Mercantile Bank Corporation Reports Third Quarter 2012 Results

GRAND RAPIDS, Mich., Oct. 16, 2012 /PRNewswire/ -- Mercantile Bank Corporation (NASDAQ: MBWM) ("Mercantile") reported net income attributable to common shares of $2.6 million, or $0.30 per diluted share, for the third quarter of 2012, compared with net income attributable to common shares of $2.7 million, or $0.30 per diluted share, for the prior-year period.  On a pre-tax basis, income was $3.9 million in the third quarter of 2012 compared to $3.0 million in the prior-year third quarter, an increase of 27.5 percent.

The third quarter was highlighted by:

• Continued growth in profitability as asset quality continues to improve
• Nonperforming assets declined 37 percent from a year ago and 69 percent since peak in early 2010
• Level of loans in the 30- to 89-days delinquent category remains at virtually zero
• Improvement in net interest margin from previous quarter and on year-over-year basis
• Regulatory capital ratios remain significantly above minimum requirements for "well-capitalized" institutions
• Reinstatement of a quarterly dividend at $0.09 per common share, or a current yield of approximately 2%

"We are pleased to report another quarter of solid earnings which marks seven consecutive quarters of profitability driven by continued improvements in several key areas," said Michael Price, Chairman and CEO of Mercantile Bank Corporation.  "Our strong earnings momentum and the work we have done to build our capital structure have positioned us for future growth.  Our business model remains focused on achieving and maintaining excellent asset quality, continued improvement of profitability, protecting our margin and further strengthening of the balance sheet."  

Operating Results

Total revenue, which consists of net interest income and noninterest income, was $13.6 million during the 2012 third quarter, down $0.5 million or 3.2 percent from the $14.1 million generated during the third quarter of 2011, primarily reflecting a reduction in earning assets.  Net interest income was $11.6 million, down $0.7 million or 5.8 percent from the $12.3 million earned in the prior-year third quarter. The decrease in net interest income resulted from a 10.2 percent decline in average earning assets as part of management's strategic initiative to reduce commercial real estate exposure and migrate certain high risk loans out of the loan portfolio. The net interest margin during the third quarter of 2012 was 3.67 percent, 17 basis points higher than the level during the third quarter of 2011 and well above the historical average level.

Noninterest income for the 2012 third quarter was $2.1 million, up $0.3 million or 14.0 percent from the comparable 2011 period.  The increase in noninterest income primarily resulted from increased residential mortgage banking fee income and an increase in rental income on foreclosed properties.

Mercantile had a negative $0.4 million provision for loan losses during the third quarter of 2012 compared to a provision expense of $1.1 million for the year-ago quarter. The negative provision expense is the result of several factors, including continued progress towards loan recoveries and collections as well as a reduced level of loan-rating downgrades and ongoing loan-rating upgrades.

Noninterest expense for the 2012 third quarter was $10.2 million, up $0.2 million from the same period in 2011. Salaries and benefits totaled $4.8 million, up $0.2 million from the prior-year quarter, primarily reflecting expense associated with reinstating certain employee benefit programs that had been suspended or reduced in prior years.  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 $1.6 million during the third quarters of 2011 and 2012, reflecting the continuation of Mercantile's aggressive approach to managing and resolving problem assets.  Federal Deposit Insurance Corporation insurance premiums were $0.3 million in the third quarter of 2012, down $0.3 million from the 2011 third quarter, primarily resulting from a decreased assessment rate that reflects the Company's improved financial condition and operating performance.   

Mr. Price continued: "Our financial results reflect an aggressive stance toward right-sizing our operations and asset base to sustain our operating performance and increase profitability.  Our enhanced financial condition and capital strength are serving us well as we continue on our path of disciplined growth for long-term performance." 

Balance Sheet

Mercantile has steadily reduced its exposure to loans secured by commercial real estate over the past several years.  While the rate of decline has slowed as a slight improvement of economic conditions has led to increased lending opportunities, efforts to reduce certain segments of the commercial real estate portfolio continue.  Despite competitive pressures and economic uncertainty that continue to negatively impact the loan portfolio, during the third quarter of 2012 approximately $20 million of new loans were originated.  As of September 30, 2012, total assets were $1.39 billion, down $44.9 million or 3.1 percent from December 31, 2011; total loans decreased $37.1 million, or 3.5 percent, to $1.04 billion over the same period.  Compared to September 30, 2011, total assets declined $89.6 million, or 6.1 percent, and total loans declined $58.7 million, or 5.4 percent.

Real estate loans comprise a majority of Mercantile's loan portfolio. At September 30, 2012, real estate loans, excluding residential mortgage loans representing permanent financing of owner-occupied dwellings and home equity lines of credit, were $674 million or approximately 65 percent of total loans, representing a decline of $68.2 million, or 9.2 percent, from $742 million, or 67.8 percent of total loans, at September 30, 2011.

Non-owner-occupied commercial real estate ("CRE") loans totaled $333 million as of September 30, 2012 (32.2 percent of total loans), a decline of $63.9 million over the past 12 months. Owner-occupied CRE loans were $271 million at the end of the third quarter of 2012, an increase of $1.6 million from a year ago. Vacant land, land development and construction ("C&D") loans, including both residential and commercial projects, totaled $62.5 million at September 30, 2012, down $4.9 million from a year ago. The commercial and industrial ("C&I") segment of the loan portfolio was $272 million at September 30, 2012, an increase of $11.2 million since year-end 2011 and an increase of $14.7 million over the past 12 months.  The average balance of commercial lines of credit has remained relatively stable since early 2011.

Since December 2008, Mercantile has focused on improving liquidity by reducing wholesale funding and growing local deposits, especially interest-bearing checking and money market deposit accounts. As of September 30, 2012, total deposits were $1.11 billion, a decline of $492 million since year-end 2008. By comparison, local deposits increased $357 million to $827 million since year-end 2008, representing 74.7 percent of total deposits compared to 29.4 percent at December 31, 2008. Approximately 72 percent, or $257 million, of local deposit growth since year-end 2008 occurred in the interest-bearing checking and money market deposit account categories, while DDA checking accounted for $56.2 million, or about 16 percent of total growth.  Growth in local deposits was driven primarily by 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 $315 million, or 26.2 percent of total funds, as of September 30, 2012, compared to $1.41 billion, or 71.5 percent of total funds, as of December 31, 2008. The $1.10 billion decline in wholesale funding since the end of 2008 reflects both the shift toward local deposits, as well as an $822 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 $83.4 million during the third quarter of 2012. In addition to its short-term investments, at the end of the third quarter of 2012, Mercantile had approximately $150 million of borrowing capacity through various established lines of credit to meet potential funding needs, as well as $36.0 million of U.S. Government securities available to sell.

Asset Quality

Nonperforming assets ("NPAs") at September 30, 2012 were $35.9 million, or 2.6 percent of total assets, compared to $60.4 million as of December 31, 2011, and $56.8 million as of September 30, 2011 (4.2 percent and 3.8 percent of total assets, respectively). This represents a decline of $24.4 million or 40.4 percent from the end of 2011, and a decline of $20.9 million or 36.8 percent from the year-ago quarter-end.

Robert B. Kaminski, Jr., Mercantile's Executive Vice President and Chief Operating Officer, noted: "We are pleased with the continued improvement in our asset quality.  During the third quarter, we witnessed a further contraction of nonperforming assets which was driven by a decline in nonperforming loans, and our 30-to 89-day delinquent loans remain virtually at zero. While we continue to dedicate resources towards moving our troubled assets off the balance sheet, we are encouraged by our progress thus far and the position it has afforded us as we face growing competition in our markets.  Despite these competitive pressures in our markets, we are benefiting from our robust sales programs and marketing initiatives as evidenced by our strong commercial loan pipeline.  Going forward, we will continue to leverage our relationship-based approach towards client acquisition to drive sustainable growth in our markets."

Nonperforming loans ("NPLs") totaled $24.8 million as of September 30, 2012, down $3.7 million and $14.8 million, respectively, from the linked quarter-end and the year-ago quarter-end, while foreclosed real estate and repossessed assets declined $0.4 million and $6.1 million, respectively, from the linked and year-ago quarter-ends.  CRE loans represented 62.5 percent of NPLs, or $15.5 million at September 30, 2012.  Investor-owned nonperforming CRE loans accounted for $11.2 million of total CRE nonperforming loans (3.4 percent of $333 million investor-owned CRE loans), while owner-occupied CRE nonperforming loans accounted for $4.2 million (1.6 percent of $271 million owner-occupied CRE loans).

Nonperforming C&D loans were $3.0 million as of September 30, 2012, a decrease of $0.3 million since the year-ago quarter-end.  Nonperforming C&I loans were $1.4 million as of September 30, 2012, a decline of $2.5 million since September 30, 2011. Owner-occupied and rental residential NPLs were $5.0 million as of September 30, 2012, down $2.4 million since the year-ago quarter-end.

During the third quarter of 2012, Mercantile added only $0.2 million of NPAs to its problem asset portfolio, while disposing of $4.3 million through a combination of asset sales and principal pay-downs ($2.4 million), loan charge-offs ($1.0 million), and foreclosed asset valuation write-downs ($0.9 million). In total, NPAs decreased by a net $4.1 million during the third quarter of 2012.

Improvement in asset quality is also apparent on a full-year basis. During the 12-month period ended September 30, 2012, Mercantile added $23.3 million of problem assets to its NPA portfolio, successfully disposed of $36.1 million, and charged off or wrote down an additional $8.1 million.  In total, NPAs declined by a net $20.9 million since September 30, 2011.

Net loan charge-offs were $1.5 million during the third quarter of 2012, or an annualized 0.6 percent of average loans, compared with net loan recoveries of $1.7 million (negative 0.7 percent annualized) and net loan charge-offs of $0.5 million (0.2 percent annualized) for the linked and prior-year quarters, respectively.  Approximately 90 percent of the gross loan charge-offs during the third quarter of 2012 were specifically reserved for as of June 30, 2012.

Capital Position

Shareholders' equity totaled $145 million as of September 30, 2012, a decrease of $20.4 million from December 31, 2011. During the second quarter of 2012, Mercantile repurchased the entire $21.0 million of preferred stock that was sold to the U.S. Department of the Treasury on May 15, 2009.  On July 3, 2012 Mercantile repurchased, for $7.5 million, the warrant it sold to the U.S. Department of the Treasury on May 15, 2009.  The warrant provided for the purchase of 616,438 shares of Mercantile common stock at a price of $5.11 per share. To fund the repurchases, the Bank paid cash dividends to the Company in approximately the same amounts. The Bank remains "well-capitalized" with a total risk-based capital ratio of 14.5 percent as of September 30, 2012, compared to 15.5 percent at December 31, 2011.  At September 30, 2012, the Bank had approximately $53.0 million in excess of the 10.0 percent minimum regulatory threshold required to be considered a "well-capitalized" institution.  Mercantile reported 8,635,070 total shares outstanding at September 30, 2012.

Reflecting the repurchase of the preferred stock and warrant that were sold to the U.S. Department of the Treasury, together with the continued strength of Mercantile's operating performance and capital position, the Board of Directors declared a fourth quarter dividend of $0.09 per common share.  This is the first dividend paid since a reduced dividend of $0.01 per share was paid in the first quarter of 2010.

Mr. Price concluded: "Throughout the economic downturn our priority has always remained to enhance our capital position while increasing value for our shareholders.  Our sustained earnings growth and improved financial condition have brought us to yet another milestone, which is the Board of Directors' approval of the reinstatement of our quarterly dividend at the $0.09 per share level.  We are pleased to reward our shareholders and distribute competitive cash returns in the form of dividends."   

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

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