Mercantile Bank Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; balance-sheet comparisons are primarily with December 31, 2022. The interim financial statements are unaudited. Mercantile is a Michigan-based bank holding company whose lending is predominantly commercial.
Financial performance and position
| Metric | Q2 / June 30, 2023 | Comparable period / prior date |
|---|---|---|
| Net income | $20.4 million; diluted EPS $1.27 | Q2 2022: $11.7 million; $0.74 per diluted share |
| Six-month net income | $41.3 million; diluted EPS $2.58 | First half 2022: $23.2 million; $1.47 per diluted share |
| Net interest income | Q2: $47.6 million; first half: $95.9 million | Q2 2022: $34.3 million; first half 2022: $65.2 million |
| Net interest margin | Q2: 4.05%; first half: 4.16% | Q2 2022: 2.88%; first half 2022: 2.73% |
| Noninterest income | Q2: $7.6 million; first half: $14.6 million | Q2 2022: $7.7 million; first half 2022: $17.0 million |
| Noninterest expense | Q2: $27.8 million; first half: $56.4 million | Q2 2022: $26.9 million; first half 2022: $52.7 million |
| Total assets | $5.14 billion | $4.87 billion at December 31, 2022 |
| Total loans / allowance | $4.05 billion / $44.7 million; allowance equals 1.10% of loans | Loans: $3.92 billion; allowance: $42.2 million at December 31, 2022 |
| Deposits | $3.76 billion | $3.71 billion at December 31, 2022 |
| Cash and cash equivalents | $207.8 million | $96.8 million at December 31, 2022 |
| Shareholders’ equity | $478.7 million | $441.4 million at December 31, 2022 |
- Cash flow, first half: Operating activities provided $37.5 million, investing activities used $145.3 million, and financing activities provided $218.9 million. Cash and cash equivalents increased $111.0 million from year-end.
- Borrowings: Federal Home Loan Bank advances were $467.9 million, repurchase agreements $219.5 million, subordinated debentures $49.3 million, and subordinated notes $88.8 million at June 30. FHLB advances increased $159.6 million from year-end.
- Capital and liquidity: The bank reported a 13.7% total risk-based capital ratio and was categorized as well capitalized. Remaining FHLB borrowing availability, subject to collateral, was $386 million; unsecured correspondent lines totaled $70 million.
Material changes and drivers
- Q2 net income rose about 74% year over year; first-half net income rose about 78%. The main driver was higher net interest income as loan yields and the net interest margin increased with market rates and loan growth.
- Interest expense rose sharply: to $18.4 million in Q2 from $5.2 million, and to $30.5 million in the first half from $10.2 million. Management attributed this to higher deposit and borrowing costs and a shift toward more costly funding.
- Loans grew $135.2 million, or 3.5%, from year-end. Residential mortgage loans grew $78.7 million; commercial loans grew $56.8 million. Commercial and industrial loans and owner-occupied commercial real estate together represented 58.7% of commercial loans.
- Deposits increased $44.0 million overall, but local deposits fell $67.3 million while out-of-area deposits rose $111 million. Noninterest-bearing deposits declined $233.1 million; money-market and time deposits increased. Wholesale funding—out-of-area deposits and FHLB advances—rose to $579 million, about 13% of deposits and borrowings, from $308 million, about 7%, at year-end.
- Nonperforming loans declined to $2.1 million from $7.7 million at year-end. First-half gross charge-offs were $0.6 million and recoveries were $0.5 million. The provision for credit losses increased to $2.6 million from $0.6 million in the first half of 2022, mainly reflecting loan growth and updated expected-loss estimates.
- Noninterest income was lower in the first half, chiefly due to reduced mortgage banking income and deposit service charges. Noninterest expense increased, reflecting compensation, unfunded-commitment reserves, FDIC premiums, and interest-rate-swap collateral costs.
- Available-for-sale securities were $609.0 million, with a $77.9 million net unrealized loss, largely attributed by management to interest rates. The loss narrowed from $82.7 million at year-end; the first-half after-tax improvement in securities market value increased equity by $3.8 million.
Outlook, commentary, and risks
- No formal earnings or financial guidance is provided. Management described the commercial lending pipeline as strong: approximately $351 million in new lending commitments, most expected to be accepted and funded over the next 12–18 months; $327 million of construction-phase commercial commitments were also outstanding.
- Management expects securities purchases generally to be municipal bonds and the securities portfolio to remain about 12% of assets. It cited prudent underwriting and portfolio concentration limits, while noting that actual loan growth and funding depend on customer activity and market conditions.
- Interest-rate simulation estimated next-12-month net interest income of $199 million under the baseline. Compared with that baseline, modeled changes ranged from a 10.0% decline if rates fell 300 basis points to a 10.4% increase if rates rose 300 basis points. Management cautioned that model assumptions and actual results can differ.
- Liquidity risks include deposit outflows, reliance on greater wholesale funding, changing funding costs, and sizable unfunded commitments: $2.15 billion of loan commitments and $24.1 million of standby letters of credit. Management said it monitors liquidity and maintains contingency funding plans, but unexpected market or economic events could create challenges.
- Other stated risks include interest-rate changes, inflation or recession, commercial real-estate values, borrower repayment capacity, competition, regulation, cybersecurity, litigation, and local or national economic conditions. The filing reports no material change in previously disclosed risk factors and no material current legal proceedings.
- Unusual items and capital actions: a $0.4 million write-down of a former branch facility was recorded in Q1 2023; a $0.5 million bank-owned-life-insurance claim benefited Q2 and first-half 2022 comparisons. No shares were repurchased in the first half of 2023. A $0.34-per-share dividend was declared in July for payment in September.
Important facts for investors to verify
- Whether deposit trends, especially the reduction in noninterest-bearing and local deposits, stabilize and how the higher-cost wholesale funding mix affects margins.
- Whether loan growth and the stated pipeline convert to funded loans, particularly in commercial construction and real estate, and whether portfolio concentrations or collateral values change.
- Whether credit quality remains strong and whether the $44.7 million allowance adequately reflects expected losses as economic conditions evolve.
- How net interest margin and earnings respond to future rate changes, deposit repricing, and the modeled assumptions underlying interest-rate sensitivity.
- Whether available liquidity and capital remain sufficient given unfunded commitments, securities valuation exposure, and funding needs; confirm the terms and availability of collateral-dependent borrowing capacity.