognized immediately in current earnings as interest income or expense. We had no derivative instruments designated as hedges as of March 31, 2025, and December 31, 2024.

Goodwill: The acquisition method of accounting requires that assets and liabilities acquired in a business combination be recorded at fair value as of the acquisition date. The valuation of assets and liabilities often involves estimates based on third-party valuations or internal valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective. This typically results in goodwill, the amount by which the cost of net assets acquired in a business combination exceeds their fair value, which is subject to impairment testing at least annually. We review goodwill for impairment on an annual basis as of October 1 or more often if events or circumstances indicate that it is more-likely-than-not that the fair value of a reporting unit is below its carrying value. Based on our annual impairment analysis of goodwill as of October 1, it was determined that the fair value was in excess of its respective carrying value as of October 1, 2024; therefore, goodwill is considered notimpaired.

(Continued)

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue from Contracts with Customers: We record revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers" ("Topic 606"). Under Topic 606, we must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) we satisfy a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

Our primary sources of revenue are derived from interest and dividends earned on loans, securities and other financial instruments that are not within the scope of Topic 606. We have evaluated the nature of our contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary.

We generally satisfy our performance obligations on contracts with customers as services are rendered, and the transaction prices are typically fixed and charged either on a periodic basis (generally monthly) or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

(Continued)

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)

The following table depicts our sources of noninterest income presented in the Consolidated Statements of Income that are scoped within Topic 606:

		Three Months				Three Months
		Ended				Ended
(Dollars in thousands)		March 31, 2025				March 31, 2024
Service charges on deposit and sweep accounts		$	1,839			$	1,531
Credit and debit card income			2,201				2,121
Interest rate swap fees			80				1,339
Payroll services income			1,040				896
Customer service fees			197				198

Service Charges on Deposit and Sweep Accounts: We earn fees from deposit and sweep customers for account maintenance, transaction-based and overdraft services. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month reflecting the period over which we satisfy the performance obligation. Transaction-based fees, which include services such as stop payment and returned item charges, are recognized at the time the transaction is executed as that is the point in time we fulfill the customer request. Service charges on deposit and sweep accounts are withdrawn from the customer account balance.

Credit and Debit Card Income: We earn interchange income on our cardholder debit and credit card usage. Interchange income is primarily comprised of fees whenever our debit and credit cards are processed through card payment networks such as Visa. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Interest Rate Swap Fees: We offer a loan swap program to certain commercial loan customers. Through this program, we originate a variable rate loan with the customer. We and the swap customer will then enter into a fixed interest rate swap. Separately, an identical offsetting swap is entered into by the Company with a counterparty. These "back-to-back" swap arrangements are intended to offset each other and allow us to book a variable rate loan, while providing the customer with a contract for fixed interest payments. Through this program, we receive an upfront, non-refundable fee from the counterparty, dependent upon the pricing, which is recognized upon receipt from the counterparty.

Payroll Services Income: We earn fees from providing payroll processing services for our commercial clients. Fees are assessed for processing weekly or bi-weekly payroll files, reports and documents, as well as year-end tax-related files, reports and documents. Fees are recognized and collected as payroll processing services are completed for each payroll run and year-end processing activities.

Customer Service Fees: We earn fees by providing a variety of other services to our customers, such as wire transfers, check ordering, sales of cashier checks and money orders, and rentals of safe deposit boxes. Generally, fees are recognized and collected daily, concurrently with the point in time we fulfill the customer request. Safe deposit box rentals are on annual contracts, with fees generally earned at the time of the contract signing or renewal. Customer service fees are recorded as other noninterest income on our Consolidated Statements of Income.

(Continued)

2. SECURITIES

The amortized cost and fair value of available for sale securities and the related pre-tax gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) are as follows:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(Dollars in thousands)		Cost				Gains				Losses				Value
March 31, 2025
U.S. Government agency debt obligations		$	583,732			$	1,380			$	(37,703	)		$	547,409
Mortgage-backed securities			30,848				8				(5,674	)			25,182
Municipal general obligation bonds			192,160				483				(7,853	)			184,790
Municipal revenue bonds			31,820				119				(2,237	)			29,702
Other investments			500				0				0				500
		$	839,060			$	1,990			$	(53,467	)		$	787,583
December 31, 2024
U.S. Government agency debt obligations		$	542,676			$	131			$	(47,226	)		$	495,581
Mortgage-backed securities			31,696				4				(6,332	)			25,368
Municipal general obligation bonds			187,484				513				(7,827	)			180,170
Municipal revenue bonds			31,066				89				(2,422	)			28,733
Other investments			500				0				0				500
		$	793,422			$	737			$	(63,807	)		$	730,352

Securities with unrealized losses at March 31, 2025, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

		Less than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(Dollars in thousands)		Value				Loss				Value				Loss				Value				Loss
March 31, 2025
U.S. Government agency debt obligations		$	76,302			$	685			$	361,528			$	37,018			$	437,830			$	37,703
Mortgage-backed securities			12				0				24,625				5,674				24,637				5,674
Municipal general obligation bonds			52,177				1,486				101,963				6,367				154,140				7,853
Municipal revenue bonds			2,369				21				20,967				2,216				23,336				2,237
Other investments			0				0				0				0				0				0
		$	130,860			$	2,192			$	509,083			$	51,275			$	639,943			$	53,467

(Continued)

2. SECURITIES (Continued)

Securities with unrealized losses at December 31, 2024, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

		Less than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(Dollars in thousands)		Value				Loss				Value				Loss				Value				Loss
December 31, 2024
U.S. Government agency debt obligations		$	113,942			$	2,379			$	361,171			$	44,847			$	475,113			$	47,226
Mortgage-backed securities			194				1				24,865				6,331				25,059				6,332
Municipal general obligation bonds			63,387				1,117				92,153				6,710				155,540				7,827
Municipal revenue bonds			2,840				28				21,865				2,394				24,705				2,422
Other investments			0				0				0				0				0				0
		$	180,363			$	3,525			$	500,054			$	60,282			$	680,417			$	63,807

We evaluate securities in an unrealized loss position at least quarterly. Consideration is given to the financial condition of the issuer and the intent and ability we have to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. For those debt securities whose fair value is less than their amortized cost basis, we also consider our intent to sell the security, whether it is more likely than not that we will be required to sell the security before recovery and if we do not expect to recover the entire amortized cost basis of the security. In analyzing an issuer's financial condition, we may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer's financial condition.

At March 31, 2025, 799 debt securities with estimated fair values totaling $640 million had unrealized losses aggregating $53.5 million. At December 31, 2024, 843 debt securities with estimated fair values totaling $680 million had unrealized losses aggregating $63.8 million. At March 31, 2025, unrealized losses aggregating $43.4 million were attributable to bonds issued or guaranteed by agencies of the U.S. Federal Government, while unrealized losses totaling $10.1 million were associated with bonds issued by state-based municipalities. For available for sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the debt security's amortized cost basis is written down to fair value through income with the establishment of an allowance. For debt securities available for sale that do not meet the aforementioned criteria, we evaluate whether any decline in fair value is due to credit loss factors. In making this assessment, we consider any changes to the rating of the security by a rating agency and adverse conditions specifically related to the issuer of the security, among other factors.

(Continued)

2. SECURITIES (Continued)

The amortized cost and fair value of debt securities at March 31, 2025, by maturity, are shown in the following table. The contractual maturity is utilized for U.S. Government agency debt obligations and municipal bonds. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

		Amortized				Fair
(Dollars in thousands)		Cost				Value
Due in 2025		$	51,895			$	51,218
Due in 2026 through 2030			456,080				432,090
Due in 2031 through 2035			253,116				232,846
Due in 2036 and beyond			46,621				45,747
Mortgage-backed securities			30,848				25,182
Other investments			500				500
Total available for sale securities		$	839,060			$	787,583

No securities were sold during the first three months of 2025 or the full-year 2024.

Securities issued by the State of Michigan and all its political subdivisions had combined amortized costs of $224 million and $219 million as of March 31, 2025, and December 31, 2024, respectively, with estimated market values of $215 million and $209 million at the respective dates. We had no securities issued by all other states and their political subdivisions as of March 31, 2025, and December 31, 2024. Total securities of any other specific issuer, other than the U.S. Government and its agencies and the State of Michigan and all its political subdivisions, did not exceed 10% of shareholders' equity.

The carrying value of U.S. Government agency debt obligation securities that are pledged to secure repurchase agreements was $242 million and $122 million at March 31, 2025, and December 31, 2024, respectively. The carrying value of U.S. Government agency debt obligation securities that are pledged to secure specific customer deposits was $12.1 million and $11.7 million at March 31, 2025, and December 31, 2024, respectively.

(Continued)

3. LOANS AND ALLOWANCE FOR CREDIT LOSSES

Commercial loans are divided among five segments based primarily on collateral type, risk characteristics, and primary and secondary sources of repayment. These segments are then further stratified based on the commercial loan grade that is assigned using our standard loan grading paradigm. Retail loans are divided into one of two groups based on risk characteristics and source of repayment. Our allowance for credit loss pools are consistent with those used for loan note disclosure purposes.

Our loan portfolio segments as of both March 31, 2025 and December 31, 2024 were as follows:

o

Commercial Loans

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Commercial and Industrial: Risks to this loan category include industry concentration and the practical limitations associated with monitoring the condition of the collateral which often consists of inventory, accounts receivable, and other non-real estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt.

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Owner Occupied Commercial Real Estate: Risks to this loan category include industry concentration and the inability to monitor the condition of the collateral. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Also, declines in real estate values and lack of suitable alternative use for the properties are risks for loans in this category.

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Non-Owner Occupied Commercial Real Estate: Loans in this category are susceptible to declines in occupancy rates, business failure, and general economic conditions. Also, declines in real estate values and lack of suitable alternative use for the properties are risks for loans in this category.

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Multi-Family and Residential Rental: Risks to this loan category include industry concentration and the inability to monitor the condition of the collateral. Loans in this category are susceptible to weakening general economic conditions and increases in unemployment rates, as well as market demand and supply of similar property and the resulting impact on occupancy rates, market rents, cash flow, and income-based real estate values. Also, the lack of a suitable alternative use for the properties is a risk for loans in this category.

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Vacant Land, Land Development and Residential Construction: Risks common to commercial construction loans are cost overruns, changes in market demand for property, inadequate long-term financing arrangements, and declines in real estate values. Residential construction loans are susceptible to those same risks as well as those associated with residential mortgage loans. Changes in market demand for property could lead to longer marketing times resulting in higher carrying costs, declining values, and higher interest rates.

o

Retail Loans

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1-4 Family Mortgages: Residential mortgage loans are susceptible to weakening general economic conditions and increases in unemployment rates and declining real estate values.

■

Other Consumer Loans: Risks common to these loans include regulatory risks, unemployment, and changes in local economic conditions as well as the inability to monitor collateral consisting of personal property.

(Continued)

3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Our total loans at March 31, 2025 were $4.64 billion compared to $4.60 billion at December 31, 2024, an increase of $35.8 million, or 0.8%. The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at March 31, 2025 and December 31, 2024, and the percentage change in loans from the end of 2024 to the end of the first quarter of 2025, are as follows:

																		Percent
		March 31, 2025								December 31, 2024								Increase
(Dollars in thousands)		Balance				%				Balance				%				(Decrease)
Commercial:
Commercial and industrial		$	1,314,383				28.3	%		$	1,287,308				28.0	%			2.1	%
Vacant land, land development, and residential construction			68,790				1.5				66,936				1.5				2.8
Real estate - owner occupied			705,645				15.2				748,837				16.3				(5.8	)
Real estate - non-owner occupied			1,183,728				25.5				1,128,404				24.5				4.9
Real estate - multi-family and residential rental			479,045				10.3				475,819				10.3				0.7
Total commercial			3,751,591				80.8				3,707,304				80.6				1.2
Retail:
1-4 family mortgages			817,212				17.6				827,597				18.0				(1.3	)
Other consumer loans			67,746				1.6				65,880				1.4				2.8
Total retail			884,958				19.2				893,477				19.4				(1.0	)
Total loans		$	4,636,549				100.0	%		$	4,600,781				100.0	%			0.8	%

(Continued)

3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

An age analysis of past due loans is as follows as of March 31, 2025:

																										Recorded
										Greater																Balance
		30 - 59				60 - 89				Than 89																> 89
		Days				Days				Days				Total								Total				Days and
(Dollars in thousands)		Past Due				Past Due				Past Due				Past Due				Current				Loans				Accruing
Commercial:
Commercial and industrial		$	0			$	4			$	274			$	278			$	1,314,105			$	1,314,383			$	0
Vacant land, land development, and residential construction			4				0				0				4				68,786				68,790				0
Real estate - owner occupied			0				0				0				0				705,645				705,645				0
Real estate - non- owner occupied			0				0				0				0				1,183,728				1,183,728				0
Real estate - multi-family and residential rental			0				0				0				0				479,045				479,045				0
Total commercial			4				4				274				282				3,751,309				3,751,591				0
Retail:
1-4 family mortgages			57				136				662				855				816,357				817,212				0
Other consumer loans			24				0				0				24				67,722				67,746				0
Total retail			81				136				662				879				884,079				884,958				0
Total past due loans		$	85			$	140			$	936			$	1,161			$	4,635,388			$	4,636,549			$	0

(Continued)

3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

An age analysis of past due loans is as follows as of December 31, 2024:

																										Recorded
										Greater																Balance
		30 - 59				60 - 89				Than 89																> 89
		Days				Days				Days				Total								Total				Days and
(Dollars in thousands)		Past Due				Past Due				Past Due				Past Due				Current				Loans				Accruing
Commercial:
Commercial and industrial		$	5			$	0			$	864			$	869			$	1,286,439			$	1,287,308			$	0
Vacant land, land development, and residential construction			12				0				0				12				66,924				66,936				0
Real estate - owner occupied			0				0				0				0				748,837				748,837				0
Real estate - non-owner occupied			0				0				0				0				1,128,404				1,128,404				0
Real estate - multi-family and residential rental			0				0				0				0				475,819				475,819				0
Total commercial			17				0				864				881				3,706,423				3,707,304				0
Retail:
1-4 family mortgages			2,365				713				182				3,260				824,337				827,597				0
Other consumer loans			112				0				0				112				65,768				65,880				0
Total retail			2,477				713				182				3,372				890,105				893,477				0
Total past due loans		$	2,494			$	713			$	1,046			$	4,253			$	4,596,528			$	4,600,781			$	0

(Continued)

3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Nonaccrual loans as of March 31, 2025 were as follows:

		Recorded
		Principal				Related
(Dollars in thousands)		Balance				Allowance
With no allowance recorded:
Commercial:
Commercial and industrial		$	25			$	0
Vacant land, land development and residential construction			0				0
Real estate - owner occupied			41				0
Real estate - non-owner occupied			0				0
Real estate - multi-family and residential rental			0				0
Total commercial			66				0
Retail:
1-4 family mortgages			1,280				0
Other consumer loans			0				0
Total retail			1,280				0
Total with no allowance recorded		$	1,346			$	0
With an allowance recorded:
Commercial:
Commercial and industrial		$	2,232			$	1,850
Vacant land, land development and residential construction			0				0
Real estate - owner occupied			0				0
Real estate - non-owner occupied			0				0
Real estate - multi-family and residential rental			0				0
Total commercial			2,232				1,850
Retail:
1-4 family mortgages			1,783				523
Other consumer loans			0				0
Total retail			1,783				523
Total with an allowance recorded		$	4,015			$	2,373
Total nonaccrual loans:
Commercial		$	2,298			$	1,850
Retail			3,063				523
Total nonaccrual loans		$	5,361			$	2,373

Nonaccrual loans represent the entire balance of collateral dependent loans. As of March 31, 2025 and December 31, 2024, all collateral dependent loans were secured by real estate, with the exception of those classified as commercial and industrial, which were secured by accounts receivable, inventory, and equipment. Interest income recognized on nonaccrual loans totaled $0.3 million and $0.2 million during the three months ended March 31, 2025 and 2024, respectively, reflecting the collection of interest at the time of principal pay-off.

(Continued)

3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Nonaccrual loans as of December 31, 2024 were as follows:

		Recorded
		Principal				Related
(Dollars in thousands)		Balance				Allowance
With no allowance recorded:
Commercial:
Commercial and industrial		$	615			$	0
Vacant land, land development and residential construction			0				0
Real estate - owner occupied			42				0
Real estate - non-owner occupied			0				0
Real estate - multi-family and residential rental			0				0
Total commercial			657				0
Retail:
1-4 family mortgages			1,167				0
Other consumer loans			0				0
Total retail			1,167				0
Total with no allowance recorded		$	1,824			$	0
With an allowance recorded:
Commercial:
Commercial and industrial		$	2,110			$	1,732
Vacant land, land development and residential construction			0				0
Real estate - owner occupied			0				0
Real estate - non-owner occupied			0				0
Real estate - multi-family and residential rental			0				0
Total commercial			2,110				1,732
Retail:
1-4 family mortgages			1,808				402
Other consumer loans			0				0
Total retail			1,808				402
Total with an allowance recorded		$	3,918			$	2,134
Total nonaccrual loans:
Commercial		$	2,767			$	1,732
Retail			2,975				402
Total nonaccrual loans		$	5,742			$	2,134

(Continued)

3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Credit Quality Indicators. We utilize a comprehensive grading system for our commercial loans. All commercial loans are graded on a ten grade rating system. The rating system utilizes standardized grade paradigms that analyze several critical factors such as cash flow, operating performance, financial condition, collateral, industry condition and management. All commercial loans are graded at inception and reviewed and, if appropriate, re-graded at various intervals thereafter. The primary risk elements with respect to commercial loans are the financial condition of the borrower, sufficiency of collateral, and timeliness of scheduled payments. We have a policy of requesting and reviewing periodic financial statements from commercial loan customers and employ a disciplined and formalized review of the existence of collateral and its value. All commercial loans are graded using the following criteria:

Grade 1.	"Exceptional" Loans with this rating contain very little, if any, risk.
Grade 2.	"Outstanding" Loans with this rating have excellent and stable sources of repayment and conform to bank policy and regulatory requirements.
Grade 3.	"Very Good" Loans with this rating have strong sources of repayment and conform to bank policy and regulatory requirements. These are loans for which repayment risks are acceptable.
Grade 4.	"Good" Loans with this rating have solid sources of repayment and conform to bank policy and regulatory requirements. These are loans for which repayment risks are modest.
Grade 5.	"Acceptable" Loans with this rating exhibit acceptable sources of repayment and conform with most bank policies and all regulatory requirements. These are for loans for which repayment risks are satisfactory.
Grade 6.	"Monitor" Loans with this rating are considered to have emerging weaknesses which may include negative current cash flow, high leverage, or operating losses. Generally, if further deterioration is observed, these credits will be downgraded to the criticized asset report.
Grade 7.	"Special Mention" Loans with this rating have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at some future date.
Grade 8.	"Substandard" Loans with this rate are inadequately protected by current sound net worth, paying capacity of the obligor, or of the pledged collateral, if any. A Substandard loan normally has one or more well-defined weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility of loss if the deficiencies are not corrected.
Grade 9.	"Doubtful" Loans with this rating exhibit all the weaknesses inherent in the Substandard classification and where collection or liquidation in full is highly questionable and improbable.
Grade 10.	"Loss" Loans with this rating are considered uncollectable, and of such little value that continuance as an active asset is not warranted.

The primary risk element with respect to each residential real estate 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. Retail loans that reach 90 days or more past due are generally placed into nonaccrual status and are categorized as nonperforming.

(Continued)

3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

The following table reflects amortized cost basis of loans and year-to-date loan charge-offs as of March 31, 2025 based on year of origination:

																														Revolving				Grand
(Dollars in thousands)		2025				2024				2023				2022				2021				Prior				Term Total				Loans				Total
Commercial:
Commercial and Industrial:
Grades 1 - 4		$	15,017			$	101,104			$	61,386			$	16,904			$	43,365			$	16,307			$	254,083			$	369,025			$	623,108
Grades 5 - 7			48,282				164,251				71,099				38,836				13,329				4,326				340,123				314,148				654,271
Grades 8 - 9			0				6,244				374				1,202				258				47				8,125				28,879				37,004
Total		$	63,299			$	271,599			$	132,859			$	56,942			$	56,952			$	20,680			$	602,331			$	712,052			$	1,314,383
Year-to-date gross write offs		$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0
Vacant Land, Land Development and Residential Construction:
Grades 1 - 4		$	5,571			$	14,277			$	2,003			$	779			$	506			$	385			$	23,521			$	0			$	23,521
Grades 5 - 7			6,650				30,658				5,724				1,632				173				428				45,265				0				45,265
Grades 8 - 9			0				0				4				0				0				0				4				0				4
Total		$	12,221			$	44,935			$	7,731			$	2,411			$	679			$	813			$	68,790			$	0			$	68,790
Year-to-date gross write offs		$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0
Real Estate - Owner Occupied:
Grades 1 - 4		$	22,307			$	166,418			$	70,497			$	86,006			$	70,936			$	31,187			$	447,351			$	0			$	447,351
Grades 5 - 7			26,557				77,992				55,246				52,417				23,391				15,859				251,462				0				251,462
Grades 8 - 9			0				3,771				0				3,030				0				31				6,832				0				6,832
Total		$	48,864			$	248,181			$	125,743			$	141,453			$	94,327			$	47,077			$	705,645			$	0			$	705,645
Year-to-date gross write offs		$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0
Real Estate - Non-Owner Occupied:
Grades 1 - 4		$	35,110			$	91,945			$	95,902			$	75,498			$	89,377			$	96,203			$	484,035			$	0			$	484,035
Grades 5 - 7			21,954				222,630				203,640				84,198				91,472				75,799				699,693				0				699,693
Grades 8 - 9			0				0				0				0				0				0				0				0				0
Total		$	57,064			$	314,575			$	299,542			$	159,696			$	180,849			$	172,002			$	1,183,728			$	0			$	1,183,728
Year-to-date gross write offs		$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0
Real Estate - Multi-Family and Residential Rental:
Grades 1 - 4		$	10,757			$	17,826			$	45,408			$	9,768			$	60,249			$	35,555			$	179,563			$	0			$	179,563
Grades 5 - 7			36,971				73,373				146,773				29,676				5,620				6,466				298,879				0				298,879
Grades 8 - 9			0				47				0				0				0				556				603				0				603
Total		$	47,728			$	91,246			$	192,181			$	39,444			$	65,869			$	42,577			$	479,045			$	0			$	479,045
Year-to-date gross write offs		$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0
Total Commercial		$	229,176			$	970,536			$	758,056			$	399,946			$	398,676			$	283,149			$	3,039,539			$	712,052			$	3,751,591
Total Commercial year-to-date gross write offs		$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0
Retail:
1-4 Family Mortgages:
Performing		$	9,550			$	73,355			$	117,133			$	299,888			$	198,136			$	116,087			$	814,149			$	0			$	814,149
Nonperforming			0				179				88				1,604				365				827				3,063				0				3,063
Total		$	9,550			$	73,534			$	117,221			$	301,492			$	198,501			$	116,914			$	817,212			$	0			$	817,212
Year-to-date gross write offs		$	0			$	0			$	0			$	0			$	61			$	0			$	61			$	0			$	61
Other Consumer Loans:
Performing		$	1,688			$	4,800			$	2,631			$	1,157			$	576			$	838			$	11,690			$	56,056			$	67,746
Nonperforming			0				0				0				0				0				0				0				0				0
Total		$	1,688			$	4,800			$	2,631			$	1,157			$	576			$	838			$	11,690			$	56,056			$	67,746
Year-to-date gross write offs		$	0			$	0			$	2			$	0			$	0			$	0			$	2			$	0			$	2
Total Retail		$	11,238			$	78,334			$	119,852			$	302,649			$	199,077			$	117,752			$	828,902			$	56,056			$	884,958
Total Retail year-to-date gross write offs		$	0			$	0			$	2			$	0			$	61			$	0			$	63			$	0			$	63
Total		$	240,414			$	1,048,870			$	877,908			$	702,595			$	597,753			$	400,901			$	3,868,441			$	768,108			$	4,636,549
Total year-to-date gross write offs		$	0			$	0			$	2			$	0			$	61			$	0			$	63			$	0			$	63

There were lines of credit with principal balances of $0.3 million that were converted to term loans during the first three months of 2025.

(Continued)

3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

The following table reflects amortized cost basis of loans as of December 31, 2024 and loan charge-offs during the three months ended March 31, 2024 based on year of origination:

																														Revolving				Grand
(Dollars in thousands)		2024				2023				2022				2021				2020				Prior				Term Total				Loans				Total
Commercial:
Commercial and Industrial:
Grades 1 - 4		$	102,898			$	68,536			$	41,609			$	47,534			$	9,551			$	8,412			$	278,540			$	351,311			$	629,851
Grades 5 - 7			188,267				88,471				31,755				13,513				3,298				2,019				327,323				309,860				637,183
Grades 8 - 9			4,813				401				3,436				262				69				0				8,981				11,293				20,274
Total		$	295,978			$	157,408			$	76,800			$	61,309			$	12,918			$	10,431			$	614,844			$	672,464			$	1,287,308
Year-to-date gross write offs		$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	6			$	6
Vacant Land, Land Development and Residential Construction:
Grades 1 - 4		$	18,536			$	4,997			$	610			$	645			$	177			$	226			$	25,191			$	0			$	25,191
Grades 5 - 7			31,692				7,681				1,855				49				0				463				41,740				0				41,740
Grades 8 - 9			0				5				0				0				0				0				5				0				5
Total		$	50,228			$	12,683			$	2,465			$	694			$	177			$	689			$	66,936			$	0			$	66,936
Year-to-date gross write offs		$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0
Real Estate - Owner Occupied:
Grades 1 - 4		$	179,763			$	84,641			$	88,794			$	75,702			$	34,031			$	3,469			$	466,400			$	0			$	466,400
Grades 5 - 7			108,316				61,998				52,072				21,833				12,386				5,611				262,216				13,290				275,506
Grades 8 - 9			714				0				6,184				0				33				0				6,931				0				6,931
Total		$	288,793			$	146,639			$	147,050			$	97,535			$	46,450			$	9,080			$	735,547			$	13,290			$	748,837
Year-to-date gross write offs		$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0
Real Estate - Non-Owner Occupied:
Grades 1 - 4		$	84,773			$	79,911			$	76,468			$	93,034			$	84,355			$	13,703			$	432,244			$	0			$	432,244
Grades 5 - 7			194,634				220,681				84,897				91,569				85,828				10,569				688,178				0				688,178
Grades 8 - 9			7,982				0				0				0				0				0				7,982				0				7,982
Total		$	287,389			$	300,592			$	161,365			$	184,603			$	170,183			$	24,272			$	1,128,404			$	0			$	1,128,404
Year-to-date gross write offs		$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0
Real Estate - Multi-Family and Residential Rental:
Grades 1 - 4		$	16,271			$	46,870			$	10,107			$	62,744			$	33,337			$	3,780			$	173,109			$	0			$	173,109
Grades 5 - 7			81,919				174,468				32,506				4,559				5,626				2,985				302,063				37				302,100
Grades 8 - 9			47				0				0				0				563				0				610				0				610
Total		$	98,237			$	221,338			$	42,613			$	67,303			$	39,526			$	6,765			$	475,782			$	37			$	475,819
Year-to-date gross write offs		$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0
Total Commercial		$	1,020,625			$	838,660			$	430,293			$	411,444			$	269,254			$	51,237			$	3,021,513			$	685,791			$	3,707,304
Total Commercial year-to-date gross write offs		$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	6			$	6
Retail:
1-4 Family Mortgages:
Performing		$	72,349			$	122,718			$	307,161			$	203,052			$	73,052			$	46,290			$	824,622			$	0			$	824,622
Nonperforming			0				89				1,626				439				0				821				2,975				0				2,975
Total		$	72,349			$	122,807			$	308,787			$	203,491			$	73,052			$	47,111			$	827,597			$	0			$	827,597
Year-to-date gross write offs		$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0
Other Consumer Loans:
Performing		$	5,863			$	3,008			$	1,428			$	732			$	361			$	653			$	12,045			$	53,835			$	65,880
Nonperforming			0				0				0				0				0				0				0				0				0
Total		$	5,863			$	3,008			$	1,428			$	732			$	361			$	653			$	12,045			$	53,835			$	65,880
Year-to-date gross write offs		$	0			$	1			$	0			$	8			$	0			$	0			$	9			$	0			$	9
Total Retail		$	78,212			$	125,815			$	310,215			$	204,223			$	73,413			$	47,764			$	839,642			$	53,835			$	893,477
Total Retail year-to-date gross write offs		$	0			$	1			$	0			$	8			$	0			$	0			$	9			$	0			$	9
Total		$	1,098,837			$	964,475			$	740,508			$	615,667			$	342,667			$	99,001			$	3,861,155			$	739,626			$	4,600,781
Total year-to-date gross write offs		$	0			$	1			$	0			$	8			$	0			$	0			$	9			$	6			$	15

There were lines of credit with principal balances of $9.1 million as of December 31, 2023 that were converted to term loans during 2024.

(Continued)

3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

We use a migration to loss methodology to determine historical loss rates for commercial loans given the comprehensive loan grading process employed by our bank for over two decades, while an open pool approach is best suited for retail loans given the smaller dollar size of the segments. A baseline loss rate is produced at each reporting date for each loan portfolio segment using bank-specific loan charge-off and recovery data over a defined historical look-back period. The look-back period represents the number of data periods that will be used to calculate a baseline loss rate for each loan portfolio segment. We determined that the look-back period commencing on January 1, 2011 through the current reporting date was reasonable and appropriate, which was used in the calculation of both the March 31, 2025, and December 31, 2024 allowance for credit losses.

Our historical loss rate is then applied to future loan balances at the instrument level based on remaining contractual life adjusted for amortization, prepayment and default to develop a baseline lifetime loss. Our prepayment speed assumptions are developed at the loan segment level based upon the consideration of all relevant data which we believe could impact anticipated customer behavior, including changes in interest rates, economic conditions, and underlying property valuations. For the commercial portfolio segments, we assumed a 2.0% prepayment speed as of both March 31, 2025 and December 31, 2024 as we deemed there to be no considerable changes from historical experience. For the retail 1-4 family mortgage and retail other consumer portfolios, we used a prepayment speed of 7.8% as of March 31, 2025 and December 31, 2024.

During each reporting period, we also consider the need to adjust the historical loss rates as determined to reflect the extent to which we expect current conditions and reasonable and supportable economic forecasts to differ from the conditions that existed for the period over which the historical loss information was determined. These qualitative adjustments may increase or decrease our estimate of expected future credit losses. As of March 31, 2025 and December 31, 2024, we used a one-year reasonable and supportable economic forecast period, with a six-month straight-line reversion period for all loan segments. The economic forecasts used for our March 31, 2025 allowance calculation reflected less than a $0.1 million allowance balance reduction. The forecasts used for our December 31, 2024 allowance calculation reflected a $2.2 million allowance balance reduction.

Individual loans exhibiting unique risk characteristics, which differentiated the loans from other loans within the loan segments and were evaluated for expected credit losses on an individual basis, totaled $7.0 million and $7.4 million as of March 31, 2025 and December 31, 2024, respectively. Individual allowance allocations totaled $2.4 million and $2.2 million as of March 31, 2025 and December 31, 2024, respectively.

(Continued)

3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

Activity in the allowance for credit losses during the three months ended March 31, 2025 is as follows:

(Dollars in thousands)		Commercial and industrial				Commercial vacant land, land development and residential construction				Commercial real estate - owner occupied				Commercial real estate - non-owner occupied				Commercial real estate - multi-family and residential rental				1-4 family mortgages				Other consumer loans				Unallocated				Total
Balance at 12-31-24		$	11,165			$	367			$	7,671			$	10,919			$	3,667			$	18,702			$	1,936			$	27			$	54,454
Provision for credit losses			598				18				6				1,027				206				186				83				(24	)			2,100
Charge-offs			0				0				0				0				0				(61	)			(2	)			0				(63	)
Recoveries			35				1				2				0				5				47				85				0				175
Ending balance		$	11,798			$	386			$	7,679			$	11,946			$	3,878			$	18,874			$	2,102			$	3			$	56,666

Activity in the allowance for credit losses during the three months ended March 31, 2024 is as follows:

(Dollars in thousands)		Commercial and industrial				Commercial vacant land, land development and residential construction				Commercial real estate - owner occupied				Commercial real estate - non-owner occupied				Commercial real estate - multi-family and residential rental				1-4 family mortgages				Other consumer loans				Unallocated				Total
Balance at 12-31-23		$	7,441			$	384			$	7,186			$	9,852			$	3,184			$	18,986			$	2,881			$	0			$	49,914
Provision for credit losses			1,466				2				(151	)			289				232				(476	)			(77	)			15				1,300
Charge-offs			(6	)			0				0				0				0				0				(9	)			0				(15	)
Recoveries			277				1				57				0				4				70				30				0				439
Ending balance		$	9,178			$	387			$	7,092			$	10,141			$	3,420			$	18,580			$	2,825			$	15			$	51,638

(Continued)

3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

There were no loan modifications to borrowers experiencing financial difficulty during the three months ended March 31, 2025. The following table presents the period-end amortized cost basis of modifications to borrowers experiencing financial difficulty by type of modification made during the three months ended March 31, 2024:

		Interest Rate								Principal
(Dollars in thousands)		Reduction				Term Extension				Forgiveness
Commercial:
Commercial and industrial		$	0			$	500			$	0
Vacant land, land development and residential construction			0				0				0
Real estate - owner occupied			0				0				0
Real estate - non-owner occupied			0				0				0
Real estate - multi-family and residential rental			0				0				0
Total commercial		$	0			$	500			$	0
Retail:
1-4 family mortgages			0				0				0
Other consumer loans			0				0				0
Total retail		$	0			$	0			$	0
Total loans		$	0			$	500			$	0

Loans listed under Term Extension were generally granted a series of short-term maturity extensions as part of the workout process and associated forbearance agreements.

The following table presents the amortized cost basis of loans that have been modified in the past twelve months to borrowers experiencing financial difficulty by payment status and loan segment as of March 31, 2025:

						30 - 89 Days				90 + Days
(Dollars in thousands)		Current				Past Due				Past Due				Total
Commercial:
Commercial and industrial		$	7,100			$	0			$	0			$	7,100
Vacant land, land development and residential construction			0				0				0				0
Real estate - owner occupied			41				0				0				41
Real estate - non-owner occupied			0				0				0				0
Real estate - multi-family and residential rental			0				0				0				0
Total commercial		$	7,141			$	0			$	0			$	7,141
Retail:
1-4 family mortgages			0				0				0				0
Other consumer loans			0				0				0				0
Total retail		$	0			$	0			$	0			$	0
Total loans		$	7,141			$	0			$	0			$	7,141

(Continued)

4. PREMISES AND EQUIPMENT, NET

Premises and equipment are comprised of the following:

		March 31,				December 31,
(Dollars in thousands)		2025				2024
Land and improvements		$	14,043			$	14,021
Buildings			63,331				62,365
Furniture and equipment			27,189				26,657
			104,563				103,043
Less: accumulated depreciation			50,870				49,616
Premises and equipment, net		$	53,693			$	53,427

Depreciation expense totaled $1.3 million and $1.6 million during the first quarters of 2025 and 2024, respectively.

We enter into facility leases in the normal course of business. As of March 31, 2025, we were under lease contracts for eleven of our banking facilities. The leases have maturity dates ranging from November, 2025 through May, 2048, with a weighted average life of 9.3 years as of March 31, 2025. All of our leases have multiple three- to five-year extensions; however, these were not factored in the lease maturities and weighted average lease term as it was not reasonably certain we would exercise the options on the dates we entered into the lease agreements.

Leases are classified as either operating or finance leases at the lease commencement date, with all of our current leases determined to be operating leases. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent our right to use an underlying asset for the lease term, while lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date at the estimated present value of lease payments over the lease term. We use our incremental borrowing rate, on a collateralized basis, at lease commencement to calculate the present value of lease payments. The weighted average discount rate for leases was 6.53% as of March 31, 2025.

The right-of-use assets, included in premises and equipment, neton our Consolidated Balance Sheets, and the lease liabilities, included in other liabilitieson our Consolidated Balance Sheets, totaled $4.5 million and $4.4 million as of March 31, 2025, and December 31, 2024, respectively. As permitted by applicable accounting standards, we have elected not to recognize short-term leases with original terms of twelve months or less on our Consolidated Balance Sheets. Total operating lease expense associated with the leases aggregated $0.3 million during the first quarter of 2025 and $0.4 million during the first quarter of 2024.

(Continued)

4. PREMISES AND EQUIPMENT, NET (Continued)

Future lease payments were as follows as of March 31, 2025:

(Dollars in thousands)
2025		$	895
2026			1,159
2027			1,089
2028			913
2029			713
Thereafter			1,215
Total undiscounted lease payments			5,984
Less effect of discounting			(1,526	)
Present value of future lease payments (lease liability)		$	4,458

5. DEPOSITS

Our total deposits at March 31, 2025 totaled $4.68 billion, a decrease of $16.6 million, or 0.4%, from December 31, 2024. The components of our outstanding balances at March 31, 2025 and December 31, 2024, and percentage change in deposits from the end of 2024 to the end of the first quarter of 2025, are as follows:

																		Percent
		March 31, 2025								December 31, 2024								Increase
(Dollars in thousands)		Balance				%				Balance				%				(Decrease)
Noninterest-bearing checking		$	1,173,499				25.1	%		$	1,264,523				26.9	%			(7.2	)%
Interest-bearing checking			751,344				16.0				738,291				15.7				1.8
Money market			1,566,569				33.5				1,516,436				32.3				3.3
Savings			226,361				4.8				221,900				4.7				2.0
Time, under $100,000			213,281				4.6				207,534				4.4				2.8
Time, $100,000 and over			601,036				12.8				599,983				12.8				0.2
Total local deposits			4,532,090				96.8				4,548,667				96.8				(0.4	)
Out-of-area time, $100,000 and over			149,695				3.2				149,699				3.2				(0.0	)
Total deposits		$	4,681,785				100.0	%		$	4,698,366				100.0	%			(0.4	)%

(Continued)

6. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase ("repurchase agreements") are offered principally to certain large deposit customers. Information relating to our repurchase agreements is as follows:

		Three Months Ended				Twelve Months Ended
(Dollars in thousands)		March 31, 2025				December 31, 2024
Outstanding balance at end of period		$	242,102			$	121,521
Average interest rate at end of period			3.47	%			2.17	%
Average daily balance during the period		$	221,288			$	224,878
Average interest rate during the period			3.23	%			3.43	%
Maximum daily balance during the period		$	283,757			$	278,227

Repurchase agreements have maturities of onebusiness day. Repurchase agreements are treated as financings, and the obligations to repurchase securities sold are reflected as liabilities on our Consolidated Balance Sheets. Repurchase agreements are secured by U.S. Government agency securities with an aggregate fair value equal to the aggregate outstanding balance of the repurchase agreements. The securities, which are included in securities available for sale on our Consolidated Balance Sheets, are held in safekeeping by a correspondent bank.

7. FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES

FHLBI bullet advances totaled $340 million at March 31, 2025, and were scheduled to mature at varying dates from April 2025 through January 2029, with fixed rates of interest from 0.70% to 4.54% and averaging 3.18%. FHLBI bullet advances totaled $360 million at December 31, 2024, and were scheduled to mature at varying dates from January 2025 through January 2029, with fixed rates of interest from 0.70% to 4.54% and averaging 3.10%.

Maturities of FHLBI bullet advances as of March 31, 2025 were as follows:

(Dollars in thousands)
2025		$	60,000
2026			80,000
2027			100,000
2028			90,000
2029			10,000
Thereafter			0

FHLBI amortizing advances totaled $26.2 million as of March 31, 2025, with an average rate of 2.52% and with final maturities in 2042. FHLBI amortizing advances totaled $27.1 million as of December 31, 2024, with an average rate of 2.52% and with final maturities in 2042. FHLBI amortizing advances are obtained periodically to assist in managing interest rate risk associated with certain longer-term fixed rate commercial loans, with annual principal payments that closely align with the scheduled amortization of the underlying commercial loans.

(Continued)

7. FEDERAL HOME LOAN BANK OF INDIANAPOLIS ADVANCES (Continued)

Scheduled principal payments on FHLBI amortizing advances as of March 31, 2025 were as follows:

(Dollars in thousands)
2025		$	0
2026			899
2027			938
2028			979
2029			1,021
Thereafter			22,384

Each advance is payable at its maturity date, and is subject to a prepayment fee if paid prior to the maturity date. The advances are collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on commercial real estate property loans, and substantially all other assets of our bank under a blanket lien arrangement. Our borrowing line of credit as of March 31, 2025 totaled $1.06 billion, with remaining availability based on collateral of $674 million.

8. STOCK-BASED COMPENSATION

A summary of restricted stock activity during the three months ended March 31, 2025, is as follows:

						Weighted
						Average
		Shares				Fair Value
Nonvested at beginning of the period			228,646			$	35.84
Grants			84,685			$	50.34
Vested			(34,053	)			34.79
Forfeited			(845	)			34.42
Nonvested at end of the period			278,433			$	40.38

(Continued)

8. STOCK-BASED COMPENSATION (Continued)

Of the restricted stock shares granted during the three months ended March 31, 2024, 24,910 shares are performance-based awards made to our Named Executive Officers at the target level and are subject to the attainment of pre-determined performance goals. As of March 31, 2025, there were approximately 298,000 shares authorized for future incentive awards, and as of December 31, 2024, there were approximately 383,000 shares authorized for future incentive awards.

We periodically grant shares of common stock to our Corporate and Bank Board Directors for retainer payments with the related expense being recorded over the period of the Directors' service, as summarized below:

						Total Cost
Grant Year		Shares Granted				(in thousands)			Covered Period
2023			11,529				350		June 1, 2023 - May 31, 2024
2024			11,316				423		June 1, 2024 - May 31, 2025

9. COMMITMENTS AND OFF-BALANCE SHEET RISK

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued by our bank to guarantee the performance of a customer to a third party. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized, if any, in the balance sheet. Our maximum exposure to loan loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Collateral, such as accounts receivable, securities, inventory, and property and equipment, is generally obtained based on management's credit assessment of the borrower.

We are required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is increased or decreased via other noninterest expense on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.

For commercial lines of credit, retail lines of credit and credit card average outstanding balances, we determined allowance requirements by calculating the difference between the average percent outstanding of the funded commitments over the past several years to actual percent outstanding at the end of the period and applying the respective expected loss allocation factors to the difference as this difference represents the average of unfunded commitments we expect to eventually be drawn upon. For commitments to make loans, we determine an allowance by applying the expected loss allocation factor to the amount expected to be funded. The calculated allowance aggregated $0.3 million and $1.0 million as of March 31, 2025 and December 31, 2024, respectively. We do not reserve for residential mortgage construction loans, as the loans are for one year or less and draws are governed by the receipt and satisfactory review of contractor and subcontractor sworn statements, lien waivers and title insurance company endorsements. Letters of credit are rarely drawn.

At March 31, 2025, and December 31, 2024, the rates on existing off-balance sheet instruments were substantially equivalent to current market rates, considering the underlying credit standing of the counterparties.

(Continued)

9. COMMITMENTS AND OFF-BALANCE SHEET RISK (Continued)

A summary of the contractual amounts of our financial instruments with off-balance sheet risk at March 31, 2025 and December 31, 2024 is as follows:

		March 31,				December 31,
(Dollars in thousands)		2025				2024
Commercial unused lines of credit		$	1,474,577			$	1,488,782
Unused lines of credit secured by 1-4 family residential properties			86,113				84,298
Credit card unused lines of credit			181,546				172,273
Other consumer unused lines of credit			33,852				33,892
Commitments to make loans			233,847				295,566
Standby letters of credit			27,177				26,491
		$	2,037,112			$	2,101,302

10. DERIVATIVES AND HEDGING ACTIVITIES

We are exposed to certain risks arising from both business operations and economic conditions. We principally manage the exposure to a wide variety of operational risks through core business activities. Economic risks, including interest rate, liquidity and credit risk, are primarily administered via the amount, sources and duration of assets and liabilities. Derivative financial instruments may also be used to assist in managing economic risks.

Derivatives not designated as hedges are not speculative and result from a service provided to certain commercial loan borrowers. We execute interest rate swaps with commercial banking customers desiring longer-term fixed rate loans, while simultaneously entering into interest rate swaps with correspondent banks to offset the impact of the interest rate swaps with the commercial banking customers. The net result is the desired floating rate loans and a minimization of the risk exposure of the interest rate swap transactions.

As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the commercial banking customer interest rate swaps and the offsetting interest rate swaps with the correspondent banks are recognized directly to earnings. Fees paid to us by the correspondent banks are recognized as noninterest income on our Consolidated Statements of Income on the settlement date.

The fair values of derivative instruments as of March 31, 2025, are reflected in the following table.

					Balance Sheet
(Dollars in thousands)		Notional Amount			Location		Fair Value
Derivative Assets
Interest rate swaps		$	890,944		Other Assets		$	24,722
Derivative Liabilities
Interest rate swaps			888,917		Other Liabilities			25,073

(Continued)

10. DERIVATIVES AND HEDGING ACTIVITIES (Continued)

The effect of interest rate swaps that are not designated as hedging instruments resulted in expense of $0.1 million during the three months ended March 31, 2025 that was recorded in other noninterest expense on our Consolidated Statements of Income. We have master netting arrangements with our correspondent banks that allow us to net receivables and payables. The netting agreement also allows us to net related cash collateral received and transferred up to the fair value exposure amount. We have elected to not offset these transactions on the Consolidated Balance Sheets. The netting of derivative instruments as of March 31, 2025 is presented in the following table.

						Gross Amounts Not Offset on the Consolidated Balance Sheet
(Dollars in thousands)		Net Amounts Recognized				Financial Instruments				Cash Collateral Received or Posted				Net Amount
Derivative Assets
Interest rate swaps		$	24,722			$	6,655			$	9,100			$	8,967
Derivative Liabilities
Interest rate swaps			25,073				6,639				3,110				15,324

The fair values of derivative instruments as of December 31, 2024, are reflected in the following table.

					Balance Sheet
(Dollars in thousands)		Notional Amount			Location		Fair Value
Derivative Assets
Interest rate swaps		$	866,157		Other Assets		$	26,793
Derivative Liabilities
Interest rate swaps			864,130		Other Liabilities			27,050

The effect of interest rate swaps that are not designated as hedging instruments resulted in expense of $0.1 million during the three months ended March 31, 2024 that was recorded in other noninterest expense on our Consolidated Statements of Income. The netting of derivative instruments as of December 31, 2024 is presented in the following table.

						Gross Amounts Not Offset on the Consolidated Balance Sheet
(Dollars in thousands)		Net Amounts Recognized				Financial Instruments				Cash Collateral Received or Posted				Net Amount
Derivative Assets
Interest rate swaps		$	26,793			$	3,064			$	19,040			$	4,689
Derivative Liabilities
Interest rate swaps			27,050				2,915				1,640				22,495

(Continued)

11. FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying amounts, estimated fair values and level within the fair value hierarchy of financial instruments were as follows as of March 31, 2025 and December 31, 2024:

		Level in			March 31, 2025								December 31, 2024
		Fair
		Value			Carrying				Fair				Carrying				Fair
(Dollars in thousands)		Hierarchy			Values				Values				Values				Values
Financial assets:
Cash and cash equivalents		Level 1			$	385,460			$	385,460			$	393,010			$	393,010
Securities available for sale		(1)				787,583				787,583				730,352				730,352
FHLBI stock		(2)				21,513				21,513				21,513				21,513
Loans, net		Level 3				4,579,883				4,597,149				4,546,327				4,558,628
Mortgage loans held for sale		Level 2				15,192				15,525				15,824				16,047
Accrued interest receivable		Level 2				22,901				22,901				21,401				21,401
Interest rate swaps		Level 2				24,722				24,722				26,793				26,793
Financial liabilities:
Deposits		Level 2				4,681,785				4,547,926				4,698,366				4,541,896
Securities sold under agreements to repurchase		Level 2				242,102				242,102				121,521				121,521
FHLBI advances		Level 2				366,221				357,003				387,083				374,499
Subordinated debentures		Level 2				50,501				50,507				50,330				50,336
Subordinated notes		Level 2				89,400				82,724				89,314				81,825
Accrued interest payable		Level 2				9,527				9,527				10,201				10,201
Interest rate swaps		Level 2				25,073				25,073				27,050				27,050

(1)

See Note 12 for a description of the fair value hierarchy as well as a disclosure of levels for classes of financial assets and liabilities.

(2)

It is not practical to determine the fair value of FHLBI stock due to transferability restrictions; therefore, fair value is estimated at carrying amount.

Carrying amount is the estimated fair value for cash and cash equivalents, FHLBI stock, accrued interest receivable and payable, noninterest-bearing checking accounts and securities sold under agreements to repurchase. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. Fair value for loans is based on an exit price model as required by ASU 2016-01, taking into account inputs such as discounted cash flows, probability of default and loss given default assumptions. The fair value for deposit accounts other than noninterest-bearing checking accounts is based on discounted cash flows using current market rates applied to the estimated life. The fair values of subordinated debentures, subordinated notes, and FHLBI advances are based on current rates for similar financing. The fair values of interest rate swaps are based on discounted cash flows using forecasted yield curves, along with insignificant unobservable inputs, such as borrower credit spreads. The fair value of other off-balance sheet items is estimated to be nominal.

(Continued)

12. FAIR VALUES

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability, or in the absence of a principal market, the most advantageous market for the asset or liability. The price of the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

We are required to use valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources, or unobservable, meaning those that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. In that regard, we utilize a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that we have the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be derived from or corroborated by observable market data by correlation or other means.

Level 3: Significant unobservable inputs that reflect our own conclusions about the assumptions that market participants would use in pricing an asset or liability.

The following is a description of our valuation methodologies used to measure and disclose the fair values of our financial assets and liabilities that are recorded at fair value on a recurring or nonrecurring basis:

Securities available for sale. Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based on quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models. Level 2 securities include U.S. Government agency debt obligations, mortgage-backed securities issued or guaranteed by U.S. Government agencies, and municipal general obligation and revenue bonds. Level 3 securities include bonds issued by certain relatively small municipalities located within our markets that have very limited marketability due to their size and lack of ratings from a recognized rating service. We carry these bonds at historical cost, which we believe approximates fair value, unless our periodic financial analysis or other information that becomes known to us necessitates an impairment. There was no such impairment as of March 31, 2025, or December 31, 2024. We have no Level 1 securities available for sale.

Derivatives. We measure fair value utilizing models that use primarily market observable inputs, such as forecasted yield curves. Insignificant unobservable inputs, such as borrower credit spreads, are also utilized.

(Continued)

12. FAIR VALUES (Continued)

Mortgage loans held for sale. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors, and are measured on a nonrecurring basis. Fair value is based on independent quoted market prices, where applicable, or the prices for other mortgage whole loans with similar characteristics. As of March 31, 2025 and December 31, 2024, we determined the fair value of our mortgage loans held for sale to be $15.5 million and $16.0 million, respectively.

Loans. We do not record loans at fair value on a recurring basis. However, from time to time, we record nonrecurring fair value adjustments to collateral dependent loans to reflect partial write-downs or specific reserves that are based on the observable market price or current estimated value of the collateral. These loans are reported in the nonrecurring table below at initial recognition of significant borrower distress and on an ongoing basis until recovery or charge-off. The fair values of distressed loans are determined using either the sales comparison approach or income approach; respective unobservable inputs for the approaches consist of adjustments for differences between comparable sales and the utilization of appropriate capitalization rates.

Foreclosed Assets. At time of foreclosure or repossession, foreclosed and repossessed assets are adjusted to fair value less costs to sell upon transfer of the loans to foreclosed and repossessed assets, establishing a new cost basis. We subsequently adjust estimated fair value of foreclosed assets on a nonrecurring basis to reflect write-downs based on revised fair value estimates. The fair values of parcels of other real estate owned are determined using either the sales comparison approach or income approach; respective unobservable inputs for the approaches consist of adjustments for differences between comparable sales and the utilization of appropriate capitalization rates.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The balances of assets and liabilities measured at fair value on a recurring basis as of March 31, 2025 are as follows:

						Quoted
						Prices in
						Active
						Markets				Significant
						for				Other				Significant
						Identical				Observable				Unobservable
						Assets				Inputs				Inputs
(Dollars in thousands)		Total				(Level 1)				(Level 2)				(Level 3)
Available for sale securities
U.S. Government agency debt obligations		$	547,409			$	0			$	547,409			$	0
Mortgage-backed securities			25,182				0				25,182				0
Municipal general obligation bonds			184,790				0				184,396				394
Municipal revenue bonds			29,702				0				29,702				0
Other investments			500				0				500				0
Interest rate swaps			24,722				0				24,722				0
Total assets		$	812,305			$	0			$	811,911			$	394
Interest rate swaps			25,073				0				25,073				0
Total liabilities		$	25,073			$	0			$	25,073			$	0

(Continued)

12. FAIR VALUES (Continued)

There were no sales, purchases or transfers in or out of Level 3 during the three months ended March 31, 2025. The insignificant reduction in Level 3 municipal general obligation bonds during the three months ended March 31, 2025 reflects the scheduled maturities of such bonds.

The balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2024 are as follows:

						Quoted
						Prices in
						Active
						Markets				Significant
						for				Other				Significant
						Identical				Observable				Unobservable
						Assets				Inputs				Inputs
(Dollars in thousands)		Total				(Level 1)				(Level 2)				(Level 3)
Available for sale securities
U.S. Government agency debt obligations		$	495,581			$	0			$	495,581			$	0
Mortgage-backed securities			25,368				0				25,368				0
Municipal general obligation bonds			180,170				0				179,777				393
Municipal revenue bonds			28,733				0				28,733				0
Other investments			500				0				500				0
Interest rate swaps			26,793				0				26,793				0
Total assets		$	757,145			$	0			$	756,752			$	393
Interest rate swaps			27,050				0				27,050				0
Total liabilities		$	27,050			$	0			$	27,050			$	0

There were no sales, purchases or transfers in or out of Level 3 during 2024.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2025 are as follows:

						Quoted
						Prices in
						Active				Significant
						Markets for				Other				Significant
						Identical				Observable				Unobservable
						Assets				Inputs				Inputs
(Dollars in thousands)		Total				(Level 1)				(Level 2)				(Level 3)
Collateral dependent loans		$	1,642			$	0			$	0			$	1,642
Total		$	1,642			$	0			$	0			$	1,642

(Continued)

12. FAIR VALUES (Continued)

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2024 are as follows:

						Quoted
						Prices
						in Active				Significant
						Markets for				Other				Significant
						Identical				Observable				Unobservable
						Assets				Inputs				Inputs
(Dollars in thousands)		Total				(Level 1)				(Level 2)				(Level 3)
Collateral dependent loans		$	2,173			$	0			$	0			$	2,173
Total		$	2,173			$	0			$	0			$	2,173

The carrying values are based on the estimated value of the property or other assets. Fair value estimates of collateral on nonperforming loans and foreclosed assets are reviewed periodically. Our credit policies establish criteria for obtaining appraisals and determining internal value estimates. We may also adjust outside appraisals and internal evaluations based on identifiable trends within our markets, such as sales of similar properties or assets, listing prices and offers received. In addition, we may discount certain appraised and internal value estimates to address current distressed market conditions. We generally assign a discount factor range of 25% to 35% for commercial real estate dependent loans and foreclosed assets, and a discount factor range of 25% to 50% for residential-related properties. In a vast majority of cases, we assign a 10% discount factor for estimated selling costs.

13. REGULATORY MATTERS

We are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If an institution is not well capitalized, regulatory approval is required to accept brokered deposits. Subject to limited exceptions, no institution may make a capital distribution if, after making the distribution, it would be undercapitalized. If an institution is undercapitalized, it is subject to close monitoring by its principal federal regulator, its asset growth and expansion are restricted, and plans for capital restoration are required. In addition, further specific types of restrictions may be imposed on the institution at the discretion of the federal regulator. As of March 31, 2025 and December 31, 2024, our bank was in the well capitalized category under the regulatory framework for prompt corrective action. There are no conditions or events since March 31, 2025, that we believe have changed our bank's categorization.

(Continued)

13. REGULATORY MATTERS (Continued)

Our actual capital levels and the minimum levels required to be categorized as adequately and well capitalized were:

																		Minimum Required
																		to be Well
										Minimum Required								Capitalized Under
										for Capital								Prompt Corrective
		Actual								Adequacy Purposes								Action Regulations
(Dollars in thousands)		Amount				Ratio				Amount				Ratio				Amount				Ratio
March 31, 2025
Total capital (to risk weighted assets)
Consolidated		$	794,143				14.4	%		$	439,924				8.0	%		$ NA				NA%
Bank			762,135				14.0				435,901				8.0				544,877				10.0
Tier 1 capital (to risk weighted assets)
Consolidated			647,795				11.8				329,943				6.0			NA				NA
Bank			705,187				12.9				326,926				6.0				435,901				8.0
Common equity tier 1 (to risk weighted assets)
Consolidated			599,540				10.9				247,458				4.5			NA				NA
Bank			705,187				12.9				245,195				4.5				354,170				6.5
Tier 1 capital (to average assets)
Consolidated			647,795				10.8				241,144				4.0			NA				NA
Bank			705,187				11.8				239,314				4.0				299,142				5.0
December 31, 2024
Total capital (to risk weighted assets)
Consolidated		$	777,857				14.2	%		$	439,031				8.0	%		$ NA				NA%
Bank			759,146				13.9				435,793				8.0				544,741				10.0
Tier 1 capital (to risk weighted assets)
Consolidated			633,134				11.5				329,274				6.0			NA				NA
Bank			703,737				12.9				326,845				6.0				435,793				8.0
Common equity tier 1 (to risk weighted assets)
Consolidated			584,879				10.7				246,955				4.5			NA				NA
Bank			703,737				12.9				245,134				4.5				354,082				6.5
Tier 1 capital (to average assets)
Consolidated			633,134				10.6				238,934				4.0			NA				NA
Bank			703,737				11.9				237,447				4.0				296,808				5.0

(Continued)

13. REGULATORY MATTERS (Continued)

Our consolidated capital levels as of both March 31, 2025 and December 31, 2024 include $48.3 million of trust preferred securities. Under applicable Federal Reserve guidelines, the trust preferred securities constitute a restricted core capital element. The guidelines provide that the aggregate amount of restricted core elements that may be included in our Tier 1 capital must not exceed 25% of the sum of all core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability. Our ability to include the trust preferred securities in Tier 1 capital in accordance with the guidelines is not affected by the provision of the Dodd-Frank Act generally restricting such treatment, because (i) the trust preferred securities were issued before May 19, 2010, and (ii) our total consolidated assets as of December 31, 2009 were less than $15.0 billion. As of both March 31, 2025 and December 31, 2024, all $48.3 million of the trust preferred securities were included in our consolidated Tier 1 capital.

Under the final BASEL III capital rules that became effective on January 1, 2015, there is a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not meet this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in cash dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement was phased in over three years beginning in 2016. The capital buffer requirement raised the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5% and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019. We believe that, as of March 31, 2025, our bank meets all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis.

Our and our bank's ability to pay cash and stock dividends is subject to limitations under various laws and regulations and to prudent and sound banking practices. On January 16, 2025, our Board of Directors declared a cash dividend on our common stock in the amount of $0.37 per share that was paid on March 19, 2025, to shareholders of record as of March 7, 2025.

As of March 31, 2025, we had the ability to repurchase up to $6.8 million in common stock shares from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations as part of a $20.0 million common stock repurchase program announced in May 2021. No shares were repurchased during the first three months of 2025. Historically, stock repurchases have been funded from cash dividends paid to us from our bank. Additional repurchases may be made in future periods under the authorized plan or a new plan, which would also likely be funded from cash dividends paid to us from our bank. The actual timing, number and value of shares repurchased will be determined by us in our discretion and will depend on a number of factors, including the stock price, capital position, financial performance, general market and economic conditions, alternative uses of capital and applicable legal requirements.

14. SUBSEQUENT EVENTS

On April 17, 2025, our Board of Directors declared a cash dividend on our common stock in the amount of $0.37 per share that will be paid on June 18, 2025, to shareholders of record as of June 6, 2025.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

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

Future Factors include, among others, adverse changes in interest rates and interest rate relationships; increasing rates of inflation and slower growth rates or recession; significant declines in the value of commercial real estate; market volatility; demand for products and services; climate impacts; labor markets; the degree of competition by traditional and non-traditional financial services companies; changes in banking regulation or actions by bank regulators; changes in tax laws and other laws and regulations applicable to us; changes in prices, levies, and assessments; the impact of technological advances; potential cyber-attacks, information security breaches, and other criminal activities; litigation liabilities; governmental and regulatory policy changes; the outcomes of existing or future contingencies; trends in customer behavior as well as their ability to repay loans; changes in local real estate values; damage to our reputation resulting from adverse publicity, regulatory actions, litigation, operational failures, and the failure to meet client expectations and other facts; changes in the national and local economies; unstable political and economic environments; disease outbreaks, such as the Covid-19 pandemic or similar public health threats, and measures implemented to combat them; and other risk factors, including those described in our annual report on Form 10-K for the year ended December 31, 2024. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a forward-looking statement.

Introduction

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, 2025 and December 31, 2024 and the results of operations for the three months ended March 31, 2025 and 2024. 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.

Critical Accounting Policies

Accounting principles generally accepted in the United States of America ("GAAP") are complex and require us to apply significant judgment to various accounting, reporting and disclosure matters. We must use assumptions and estimates to apply these principles where actual measurements are not possible or practical. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited financial statements included in this report. For a discussion of our significant accounting estimates, see Note 1 of the Notes to our Consolidated Financial Statements included in our Form 10-K for the fiscal year ended December 31, 2024 (Commission file number 000-26719). Our critical accounting policies are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements, and actual results may differ from those estimates. We have reviewed the application of these policies with the Audit Committee of our Board of Directors.

Allowance for Credit Losses ("allowance"): The allowance is maintained at a level we believe is adequate to absorb estimated credit losses identified and expected in the loan portfolio. Our evaluation of the adequacy of the allowance is an estimate based on historical credit loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, guidance from bank regulatory agencies, and assessments of the impact of current and anticipated economic conditions on the loan portfolio. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off. Credit losses are charged against the allowance when we believe the uncollectability of a loan is likely. The balance of the allowance represents our best estimate, but significant downturns in circumstances relating to loan quality or economic conditions could result in a requirement for an increased allowance in the future. Likewise, an upturn in loan quality or improved economic conditions may result in a decline in the required allowance in the future. In either instance, unanticipated changes could have a significant impact on the allowance and operating results. The allowance is increased through a provision charged to operating expense. Uncollectable loans are charged-off through the allowance, while recoveries of loans previously charged-off are added to the allowance.

See Note 1- Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the allowance. See also Note 3 - Loans and Allowance for Credit Losses in this Quarterly Report on Form 10-Q for further information regarding our loan portfolio and allowance.

Mortgage Servicing Rights: Mortgage servicing rights are recognized as assets based on the allocated fair value of retained servicing rights on loans sold. Servicing rights are carried at the lower of amortized cost or fair value and are expensed in proportion to, and over the period of, estimated net servicing income. We utilize a discounted cash flow model to determine the value of our servicing rights. The valuation model utilizes mortgage loan prepayment speeds, the remaining life of the mortgage loan pool, delinquency rates, our cost to service loans, and other factors to determine the cash flow that we will receive from servicing each grouping of loans. These cash flows are then discounted based on current interest rate assumptions to arrive at the fair value of the right to service those loans. Impairment is evaluated quarterly based on the fair value of the servicing rights, using groupings of the underlying loans classified by interest rates. Any impairment of a grouping is reported as a valuation allowance.

Goodwill: Accounting rules require us to determine the fair value of all the assets and liabilities of an acquired entity, and to record their fair value on the date of acquisition. We employ a variety of means in determining fair value, including the use of discounted cash flow analysis, market comparisons and projected future revenue streams. For those items for which we conclude that we have the appropriate expertise to determine fair value, we may choose to use our own calculation of fair value. In other cases, where the fair value is not readily determined, consultation with outside parties is used to determine fair value. Once valuations have been determined, the net difference between the price paid for the acquired entity and the fair value of the balance sheet is recorded as goodwill. Goodwill is assessed at least annually for impairment, with any such impairment recognized in the period identified. A more frequent assessment is performed if there are material changes in the market place or within the organizational structure.

Financial Overview

We reported net income of $19.5 million, or $1.21 per diluted share, for the first quarter of 2025, compared with net income of $21.6 million, or $1.34 per diluted share, during the first quarter of 2024. Although net interest income increased, net income was negatively impacted by lower noninterest income, increased noninterest costs and a higher provision expense.

Commercial loans increased $44.3 million during the first three months of 2025, providing for an annualized growth rate of about 5%. Non-owner occupied commercial real estate ("CRE") loans grew $55.3 million, commercial and industrial loans increased $27.1 million, multi-family and residential rental property loans were up $3.2 million and land development and construction loans expanded by $1.9 million, while owner occupied CRE loans declined $43.2 million. As a percent of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 53.8% as of March 31, 2025, compared to 54.9% as of December 31, 2024. While the "in discussion" segment of our commercial loan pipeline remains strong, the "committed and accepted" segment is relatively low, the latter generally reflecting customer reaction to the uncertain economic environment associated with United States tariff changes and negotiations. As of March 31, 2025, we had $210 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase.

Residential mortgage loans decreased $10.4 million during the first three months of 2025, as aggregate payoffs and scheduled monthly payments exceeded new loans added to the portfolio during the first quarter. Residential mortgage loan originations totaled $100 million during the first three months of 2025, of which about 80% were originated with the intent to sell.

The overall quality of our loan portfolio remains strong, with nonperforming loans equaling only 0.12% of total loans as of March 31, 2025. 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 $0.1 million during the first three months of 2025, while recoveries of prior period loan charge-offs aggregated $0.2 million, providing for a net loan recovery of $0.1 million. We recorded a provision expense of $2.1 million during the first three months of 2025, primarily reflecting an increased allocation necessitated by changes to the economic forecast and loan growth.

Interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, averaged $267 million during the first three months of 2025, compared to $150 million during the first three months of 2024. The higher average balance primarily reflects our strategy to reduce the loan-to-deposit ratio via local deposit growth exceeding loan and investment growth, as well as our desire to maintain higher levels of on-balance sheet liquidity.

Total deposits declined $16.6 million during the first three months of 2025. Aggregate net growth in almost all interest-bearing deposit types offset a significant portion of the reduction in business noninterest-bearing checking accounts primarily reflecting the customary level of customers' tax and bonus payments and partnership distributions during the early part of each first quarter. Securities sold under agreements to repurchase ("sweep accounts") increased $121 million during the first quarter of 2025, largely reflecting the return of funds that had been withdrawn during the fourth quarter of 2024. Federal Home Loan Bank of Indianapolis ("FHLBI") advances declined $20.9 million during the first three months of 2025. Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $516 million, or about 10% of total funds, as of March 31, 2025.

Net interest income increased $1.2 million during the first three months of 2025 compared to the first quarter of 2024, reflecting the net impact of $3.6 million and $2.4 million increases in interest income and interest expense, respectively. Our net interest margin during the first quarter of 2025 was 27 basis points lower than during the first quarter of 2024. Our yield on earning assets declined 32 basis points while our cost of funds was down 5 basis points during that time period. The lower yield on earning assets largely reflected the aggregate 100 basis point reduction in the federal funds rate during the last four months of 2024. Despite the reduction in the net interest margin, net interest income increased primarily due to significant loan growth between the first quarters of 2024 and 2025. Total loans averaged $4.63 billion and $4.30 billion during the first quarters of 2025 and 2024, respectively, reflecting growth of $330 million, or about 8%.

Noninterest income totaled $8.7 million during the first three months of 2025, compared to $10.9 million during the first quarter of 2024. Growth in treasury management fees, mortgage banking income and payroll service fees was more than offset by lower levels of interest rate swap income, revenue generated from a private equity fund investment and bank owned life insurance income.

Noninterest expense totaled $31.1 million during the first three months of 2025, compared to $29.9 million during the first quarter of 2024. The higher level of noninterest expense primarily resulted from increased compensation and benefit costs along with higher data processing expenses.

Financial Condition

Our total assets increased $89.0 million during the first three months of 2025, and totaled $6.14 billion as of March 31, 2025. Securities available for sale grew $57.2 million and total loans increased $35.8 million, while interest-earning deposits declined $20.9 million during the first quarter of 2025. Sweep accounts grew $121 million, while total deposits declined $16.6 million and FHLBI advances decreased $20.9 million during the first three months of 2025.

Commercial loans totaled $3.75 billion, or 80.9% of total loans, as of March 31, 2025. Commercial loans increased $44.3 million during the first three months of 2025, providing for an annualized growth rate of about 5%. Non-owner occupied CRE loans grew $55.3 million, commercial and industrial loans increased $27.1 million, multi-family and residential rental property loans were up $3.2 million and land development and construction loans expanded by $1.9 million, while owner occupied CRE loans declined $43.2 million. As a percent of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 53.8% as of March 31, 2025, compared to 54.9% as of December 31, 2024.

As of March 31, 2025, we had $210 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. While the "in discussion" segment of our commercial loan pipeline remains strong, the "committed and accepted" segment is relatively low, the latter generally reflecting customer reaction to the uncertain economic environment associated with United States tariff changes and negotiations. Our current pipeline reports indicate approximately $234 million in new lending opportunities of which we expect a majority to be accepted and funded over the next 12 to 18 months. 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 45% during the first three months of 2025, compared to approximately 42% during all of 2024.

Residential mortgage loans totaled $817 million, or 17.6% of total loans, as of March 31, 2025. Residential mortgage loans decreased $10.4 million during the first three months of 2025, as aggregate payoffs and scheduled monthly payments exceeded new loans added to the portfolio during the first quarter. Residential mortgage loan originations totaled $100 million during the first three months of 2025, of which about 80% were originated with the intent to sell.

Other consumer-related loans totaled $67.7 million, or 1.5% of total loans, as of March 31, 2025, compared to $65.9 million, or 1.4% of total loans, as of December 31, 2024. 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.

Our credit policies establish guidelines to manage credit risk and asset quality. These guidelines include loan review and early identification of problem loans to provide effective loan portfolio administration. The credit policies and procedures are meant to minimize the risk and uncertainties inherent in lending. In following these policies and procedures, we must rely on estimates, appraisals and evaluations of loans and the possibility that changes in these could occur quickly because of changing economic conditions or other factors. Identified problem loans, which exhibit characteristics (financial or otherwise) that could cause the loans to become nonperforming or require modification in the future, are included on an internal watch list. Senior management and the Board of Directors review this list regularly. Market value estimates of collateral on nonperforming loans, as well as on foreclosed and repossessed assets, are reviewed periodically. We also have a process in place to monitor whether value estimates at each quarter end are reflective of current market conditions. Our credit policies establish criteria for obtaining appraisals and determining internal value estimates. We may also adjust outside and internal valuations based on identifiable trends within our markets, such as recent sales of similar properties or assets, listing prices and offers received. In addition, we may discount certain appraised and internal value estimates to address distressed market conditions.

Nonperforming assets, comprised of nonaccrual loans, loans past due 90 days or more and accruing interest and foreclosed properties, totaled $5.4 million (0.1% of total assets) as of March 31, 2025, compared to $5.7 million (0.1% of total assets) as of December 31, 2024. 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.

Loan charge-offs totaled $0.1 million, while recoveries of prior period loan charge-offs equaled $0.2 million, providing for a net loan recovery of $0.1 million during the first three months of 2025. 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. We recorded a provision expense of $2.1 million during the first three months of 2025, primarily reflecting an increased allocation necessitated by changes to the economic forecast and loan growth.

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.

See Note 1- Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the allowance. See also Note 3 - Loans and Allowance for Credit Losses in this Quarterly Report on Form 10-Q for further information regarding our loan portfolio and allowance.

The allowance equaled $56.7 million, or 1.22% of total loans and 1,057% of nonperforming loans, as of March 31, 2025. The allowance was comprised of $54.3 million in general reserves relating to performing loans and $2.4 million in specific reserves on other loans, primarily nonperforming loans, as of March 31, 2025. Loans with an aggregate carrying value of $0.3 million as of March 31, 2025 had been subject to previous partial charge-offs aggregating $4.1 million over the past several years. There were no specific reserves allocated to loans that had been subject to a previous partial charge-off as of March 31, 2025.

Although we believe the allowance is adequate to absorb loan losses in our loan portfolio as they arise, there can be no assurance that we will not sustain loan losses in any given period that could be substantial in relation to, or greater than, the size of the allowance.

The following table reflects the composition of our allowance for credit losses, nonaccrual loans, and net charge-offs as of and for the three months ended March 31, 2025.

(Dollars in thousands)		Allowance for Credit Losses				Total Loans				Allowance for Credit Losses to Total Loans				Nonaccrual Loans				Nonaccrual Loans to Total Loans				Allowance for Credit Losses to Nonaccrual Loans				Net Charge-Offs				Annualized Net Charge-Offs to Average Loans
Commercial:
Commercial and industrial		$	11,798			$	1,314,383				0.90	%		$	2,257				0.17	%			522.73	%		$	(35	)			(0.01	)%
Vacant land, land development and residential construction			386				68,790				0.56				0				0			NA					(1	)			(0.01	)
Real estate - owner occupied			7,679				705,645				1.09				41				0.01				18,729.27				(2	)			(0.00	)
Real estate - non-owner occupied			11,946				1,183,728				1.01				0				0			NA					0				0.00
Real estate - multi-family and residential rental			3,878				479,045				0.81				0				0			NA					(5	)			(0.00	)
Total commercial			35,687				3,751,591				0.95				2,298				0.06				1,552.96				(43	)			(0.00	)
Retail:
1-4 family mortgages			18,874				817,212				2.31				3,063				0.37				616.19				14				0.01
Other consumer			2,102				67,746				3.10				0				0			NA					(83	)			(0.50	)
Total retail			20,976				884,958				2.37				3,063				0.35				684.82				(69	)			(0.03	)
Unallocated			3				NA				NA				NA				NA				NA				NA				NA
Total		$	56,666			$	4,636,549				1.22	%		$	5,361				0.12	%			1,057.00	%		$	(112	)			(0.01	)%

Securities available for sale increased $57.2 million during the first three months of 2025, totaling $788 million as of March 31, 2025. Purchases of U.S. Government agency bonds during the first three months of 2025 aggregated $46.0 million, while proceeds from maturities totaled $6.0 million. There were no purchases of U.S. Government agency guaranteed mortgage-backed securities during the first three months of 2025, while proceeds from principal paydowns aggregated $0.8 million. Purchases of municipal bonds totaled $5.7 million during the first three months of 2025; there were no maturities. As of March 31, 2025, the portfolio was primarily comprised of U.S. Government agency bonds (70%), municipal bonds (27%) 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 as of March 31, 2025, totaled $788 million, including a net unrealized loss of $51.5 million. The net unrealized loss equaled $63.1 million as of December 31, 2024. 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 13% to 16% of total assets.

Market values on our U.S. Government agency bonds, mortgage-backed securities issued or guaranteed by U.S. Government agencies and municipal bonds are generally determined on a monthly basis with the assistance of a third-party vendor. Evaluated pricing models that vary by type of security and incorporate available market data are utilized. Standard inputs include issuer and type of security, benchmark yields, reported trades, broker/dealer quotes and issuer spreads. The market value of certain non-rated securities issued by relatively small municipalities generally located within our markets is estimated at carrying value. We believe our valuation methodology provides for a reasonable estimation of market value, and that it is consistent with the requirements of accounting guidelines.

FHLBI stock totaled $21.5 million as of March 31, 2025, unchanged from December 31, 2024. 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.

Interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, averaged $267 million during the first three months of 2025, compared to $150 million during the first three months of 2024. The higher average balance primarily reflects our strategy to reduce the loan-to-deposit ratio via local deposit growth exceeding loan and investment growth, as well as our desire to maintain higher levels of on-balance sheet liquidity.

Net premises and equipment equaled $53.7 million as of March 31, 2025, compared to $53.4 million as of December 31, 2024. Depreciation expense totaled $1.3 million during the first three months of 2025, while investments associated with renovations of existing facilities and equipment purchases aggregated $1.6 million.

Total deposits declined $16.6 million during the first three months of 2025. Aggregate net growth in almost all interest-bearing deposit types offset a significant portion of the reduction in business noninterest-bearing checking accounts primarily reflecting the expected large withdrawal of funds that had been deposited in late 2024 and the customary level of customers' tax and bonus payments and partnership distributions during the early part of each first quarter. Out-of-area deposits were unchanged, while FHLBI advances declined $20.9 million during the first three months of 2025. Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $516 million, or about 10% of total funds, as of March 31, 2025.

Uninsured deposits totaled approximately $2.5 billion, or about 53% of total deposits, as of March 31, 2025, compared to approximately $2.2 billion, or 46% of total deposits, as of December 31, 2024. The uninsured amounts are estimates based on the methodologies and assumptions we use for regulatory reporting requirements.

Sweep accounts increased $121 million during the first quarter of 2025, largely reflecting the return of funds that had been withdrawn during the fourth quarter of 2024. In addition, 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 three months of 2025, with a high daily balance of $284 million and a low daily balance of $115 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. All of our repurchase agreements are accounted for as secured borrowings.

FHLBI advances declined $20.9 million during the first three months of 2025, totaling $366 million as of March 31, 2025. Bullet advance maturities aggregated $20.0 million, while no new bullet advances were obtained, during the first three months of 2025. Payments on amortizing FHLBI advances totaled $0.9 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 totaled $1.06 billion, with remaining availability based on collateral equaling $674 million, as of March 31, 2025.

Shareholders' equity increased $23.8 million during the first three months of 2025, equaling $608 million as of March 31, 2025. Positively impacting shareholders' equity during the first three months of 2025 was net income of $19.5 million, which was partially offset by the payment of cash dividends totaling $5.9 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 $9.2 million after-tax increase in the market value of our available for sale securities portfolio, reflecting a decline in market interest rates, positively impacted shareholders' equity during the first three months of 2025.

Liquidity

Liquidity is measured by our ability to raise funds through deposits, borrowed funds, and 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 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 deposits. Asset and liability management is the process of managing our balance sheet to achieve a mix of earning assets and liabilities that maximizes profitability, while providing adequate liquidity.

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 $516 million, or about 10% of total funds, as of March 31, 2025, compared to $537 million, or about 10% of total funds, as of December 31, 2024.

Sweep accounts increased $121 million during the first quarter of 2025, largely reflecting the return of funds that had been withdrawn during the fourth quarter of 2024. In addition, 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 three months of 2025, with a high daily balance of $284 million and a low daily balance of $115 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. All of our repurchase agreements are accounted for as secured borrowings.

Information regarding our repurchase agreements as of March 31, 2025 and during the first three months of 2025 is as follows:

(Dollars in thousands)
Outstanding balance at March 31, 2025		$	242,102
Weighted average interest rate at March 31, 2025			3.47	%
Maximum daily balance three months ended March 31, 2025		$	283,757
Average daily balance for three months ended March 31, 2025		$	221,288
Weighted average interest rate for three months ended March 31, 2025			3.23	%

FHLBI advances declined $20.9 million during the first three months of 2025, totaling $366 million as of March 31, 2025. Bullet advance maturities aggregated $20.0 million, while no new bullet advances were obtained, during the first three months of 2025. Payments on amortizing FHLBI advances totaled $0.9 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 totaled $1.06 billion, with remaining availability based on collateral equaling $674 million, as of March 31, 2025.

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 three months of 2025. In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged $248 million during the first three months of 2025. 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 $153 million as of March 31, 2025. We did not utilize this line of credit during the first three months of 2025 or at any time during the previous 16 fiscal years, and do not plan to access this line of credit in future periods.

The following table reflects, as of March 31, 2025, significant fixed and determinable contractual obligations to third parties by payment date, excluding accrued interest:

		One Year				One to				Three to				Over
(Dollars in thousands)		or Less				Three Years				Five Years				Five Years				Total
Deposits without a stated maturity		$	3,717,773			$	0			$	0			$	0			$	3,717,773
Time deposits			699,938				252,780				11,294				0				964,012
Short-term borrowings			242,102				0				0				0				242,102
Federal Home Loan Bank advances			90,899				181,917				72,087				21,318				366,221
Subordinated debentures			0				0				0				50,501				50,501
Subordinated notes			0				0				0				89,400				89,400
Other borrowed money			0				0				0				1,486				1,486
Premises and equipment leases			1,186				2,207				1,401				1,188				5,982

The balance of certificates of deposit exceeding the FDIC insured limit and their maturity profile as of March 31, 2025 and December 31, 2024 were as follows:

(Dollars in thousands)		March 31, 2025				December 31, 2024
Up to three months		$	75,397			$	101,062
Three months to six months			146,367				66,314
Six months to twelve months			62,033				161,409
Over twelve months			82,060				20,476
Total certificates of deposit		$	365,857			$	349,261

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, 2025, we had a total of $2.01 billion in unfunded loan commitments and $27.2 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 $234 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.

We monitor our liquidity position and funding strategies on an ongoing basis, but recognize that unexpected events, changes in economic or market conditions, a reduction in earnings performance, declining capital levels or situations beyond our control could cause liquidity challenges. We have developed contingency funding plans that provide a framework for meeting liquidity disruptions.

Capital Resources

Shareholders' equity increased $23.8 million during the first three months of 2025, equaling $608 million as of March 31, 2025. Positively impacting shareholders' equity during the first three months of 2025 was net income of $19.5 million, which was partially offset by the payment of cash dividends totaling $5.9 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 $9.2 million after-tax increase in the market value of our available for sale securities portfolio, reflecting a decline in market interest rates, positively impacted shareholders' equity during the first three months of 2025.

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, 2025, our bank's total risk-based capital ratio was 14.0%, compared to 13.9% as of December 31, 2024. Our bank's total regulatory capital increased $3.0 million during the first three months of 2025, in large part reflecting net income totaling $22.3 million, which was partially offset by cash dividends paid to us aggregating $20.8 million. As of March 31, 2025, our bank's total regulatory capital equaled $762 million, or $217 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, 2025 and December 31, 2024 are disclosed in Note 13 of the Notes to Consolidated Financial Statements.

Results of Operations

We recorded net income of $19.5 million, or $1.21 per basic and diluted share, for the first quarter of 2025, compared with net income of $21.6 million, or $1.34 per basic and diluted share, for the first quarter of 2024. Diluted earnings per share decreased $0.13, or 9.7%, during the first quarter of 2025, compared with the prior-year first quarter.

The decrease in net income during the first three months of 2025 compared to the respective 2024 period reflected lower noninterest income and higher levels of noninterest expense and provisions for credit losses, which more than offset increased net interest income. Net interest income increased as earning asset expansion and a decrease in the cost of funds outpaced a lower yield on earning assets and growth in interest-bearing liabilities. Noninterest income declined as increases in treasury management fees, mortgage banking income, and payroll service fees were outweighed by reductions in interest rate swap income, revenue generated from an investment in a private equity fund, and bank owned life insurance income. Noninterest expense was up primarily due to increased salary and benefit and data processing costs. The provision expense recorded during the current-year first quarter mainly reflected an increased allocation necessitated by changes to the economic forecast.

Interest income during the first quarter of 2025 was $80.3 million, an increase of $3.6 million, or 4.7%, from the $76.7 million earned during the first quarter of 2024. The increase resulted from growth in average earning assets, which more than offset a lower yield on average earning assets. Average earning assets equaled $5.68 billion during the first quarter of 2025, up $597 million, or 11.7%, from the level of $5.08 billion during the prior-year first quarter; average loans were up $330 million, average securities increased $150 million, and average interest-earning deposits grew $117 million. The yield on average earning assets was 5.74% during the current-year first quarter, a decrease from 6.06% during the respective 2024 period. The lower yield mainly resulted from a decreased yield on loans and a change in earning asset mix, which more than offset an enhanced yield on securities stemming from reinvestment and portfolio expansion activities in a higher interest rate environment. The yield on loans was 6.31% during the first quarter of 2025, down from 6.65% during the first quarter of 2024 primarily due to lower interest rates on variable-rate commercial loans resulting from the Federal Open Market Committee ("FOMC") lowering the targeted federal funds rate. The FOMC decreased the targeted federal funds rate by 50 basis points in September of 2024 and 25 basis points in each of November and December of 2024, during which time average variable-rate commercial loans represented approximately 73% of average total commercial loans. Signifying the success of a strategic initiative to reduce the loan-to-deposit ratio and increase on-balance sheet liquidity, higher-yielding loans represented a reduced percentage of earning assets and lower-yielding securities and interest-earning deposits accounted for increased percentages of earning assets in the first quarter of 2025 compared to the first quarter of 2024. The yield on securities equaled 2.79% during the first three months of 2025, up from 2.20% during the first three months of 2024.

Interest expense during the first quarter of 2025 was $31.8 million, an increase of $2.4 million, or 8.3%, from the $29.4 million expensed during the first quarter of 2024. The higher level of interest expense resulted from growth in average interest-bearing liabilities, which more than offset a decline in the weighted average cost of these funds. Average interest-bearing liabilities totaled $4.18 billion during the first three months of 2025, compared to $3.61 billion during the respective 2024 period, representing an increase of $575 million, or 15.9%. The average weighted cost of interest-bearing liabilities declined from 3.27% during the first quarter of 2024 to 3.08% during the first quarter of 2025 mainly due to lower rates paid on money market accounts, reflecting the decreased interest rate environment that began in September of 2024 in conjunction with the FOMC's lowering of the targeted federal funds rate. A change in funding mix, primarily consisting of a decrease in average noninterest-bearing checking accounts and growth in average higher-cost money market accounts and time deposits, negatively impacted the weighted average cost of interest-bearing liabilities during the first three months of 2025. The increases in money market accounts and time deposits reflected new deposit relationships, growth in existing deposit relationships, and deposit migration.

Net interest income during the first quarter of 2025 was $48.5 million, an increase of $1.2 million, or 2.5%, from the $47.3 million earned during the respective 2024 period. The increase reflected growth in earning assets, which more than offset a lower net interest margin. The net interest margin was 3.47% in the first quarter of 2025, down from 3.74% in the prior-year first quarter due to a decreased yield on earning assets, which more than offset a decline in the cost of funds. The lower yield on average earning assets mainly resulted from a decreased yield on commercial loans, largely reflecting the impact of the previously mentioned FOMC rate cuts. The cost of funds equaled 2.27% in the first quarter of 2025, down from 2.32% in the first quarter of 2024 primarily due to lower costs of money market accounts, reflecting the decreasing interest rate environment over the last four months of 2024.

The following table sets forth certain information relating to our consolidated average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the first quarters of 2025 and 2024. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the period presented. Tax-exempt securities interest income and yield for the first quarters of 2025 and 2024 have been computed on a tax equivalent basis using a marginal tax rate of 21.0%. Securities interest income was increased by $60,000 in the first quarters of 2025 and 2024 for this non-GAAP, but industry standard, adjustment. These adjustments equated to increases in our net interest margin of less than one basis point for both periods.

		Quarters ended March 31,
		2025												2024
		Average								Average				Average								Average
		Balance				Interest				Rate				Balance				Interest				Rate
		(dollars in thousands)
ASSETS
Loans		$	4,629,098			$	71,992				6.31	%		$	4,299,163			$	71,270				6.65	%
Investment securities			784,608				5,471				2.79				634,099				3,481				2.20
Interest-earning deposits			266,871				2,935				4.40				150,234				2,033				5.35
Total interest - earning assets			5,680,577				80,398				5.74				5,083,496				76,784				6.06
Allowance for credit losses			(55,657	)											(51,046	)
Other assets			393,238												352,225
Total assets		$	6,018,158											$	5,384,675
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits		$	3,443,770			$	25,192				2.97	%		$	2,790,307			$	22,224				3.19	%
Short-term borrowings			221,288				1,763				3.23				216,674				1,654				3.06
Federal Home Loan Bank advances			376,211				2,898				3.08				460,251				3,399				2.92
Other borrowings			141,129				1,937				5.49				139,923				2,086				5.90
Total interest-bearing liabilities			4,182,398				31,790				3.08				3,607,155				29,363				3.27
Noninterest-bearing deposits			1,144,781												1,175,884
Other liabilities			96,834												74,455
Shareholders' equity			594,145												527,181
Total liabilities and shareholders' equity		$	6,018,158											$	5,384,675
Net interest income						$	48,608											$	47,421
Net interest rate spread											2.66	%											2.79	%
Net interest spread on average assets											3.28	%											3.53	%
Net interest margin on earning assets											3.47	%											3.74	%

Provisions for credit losses of $2.1 million and $1.3 million were recorded during the first quarters of 2025 and 2024, respectively. The provision expense recorded during the first three months of 2025 mainly reflected an increased allocation dictated by changes to the economic forecast. The provision expense recorded during the first three months 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, which more than offset the impacts of an improved economic forecast and changes to the loan portfolio composition. Sustained strength in loan quality metrics and the recording of net loan recoveries during both periods largely mitigated additional reserves associated with loan growth.

Noninterest income totaled $8.7 million during the first quarter of 2025, down from $10.9 million during the respective 2024 period as growth in treasury management fees, mortgage banking income, and payroll service fees was more than offset by lower levels of interest rate swap income, revenue generated from an investment in a private equity fund, and bank owned life insurance income. The increase in treasury management fees mainly reflected customers' expanded use of products and services and the successful marketing of these offerings to existing and new clients. The higher level of mortgage banking income primarily resulted from increases in the percentage of loans originated with the intent to sell, which equaled approximately 80% during the current-year first quarter compared to approximately 74% during the first quarter of 2024, and total loan originations, which were up approximately 26% during the first quarter of 2025 compared to the corresponding 2024 period. During the first quarter of 2025, interest rate swap income, which sometimes varies greatly from period to period due to the timing of closing transactions, was negatively impacted by the ongoing uncertainty surrounding economic and operating conditions and the associated reduction in commercial loan activity. Noninterest income during the first three months of 2024 included bank owned life insurance claims totaling $0.7 million.

Noninterest expense totaled $31.1 million during the first quarter of 2025, compared to $29.9 million during the prior-year first quarter. The increase primarily resulted from higher salary and benefit costs, largely reflecting annual merit pay increases and market adjustments. A higher level of data processing costs, mainly reflecting increased software support costs, also contributed to the rise in noninterest expense. Lower depreciation expense, largely reflecting facility expansion and leasehold improvement projects becoming fully depreciated during 2024, and a reduced reserve for commercial loan commitments positively impacted noninterest expense during the first three months of 2025. Noninterest expense during the first quarter of 2024 included contributions to The Mercantile Bank Foundation totaling $0.7 million.

During the first quarter of 2025, we recorded income before federal income tax of $24.0 million and a federal income tax expense of $4.5 million. During the first quarter of 2024, we recorded income before federal income tax of $27.0 million and a federal income tax expense of $5.4 million. The $0.9 million decrease in federal income tax expense in the first three months of 2025 compared to the respective 2024 period primarily resulted from the lower level of income before federal income tax. The aforementioned bank owned life insurance claims, substantially all of which were nontaxable, positively impacted the effective tax rate in the first three months of 2024.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. All of our transactions are denominated in U.S. dollars with no specific foreign exchange exposure. We have only limited agricultural-related loan assets and therefore have no significant exposure to changes in commodity prices. Any impact that changes in foreign exchange rates and commodity prices would have on interest rates is assumed to be insignificant. Interest rate risk is the exposure of our financial condition to adverse movements in interest rates. We derive our income primarily from the excess of interest collected on our interest-earning assets over the interest paid on our interest-bearing liabilities. The rates of interest we earn on our assets and owe on our liabilities generally are established contractually for a period of time. Since market interest rates change over time, we are exposed to lower profitability if we cannot adapt to interest rate changes. Accepting interest rate risk can be an important source of profitability and shareholder value; however, excessive levels of interest rate risk could pose a significant threat to our earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to our safety and soundness.

Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control interest rate risk and the quantitative level of exposure. Our interest rate risk management process seeks to ensure that appropriate policies, procedures, management information systems and internal control procedures are in place to maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest rate risk, we assess the existing and potential future effects of changes in interest rates on our financial condition, including capital adequacy, earnings, liquidity and asset quality.

We use two interest rate risk measurement techniques. The first, which is commonly referred to as GAP analysis, measures the difference between the dollar amounts of interest sensitive assets and liabilities that will be refinanced or repriced during a given time period. A significant repricing gap could result in a negative impact to our net interest margin during periods of changing market interest rates.

The following table depicts our GAP position as of March 31, 2025:

		Within				Three to				One to				After
		Three				Twelve				Five				Five
(Dollars in thousands)		Months				Months				Years				Years				Total
Assets:
Loans (1)		$	2,932,924			$	163,911			$	1,058,971			$	480,743			$	4,636,549
Securities available for sale (2)			40,379				42,900				342,767				383,050				809,096
Interest-earning deposits			310,634				506				4,000				0				315,140
Mortgage loans held for sale			15,192				0				0				0				15,192
Allowance for credit losses			0				0				0				0				(56,666	)
Other assets			0				0				0				0				421,889
Total assets		$	3,299,129			$	207,317			$	1,405,738			$	863,793			$	6,141,200
Liabilities:
Interest-bearing deposits			2,788,229				455,984				264,073				0				3,508,286
Short-term borrowings			242,102				0				0				0				242,102
Federal Home Loan Bank advances			30,000				60,899				254,004				21,318				366,221
Other borrowed money			51,987				0				89,400				0				141,387
Noninterest-bearing checking			0				0				0				0				1,173,499
Other liabilities			0				0				0				0				101,359
Total liabilities			3,112,318				516,883				607,477				21,318				5,532,854
Shareholders' equity			0				0				0				0				608,346
Total liabilities & shareholders' equity		$	3,112,318			$	516,883			$	607,477			$	21,318			$	6,141,200
Net asset (liability) GAP		$	186,811			$	(309,566	)		$	798,261			$	842,475
Cumulative GAP		$	186,811			$	(122,755	)		$	675,506			$	1,517,981
Percent of cumulative GAP to total assets			3.0	%			(2.0	)%			11.0	%			24.7	%

(1)	Floating rate loans that are currently at interest rate floors are treated as fixed rate loans and are reflected using maturity date and not repricing frequency.
(2)	Mortgage-backed securities are categorized by expected maturities based upon prepayment trends as of March 31, 2025.

The second interest rate risk measurement we use is commonly referred to as net interest income simulation analysis. We believe that this methodology provides a more accurate measurement of interest rate risk than the GAP analysis, and therefore, it serves as our primary interest rate risk measurement technique. The simulation model assesses the direction and magnitude of variations in net interest income resulting from potential changes in market interest rates.

Key assumptions in the model include prepayment speeds on various loan and investment assets; cash flows and maturities of interest sensitive assets and liabilities; and changes in market conditions impacting loan and deposit volume and pricing. These assumptions are inherently uncertain, subject to fluctuation and revision in a dynamic environment; therefore, the model cannot precisely estimate net interest income or exactly predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes and changes in market conditions and our strategies, among other factors.

We conducted multiple simulations as of March 31, 2025, in which it was assumed that changes in market interest rates occurred ranging from up 300 basis points to down 400 basis points in equal quarterly instalments over the next twelve months. The following table reflects the suggested dollar and percentage changes in net interest income over the next twelve months in comparison to the $225 million in net interest income projected using our balance sheet amounts and anticipated replacement rates as of March 31, 2025. The resulting estimates are generally within our policy parameters established to manage and monitor interest rate risk.

(Dollars in thousands)		Dollar Change				Percent Change
		In Net				In Net
Interest Rate Scenario		Interest Income				Interest Income
Interest rates down 400 basis points		$	(29,500	)			(13.1	)%
Interest rates down 300 basis points			(17,800	)			(7.9	)
Interest rates down 200 basis points			(13,800	)			(6.1	)
Interest rates down 100 basis points			(6,600	)			(2.9	)
Interest rates up 100 basis points			6,300				2.8
Interest rates up 200 basis points			12,800				5.7
Interest rates up 300 basis points			18,900				8.4

The resulting estimates have been significantly impacted by the current interest rate and economic environments, as adjustments have been made to critical model inputs with regards to traditional interest rate relationships. This is especially important as it relates to floating rate commercial loans, which comprise a sizable portion of our balance sheet.

In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including: the growth, composition and absolute levels of loans, deposits, and other earning assets and interest-bearing liabilities; level of nonperforming assets; economic and competitive conditions; potential changes in lending, investing, and deposit gathering strategies; client preferences; and other factors.

Item 4. Controls and Procedures

As of March 31, 2025, an evaluation was performed under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of March 31, 2025.

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we may be involved in various legal proceedings that are incidental to our business. In our opinion, we are not a party to any current legal proceedings that are material to our financial condition, either individually or in the aggregate.

Item 1A. Risk Factors.

There have been no material changes in our risk factors from those previously disclosed in our annual report on Form 10-K for the year ended December 31, 2024.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

We made no unregistered sales of equity securities during the quarter ended March 31, 2025.

Issuer Purchases of Equity Securities

On May 27, 2021, we announced that our Board of Directors had authorized a program to repurchase up to $20.0 million of our common stock from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations. The actual timing, number and value of shares repurchased under the program will be determined by management in its discretion and will depend on a number of factors, including the market price of our stock, general market and economic conditions, our capital position, financial performance and alternative uses of capital, and applicable legal requirements. The program may be discontinued at any time. No shares were repurchased during the first three months of 2025. Historically, stock repurchases have been funded from cash dividends paid to us from our bank. Additional repurchases may be made in future periods under the authorized plan or a new plan, which would also likely be funded from cash dividends paid to us from our bank. As of March 31, 2025, repurchases aggregating $6.8 million were available to be made under the current repurchase program.

Repurchases made during the first quarter of 2025 are detailed in the table below.

														Maximum Number
														of Shares or
														Approximate Dollar
										Total Number of				Value that May Yet
		Total								Shares Purchased as				Be
		Number of				Average				Part of Publicly				Purchased Under the
		Shares				Price Paid Per				Announced Plans or				Plans or Programs
Period		Purchased				Share				Programs				(Dollars in thousands)
January 1 - 31			0			$	0				0			$	6,818
February 1 - 28			0				0				0				6,818
March 1 - 31			0				0				0				6,818
Total			0			$	0				0			$	6,818

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Notapplicable.

Item 6. Exhibits

EXHIBIT NO.	EXHIBIT DESCRIPTION
3.1	Articles of Incorporation of Mercantile Bank Corporation, including all amendments thereto, incorporated by reference to Exhibit 3.1 of our Form S-4 Registration Statement filed February 16, 2022
3.2	Our Amended and Restated Bylaws dated as of February 26, 2015 are incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed February 26, 2015
4.1	Instruments defining the Rights of Security Holders - reference is made to Exhibits 3.1 and 3.2. In accordance with Regulation S-K Item 601(b)(4), Mercantile Bank Corporation is not filing copies of instruments defining the rights of holders of long-term debt because none of those instruments authorizes debt in excess of 10% of the total assets of Mercantile Bank Corporation and its subsidiaries on a consolidated basis. Mercantile Bank Corporation hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
4.2	Subordinated indenture, dated December 15, 2021, by and between Mercantile Bank Corporation and Wilmington Trust, National Association, as trustee, incorporated by reference to our Current Report on Form 8-K filed December 17, 2021
4.3	First Supplemental Indenture to Subordinated indenture, dated December 15, 2021, by and between Mercantile Bank Corporation and Wilmington Trust, National Association, as trustee, incorporated by reference to our Current Report on Form 8-K filed December 17, 2021
4.4	Form of 3.25% Fixed-to-Floating Rate Subordinated Note due 2032, incorporated by reference to our Current Report on Form 8-K filed December 17, 2021
4.5	Form of Subordinated Note Purchase Agreement dated December 15, 2021, by and among Mercantile Bank Corporation and the Purchasers, incorporated by reference to our Current Report on Form 8-K filed December 17, 2021
4.6	Form of Registration Rights Agreement dated December 15, 2021, by and among Mercantile Bank Corporation and the Purchasers, incorporated by reference to our Current Report on Form 8-K filed December 17, 2021
10.1	Form of Performance-Based Restricted Stock Award Agreement, in connection with the Mercantile Bank Corporation Stock Incentive Plan of 2023, incorporated by reference to Exhibit 10.1 on our Form 8-K filed February 6, 2025
10.2	Form of Standard Restricted Stock Award Agreement, in connection with the Mercantile Bank Corporation Stock Incentive Plan of 2023, incorporated by reference to Exhibit 10.2 on our Form 8-K filed February 6, 2025
10.3	2025 Mercantile Executive Officer Bonus Plan, incorporated by reference to Exhibit 10.1 on our Form 8-K filed March 20, 2025
31	Rule 13a-14(a) Certifications
32.1	Section 1350 Chief Executive Officer Certification
32.2	Section 1350 Chief Financial Officer Certification
101	The following financial information from Mercantile's Quarterly Report on Form 10-Q for the quarter ended March 31, 2025, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders' Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 2, 2025.

	MERCANTILE BANK CORPORATION
	By: /s/ Raymond E. Reitsma
	Raymond E. Reitsma
	President and Chief Executive Officer (Principal Executive Officer)

	By: /s/ Charles E. Christmas
	Charles E. Christmas
	Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)