Mercantile Bank (MBWM) - 2023 Q1 - Quarterly Report

PART I. Financial Information Financial Statements The unaudited consolidated financial statements for Mercantile Bank Corporation as of March 31, 2023, show a slight increase in total assets to $4.90 billion, with net income significantly rising to $21.0 million Consolidated Balance Sheets Total assets increased to $4.90 billion as of March 31, 2023, driven by a $48.3 million increase in net loans, while deposits decreased and borrowings rose to fund asset growth Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total cash and cash equivalents | $57,938 | $96,772 | | Loans, net | $3,922,651 | $3,874,373 | | Total assets | $4,895,874 | $4,872,619 | | Total deposits | $3,598,018 | $3,712,811 | | Federal Home Loan Bank advances | $377,910 | $308,263 | | Total liabilities | $4,428,502 | $4,431,211 | | Total shareholders' equity | $467,372 | $441,408 | Consolidated Statements of Income Net income for Q1 2023 significantly increased to $21.0 million, primarily due to a 56.7% rise in net interest income from higher interest rates on loans, despite decreases in noninterest income and increases in noninterest expense Q1 Income Statement Comparison (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Total interest income | $60,485 | $35,882 | | Total interest expense | $12,101 | $4,997 | | Net interest income | $48,384 | $30,885 | | Provision for credit losses | $600 | $100 | | Total noninterest income | $6,951 | $9,277 | | Total noninterest expenses | $28,599 | $25,742 | | Net income | $20,974 | $11,492 | | Diluted earnings per share | $1.31 | $0.73 | Consolidated Statements of Comprehensive Income Comprehensive income for Q1 2023 was $30.0 million, a significant positive shift from a $16.7 million loss in Q1 2022, driven by net income and unrealized holding gains on securities Comprehensive Income (Loss) Summary (in thousands) | Component | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net income | $20,974 | $11,492 | | Other comprehensive income (loss), net of tax | $9,074 | $(28,163) | | Comprehensive income (loss) | $30,048 | $(16,671) | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased to $467.4 million by March 31, 2023, primarily due to net income and positive changes in unrealized gains on securities, partially offset by cash dividends - Key drivers for the increase in shareholders' equity in Q1 2023 were net income of $20.97 million and a $9.07 million positive change in accumulated other comprehensive income, net of tax[19] - Cash dividends of $0.33 per common share, totaling $5.16 million, were paid during the first quarter of 2023[19] Consolidated Statements of Cash Flows Cash and cash equivalents decreased by $38.8 million in Q1 2023, with operating activities providing $18.1 million, investing activities using $57.1 million, and financing activities providing a net $0.2 million Cash Flow Summary (in thousands) | Activity | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net cash from operating activities | $18,065 | $27,888 | | Net cash for investing activities | $(57,136) | $(151,130) | | Net cash from (for) financing activities | $237 | $(81,714) | | Net change in cash and cash equivalents | $(38,834) | $(204,956) | Notes to Consolidated Financial Statements The notes detail accounting policies, portfolio compositions, credit loss allowances, deposit and borrowing structures, off-balance sheet commitments, derivatives, fair value measurements, and regulatory capital adequacy Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q1 2023 performance to higher net interest income and loan growth, with total assets reaching $4.90 billion, while managing deposit decreases with wholesale funds and facing lower noninterest income from reduced mortgage banking activity - Net income for Q1 2023 was $21.0 million ($1.31 per diluted share), up from $11.5 million ($0.73 per diluted share) in Q1 2022[195] - Commercial loan growth was impacted by approximately $65 million in full payoffs and partial paydowns from customers selling businesses and using excess cash flow[196] - The overall quality of the loan portfolio remains strong, with nonperforming loans at only 0.20% of total loans as of March 31, 2023[198] - Total deposits decreased by $115 million in Q1 2023, primarily due to customary customer tax/bonus payments and transfers to sweep accounts. This was offset by an increase in FHLBI advances[200] Financial Condition As of March 31, 2023, total assets reached $4.90 billion, driven by a $48.9 million increase in total loans, with excellent credit quality and nonperforming assets at 0.2% of total assets Loan Portfolio Composition (in thousands) | Loan Type | 3/31/23 | 12/31/22 | | :--- | :--- | :--- | | Total Commercial | $3,140,420 | $3,131,830 | | Total Retail | $825,108 | $784,789 | | Total Loans | $3,965,528 | $3,916,619 | - Nonperforming assets were stable at $8.4 million (0.2% of total assets) as of March 31, 2023, compared to $7.7 million (0.2% of total assets) at year-end 2022[211] - The allowance for credit losses was $42.9 million, or 1.08% of total loans, as of March 31, 2023[223] Liquidity The company maintains a strong liquidity position through deposits, borrowings, and cash flows, with $378 million in FHLBI advances and additional lines of credit available - Wholesale funds, comprised of FHLBI advances, increased to $378 million as of March 31, 2023, from $308 million at year-end 2022[236] - As of March 31, 2023, the company had total unfunded loan commitments of $1.97 billion and standby letters of credit of $22.7 million[240] - The company has a borrowing line of credit with the FHLBI totaling $665 million, with remaining availability of $281 million as of March 31, 2023[237] Capital Resources Shareholders' equity increased to $467 million by March 31, 2023, driven by net income and an increase in securities' market value, maintaining the bank's well-capitalized status with a 13.8% total risk-based capital ratio Bank Capital Ratios | Ratio | March 31, 2023 | Minimum to be Well Capitalized | | :--- | :--- | :--- | | Total risk-based capital | 13.8% | 10.0% | | Tier 1 risk-based capital | 12.8% | 8.0% | | Common equity tier 1 | 12.8% | 6.5% | | Tier 1 leverage | 12.2% | 5.0% | Results of Operations Net income for Q1 2023 rose to $21.0 million, primarily due to a 56.7% increase in net interest income and an expanded net interest margin, despite lower noninterest income and higher noninterest expenses Key Performance Metrics | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Interest Income | $48.4M | $30.9M | | Net Interest Margin | 4.28% | 2.57% | | Yield on Earning Assets | 5.35% | 2.99% | | Cost of Funds | 1.07% | 0.42% | - Noninterest income decreased primarily due to lower mortgage banking income, as residential mortgage loan production fell 57.2% year-over-year[256] - Noninterest expense increased mainly due to a $1.4 million bonus accrual (none in Q1 2022) and higher salary costs[257] Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk using GAP analysis and NII simulation, projecting a 3.0% increase in NII for a 100 basis point rate rise and a 2.6% decrease for a 100 basis point rate drop over 12 months Net Interest Income Sensitivity Analysis (as of March 31, 2023) | Interest Rate Scenario (12-month gradual change) | Estimated % Change in NII | | :--- | :--- | | +300 bps | +9.4% | | +200 bps | +6.3% | | +100 bps | +3.0% | | -100 bps | -2.6% | | -200 bps | -6.2% | | -300 bps | -6.2% | - The company's primary tool for measuring interest rate risk is a net interest income simulation analysis, which it believes is more accurate than GAP analysis[264] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective as of March 31, 2023[269] - No material changes were made to internal controls over financial reporting during the first quarter of 2023[270] PART II. Other Information Legal Proceedings The company is not involved in any legal proceedings deemed material to its financial condition - The company reports no material legal proceedings incidental to its business[273] Risk Factors No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022, have been reported - No material changes in risk factors were reported from the latest Form 10-K[274] Unregistered Sales of Equity Securities and Use of Proceeds The company made no unregistered sales of equity securities and no share repurchases in Q1 2023, with approximately $6.8 million remaining available under the stock repurchase program - No shares were repurchased during the first quarter of 2023[276] - As of March 31, 2023, $6.8 million remains available under the current stock repurchase program[276] Defaults Upon Senior Securities Not applicable Mine Safety Disclosures Not applicable Other Information Not applicable Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, certifications, and financial data