Mercantile Bank Corporation Reports First Quarter 2012 Results Asset quality improves, profitability increases and net interest margin expands

GRAND RAPIDS, Mich., April 17, 2012 /PRNewswire/ -- Mercantile Bank Corporation (NASDAQ: MBWM) ("Mercantile") reported net income attributable to common shares of $2.6 million, or $0.28 per diluted share, for the first quarter of 2012, compared with net income attributable to common shares of $1.1 million, or $0.12 per diluted share, for the prior-year period.  On a pre-tax basis, net income was $4.1 million in the first quarter of 2012 compared to $1.4 million in the prior-year first quarter, an increase of 192 percent.

The first quarter was highlighted by:

  • Significant improvement in profitability resulting from lower provision expense, decreased overhead costs, and an increased net interest margin
  • Additional improvement in asset quality; continued decline in nonperforming assets, down 31 percent from a year ago
  • Level of loans in the 30- to 89-days delinquent category remains at virtually zero
  • No provision expense during the quarter, compared to provision expense of $2.2 million in the first quarter of 2011
  • A $1.8 million decline in nonperforming asset costs compared to the prior-year first quarter
  • A record net interest margin of 3.73 percent
  • Regulatory capital ratios remain significantly above minimum requirements for "well-capitalized" institutions
  • Wholesale funds declined to 29 percent of total funds, down from 41 percent at first-quarter end 2011

In addition to these first quarter 2012 highlights, Mercantile also announced at the beginning of the second quarter that it had repurchased 50 percent of the $21.0 million in non-voting preferred stock issued in May 2009 to the U.S. Department of the Treasury under the Treasury's Capital Purchase Program, as part of the Troubled Asset Relief Program ("TARP").

"The first quarter was another period of strong financial performance that has provided the conditions necessary for the next chapter of growth for Mercantile," said Michael Price, Chairman and CEO of Mercantile Bank Corporation.  "Solid growth in profitability and continued effective balance sheet management set the stage for the recent repurchase of half of our outstanding preferred stock under TARP.  We were able to accomplish this through internally generated cash flow, without the need to access outside capital, which is a testament to how we have managed through the challenges of the Great Recession and subsequent recovery."  

Operating Results

Total revenue, which consists of net interest income and noninterest income, was $13.8 million during the 2012 first quarter, down $1.4 million or 9.2 percent from the $15.2 million generated during the first quarter of 2011, primarily reflecting a reduction in average earning assets.  Net interest income was $11.9 million, down $1.6 million or 11.7 percent from the $13.5 million earned in the prior-year first quarter.  The decrease in net interest income resulted from a 14.8 percent decline in average earning assets, which was partially offset by a nine basis point increase in the net interest margin.  The reduction in average earning assets resulted mainly from the shifting of assets out of the loan portfolio as part of management's strategic initiative to reduce Mercantile's commercial real estate exposure.   

Noninterest income for the 2012 first quarter was $1.9 million, up $0.2 million or 10.4 percent from the comparable 2011 period.  The increase in noninterest income primarily resulted from higher residential mortgage banking fee income, reflecting increased activity due to lower mortgage interest rates.

Mercantile made further progress in reducing provision expense during the quarter.  A provision for loan losses was not recorded in the first quarter of 2012, compared to $2.2 million for the year-ago quarter. The lower level of provision expense is the result of a decline in total nonperforming loans, a decline in loan-rating downgrades, and an increase in loan-rating upgrades as the quality of the loan portfolio continues to improve.

Over the past several years, the Company has made significant reductions in overhead costs.  Noninterest expense for the 2012 first quarter was $9.7 million, down $1.9 million from the same period in 2011. Costs associated with the administration and resolution of problem assets, including legal expenses, property tax payments, appraisal costs and write-downs on foreclosed properties, totaled $1.3 million during the 2012 first quarter, down $1.8 million or 58.8 percent from the year-ago quarter.  Federal Deposit Insurance Corporation ("FDIC") insurance premiums were $0.3 million in the first quarter of 2012, down $0.6 million from the 2011 first quarter, resulting from a decreased assessment rate that reflects the Company's improved financial condition and operating performance and the implementation of the FDIC's revised risk-based assessment system on April 1, 2011.   

"We continued to make progress reducing nonperforming assets during the first quarter," added Price.  "As a result of this effort, we saw a notable improvement in our asset quality allowing for no provision expense in the quarter.  The solid execution of our strategic plan is the foundation of our improved financial performance."

Balance Sheet

Over the past several years, Mercantile focused on reducing its exposure to loans secured by commercial real estate.  While efforts to reduce certain segments of the commercial real estate portfolio continue, the loan shrinkage rate has subsided over the past several quarters as slightly improving economic conditions have led to increased lending opportunities.  As of March 31, 2012, total assets were $1.40 billion, down $31.6 million or 2.2 percent from December 31, 2011; total loans declined $20.7 million, or 1.9 percent, to $1.05 billion over the same time period.  Compared to March 31, 2011, total assets declined $175 million, or 11.1 percent, and total loans declined $155 million, or 12.9 percent.

Real estate loans comprise a majority of Mercantile's loan portfolio. At March 31, 2012, real estate loans, excluding residential mortgage loans representing permanent financing of owner-occupied dwellings and home equity lines of credit, were $711 million or approximately 68 percent of total loans, representing a decline of $138 million, or 16.2 percent, from $848 million, or 70.3 percent of total loans, at March 31, 2011.

Non-owner-occupied commercial real estate ("CRE") loans totaled $357 million as of March 31, 2012 (34.0 percent of total loans), a decline of $128 million over the past 12 months. Owner-occupied CRE loans were $273 million at the end of the first quarter of 2012, a decline of $0.4 million over the same period. Vacant land, land development and construction ("C&D") loans, including both residential and commercial projects, totaled $80.1 million at March 31, 2012, down $9.9 million from a year ago. The commercial and industrial ("C&I") segment of the loan portfolio was $260 million at March 31, 2012, a decline of $6.8 million since year-end 2011 and $20.8 million over the past 12 months.  The average balance of commercial lines of credit has remained relatively stable since early 2011 after declining for several years.

 

LOANS SECURED BY REAL ESTATE












($000s)


3/31/12


12/31/11


9/30/11


6/30/11


3/31/11

Residential-Related:











   Vacant Land

$

12,837

$

13,124

$

13,264

$

13,484

$

16,321

   Land Development


16,173


17,007


17,441


18,134


27,171

   Construction


4,318


4,923


4,647


4,706


4,906



33,328


35,054


35,352


36,324


48,398












Comm'l Non-Owner Occupied:











   Vacant Land


9,255


10,555


11,082


12,639


13,669

   Land Development


14,418


14,486


14,541


16,348


16,492

   Construction


16,936


13,615


11,061


10,709


10,046

   Commercial Buildings


357,128


376,805


397,279


429,708


484,629



397,737


415,461


433,963


469,404


524,836












Comm'l Owner Occupied:











   Construction


6,198


4,213


2,986


1,517


1,404

   Commercial Buildings


273,376


268,479


269,776


264,848


273,739



279,574


272,692


272,762


266,365


275,143












      Total

$

710,639

$

723,207

$

742,077

$

772,093

$

848,377























Note --- Excludes residential mortgage loans representing permanent financing of owner occupied dwellings and home

                equity lines of credit.











 

Since December 2008, Mercantile has been focused on improving liquidity by reducing wholesale funding and growing local deposits, especially interest-bearing checking and money market deposit accounts. As of March 31, 2012, total deposits were $1.09 billion, a decline of $506 million since year-end 2008. By comparison, local deposits increased $316 million to $787 million since year-end 2008, representing 71.9 percent of total deposits compared to 29.4 percent at December 31, 2008. Approximately 80 percent, or $253 million, of local deposit growth since year-end 2008 occurred in the interest-bearing checking and money market deposit account categories, primarily reflecting the introduction of innovative new products, various deposit-gathering initiatives, enhanced advertising and branding campaigns, and transfers from maturing time deposit accounts.

Wholesale funds were $352 million, or 29.4 percent of total funds, as of March 31, 2012, compared to $1.41 billion, or 71.5 percent of total funds, as of December 31, 2008. Compared to a year ago, wholesale funding was reduced by $220 million, or 38.4 percent. The $1.06 billion decline in wholesale funding since the end of 2008 reflects both the shift toward local deposits, as well as an $805 million decline in total loans. This strategy has allowed Mercantile to reduce brokered deposits and Federal Home Loan Bank advances as they matured since year-end 2008.

Short-term investments, consisting of federal funds sold and interest-bearing bank deposits, averaged $60.1 million during the first quarter of 2012. In addition to its short-term investments, Mercantile had approximately $105 million of borrowing capacity through various established lines of credit to meet potential funding needs, as well as $31.5 million of U.S. Government securities available to sell at the end of the first quarter of 2012.

Asset Quality

Nonperforming assets ("NPAs") at March 31, 2012 were $52.2 million, or 3.7 percent of total assets, compared to $60.4 million as of December 31, 2011, and $76.1 million as of March 31, 2011 (4.2 percent and 4.8 percent of total assets, respectively). This represents a decline of $8.2 million or 13.6 percent from the end of 2011, and a decline of $23.9 million or 31.4 percent from the year-ago quarter-end.

Robert B. Kaminski, Jr., Mercantile's Executive Vice President and Chief Operating Officer, noted: "We continue to make significant progress in improving our asset quality, as evidenced by the decrease in nonperforming assets.  Our loan loss reserve, as a percent of total loans, remains well above historical levels, and we continue to be diligent and proactive in our efforts to resolve problem assets.  With much of this work behind us, and armed with the lessons learned, we are able to begin shifting additional focus towards driving growth in our markets.   We are encouraged by the opportunities we are seeing and will continue to focus our efforts on expanding our customer base with Mercantile's relationship-based approach which highlights our innovative new products and compelling value to consumers."

Nonperforming loans ("NPLs") totaled $38.7 million as of March 31, 2012, down $6.4 million and $21.5 million, respectively, from the linked quarter-end and the year-ago quarter-end, while foreclosed real estate and repossessed assets declined $1.8 million and $2.4 million, respectively, from the linked and year-ago quarter-ends.  CRE loans represented 71.3 percent of NPLs, or $27.6 million at March 31, 2012.  Investor-owned nonperforming CRE loans accounted for $22.0 million of total CRE nonperforming loans (6.2 percent of $357 million investor-owned CRE loans), while owner-occupied CRE nonperforming loans accounted for $5.6 million (2.0 percent of $273 million owner-occupied CRE loans).

Progress was achieved this past year toward resolution of nonperforming C&D loans, including both residential and commercial projects. C&D loans currently total $80.1 million, of which $3.0 million, or 3.8 percent, were nonperforming at March 31, 2012. This represents a marked improvement since March 31, 2011 when $14.4 million, or 16.0 percent, of the $90.0 million C&D loan portfolio was nonperforming. Nonperforming C&I loans were $2.1 million as of March 31, 2012, a decline of $2.6 million since March 31, 2011. Owner-occupied and rental residential NPLs were $5.9 million as of March 31, 2012, down $2.7 million since the year-ago quarter-end. 

 

NONPERFORMING ASSETS












($000s)


3/31/12


12/31/11


9/30/11


6/30/11


3/31/11

Residential Real Estate:











   Land Development

$

3,762

$

5,479

$

8,139

$

8,531

$

14,252

   Construction


1,242


1,397


1,418


2,089


2,268

   Owner Occupied / Rental


6,437


7,138


7,737


8,996


8,893



11,441


14,014


17,294


19,616


25,413












Commercial Real Estate:











   Land Development


1,531


2,111


1,885


2,223


2,422

   Construction


403


409


0


0


0

   Owner Occupied 


7,687


10,642


11,287


10,749


13,389

   Non-Owner Occupied


28,954


30,106


22,435


25,526


30,086



38,575


43,268


35,607


38,498


45,897












Non-Real Estate:











   Commercial Assets


2,144


3,060


3,897


3,777


4,728

   Consumer Assets


14


14


29


4


51



2,158


3,074


3,926


3,781


4,779












      Total

$

52,174

$

60,356

$

56,827

$

61,895

$

76,089

 

During the first quarter of 2012, Mercantile added $9.7 million of NPAs to its problem asset portfolio and successfully disposed of $15.6 million through a combination of asset sales, principal pay-downs, and returns to performing status.  Loan charge-offs were $1.7 million and foreclosed asset valuation write-downs were $0.6 million. In total, NPAs decreased by a net $8.2 million during the first quarter of 2012.

Improvement in asset quality is also apparent on a full-year basis. During the 12-month period ended March 31, 2012, Mercantile added $30.0 million of problem assets to its NPA portfolio, successfully disposed of $43.0 million, and charged off or wrote down an additional $10.9 million. In total, NPAs declined by a net $23.9 million since March 31, 2011.

NONPERFORMING ASSETS RECONCILIATION












($000s)


1Q 2012


4Q 2011


3Q 2011


2Q 2011


1Q 2011












Beginning balance

$

60,356

$

56,827

$

61,895

$

76,089

$

86,119

Additions


9,651


10,188


3,740


6,478


3,848

Returns to performing











   status


(737)


0


0


0


(766)

Principal payments


(5,533)


(2,115)


(5,058)


(12,067)


(5,555)

Sale proceeds


(9,282)


(3,038)


(2,670)


(2,547)


(2,085)

Loan charge-offs


(1,691)


(890)


(476)


(5,393)


(4,800)

Valuation write-downs


(590)


(616)


(604)


(665)


(672)












      Total 

$

52,174

$

60,356

$

56,827

$

61,895

$

76,089












Net loan charge-offs were $5.6 million during the first quarter of 2012, or an annualized 2.1 percent of average loans, compared with $4.7 million (1.8 percent annualized) and $5.4 million (1.8 percent annualized) for the linked and prior-year quarters, respectively.

NET LOAN CHARGE-OFFS (RECOVERIES)












($000s)


1Q 2012


4Q 2011


3Q 2011


2Q 2011


1Q 2011

Residential Real Estate:











   Land Development

$

38

$

15

$

135

$

2,496

$

(2)

   Construction


0


(90)


(11)


(9)


0

   Owner Occupied / Rental


237


1,176


(187)


1,819


1,208



275


1,101


(63)


4,306


1,206












Commercial Real Estate:











   Land Development


103


(75)


47


(62)


(73)

   Construction


0


0


0


0


0

   Owner Occupied  


793


68


(18)


755


1,436

   Non-Owner Occupied


4,341


4,060


639


445


(40)



5,237


4,053


668


1,138


1,323












Non-Real Estate:











   Commercial Assets


81


(435)


(162)


(336)


2,794

   Consumer Assets


(4)


0


26


(9)


126



77


(435)


(136)


(345)


2,920












      Total 

$

5,589

$

4,719

$

469

$

5,099

$

5,449












Capital Position

Shareholders' equity totaled $167 million as of March 31, 2012, an increase of $40.3 million from March 31, 2011, and regulatory capital ratios continue to improve. The Bank remains "well-capitalized" with a total risk-based capital ratio of 16.1 percent as of March 31, 2012, compared to 13.0 percent at March 31, 2011.  At March 31, 2012, the Bank had approximately $72.3 million in excess of the 10.0 percent minimum regulatory threshold required to be considered a "well-capitalized" institution.  On April 4, 2012, Mercantile repurchased 50 percent of the $21 million in preferred stock issued to the U.S. Department of the Treasury.  To fund the repurchase, the Bank paid a cash dividend of approximately $10.5 million to the Company; if the repurchase transaction would have been consummated on March 31, 2012, the Bank's total risk-based capital ratio would have been 15.2 percent and the amount in excess of the 10.0 percent minimum regulatory threshold would have been $61.8 million at the end of the first quarter of 2012. Mercantile reported 8,608,544 total shares outstanding at March 31, 2012.

Mr. Price concluded: "We've started 2012 on a strong note, with solid financial performance in the first quarter that has allowed us to complete the repurchase of half of the preferred stock outstanding under TARP just after the close of the quarter without the need to access outside capital.  Our disciplined approach over the past three years has enabled us to make great progress in our recovery while pursuing our relationship approach to community banking.  Looking ahead, we remain committed to the strategy we employed to successfully improve our financial position and operating performance as we grow our business for continued long-term profitability."

About Mercantile Bank Corporation

Based in Grand Rapids, Michigan, Mercantile Bank Corporation is the bank holding company for Mercantile Bank of Michigan. Founded in 1997 to provide banking services to businesses, individuals and governmental units, the Bank differentiates itself on the basis of service quality and the expertise of its banking staff. Mercantile has seven full-service banking offices in Grand Rapids, Holland and Lansing, Michigan. Mercantile Bank Corporation's common stock is listed on the NASDAQ Global Select Market under the symbol "MBWM."

Forward-Looking Statements