Mercantile Bank Corporation (MBWM) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022 unless stated otherwise. Mercantile Bank Corporation is a Michigan-based bank holding company. Financial statements are unaudited.
Financial performance and condition
| Metric | Q1 2023 / Mar. 31, 2023 | Comparable period / change |
|---|---|---|
| Net interest income | $48.4 million | Up 56.7% from $30.9 million in Q1 2022 |
| Net interest margin | 4.28% | 2.57% in Q1 2022 |
| Net income; diluted EPS | $21.0 million; $1.31 | $11.5 million; $0.73 in Q1 2022 |
| Noninterest income | $7.0 million | Down from $9.3 million in Q1 2022 |
| Noninterest expense | $28.6 million | Up from $25.7 million in Q1 2022 |
| Net cash from operating activities | $18.1 million | $27.9 million in Q1 2022 |
| Total assets | $4.90 billion | Up $23.3 million from year-end 2022 |
| Total loans | $3.97 billion | Up $48.9 million, or 1.2%, from year-end 2022 |
| Total deposits | $3.60 billion | Down $115 million, or 3.1%, from year-end 2022 |
| Cash and cash equivalents | $57.9 million | Down from $96.8 million at year-end 2022 |
| Shareholders’ equity | $467.4 million | Up from $441.4 million at year-end 2022 |
- Interest income rose 68.6% year over year as loan yields increased to 5.90% from 3.87%, reflecting higher rates and loan growth. Interest expense also climbed 142% to $12.1 million, primarily from higher deposit and borrowing costs.
- Loan growth was led by residential mortgages, up $40.1 million in the quarter, and non-owner-occupied commercial real estate. Commercial and industrial loans declined $11.6 million. Commercial loans represented 79.2% of loans.
- Credit quality remained strong by reported measures: nonperforming loans were $7.8 million, or 0.20% of loans; the allowance was $42.9 million, or 1.08% of loans and 551% of nonperforming loans. Q1 gross charge-offs were $0.1 million, approximately offset by recoveries.
- Available-for-sale securities had a $71.2 million net unrealized loss at March 31, versus $82.7 million at year-end. Management attributed the losses to interest-rate changes and reported no allowance for credit losses on the securities portfolio.
- Q1 cash flow was $18.1 million from operations, $57.1 million used in investing activities, and $0.2 million provided by financing activities; cash and equivalents decreased $38.8 million.
- The bank’s total risk-based capital ratio was 13.8%, versus 13.7% at year-end. It was classified as well capitalized and reported $174 million of total regulatory capital above the 10% well-capitalized threshold.
Material changes and management commentary
- Profit growth was mainly driven by higher net interest income and margin, loan growth, and limited credit-loss provision. Net income rose about 82.5% year over year.
- Noninterest income fell mainly because mortgage banking income, deposit service charges, and interest-rate-swap income declined. Residential mortgage production fell 57.2% year over year to $72.0 million.
- Noninterest expense increased by $2.9 million. It included a $0.4 million write-down of a former branch facility under contract to sell and a $1.4 million bonus accrual, which was absent in Q1 2022. Higher compensation, swap-related costs, and FDIC premiums also contributed.
- Deposits declined partly due to customary customer tax and bonus payments, partnership distributions, and transfers to sweep accounts. The company said withdrawals it identified as related to concerns following two bank failures in March were less than 1% of deposits.
- Management reported a strong commercial lending pipeline, including approximately $347 million of new lending commitments expected to be accepted and funded largely over the next 12 to 18 months, and $285 million of construction-phase commercial commitments expected to be drawn over that period.
Liquidity, outlook, and risks
- To offset deposit declines and support lending, FHLB advances increased $69.6 million to $377.9 million; repurchase-agreement sweep balances rose $33.1 million to $227.5 million. The FHLB borrowing line totaled $665 million, with $281 million of remaining collateral-based availability. The company also had $70 million of unsecured correspondent-bank federal funds lines.
- Sweep balances are secured borrowings, not deposits, and are not covered by federal deposit insurance. They can fluctuate materially; the quarter’s average was $195.6 million, with a high of $255.2 million.
- Management did not provide formal earnings or margin guidance. It expects continued commercial lending opportunities, intends to maintain securities at about 12% of assets, and described its liquidity monitoring and contingency funding plans. These expectations are not guarantees.
- Interest-rate simulation estimated next-12-month net interest income would change by +3.0% under a 100-basis-point rise and +9.4% under a 300-basis-point rise; a 100-basis-point decline was estimated to reduce it 2.6%. The filing cautions that model assumptions are uncertain and actual outcomes may differ.
- Principal risks cited include interest-rate and funding conditions, economic slowdown or recession, commercial real-estate values, customer repayment capacity, competition, cyber and operational risks, regulation, and changing customer behavior. Management said it did not believe its liquidity position shared the circumstances behind the failures of certain institutions, while acknowledging that unexpected events could create liquidity challenges.
- The board declared a $0.33-per-share dividend payable June 14, 2023. No shares were repurchased in Q1; $6.8 million remained under the existing repurchase authorization. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether deposit trends stabilize, including the movement of noninterest-bearing balances into interest-bearing deposits and uninsured sweep borrowings, and the cost and availability of wholesale funding.
- Whether loan growth and the reported pipeline convert to funded loans, especially commercial construction and real estate exposure, and how asset quality and allowance requirements evolve.
- Whether rising deposit and borrowing costs narrow the net interest margin, given the strong Q1 improvement and the large variable-rate commercial loan share.
- How the securities portfolio’s unrealized losses and any further interest-rate changes affect equity, liquidity, or potential securities sales.
- Whether mortgage banking income, operating expenses, and the former branch property sale develop as management expects; Q1 included a facility write-down and higher bonus accrual.