Mercantile Bank (MBWM) - 2022 Q3 - Quarterly Report

PART I. Financial Information Item 1. Financial Statements The unaudited consolidated financial statements show decreased total assets to $5.02 billion and mixed net income results for the third quarter and nine months ended September 30, 2022 Consolidated Balance Sheets Total assets decreased to $5.02 billion due to lower cash, partially offset by loan growth, while shareholders' equity declined Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $5,016,934 | $5,257,749 | | Cash and cash equivalents | $284,014 | $975,160 | | Loans, net | $3,841,838 | $3,418,096 | | Securities available for sale | $582,999 | $592,743 | | Total Liabilities | $4,600,673 | $4,801,190 | | Total deposits | $3,846,085 | $4,083,193 | | Federal Home Loan Bank advances | $338,263 | $374,000 | | Total Shareholders' Equity | $416,261 | $456,559 | | Accumulated other comprehensive loss | ($72,463) | ($3,729) | Consolidated Statements of Income Quarterly net income rose on higher net interest income, but year-to-date income fell due to reduced noninterest income and higher credit loss provisions Key Income Statement Data (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $42,376 | $31,124 | $107,587 | $91,528 | | Provision for credit losses | $2,900 | $1,900 | $3,500 | ($900) | | Noninterest Income | $7,253 | $15,568 | $24,272 | $43,587 | | - Mortgage banking income | $1,764 | $6,554 | $6,991 | $23,049 | | Noninterest Expense | $26,756 | $26,210 | $79,440 | $77,519 | | Net Income | $16,030 | $15,051 | $39,260 | $47,382 | | Diluted EPS | $1.01 | $0.95 | $2.48 | $2.95 | Consolidated Statements of Comprehensive Income/(Loss) The company experienced a significant comprehensive loss driven by large unrealized holding losses on available-for-sale securities Comprehensive Income/(Loss) (in thousands) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $16,030 | $15,051 | $39,260 | $47,382 | | Other comprehensive income/(loss), net of tax | ($24,795) | ($1,802) | ($68,734) | ($5,782) | | Comprehensive Income/(Loss) | ($8,765) | $13,249 | ($29,474) | $41,600 | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity decreased to $416.3 million, primarily impacted by unrealized losses on securities and cash dividends - For the nine months ended September 30, 2022, shareholders' equity decreased by $40.3 million, driven by net income of $39.3 million, offset by cash dividends of $14.6 million and a significant $68.7 million negative adjustment from unrealized losses on securities[20] Consolidated Statements of Cash Flows Cash and cash equivalents decreased by $691.1 million, driven by significant cash usage in investing and financing activities Cash Flow Summary (Nine Months Ended Sept 30, in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash from operating activities | $82,793 | $19,169 | | Net cash for investing activities | ($502,996) | ($316,436) | | Net cash (for) from financing activities | ($270,943) | $496,622 | | Net change in cash and cash equivalents | ($691,146) | $199,355 | Notes to Consolidated Financial Statements Key accounting policy details include the adoption of CECL, Paycheck Protection Program loan status, and strong regulatory capital ratios - The company adopted the CECL methodology effective January 1, 2022, resulting in a transition adjustment that decreased the allowance for credit losses by $0.4 million[56] - The company participated in the Paycheck Protection Program (PPP), and as of September 30, 2022, only $2.6 million of these loans remained unforgiven[37][39] - The company's bank was categorized as "well capitalized" under regulatory frameworks as of September 30, 2022, with a total capital to risk-weighted assets ratio of 13.4%[202][203] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q3 2022 performance to strong loan growth and net interest margin expansion, despite a year-to-date decline in mortgage banking revenue - Net income for Q3 2022 was $16.0 million, up from $15.1 million in Q3 2021, primarily due to higher net interest income which offset a significant decline in residential mortgage banking revenue[239] - Core commercial loans grew by $232 million (11% annualized) and residential mortgage loans increased by $227 million (over 68% annualized) in the first nine months of 2022[240][241] - The provision for credit losses was $2.9 million in Q3 2022, driven by loan growth, increased specific reserves, and a decline in forecasted economic conditions[243] - Net interest margin expanded to 3.56% in Q3 2022 from 2.71% in Q3 2021, benefiting from the rising interest rate environment and a favorable shift in the earning asset mix[300] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with simulation analysis indicating a net interest income benefit from rising rates Net Interest Income Simulation Analysis (as of Sept 30, 2022) | Interest Rate Scenario | Dollar Change in NII | Percent Change in NII | | :--- | :--- | :--- | | Interest rates up 300 basis points | $19,700,000 | 10.0% | | Interest rates up 200 basis points | $13,000,000 | 6.6% | | Interest rates up 100 basis points | $6,300,000 | 3.2% | | Interest rates down 100 basis points | ($6,400,000) | (3.3%) | | Interest rates down 200 basis points | ($16,000,000) | (8.1%) | | Interest rates down 300 basis points | ($24,200,000) | (12.3%) | - The company's primary interest rate risk measurement technique is net interest income simulation analysis, which it believes is more accurate than traditional GAP analysis[322] Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of the quarter's end - Management concluded that disclosure controls and procedures were effective as of September 30, 2022[327] - No material changes were made to the company's internal control over financial reporting during the third quarter of 2022[328] PART II. Other Information Legal Proceedings The company is not a party to any material legal proceedings - The company states that it is not involved in any legal proceedings that would be material to its financial condition[330] Risk Factors No material changes to previously disclosed risk factors were reported - No material changes to risk factors have occurred since the last annual report[331] Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased in the first nine months of 2022, with $6.8 million remaining available under the current program - No shares were repurchased during the first nine months of 2022 under the existing $20.0 million stock repurchase program[333] - As of September 30, 2022, $6.8 million was still available for repurchase under the authorized plan[333] Defaults Upon Senior Securities This item is not applicable Mine Safety Disclosures This item is not applicable Other Information This item is not applicable Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications and financial data