Mercantile Bank Corporation Reports Strong Second Quarter 2018 Results

GRAND RAPIDS, Mich., July 17, 2018 /PRNewswire/ -- Mercantile Bank Corporation (NASDAQ: MBWM) ("Mercantile") reported net income of $9.4 million, or $0.57 per diluted share, for the second quarter of 2018, compared with net income of $7.3 million, or $0.45 per diluted share, for the respective prior-year period.  Net income during the first six months of 2018 totaled $20.3 million, or $1.22 per diluted share, compared to $15.0 million, or $0.91 per diluted share, during the first six months of 2017.

The successful collection of certain nonperforming commercial loans increased reported net income during the first six months of 2018 by approximately $1.7 million, or $0.10 per diluted share, while a bank owned life insurance claim during the first quarter of 2017 increased reported net income during the first six months of 2017 by approximately $1.1 million, or $0.06 per diluted share.  Excluding the impacts of these transactions, diluted earnings per share increased $0.27, or 31.8 percent, during the first six months of 2018 compared to the respective 2017 period.

Net income during the second quarter of 2018 and the first six months of 2018 also benefited from a reduction in the corporate federal income tax rate, which was lowered from 35 percent to 21 percent on January 1, 2018, as a result of the enactment of the Tax Cuts and Jobs Act.  Mercantile's effective tax rate was 19.0 percent during both the second quarter and first six months of 2018, down from 30.7 percent during each of the respective prior-year periods.

"We are pleased to report another quarter of sound financial performance, continuing the momentum generated during the first quarter of 2018," said Robert B. Kaminski, Jr., President and Chief Executive Officer of Mercantile.  "Our strong operating performance and balance sheet, sustained strength in commercial and residential mortgage loan originations, and healthy loan pipelines make us confident that the solid results achieved during the first half of the year will continue throughout the remainder of 2018."

Second quarter highlights include:

• Robust earnings performance and capital position
• Healthy net interest margin
• Increased fee income
• Controlled overhead costs
• Strong asset quality, as reflected by low levels of nonperforming assets and loans in the 30- to 89-days delinquent category
• New commercial term loan originations of approximately $142 million
• Continued strength in commercial loan pipeline

Operating Results

Total revenue, which consists of net interest income and noninterest income, was $33.8 million during the second quarter of 2018, up $2.5 million, or 8.1 percent, from the prior-year second quarter.  Net interest income during the second quarter of 2018 was $29.2 million, up $2.0 million, or 7.5 percent, from the second quarter of 2017, reflecting a higher level of earning assets and an increased net interest margin. 

The net interest margin was 3.92 percent in the second quarter of 2018, down from 4.06 percent in the linked quarter, but up from 3.85 percent in the prior-year second quarter.  The decrease in the net interest margin in the current-year second quarter relative to the first quarter of 2018 primarily resulted from a lower yield on commercial loans, which more than offset an improved earning asset mix.  The collection of interest on certain nonperforming commercial loans that paid in full positively impacted the yield on earning assets during the first quarter of 2018 by approximately 29 basis points, while a higher-than-desired level of interest-earning deposits negatively impacted the yield by approximately 8 basis points.  Excluding the impacts of these factors, the net interest margin equaled approximately 3.85 percent during the first quarter of 2018.  The change in earning asset mix mainly reflected loan growth and a reduction in interest-earning deposit balances.  Higher-yielding average loans represented 86.5 percent of average earning assets during the second quarter of 2018, up from 84.4 percent during the linked quarter, while lower-yielding average interest-earning deposit balances represented 2.1 percent of average earning assets during the current-year second quarter, down from 4.1 percent during the linked quarter.  The cost of funds equaled 0.68 percent during the second quarter of 2018, up from 0.64 percent during the first quarter of 2018 mainly due to increased costs of certain non-time deposit accounts, time deposits, and borrowed funds. 

The increase in the net interest margin during the second quarter of 2018 compared to the prior-year second quarter reflects a higher yield on average earning assets, primarily reflecting an increased yield on commercial loans, which more than offset a higher cost of funds, mainly reflecting increased costs of certain non-time deposit accounts, time deposits, and borrowed funds.  The increased yield on commercial loans primarily reflects the positive impact of higher interest rates on variable-rate commercial loans, stemming from the Federal Open Market Committee raising the targeted federal funds rate by 25 basis points in each of June and December 2017 and March and June 2018.

Net interest income and the net interest margin during the second quarter of 2018 and the prior-year second quarter were affected by purchase accounting accretion and amortization entries associated with the fair value measurements recorded effective June 1, 2014.  Increases in interest income on loans totaling $0.8 million and $1.3 million were recorded during the second quarters of 2018 and 2017, respectively.  Purchased loan accretion amounts vary from period to period as a result of periodic cash flow re-estimations, loan payoffs, and payment performance.  An increase in interest expense on subordinated debentures totaling $0.2 million was recorded during both the current-year second quarter and prior-year second quarter. 

Mercantile recorded a $0.7 million provision for loan losses during the second quarter of 2018 compared to a $0.8 million provision during the respective 2017 period.  The provision expense recorded during the second quarter of 2018 primarily reflects loan growth and increased allocations related to certain environmental factors, while the provision expense recorded during the prior-year second quarter mainly reflects loan growth.

Noninterest income during the second quarter of 2018 was $4.6 million, up $0.5 million, or 12.6 percent, from the $4.1 million recorded during the second quarter of 2017.  The increase in noninterest income in part reflects higher mortgage banking activity income, credit and debit card fees, payroll processing revenue, and service charges on accounts.  The increased mortgage banking activity income mainly reflects the success of ongoing strategic initiatives that were implemented to increase market penetration.  The positive impacts of these initiatives have more than offset the negative impacts of rising residential mortgage loan rates and a shortage of housing inventory in Mercantile's markets. 

Noninterest expense totaled $21.4 million during the second quarter of 2018, up $1.5 million, or 7.7 percent, from the respective 2017 period.  The higher level of expense primarily resulted from increased salary costs, mainly reflecting annual employee merit pay increases, the hiring of additional staff, a larger bonus accrual, and higher stock-based compensation expense.  In addition, all hourly employees received a pay increase effective April 1, 2018.

Mr. Kaminski continued, "We are very pleased with the ongoing strength and relative steadiness of our core net interest margin, depicting our continuing focus on loan pricing discipline and sound asset quality.  The recent interest rate hikes initiated by the Federal Open Market Committee have positively impacted our core net interest margin, and we believe our balance sheet structure positions us to benefit from any further rate increases.  We are also pleased with the growth in various fee income categories stemming from the success of ongoing strategic initiatives.  Although headwinds persist, including rising interest rates and limited housing inventories in our markets, mortgage banking activity income increased in the second quarter as we expected, in large part reflecting a higher level of purchase activity and our efforts to increase market penetration."  

Balance Sheet

As of June 30, 2018, total assets were $3.29 billion, up $1.8 million from December 31, 2017.  Total loans increased $78.3 million, or 3.1 percent, while interest-earning deposits decreased $75.6 million, or 52.1 percent, over the same time period.  Interest-earning deposit balances declined as a result of these funds being used to meet loan funding requirements.  Approximately $142 million in commercial term loans to new and existing borrowers were originated during the second quarter of 2018, as continuing sales and relationship-building efforts resulted in additional lending opportunities.  As of June 30, 2018, unfunded commitments on commercial construction and development loans totaled approximately $116 million, which are expected to be largely funded over the next 12 to 18 months.

Raymond Reitsma, President of Mercantile Bank of Michigan, noted, "We are very pleased with the net loan growth achieved during the second quarter of 2018, reflecting our lending team's ongoing focus on establishing new customer relationships and serving our existing customer base.  New commercial term loan originations were in line with quarterly originations over the past few years.  We remain dedicated to growing the loan portfolio in a disciplined manner, with a continuing emphasis on credit quality and risk-based pricing.  Based on expected new loan fundings, we are confident that the commercial loan portfolio will expand in future periods.  Our residential mortgage loan portfolio grew for the ninth consecutive quarter due to our ongoing strategic initiatives, and we believe we are well-positioned to increase our market presence."

As of June 30, 2018, commercial and industrial loans and owner-occupied commercial real estate ("CRE") loans combined represented approximately 58 percent of total commercial loans, while non-owner occupied CRE loans equaled about 36 percent of total commercial loans. 

Total deposits at June 30, 2018 were $2.53 billion, up $7.4 million and $159 million from December 31, 2017, and June 30, 2017, respectively, while local deposits were up $22.6 million and $165 million during the respective time periods.  New commercial loan relationships and the success of various deposit account initiatives drove the growth in local deposits.  Wholesale funds were $317 million, or approximately 11 percent of total funds, as of June 30, 2018, compared to $323 million and $339 million as of December 31, 2017, and June 30, 2017, respectively.

Asset Quality

Nonperforming assets at June 30, 2018, were $5.8 million, or 0.2 percent of total assets, compared to $9.4 million, or 0.3 percent of total assets, at December 31, 2017, and $7.2 million, or 0.2 percent of total assets, at June 30, 2017.  The decline in nonperforming assets during the first six months of 2018 primarily reflects successful loan collection efforts and sales of bank-owned real estate that were no longer being used or considered for use as bank facilities.  The level of past due loans remains nominal, and loan relationships on the internal watch list generally declined in number and dollar volume during the first six months of 2018.  Net loan recoveries were $0.5 million, or an annualized negative 0.08 percent of average loans, during both the second quarter of 2018 and the linked quarter, compared with net loan charge-offs of $0.7 million, or an annualized 0.12 percent of average loans, during the second quarter of 2017.

Capital Position

Shareholders' equity totaled $375 million as of June 30, 2018, an increase of $9.0 million from year-end 2017.  The Bank's capital position remains above "well-capitalized" with a total risk-based capital ratio of 12.9 percent as of June 30, 2018, compared to 12.6 percent at December 31, 2017.  At June 30, 2018, the Bank had approximately $88 million in excess of the 10.0 percent minimum regulatory threshold required to be considered a "well-capitalized" institution.  Mercantile reported 16,609,336 total shares outstanding at June 30, 2018.

Mr. Kaminski concluded, "Our strong financial performance during the first half of 2018 positions us to meet growth and profitability objectives and increase shareholder value.  The sustained cash dividend program, including the announcement of an increased third quarter dividend earlier today, depicts our commitment to enhancing total shareholder return.  Our value-added approach to banking, along with our wide array of products and services, have allowed us to successfully attract new customers as well as retain existing clients.  We are excited about the opportunities available to us in our markets, and we are confident that our demonstrated robust operating performance during the first six months of 2018 will continue during the remainder of the current year and beyond."

About Mercantile Bank Corporation

Based in Grand Rapids, Michigan, Mercantile Bank Corporation is the bank holding company for Mercantile Bank of Michigan.  Mercantile provides banking services to businesses, individuals and governmental units, and differentiates itself on the basis of service quality and the expertise of its banking staff. Mercantile has assets of approximately $3.3 billion and operates 47 banking offices.  Mercantile Bank Corporation's common stock is listed on the NASDAQ Global Select Market under the symbol "MBWM."

Forward-Looking Statements

This news release contains comments or information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on current expectations that involve a number of risks and uncertainties. Actual results may differ materially from the results expressed in forward-looking statements. Factors that might cause such a difference include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and nontraditional competitors; changes in banking regulation or actions by bank regulators; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; changes in local real estate values; changes in the national and local economies; and other factors, including risk factors, disclosed from time to time in filings made by Mercantile with the Securities and Exchange Commission. Mercantile undertakes no obligation to update or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

SOURCE Mercantile Bank Corporation