Mercantile Bank (US:MBWM)2021-05-07 12:41PART I. Financial Information Item 1. Financial Statements This section presents Mercantile Bank Corporation's unaudited consolidated financial statements, including balance sheets, income, comprehensive income, equity, and cash flow statements, with detailed accounting policy notes Consolidated Balance Sheets Total assets increased to $4.71 billion by March 2021, driven by loan and securities growth, with liabilities rising due to increased deposits Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $4,710,354 | $4,437,344 | | Total cash and cash equivalents | $652,344 | $626,006 | | Loans, net | $3,325,675 | $3,155,503 | | Securities available for sale | $434,257 | $387,347 | | Total Liabilities | $4,269,111 | $3,995,790 | | Total deposits | $3,644,962 | $3,411,553 | | Federal Home Loan Bank advances | $394,000 | $394,000 | | Total Shareholders' Equity | $441,243 | $441,554 | Consolidated Statements of Income Net income rose to $14.2 million in Q1 2021, driven by strong mortgage banking income, despite a slight decline in net interest income Consolidated Income Statement Highlights (in thousands, except per share data) | Account | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net interest income | $29,533 | $30,317 | | Provision for loan losses | $300 | $750 | | Total noninterest income | $13,463 | $6,550 | | Total noninterest expenses | $25,117 | $22,940 | | Net income | $14,239 | $10,673 | | Diluted earnings per share | $0.87 | $0.65 | - Mortgage banking income was a key driver of noninterest income growth, increasing from $2.6 million in Q1 2020 to $8.8 million in Q1 202114 Consolidated Statements of Comprehensive Income Comprehensive income decreased to $7.0 million in Q1 2021, primarily due to unrealized losses on available-for-sale securities Consolidated Comprehensive Income (in thousands) | Account | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net income | $14,239 | $10,673 | | Other comprehensive income (loss), net of tax | $(7,243) | $1,098 | | Comprehensive income | $6,996 | $11,771 | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity slightly declined to $441.2 million due to unrealized losses, share repurchases, and dividends, partially offset by net income - During Q1 2021, the company repurchased 118,261 shares for $3.5 million and paid cash dividends of $0.29 per common share, totaling $4.6 million19 Consolidated Statements of Cash Flows Cash and cash equivalents increased by $26.3 million in Q1 2021, with financing inflows offsetting operating and investing outflows Net Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net cash for operating activities | $(1,421) | $(9,778) | | Net cash for investing activities | $(237,925) | $(2,293) | | Net cash from financing activities | $265,684 | $15,059 | | Net change in cash and cash equivalents | $26,338 | $2,988 | Notes to Consolidated Financial Statements Detailed notes cover accounting policies, COVID-19 impact, PPP, loan and securities portfolios, deposits, and regulatory capital adequacy - The company has elected to postpone the adoption of the Current Expected Credit Loss (CECL) methodology until January 1, 2022, as permitted by the CARES Act and subsequent extensions376476 - As of March 31, 2021, the company had originated approximately 1,100 second-draw PPP loans totaling $203 million and had processed forgiveness on approximately 1,600 first-draw loans totaling $302 million3234 - Loan payment deferment programs established in response to COVID-19 have seen significant reduction in participation, with only two commercial borrowers ($1.8 million) and ten retail borrowers ($0.8 million) remaining as of March 31, 202139 - The company entered into an agreement to sell its Hastings, Michigan branch to Lake Trust Credit Union, with an expected closing date of May 14, 202177 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2021 financial performance, highlighting net income growth from mortgage banking, strong asset quality, deposit growth, and net interest margin compression Financial Condition Total assets reached $4.71 billion in Q1 2021, driven by loan and securities growth, while asset quality remained strong with low nonperforming assets Loan Portfolio Composition (in thousands) | Loan Type | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Commercial | $2,967,215 | $2,793,962 | | Total Retail | $397,155 | $399,508 | | Total Loans | $3,364,370 | $3,193,470 | - Nonperforming assets decreased to $3.2 million (0.1% of total assets) at March 31, 2021, from $4.1 million at year-end 2020218 - The allowance for loan losses stood at $38.7 million, representing 1,385% of nonperforming loans as of March 31, 2021226 Liquidity and Capital Resources Strong liquidity is maintained through significant deposit growth and borrowing capacity, with capital ratios well above regulatory minimums - As of March 31, 2021, the company had $373 million in remaining borrowing availability from the FHLBI and $70.0 million in unsecured federal funds lines246252 - During Q1 2021, the company repurchased approximately 118,000 shares for $3.5 million under its $20 million stock repurchase program announced in May 2019257 Bank Capital Ratios | Ratio | March 31, 2021 | Well Capitalized Minimum | | :--- | :--- | :--- | | Total risk-based capital | 13.3% | 10.0% | | Tier 1 capital (to risk weighted assets) | 12.2% | 8.0% | | Common equity tier 1 | 12.2% | 6.5% | | Tier 1 capital (to average assets) | 9.5% | 5.0% | Results of Operations Net income increased to $14.2 million in Q1 2021, driven by noninterest income growth, despite net interest margin compression Net Interest Margin Analysis | Metric | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Net Interest Income (tax-equivalent) | $29,593,000 | $30,377,000 | | Average Earning Assets | $4,329,412,000 | $3,359,591,000 | | Net Interest Margin | 2.77% | 3.63% | - Excess on-balance sheet liquidity negatively impacted the net interest margin by 44 basis points during Q1 2021262 - Mortgage banking income surged to $8.8 million in Q1 2021, up nearly 235% from $2.6 million in Q1 2020, driven by an 85% increase in residential mortgage loan originations271 Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk through NII simulation, showing asset sensitivity with NII increasing by 4.9% for a 100 bps rate hike Net Interest Income Sensitivity Analysis (as of March 31, 2021) | Interest Rate Scenario | Dollar Change in NII | Percent Change in NII | | :--- | :--- | :--- | | Down 100 bps | $(500,000) | (0.4%) | | Up 100 bps | $6,100,000 | 4.9% | | Up 200 bps | $11,100,000 | 9.0% | - The company's primary interest rate risk measurement technique is net interest income simulation analysis, which it believes is more accurate than traditional GAP analysis280 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2021, with no material changes to internal controls - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by this report285 PART II. Other Information Legal Proceedings The company is not currently involved in any legal proceedings deemed material to its financial condition - The company is not involved in any material legal proceedings289 Risk Factors This section details risks from the LIBOR transition, including cessation timelines, alternative rates, and potential impacts on contracts and financial performance - The company faces risks from the planned cessation of U.S. dollar LIBOR, with most tenors being discontinued after June 30, 2023290296299 - Federal banking agencies have encouraged supervised banks to cease using LIBOR as a reference rate in new contracts as soon as possible, but no later than December 31, 2021, to mitigate safety and soundness risks297 Unregistered Sales of Equity Securities and Use of Proceeds The company made no unregistered equity sales in Q1 2021, repurchasing 118,261 shares for $3.5 million under its stock repurchase program Issuer Purchases of Equity Securities (Q1 2021) | Period | Total Shares Purchased | Average Price Paid Per Share | Total Cost (approx.) | | :--- | :--- | :--- | :--- | | January | 13,740 | $28.46 | $391,000 | | February | 58,394 | $28.78 | $1,681,000 | | March | 46,127 | $31.78 | $1,466,000 | | Total | 118,261 | $29.91 | $3,538,000 | - As of the end of Q1 2021, approximately $6.3 million remained available under the company's stock repurchase program307