Mercantile Bank Corporation — Q1 2022 Form 10-Q
Business context and reporting period. Mercantile Bank Corporation is a Michigan-based bank holding company. This unaudited filing covers the three months ended March 31, 2022, with income and cash-flow comparisons to Q1 2021 and balance-sheet comparisons to December 31, 2021. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $5.176 billion | $5.258 billion at Dec. 31, 2021 |
| Total loans | $3.556 billion; up 3.0% from year-end | $3.453 billion at Dec. 31, 2021 |
| Total deposits | $3.976 billion; down 2.6% from year-end | $4.083 billion at Dec. 31, 2021 |
| Net interest income | $30.9 million | $29.5 million in Q1 2021 |
| Net interest margin | 2.57% | 2.77% in Q1 2021 |
| Noninterest income | $9.3 million | $13.5 million in Q1 2021 |
| Noninterest expense | $25.7 million | $25.1 million in Q1 2021 |
| Provision for credit losses | $0.1 million | $0.3 million in Q1 2021 |
| Net income / diluted EPS | $11.5 million / $0.73 | $14.2 million / $0.87 in Q1 2021 |
| Cash and cash equivalents | $770.2 million | $975.2 million at Dec. 31, 2021 |
| Shareholders’ equity | $436.5 million | $456.6 million at Dec. 31, 2021 |
Results, cash flow, debt and liquidity
- Interest income rose 3.2% to $35.9 million, while interest expense fell 4.9% to $5.0 million. Higher average earning assets supported net interest income, but lower asset yields and a changed earning-asset mix compressed margin. Excess liquidity at the Federal Reserve continued to weigh on returns.
- Noninterest income fell mainly because mortgage banking income declined to $3.3 million from $8.8 million. Higher service charges, card income, swap fees and payroll-processing revenue partly offset the decline. Noninterest expense rose 2.5%; management cited compensation and data-processing costs. Q1 2021 expense included a $0.5 million write-down of former branch facilities.
- Operating cash flow was $27.9 million, versus an outflow of $1.4 million in Q1 2021. Investing activities used $151.1 million, mainly for net loan growth and securities purchases; financing activities used $81.7 million, including deposit outflows and dividends. Cash and cash equivalents declined $205.0 million during the quarter.
- Borrowings at March 31 included $204.3 million of repurchase agreements, $382.3 million of Federal Home Loan Bank advances, $48.4 million of subordinated debentures and $88.4 million of subordinated notes. The company issued $15 million of 3.25% fixed-to-floating subordinated notes in January 2022, with proceeds contributed to the bank as equity. FHLB collateral-based remaining borrowing availability was $544 million; additional unused correspondent-bank lines totaled $70 million.
- The bank was reported as well capitalized. Its total risk-based capital ratio was 13.8%, versus 13.6% at year-end; common equity Tier 1 was 12.9%. The bank’s total regulatory capital was $574 million, $157 million above the stated 10.0% well-capitalized minimum for total capital.
Material changes and asset quality
- Core commercial loans grew $82 million during the quarter, while PPP payment activity reduced balances by $27.9 million. Total loans increased $102 million. Residential mortgage balances rose $48.1 million; mortgage originations declined to $168 million from $245 million a year earlier as refinancing activity weakened.
- Deposits declined $107 million. Management attributed much of the local-deposit decrease to one customer withdrawing most funds deposited late in 2021; excluding that withdrawal, local deposits increased approximately $50 million.
- Nonperforming loans fell to $1.6 million from $2.5 million at year-end, equal to 0.05% of loans. There were no foreclosed properties, and no commercial loans were on nonaccrual. Net loan recoveries were $0.1 million in Q1 2022. The allowance was $35.2 million, or 0.99% of loans.
- The company adopted CECL on January 1, 2022. Adoption reduced the allowance by $0.4 million and increased retained earnings by $0.3 million after tax. Q1 2022 results use CECL; prior-period results use the former incurred-loss method.
- Available-for-sale securities had a $40.4 million net unrealized loss at March 31, versus $4.7 million at year-end, primarily attributed to rising market rates. The after-tax securities valuation decline reduced Q1 equity by $28.2 million. Management reported no securities credit-loss allowance and said it did not intend, and did not expect to be required, to sell before recovery.
Outlook, commentary and risks
- The filing gives no specific earnings or revenue guidance. Management reported a strong commercial lending pipeline, including approximately $158 million of new lending commitments expected largely to be accepted and funded over the next 12–18 months, and $184 million available on existing construction and development loans in the construction phase. It expects securities purchases for the rest of 2022 to generally comprise agency and municipal bonds, with the portfolio maintained at about 12% of assets.
- Management identified inflation, supply-chain disruption, pandemic-related uncertainty, changing interest rates, commercial real-estate values, competition, cybersecurity, regulation, climate-related matters and economic conditions as risks. It warned that adverse economic conditions could weaken borrowers and increase delinquencies, charge-offs and credit-loss provisions.
- Interest-rate sensitivity deserves attention: management describes the bank as asset-sensitive and says significant rate reductions can harm net interest income. Its simulation nevertheless estimated next-12-month net interest income increases of 7.0% under a 100-basis-point rate decline and 5.7% under a 100-basis-point increase, with larger modeled gains for increases up to 400 basis points. Management cautions that the model depends on uncertain assumptions and actual results may differ.
- The board declared a $0.31-per-share dividend payable in June 2022. No shares were repurchased in Q1; $6.8 million remained available under the existing repurchase authorization. The filing reported no material change in risk factors and no material pending legal proceedings.
Important facts for investors to verify
- Whether the large customer deposit withdrawal was isolated and how deposits, funding costs and excess liquidity evolve.
- How rising rates affect net interest margin and earnings in practice, including the assumptions behind the filing’s rate-sensitivity scenarios.
- Whether unrealized securities losses remain manageable and whether any liquidity need could require securities sales or affect capital.
- Whether commercial loan pipeline commitments fund as expected and how credit quality, real-estate concentrations and CECL reserves respond to economic conditions.
- The performance of mortgage banking and fee income as refinancing activity and mortgage rates change.