Mercantile Bank (US:MBWM)2020-11-06 13:54PART I. Financial Information Item 1. Financial Statements The unaudited consolidated financial statements for Mercantile Bank Corporation as of September 30, 2020, detail significant asset, loan, and deposit growth, driven by PPP, and increased loan loss provisions reflecting COVID-19 uncertainty Consolidated Balance Sheets Total assets increased to $4.42 billion as of September 30, 2020, primarily due to a $494 million rise in net loans (PPP-driven) and $315 million in cash, while total deposits grew by $682 million Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2020 | Dec 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $4,420,610 | $3,632,915 | +21.7% | | Total cash and cash equivalents | $554,591 | $233,731 | +137.3% | | Loans, net | $3,314,972 | $2,832,778 | +17.0% | | Total Liabilities | $3,988,710 | $3,216,354 | +24.0% | | Total deposits | $3,372,034 | $2,690,384 | +25.3% | | Federal Home Loan Bank advances | $394,000 | $354,000 | +11.3% | | Total Shareholders' Equity | $431,900 | $416,561 | +3.7% | Consolidated Statements of Income Net income for Q3 and YTD 2020 declined to $10.7 million and $30.1 million, respectively, driven by higher loan loss provisions and lower net interest income, partially offset by strong mortgage banking income Key Income Statement Data (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $29,509 | $31,605 | $90,397 | $93,366 | | Provision for loan losses | $3,200 | $700 | $11,550 | $2,450 | | Noninterest Income | $13,307 | $6,676 | $30,839 | $19,643 | | Noninterest Expense | $26,423 | $22,027 | $72,579 | $65,944 | | Net Income | $10,686 | $12,600 | $30,056 | $36,139 | | Diluted EPS | $0.66 | $0.77 | $1.85 | $2.20 | - Mortgage banking income significantly drove noninterest income, increasing to $9.5 million in Q3 2020 from $2.9 million in Q3 2019, and to $19.7 million for the nine-month period from $5.3 million in the prior year13 Consolidated Statements of Cash Flows For the nine months ended September 30, 2020, net cash from operating activities was $16.3 million, while investing activities used $452.4 million, and financing activities generated a strong $756.9 million inflow, resulting in a $320.9 million net increase in cash Cash Flow Summary - Nine Months Ended Sep 30 (in thousands) | Cash Flow Category | 2020 | 2019 | | :--- | :--- | :--- | | Net cash from operating activities | $16,306 | $20,133 | | Net cash for investing activities | ($452,367) | ($165,543) | | Net cash from financing activities | $756,921 | $298,594 | | Net change in cash and cash equivalents | $320,860 | $153,184 | Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies and financial components, emphasizing the impact of COVID-19, $555 million in PPP loans, loan deferment programs, and the postponement of CECL adoption - The company originated approximately 2,200 PPP loans totaling $555 million, with associated net origination fees of approximately $15.0 million being accreted into interest income73 - Commercial loan payment deferments peaked at $719 million in mid-July, significantly decreasing to only $7.0 million by October 30, 20205455 - The company postponed the adoption of the Current Expected Credit Loss (CECL) methodology, as permitted by the CARES Act, due to economic uncertainty from the pandemic5881 Loan Portfolio Composition (in thousands) | Loan Class | Sep 30, 2020 | Dec 31, 2019 | % Change | | :--- | :--- | :--- | :--- | | Commercial and industrial (incl. PPP) | $1,321,419 | $846,551 | +56.1% | | Real estate – owner occupied | $549,364 | $579,003 | -5.1% | | Real estate – non-owner occupied | $878,897 | $835,346 | +5.2% | | 1-4 family mortgages | $348,460 | $339,749 | +2.6% | | Total Loans | $3,350,544 | $2,856,667 | +17.3% | - Total nonperforming loans increased to $4.1 million as of September 30, 2020, from $2.3 million at December 31, 201997 - The company's bank was categorized as "well capitalized" as of September 30, 2020, with a Common equity tier 1 capital ratio of 12.5% against a 6.5% requirement158161 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance and condition, highlighting strong balance sheet growth from PPP and deposits, compressed net interest margin, increased loan loss provisions, and robust noninterest income from mortgage refinancing Coronavirus Pandemic This section details the company's response to the COVID-19 pandemic, including originating $555 million in PPP loans, implementing loan deferment programs that have significantly declined, and delaying CECL adoption under the CARES Act - The company originated approximately 2,200 PPP loans totaling $555 million, with net origination fees of about $15.0 million190 - Commercial loan deferments peaked at $719 million in mid-July but decreased to only $7.0 million by October 30, 2020, indicating a significant number of borrowers have resumed payments196 Financial Condition Total assets grew by $788 million to $4.42 billion in the first nine months of 2020, driven by increased loans (including PPP) and deposits, with strong asset quality and an increased allowance for loan losses of $35.6 million - Commercial loans increased by $497 million in the first nine months of 2020, primarily due to $555 million in PPP loan originations, partially offset by a $109 million reduction in commercial line of credit balances202209 - Nonperforming assets were $4.7 million, or 0.1% of total assets, as of September 30, 2020218 - The allowance for loan losses increased to $35.6 million, equal to 1.27% of total loans (excluding PPP loans) and over eight times the level of nonperforming loans as of September 30, 2020228 Liquidity and Capital Resources The company maintained strong liquidity with significant deposit growth and reduced wholesale funding, while shareholders' equity increased to $432 million, and the stock repurchase program was suspended to preserve capital - The stock repurchase program was suspended in March 2020 to preserve capital amid the pandemic, with no shares repurchased in Q2 or Q3 2020, and $10.1 million remaining under authorization166264 - The bank's total risk-based capital ratio was 13.5% as of September 30, 2020, with total regulatory capital of $446 million, exceeding the "well capitalized" requirement by $116 million266 Results of Operations Net income declined in Q3 and YTD 2020 due to higher loan loss provisions and a compressed net interest margin of 2.86%, partially offset by a 99.3% increase in Q3 noninterest income from record mortgage banking activity Net Interest Margin Analysis | Period | Net Interest Margin | Yield on Earning Assets | Cost of Interest-Bearing Liabilities | | :--- | :--- | :--- | :--- | | Q3 2020 | 2.86% | 3.45% | 0.99% | | Q3 2019 | 3.71% | 4.73% | 1.52% | - The loan loss provision was $3.2 million in Q3 2020 and $11.6 million for the first nine months of 2020, significantly higher than prior year periods, reflecting economic uncertainty from the COVID-19 pandemic289 - Noninterest income in Q3 2020 increased 99.3% year-over-year, driven by a surge in mortgage banking income due to high refinance activity291 - Noninterest expense rose 20.0% in Q3 2020 compared to Q3 2019, primarily due to higher compensation costs from mortgage originator commissions and a catch-up bonus accrual293 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed via NII simulation modeling, which indicates an asset-sensitive balance sheet where a gradual 100 basis point rate increase is projected to increase NII by 3.9%, while a decrease reduces it by 0.5% Net Interest Income Sensitivity Analysis (as of Sep 30, 2020) | Interest Rate Scenario (Gradual change over 12 months) | Dollar Change in NII | Percent Change in NII | | :--- | :--- | :--- | | Rates down 100 bps | ($600,000) | (0.5%) | | Rates up 100 bps | $4,740,000 | 3.9% | | Rates up 200 bps | $9,240,000 | 7.5% | | Rates up 300 bps | $13,700,000 | 11.2% | Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2020312 PART II. Other Information Legal Proceedings The company is not a party to any legal proceedings considered material to its financial condition - The company reports no material legal proceedings incidental to its business315 Risk Factors No material changes in risk factors were reported from previous disclosures in the company's Annual Report on Form 10-K for 2019 and Form 10-Q for Q1 2020 - No material changes in risk factors were reported from previous disclosures316 Unregistered Sales of Equity Securities and Use of Proceeds The company made no unregistered sales of equity securities in Q3 2020, and its stock repurchase program, with $10.1 million remaining authorization, was temporarily suspended in March 2020 to preserve capital amid the COVID-19 pandemic - The company temporarily ceased stock repurchases in late March 2020 to preserve capital amid the Coronavirus Pandemic, with no shares repurchased in Q3 2020318 Issuer Purchases of Equity Securities (Q3 2020) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Maximum Dollar Value that May Yet Be Purchased Under the Plan | | :--- | :--- | :--- | :--- | | July 1 – 31 | 0 | N/A | $10,135,000 | | August 1 – 31 | 0 | N/A | $10,135,000 | | September 1 – 30 | 0 | N/A | $10,135,000 | | Total | 0 | N/A | $10,135,000 | Other Items (Defaults, Mine Safety, Other Info) Items 3 (Defaults Upon Senior Securities), 4 (Mine Safety Disclosures), and 5 (Other Information) are all reported as not applicable - No disclosures were required for Defaults Upon Senior Securities, Mine Safety, or Other Information320321322