Business context and reporting period
Mercantile Bank Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The company is a Michigan-based bank holding company whose consolidated operations include Mercantile Bank of Michigan and Mercantile Insurance Center. Comparisons are primarily with the 2020 periods and December 31, 2020 balances.
Financial performance and condition
| Metric | Q3 2021 / September 30, 2021 | Comparable period / prior balance |
|---|---|---|
| Net income | $15.1 million; diluted EPS $0.95 | Q3 2020: $10.7 million; $0.66 |
| Nine-month net income | $47.4 million; diluted EPS $2.95 | Nine months 2020: $30.1 million; $1.85 |
| Net interest income | Q3: $31.1 million | Q3 2020: $29.5 million |
| Net interest margin | Q3: 2.71%; nine months: 2.76% | Q3 2020: 2.86%; nine months 2020: 3.19% |
| Total assets | $4.96 billion | December 31, 2020: $4.44 billion |
| Loans, gross | $3.31 billion | December 31, 2020: $3.19 billion |
| Deposits | $3.87 billion | December 31, 2020: $3.41 billion |
| Cash and cash equivalents | $825.4 million | December 31, 2020: $626.0 million |
| Shareholders’ equity | $452.3 million | December 31, 2020: $441.6 million |
| Allowance for loan losses | $37.4 million; 1.13% of total loans, or 1.17% excluding PPP loans | December 31, 2020: $38.0 million |
For the first nine months, net interest income was $91.5 million versus $90.4 million in 2020. Noninterest income rose to $43.6 million from $30.8 million, while noninterest expense increased to $77.5 million from $72.6 million. Nine-month provision was a $0.9 million benefit, compared with $11.6 million of provision expense in 2020.
Operating cash flow was $19.2 million for the first nine months; investing cash flow was negative $316.4 million and financing cash flow was positive $496.6 million. Cash and cash equivalents increased $199.4 million from year-end 2020. These banking cash-flow measures reflect, among other items, loan and securities activity and deposit growth.
Material changes versus prior periods
- Quarterly net income increased to $15.1 million from $10.7 million, supported by lower funding costs, higher noninterest income, and a smaller loan-loss provision. For nine months, income increased to $47.4 million from $30.1 million.
- Despite higher net interest income, margin contracted: Q3 margin was 2.71% versus 2.86%, and nine-month margin was 2.76% versus 3.19%. Management attributed pressure to lower asset yields and a larger share of low-yield cash and securities; excess liquidity reduced margin by about 44 basis points in Q3 and 40 basis points year to date.
- Total loans grew 3.8% from year-end, but core commercial loans grew $298 million (about 16% annualized) as PPP balances fell $249 million. Residential mortgage loans increased $73.7 million.
- Deposits grew 13.4% from year-end, including $243 million of money-market growth. Management said a substantial portion of Q3 growth from a few existing customers may be temporary and could leave within three to six months.
- Available-for-sale securities increased $172 million. Their net unrealized position shifted to a $0.4 million loss from a $6.9 million gain at year-end, contributing a $5.8 million after-tax reduction in equity during the nine months.
Outlook, commentary, risks and unusual items
No specific earnings or financial guidance was provided. Management described commercial lending opportunities as strong, citing $155 million of available construction and development loan commitments and $253 million of new lending commitments expected largely to close and fund over the next 12 to 18 months. Management remained optimistic that mortgage originations would remain solid, while noting expected pressure from lower refinance activity.
COVID-19, supply-chain disruption and inflation remain sources of economic uncertainty. Management warned that deterioration in borrowers’ ability to repay, asset quality or collateral values could raise delinquencies, charge-offs and required provisions. The bank reported no commercial borrowers remaining in its COVID-related deferment program and six retail borrowers with $0.5 million in balances still participating at quarter-end. The company remains asset-sensitive; modeled net interest income changes over the next 12 months ranged from a 1.3% increase with rates down 100 basis points to a 16.0% increase with rates up 300 basis points, subject to uncertain model assumptions.
The bank reported $394 million of FHLB advances, $175.9 million of repurchase-agreement borrowings and $48.1 million of subordinated debentures. It had $360 million of remaining collateral-based FHLB borrowing availability. The bank was categorized as well capitalized; its total risk-based capital ratio was 12.4%, compared with 13.5% at year-end. Nonperforming loans were $2.8 million, or 0.08% of loans, and nonperforming assets totaled about $2.9 million.
Off-balance-sheet commitments and standby letters of credit totaled approximately $1.57 billion; the filing states there was no related liability recorded. The company completed the sale of its Hastings branch in May 2021 and recorded a $1.1 million gain on the sale of the branch and facility. It also disclosed a nonmaterial out-of-period lease accounting correction that understated premises and equipment and other liabilities at earlier reporting dates, with no income-statement impact. Management expects to adopt CECL on January 1, 2022. No material legal proceedings or changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether unusually high deposits persist or are withdrawn, and how that affects liquidity and the cost of funding.
- How asset yields and net interest margin respond to changing rates and continued excess cash balances; review the interest-rate simulation assumptions.
- Commercial real-estate exposure, loan pipeline funding, credit grades, troubled debt restructurings and the allowance impact of CECL adoption.
- Whether mortgage banking and interest-rate-swap fee income remain durable as refinance activity and market conditions change.
- Progress on the share-repurchase authorization: $19.8 million of repurchases were made in the first nine months, with $8.4 million of authorization remaining at September 30.