Mercantile Bank (MBWM) - 2022 Q2 - Quarterly Report

PART I. Financial Information Item 1. Financial Statements The unaudited consolidated financial statements show decreased assets and net income for the second quarter of 2022 Consolidated Balance Sheets Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2022 ($ thousands) | December 31, 2021 ($ thousands) | | :--- | :--- | :--- | | Total Assets | 5,058,555 | 5,257,749 | | Total cash and cash equivalents | 479,105 | 975,160 | | Loans, net | 3,687,826 | 3,418,096 | | Total Liabilities | 4,629,572 | 4,801,190 | | Total deposits | 3,873,893 | 4,083,193 | | Total Shareholders' Equity | 428,983 | 456,559 | - Total assets decreased from $5.26 billion at year-end 2021 to $5.06 billion as of June 30, 2022, primarily due to a significant reduction in interest-earning deposits and total cash equivalents[9] - Net loans increased by approximately $270 million, from $3.42 billion to $3.69 billion, during the first six months of 2022[9] Consolidated Statements of Income Consolidated Income Statement Highlights (Unaudited) | Metric | Three Months Ended June 30, 2022 ($ thousands) | Three Months Ended June 30, 2021 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | Six Months Ended June 30, 2021 ($ thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | 34,326 | 30,871 | 65,211 | 60,404 | | Provision for credit losses | 500 | (3,100) | 600 | (2,800) | | Noninterest Income | 7,741 | 14,556 | 17,018 | 28,019 | | Net Income | 11,737 | 18,091 | 23,229 | 32,331 | | Diluted EPS | $0.74 | $1.12 | $1.47 | $2.00 | - Net income for Q2 2022 was $11.7 million, a significant decrease from $18.1 million in Q2 2021, primarily driven by a sharp drop in noninterest income, particularly mortgage banking income which fell from $7.7 million to $1.9 million year-over-year[11] - The company recorded a $500,000 provision for credit losses in Q2 2022, compared to a release (negative provision) of $3.1 million in Q2 2021, indicating a shift in credit loss expectations[11] Consolidated Statements of Comprehensive Income Comprehensive Income/(Loss) (Unaudited) | Metric | Three Months Ended June 30, 2022 ($ thousands) | Three Months Ended June 30, 2021 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | Six Months Ended June 30, 2021 ($ thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Income | 11,737 | 18,091 | 23,229 | 32,331 | | Other comprehensive income/(loss), net of tax | (15,776) | 3,263 | (43,939) | (3,980) | | Comprehensive income/(loss) | (4,039) | 21,354 | (20,710) | 28,351 | - The company experienced a comprehensive loss of $4.0 million in Q2 2022, compared to a comprehensive income of $21.4 million in Q2 2021, driven by a significant unrealized loss on securities available for sale[14] Consolidated Statements of Changes in Shareholders' Equity - Total shareholders' equity decreased from $456.6 million to $429.0 million in the first half of 2022, primarily due to a $43.9 million negative change in net unrealized holding gain/loss on securities[20] - Cash dividends of $0.62 per common share were paid during the first six months of 2022, totaling $9.6 million[20] Consolidated Statements of Cash Flows Cash Flow Summary (Unaudited, Six Months Ended June 30) | Activity | 2022 ($ thousands) | 2021 ($ thousands) | | :--- | :--- | :--- | | Net cash from operating activities | 49,997 | 22,179 | | Net cash for investing activities | (336,399) | (194,750) | | Net cash (for) from financing activities | (209,653) | 306,096 | | Net change in cash and cash equivalents | (496,055) | 133,525 | - A net decrease in cash and cash equivalents of $496.1 million occurred in the first half of 2022, a stark contrast to the $133.5 million increase in the prior-year period[31] Notes to Consolidated Financial Statements - The company adopted the Current Expected Credit Loss (CECL) methodology on January 1, 2022, resulting in a $0.4 million decrease in the allowance for credit losses[62][222] - The Paycheck Protection Program (PPP) loan portfolio was significantly reduced to $2.9 million as of June 30, 2022[38][41] - The bank was categorized as "well capitalized" under regulatory frameworks as of June 30, 2022, with all capital ratios exceeding minimum requirements[204][205] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes lower Q2 2022 net income to reduced mortgage banking revenue, partially offset by strong commercial loan growth - Net income for Q2 2022 was $11.7 million ($0.74/share), down from $18.1 million ($1.12/share) in Q2 2021, due to declining mortgage banking revenue from rising interest rates[238] - Core commercial loans grew by $159 million (11% annualized) and residential mortgage loans increased by $148 million (66% annualized) in the first half of 2022[239][240] - Asset quality remains strong with nonperforming loans at 0.05% of total loans, and a $0.5 million provision for credit losses was recorded in Q2 2022[241][242] - The company adopted the CECL methodology on January 1, 2022, resulting in a one-time reduction to the allowance for credit losses of $0.4 million[222][242] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, and simulations show an asset-sensitive position benefiting from rising rates - The company's primary market risk exposure is interest rate risk, measured using GAP analysis and Net Interest Income (NII) simulation[318][324] Net Interest Income Simulation Analysis (as of June 30, 2022) | Interest Rate Scenario | Dollar Change in NII ($ thousands) | Percent Change in NII | | :--- | :--- | :--- | | Rates up 300 bps | 13,400 | 9.5% | | Rates up 200 bps | 8,800 | 6.3% | | Rates up 100 bps | 4,300 | 3.1% | | Rates down 100 bps | (4,500) | (3.2%) | | Rates down 200 bps | (10,000) | (7.2%) | - Simulation results indicate the company is asset-sensitive, meaning net interest income is expected to rise as interest rates increase and fall as they decrease[326][327] Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes to internal controls during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[329] - No material changes were made to the company's internal control over financial reporting during the quarter ended June 30, 2022[330] PART II. Other Information Legal Proceedings The company is not currently 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[332] Risk Factors No material changes to risk factors have been identified since the last annual report - No material changes to risk factors were reported since the last annual report (Form 10-K for year ended December 31, 2021)[333] Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased in the first half of 2022, with $6.8 million remaining available under the current program - No shares were repurchased during the first six months of 2022 under the existing stock repurchase program[335] - As of June 30, 2022, $6.8 million remained available for future repurchases under the authorized $20.0 million program[335][337] Exhibits This section lists exhibits filed with the report, including CEO/CFO certifications and financial data in Inline XBRL format - The exhibits filed with this report include CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906, as well as financial statements formatted in Inline XBRL[344]