Mercantile Bank Corporation Q2 net income $18.1 million
Net income during the first six months of 2021 totaled $32.3 million, or $2.00 per diluted share, compared to $19.4 million, or $1.19 per diluted share, during the first six months of 2020.
Total revenue, which consists of net interest income and noninterest income, was $45.4 million during the second quarter of 2021, up $3.9 million, or 9.3 percent, from the prior-year second quarter.
Net interest income during the second quarter of 2021 was $30.9 million, up from $30.6 million during the respective 2020 period due to the positive impact of earning asset growth, which more than offset a lower net interest margin. Noninterest income totaled $14.6 million during the second quarter of 2021, up $3.6 million from the second quarter of 2020, mainly due to increased interest rate swap income, a gain on the sale of a branch facility, and higher credit and debit card income.
The net interest margin was 2.76 percent in the second quarter of 2021, compared to 3.17 percent in the prior-year second quarter. The decreased net interest margin resulted from the lower interest rate environment and a higher level of excess liquidity.
The yield on average earning assets declined from 3.85 percent during the second quarter of 2020 to 3.20 percent during the respective 2021 period mainly due to a change in earning asset mix and decreased yields on commercial loans and securities.
The lower yield on commercial loans primarily stemmed from the origination of new loans and renewal of maturing loans in the decreased interest rate environment.
The decreased yield on securities mainly reflected a lower level of accelerated discount accretion on called U.S. Government agency bonds and reduced yields on newly purchased bonds, attributed to the declining interest rate environment. Accelerated discount accretion totaled $0.9 million during the second quarter of 2020; no accelerated discount accretion was recorded during the second quarter of 2021.
A significant volume of excess on-balance sheet liquidity, which initially surfaced in the second quarter of 2020 as a result of the COVID-19 environment and has persisted during the remainder of 2020 and first six months of 2021, negatively impacted both the yield on average earning assets and the net interest margin by 35 basis points to 40 basis points during the second quarter and first six months of 2021.
The excess funds, consisting primarily of low-yielding deposits with the Federal Reserve Bank of Chicago, are mainly a product of federal government stimulus programs, lower business and consumer investing and spending, and Paycheck Protection Program forgiveness activities.
The cost of funds decreased from 0.68 percent during the second quarter of 2020 to 0.44 percent during the current-year second quarter, primarily due to a change in funding mix, consisting of an increase in lower-costing non-time deposits as a percentage of total funding sources, and lower rates paid on local time deposits, reflecting the declining interest rate environment.
Mercantile recorded a negative provision expense of $3.1 million during the second quarter of 2021, compared to a provision expense of $7.6 million during the prior-year second quarter.
The negative provision expense recorded during the current-year second quarter was mainly comprised of a reduced allocation associated with the economic and business conditions environmental factor, reflecting improvement in both current and forecasted economic conditions.
The provision expense recorded during the second quarter of 2020 mainly consisted of an allocation related to a newly created COVID-19 pandemic environmental factor and an increased allocation related to the existing economic and business conditions environmental factor.
Noninterest income during the second quarter of 2021 was $14.6 million, compared to $11.0 million during the prior-year second quarter.
Noninterest income during the current-year second quarter included a $1.1 million gain on the sale of a branch facility. Excluding the impact of this transaction, noninterest income increased $2.5 million, or nearly 23 percent, during the second quarter of 2021 compared to the respective 2020 period. The higher level of noninterest income mainly reflected fee income generated from an interest rate swap program that was introduced during the fourth quarter of 2020 and increased credit and debit card income.
The interest rate swap program provides certain commercial borrowers with a longer-term fixed-rate option and assists Mercantile in managing associated longer-term interest rate risk. Growth in service charges on accounts and payroll service fees also contributed to the increased level of noninterest income.
Mortgage banking income remained solid during the second quarter of 2021, slightly exceeding the amount recorded during the prior-year second quarter as an increase in purchase mortgage loans offset a decline in refinance mortgage loans.
Noninterest expense totaled $26.2 million during the second quarter of 2021, up $3.0 million, or 12.8 percent, from the second quarter of 2020.
The higher level of expense primarily resulted from increased compensation costs, mainly reflecting a bonus accrual, increased health insurance costs, annual employee merit pay increases, and a lower level of deferred salary expense related to Paycheck Protection Program loan originations. No bonus accrual was recorded during the second quarter of 2020 due to COVID-19 and associated weakened economic environment.
The increase in health insurance costs mainly reflected a higher level of claims, some of which resulted from the treatment of COVID-19 related medical conditions. ■