Mercantile Bank Corporation Reports Strong Third Quarter 2017 Results

GRAND RAPIDS, Mich., Oct. 17, 2017 /PRNewswire/ -- Mercantile Bank Corporation (NASDAQ: MBWM) ("Mercantile") reported net income of $8.3 million, or $0.51 per diluted share, for the third quarter of 2017, compared with net income of $7.8 million, or $0.48 per diluted share, for the respective prior-year period.  Net income during the first nine months of 2017 totaled $23.3 million, or $1.41 per diluted share, compared to $23.8 million, or $1.46 per diluted share, during the first nine months of 2016.  Excluding the impacts of certain noncore transactions, including a Bank-owned life insurance death benefit claim in the first quarter of 2017, the repurchase of trust preferred securities at a discount in the first quarter of 2016, and accelerated discount accretion on called U.S. Government agency bonds during the first nine months of 2016, diluted earnings per share during the first nine months of 2017 and 2016 equaled $1.34 and $1.27, respectively.

"We are very pleased to report another quarter of strong operating performance," said Robert B. Kaminski, Jr., President and Chief Executive Officer of Mercantile.  "Our sustained strength in core profitability and strong capital position provide us with a high degree of optimism that the fourth quarter of 2017 will produce operating results similar to those achieved during the first three quarters of the year and position us well for sustainable growth opportunities into 2018."

The third quarter was highlighted by:

• Robust earnings performance and capital position
• Healthy net interest margin
• Continued expense control
• 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 $128 million
• Continued strength in commercial and mortgage loan pipelines
• Increased cash dividend

Operating Results

Total revenue, which consists of net interest income and noninterest income, was $33.2 million during the third quarter of 2017, up $1.5 million or 4.8 percent from the prior-year third quarter.  Net interest income during the third quarter of 2017 was $28.6 million, up $2.2 million or 8.3 percent from the third quarter of 2016, reflecting a higher level of earning assets and an increased net interest margin.

The net interest margin was 3.83 percent in the third quarter of 2017, up from 3.76 percent in the prior-year third quarter.  The increase in the net interest margin primarily resulted from a higher yield on loans, mainly reflecting the positive impact of higher interest rates on variable-rate commercial loans stemming from the 25 basis point increases in the targeted federal funds rate in December of 2016 and March and June of 2017 and a higher level of purchased credit-impaired commercial loan income.  The cost of funds equaled 0.58 percent during the third quarter of 2017, up from 0.46 percent during the respective 2016 period mainly due to increased costs of certain non-time deposit accounts and borrowed funds.

Net interest income and the net interest margin during the third quarter of 2017 and the prior-year third quarter were affected by purchased accounting accretion and amortization entries associated with the fair value measurements recorded effective June 1, 2014.  Increases in interest income on loans totaling $1.8 million and $1.0 million were recorded during the third quarters of 2017 and 2016, respectively.  An increase in interest expense on subordinated debentures totaling $0.2 million was recorded during both the current-year third quarter and prior-year third quarter.  Purchased loan accretion amounts vary from period to period as a result of periodic cash flow re-estimations, loan payoffs, and payment performance.

Mercantile recorded a $1.0 million provision for loan losses during the third quarter of 2017 compared to a $0.6 million provision during the respective 2016 period.  The provision expense recorded during the third quarter of 2017 primarily reflects an increased allocation related to the economic conditions environmental factor.  Ongoing loan growth also necessitated a portion of the provision expense incurred during the current-year third quarter and accounted for a substantial portion of the provision expense recorded during the third quarter of 2016.

Noninterest income during the third quarter of 2017 was $4.6 million, down $0.7 million or 12.9 percent from the $5.3 million recorded during the third quarter of 2016.    Growth in several fee income categories, including credit and debit card fees, mortgage banking activity income, and payroll processing revenue, was more than offset by a decline in other income, which was elevated in the third quarter of 2016 as a result of certain noncore transactions, including the reimbursement of medical insurance premiums charged in prior years and payments received on purchased credit-impaired loans that had been charged-off prior to the merger with Firstbank Corporation.

Noninterest expense totaled $20.2 million during the third quarter of 2017, up $0.5 million or 2.8 percent from the respective 2016 period primarily due to increased salary and benefit costs and general operating expenses.  The increase in salary and benefit costs primarily reflects annual employee merit increases and the hiring of additional staff, while increases in other operating expenses generally reflect costs associated with recent expansion initiatives. 

Mr. Kaminski continued: "As expected, our net interest margin benefitted from the recent increases in short-term interest rates stemming from the Federal Open Market Committee's decision to continue its tightening path.  Although our cost of funds has trended upward over the past few quarters, its impact on our net interest margin has been surpassed by an increasing yield on earning assets, primarily reflecting higher interest rates on variable-rate commercial loans resulting from the recent rate hikes and increased purchased credit-impaired commercial loan income.  Based on our balance sheet structure, we expect any additional tightening by the Federal Open Market Committee to positively impact our net interest margin.  We remain focused on identifying opportunities to enhance revenue and have been proactively adding proven revenue producers to our sales team.  We have also implemented expansion and other strategic initiatives in a cost-conscious manner."

Balance Sheet

As of September 30, 2017, total assets were $3.25 billion, up $172 million or 5.6 percent from December 31, 2016; total loans increased $176 million, or 7.4 percent, to $2.55 billion over the same time period, representing an annualized growth rate of approximately 10 percent.  During the twelve months ended September 30, 2017, total assets were up $191 million or 6.2 percent, and total loans were up $148 million or 6.1 percent.  Approximately $410 million in commercial term loans to new and existing borrowers were originated during the first nine months of 2017, including about $128 million during the third quarter, as continuing sales and relationship building efforts presented additional lending opportunities.  As of September 30, 2017, unfunded commitments on commercial construction and development loans totaled approximately $163 million, up from $111 million as of June 30, 2017; the commitments are expected to be largely funded over the next 12 to 18 months.

Raymond Reitsma, President of Mercantile Bank of Michigan, noted: "We are pleased with the loan growth achieved during the first nine months of 2017, along with the relatively consistent dollar volume of new commercial term loans originated during each quarter.  Although competitive pressures remain in our markets, we have not wavered from our ongoing commitment to grow the loan portfolio in a controlled manner, focusing on an appropriate balance between credit risk and pricing.  Based on the strength of our loan pipeline and expected draws on construction and development lines of credit, we are confident that a solid level of commercial loans will be funded in future periods.  We are also very pleased to report that the success of strategic initiatives designed to increase our residential mortgage loan market penetration continued during the third quarter.  Our residential mortgage portfolio grew nearly seven percent during the quarter, marking the sixth consecutive quarter of growth in the portfolio."

Commercial and industrial loans and owner-occupied commercial real estate ("CRE") loans combined represented approximately 49 percent of total loans as of September 30, 2017.  Non-owner occupied CRE loans equaled about 32 percent of total loans as of September 30, 2017. 

As of September 30, 2017, total deposits were $2.49 billion, up $114 million and $160 million from December 31, 2016 and September 30, 2016, respectively.  Local deposits were up $85.6 million since year-end 2016 and $146 million over the past twelve months.  Growth in local deposits was mainly driven by new commercial loan relationships and the success of various deposit account specials.  Wholesale funds were $325 million, or approximately 11 percent of total funds, as of September 30, 2017, compared to about 9 percent as of December 31, 2016 and 10 percent as of September 30, 2016.

Asset Quality

Nonperforming assets at September 30, 2017 were $10.6 million, or 0.3 percent of total assets, compared to $7.2 million, or 0.2 percent of total assets, at June 30, 2017, and $6.4 million, or 0.2 percent of total assets, at December 31, 2016.  The transfer of a Bank-owned parcel of real estate, which is no longer being considered for use as a bank facility, from fixed assets to other real estate owned accounted for nearly 50 percent of the $3.3 million increase in nonperforming assets during the third quarter of 2017.  The parcel of real estate is expected to be sold in the next six months for an amount that approximates current book value.  The level of past due loans remains nominal, and loan relationships on the internal watch list have remained relatively consistent in number and dollar volume.  Net loan charge-offs were $0.1 million during the third quarter of 2017, or an annualized 0.02 percent of average loans, and $1.1 million, or an annualized 0.06 percent of average loans, during the first nine months of 2017.

Capital Position

Shareholders' equity totaled $363 million as of September 30, 2017, an increase of $21.7 million from year-end 2016.  The Bank's capital position remains above "well-capitalized" with a total risk-based capital ratio of 12.5 percent as of September 30, 2017, compared to 13.1 percent at December 31, 2016.  At September 30, 2017, the Bank had approximately $74 million in excess of the 10.0 percent minimum regulatory threshold required to be considered a "well-capitalized" institution.  Mercantile reported 16,490,279 total shares outstanding at September 30, 2017.

No shares were repurchased during the first nine months of 2017 as part of the $20 million stock repurchase program that was announced in January of 2015.  Future share repurchases totaling $15.5 million can be made under the program, which was expanded by $15 million in early 2016.

Mr. Kaminski concluded: "We are excited about Mercantile's future and expect the solid operating results achieved during the first nine months of the year to extend into the fourth quarter.  Our strong overall financial condition, including sustained strength in core profitability and a healthy balance sheet, affords us the ability to meet growth objectives and fulfill our ongoing commitment to enhance shareholder value.  As depicted by loan and deposit growth, our relationship-based approach to banking continues to be well-received by businesses and individuals in our markets."

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 49 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