Mercantile Bank (MBWM) - 2021 Q2 - Quarterly Report

PART I. Financial Information Item 1. Financial Statements This section presents Mercantile Bank Corporation's unaudited consolidated financial statements for June 30, 2021, and the three and six-month periods then ended, detailing balance sheets, income, comprehensive income, equity changes, cash flows, and accounting policies Consolidated Balance Sheets As of June 30, 2021, total assets grew 7.2% to $4,757,414 thousand, driven by increased cash and securities, while liabilities rose to $4,305,526 thousand due to deposit growth, and equity increased to $451,888 thousand Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | 4,757,414 | 4,437,344 | 7.2% | | Total cash and cash equivalents | 759,531 | 626,006 | 21.3% | | Loans, net | 3,212,928 | 3,155,503 | 1.8% | | Total Liabilities | 4,305,526 | 3,995,790 | 7.8% | | Total deposits | 3,671,271 | 3,411,553 | 7.6% | | Total Shareholders' Equity | 451,888 | 441,554 | 2.3% | Consolidated Statements of Income Q2 2021 net income more than doubled to $18,091 thousand ($1.12 diluted EPS) from $8,698 thousand in Q2 2020, primarily due to a negative loan loss provision and higher noninterest income Key Income Statement Data (Unaudited) | Metric | Three Months Ended June 30, 2021 ($) | Three Months Ended June 30, 2020 ($) | Six Months Ended June 30, 2021 ($) | Six Months Ended June 30, 2020 ($) | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $30,871,000 | $30,571,000 | $60,404,000 | $60,887,000 | | Provision for loan losses | ($3,100,000) | $7,600,000 | ($2,800,000) | $8,350,000 | | Noninterest Income | $14,556,000 | $10,984,000 | $28,019,000 | $17,534,000 | | Noninterest Expense | $26,192,000 | $23,216,000 | $51,309,000 | $46,156,000 | | Net Income | $18,091,000 | $8,698,000 | $32,331,000 | $19,370,000 | | Diluted EPS | $1.12 | $0.54 | $2.00 | $1.19 | - Cash dividends per share increased to $0.29 in Q2 2021 from $0.28 in Q2 2020, and to $0.58 for the first six months of 2021 from $0.56 in the same period of 2020[12] Consolidated Statements of Comprehensive Income Comprehensive income for Q2 2021 rose to $21,354 thousand from $9,990 thousand in Q2 2020, driven by net income and securities gains, while the six-month figure was impacted by unrealized losses Comprehensive Income (Unaudited) | Metric | Three Months Ended June 30, 2021 ($) | Three Months Ended June 30, 2020 ($) | Six Months Ended June 30, 2021 ($) | Six Months Ended June 30, 2020 ($) | | :--- | :--- | :--- | :--- | :--- | | Net Income | $18,091,000 | $8,698,000 | $32,331,000 | $19,370,000 | | Other comprehensive income/(loss), net of tax | $3,263,000 | $1,292,000 | ($3,980,000) | $2,390,000 | | Comprehensive Income | $21,354,000 | $9,990,000 | $28,351,000 | $21,760,000 | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased to $451,888 thousand by June 30, 2021, driven by $32,331 thousand in net income, partially offset by share repurchases, dividends, and AOCI changes - For the six months ended June 30, 2021, key changes to shareholders' equity included: +$32,331 thousand Net Income, -$10,850 thousand Share Repurchases, -$9,200 thousand Cash Dividends, and -$3,980 thousand in AOCI change[20] - The company repurchased 346,910 shares for $10,850 thousand in the first six months of 2021[20] Consolidated Statements of Cash Flows For H1 2021, net cash from financing was $306,096 thousand, investing used $194,750 thousand, and operating provided $22,179 thousand, resulting in a $133,525 thousand increase in cash and equivalents Net Cash Flow Summary (Six Months Ended June 30) | Cash Flow Activity | 2021 ($ thousands) | 2020 ($ thousands) | | :--- | :--- | :--- | | Net cash (for) from operating activities | 22,179 | (12,389) | | Net cash for investing activities | (194,750) | (412,048) | | Net cash from financing activities | 306,096 | 661,933 | | Net change in cash and cash equivalents | 133,525 | 237,496 | Notes to Consolidated Financial Statements This section details accounting policies and financial data, covering COVID-19 impacts, PPP, CECL deferral, securities, loans, allowance for loan losses, deposits, borrowings, derivatives, fair value, and regulatory capital - The company has elected to postpone the adoption of the Current Expected Credit Loss (CECL) methodology to January 1, 2022, as permitted by the Consolidated Appropriations Act, 2021[45][83] - Under the Paycheck Protection Program (PPP), the company originated approximately 2,200 loans totaling $553,000 thousand in the first round and 1,200 loans totaling $209,000 thousand in the second round. As of June 30, 2021, forgiveness had been processed for $487,000 thousand and $29,200 thousand, respectively[39][41] - The company's loan deferment programs in response to COVID-19 have wound down significantly. As of June 30, 2021, no commercial loans and only six retail loans (totaling $500 thousand) remained in the deferment program, down from a peak of nearly 750 commercial borrowers with $719,000 thousand in loans[46][47] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and operations, highlighting the positive impact of a negative loan loss provision and strong noninterest income on Q2 and H1 2021 earnings, alongside COVID-19 effects, asset quality, liquidity, capital, and interest rate risk management - Net income for Q2 2021 was $18,091 thousand ($1.12/share), up from $8,698 thousand ($0.54/share) in Q2 2020. For H1 2021, net income was $32,331 thousand ($2.00/share), up from $19,370 thousand ($1.19/share) in H1 2020[212] - The improved performance in 2021 was primarily due to a negative loan loss provision of $3,100 thousand in Q2 2021 (vs. a $7,600 thousand expense in Q2 2020) and increased noninterest income, which offset higher noninterest expenses[215][276] - Excess liquidity from government stimulus and reduced spending negatively impacted the net interest margin by 35 to 40 basis points during Q2 and H1 2021[216][254] Financial Condition Total assets grew by $320,000 thousand to $4,757,414 thousand in H1 2021, driven by core commercial loan growth and increased deposits, while asset quality remained strong with nonperforming assets at 0.1% - Core commercial loans grew approximately 11% on an annualized basis in the first six months of 2021[222] - Nonperforming assets decreased to $3,200 thousand at June 30, 2021, from $4,100 thousand at year-end 2020[230] - The allowance for loan losses was $35,900 thousand, or over 1,300% of nonperforming loans, as of June 30, 2021[238] - Total local deposits have increased by $1,080,000 thousand since December 31, 2019, with noninterest-bearing checking accounts growing by $696,000 thousand[258] Results of Operations Net income significantly increased in Q2 and H1 2021, driven by a negative loan loss provision and higher noninterest income, despite stable net interest income and rising noninterest expenses Net Interest Margin Analysis | Period | Net Interest Margin | Impact of Excess Liquidity | | :--- | :--- | :--- | | Q2 2021 | 2.76% | -37 bps | | Q2 2020 | 3.17% | N/A | | H1 2021 | 2.76% | -37 bps | | H1 2020 | 3.38% | N/A | - A negative loan loss provision of $3,100 thousand was recorded in Q2 2021, mainly due to an improved economic outlook, compared to a $7,600 thousand provision expense in Q2 2020 related to the COVID-19 pandemic[244][291] - Noninterest income in Q2 2021 increased by $3,600 thousand YoY, driven by a new interest rate swap program ($1,500 thousand fee income), a gain on branch sale ($1,100 thousand), and higher credit/debit card income[219][293] - Noninterest expense increased by $3,000 thousand in Q2 2021 YoY, primarily due to higher compensation costs, including bonus accruals, health insurance, and a lower level of deferred salary expense from PPP originations[295] Liquidity The company maintains strong liquidity via local deposits and liquid assets, with wholesale funds at 10.0% of total funding and significant access to additional liquidity, including $407,000 thousand in FHLBI borrowing capacity - Wholesale funds totaled $425,000 thousand, or 10.0% of combined deposits and borrowed funds, as of June 30, 2021[263] - As of June 30, 2021, the company had remaining FHLBI borrowing availability of $407,000 thousand[260][266] - Unfunded loan commitments totaled $1,470,000 thousand and standby letters of credit totaled $26,200 thousand as of June 30, 2021[268] Capital Resources Shareholders' equity increased to $452,000 thousand in H1 2021, driven by net income despite share repurchases and dividends, with capital ratios remaining well above regulatory minimums - The company repurchased approximately 347,000 shares for $10,900 thousand in the first six months of 2021. A new $20,000 thousand repurchase program was authorized in May 2021[271] - As of June 30, 2021, the bank's total regulatory capital was $478,000 thousand, which is $110,000 thousand in excess of the 10.0% minimum required to be categorized as 'well capitalized'[273] - The company believes it meets all capital adequacy requirements under the fully phased-in BASEL III rules[272] Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk primarily through NII simulation, projecting NII increases in rising rate scenarios and slight decreases in falling rates, while GAP analysis indicates short-term liability sensitivity Net Interest Income Simulation (Next 12 Months) | Interest Rate Scenario | Dollar Change in NII ($ thousands) | Percent Change in NII | | :--- | :--- | :--- | | Down 100 bps | ($500) | (0.4%) | | Up 100 bps | $6,800 | 5.7% | | Up 200 bps | $12,500 | 10.5% | | Up 300 bps | $18,100 | 15.2% | - The company's primary interest rate risk measurement technique is net interest income simulation analysis, which it believes is more accurate than GAP analysis[303] - The GAP analysis as of June 30, 2021, shows a cumulative asset-liability gap of ($493,500 thousand) within one year, representing -10.4% of total assets, indicating liability sensitivity in the short term[301] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report[308] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[309] PART II. Other Information Legal Proceedings The company is not a party to any current legal proceedings deemed material to its financial condition, individually or in aggregate - The company reports that any legal proceedings it is involved in are incidental to its business and not material to its financial condition[312] Risk Factors No material changes to risk factors from the 2020 Form 10-K, except for updated disclosure on the LIBOR transition and its potential impact on income, expenses, and loan values - A key risk factor highlighted is the uncertainty surrounding the replacement of LIBOR with an alternative reference rate, such as SOFR, which could adversely affect interest income or expense[314][315] - The Bank's Libor Transition Committee is actively managing the transition, but the ultimate impact on funding costs, loan portfolios, and business remains uncertain[316] Unregistered Sales of Equity Securities and Use of Proceeds The company made no unregistered equity sales in Q2 2021, but authorized a new $20,000 thousand share repurchase program in May, under which 228,649 shares were repurchased for $7,300 thousand in Q2 - A new $20,000 thousand share repurchase program was authorized on May 27, 2021[318] Issuer Purchases of Equity Securities (Q2 2021) | Period | Total Shares Purchased | Average Price Paid Per Share ($) | Approx. Dollar Value Remaining Under Plan ($ thousands) | | :--- | :--- | :--- | :--- | | April 1 – 30 | 60,858 | $32.14 | $4,333 | | May 1 – 31 | 83,780 | $32.27 | $1,629 | | June 1 – 30 | 84,011 | $31.59 | $17,346 | | Total | 228,649 | $31.99 | $17,346 | Defaults Upon Senior Securities This section is not applicable to the current report Mine Safety Disclosures This section is not applicable to the current report Other Information This section is not applicable to the current report Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and financial statements in Inline XBRL format