Mercantile Bank Corporation Reports Third Quarter 2014 Results

GRAND RAPIDS, Mich., Oct. 21, 2014 /PRNewswire/ -- Mercantile Bank Corporation (NASDAQ: MBWM) ("Mercantile") reported net income of $5.9 million, or $0.35 per diluted share, for the third quarter of 2014, compared with net income of $3.5 million, or $0.40 per diluted share, for the prior-year period.

Third quarter performance reflects progress in the integration of Mercantile and Firstbank Corporation ("Firstbank"), which merged on June 1, 2014, including consolidated operating results for the combined businesses.  Results for the quarter also include $1.3 million in pre-tax merger-related costs.  On an after-tax basis, these costs were $0.9 million, or $0.05 per diluted share. Excluding these costs, adjusted net income was $6.8 million and adjusted earnings per diluted share was $0.40.

Third quarter highlights:

• Net interest margin increased to 3.95% from 3.62% in the second quarter
• Loan pipeline remains strong
• Successful merging of computer processing systems
• Nonperforming assets remain at a negligible level
• New loan funding of approximately $47 million during the quarter

"Mercantile delivered a strong performance in both revenue and profitability in the third quarter," said Michael Price, President and Chief Executive Officer.  "This was the first full quarter of operations following our merger with Firstbank, and our experience indicates that we are on track to realize the significant cost savings and business opportunities that were identified during the merger negotiations.  We remain confident of the positive attributes of the merger."

"Our integration teams have made excellent progress in bringing these two institutions together in a seamless way," said Samuel Stone, Executive Vice President.  "Our teams achieved a major milestone in the third quarter with the successful merging of computer processing systems involving minimal customer disruption.  We are grateful for the hard work of our employees in delivering significant progress in the initial integration of Firstbank and Mercantile while continuing to serve our customers and grow our business."

Except as noted, the Firstbank merger that was consummated effective June 1, 2014, is primarily contributing to the increases over the linked and prior year periods in the income statement and balance sheet.  "Acquired loans", as used herein, are those assumed in the Firstbank merger. The Firstbank merger was considered a business combination and accounted for under FASB Accounting Standards Codification Topic 805, Business Combinations ("ASC 805").  All Firstbank assets and liabilities were recorded at their estimated fair values as of the date of merger and identifiable intangible assets were recorded at their estimated fair value.  Estimated fair values are considered preliminary, and in accordance with ASC 805, are subject to change up to one year after the merger date.  This allows for adjustments to the initial purchase entries if additional information relative to closing date fair values becomes available, and we continue to analyze our estimates of the fair values of Firstbank's assets and liabilities.  Certain reclassifications of prior periods' amounts may also be made to conform to the current period's presentation and would have no effect on previously reported net income amounts.

Operating Results

Total revenue, which consists of net interest income and noninterest income, more than doubled during the third quarter of 2014 to $28.9 million, up $15.2 million or 111.2 percent from the prior-year third quarter. Net interest income during the third quarter of 2014 was $26.0 million, up $14.0 million or 116.7 percent from the third quarter of 2013, reflecting a 106.0 percent increase in average earning assets and a 19 basis point increase in the net interest margin.   The strong increase in the net interest margin was fueled by a merger-related 39 basis point reduction in the cost of funds.  Noninterest income during the third quarter of 2014 was $2.9 million, up 72.3 percent from the third quarter of 2013.  Industry-wide weakness in mortgage banking revenue caused the percentage increase in noninterest income to be less than the percentage increase in net interest income.

Mercantile recorded a negative $0.4 million provision for loan losses during the third quarter of 2014, compared to a negative $1.7 million provision during the respective 2013 period.  The negative provision expense is the result of several factors, including recoveries of previously charged-off loans, reversals of specific reserves, a reduced level of loan-rating downgrades and ongoing loan-rating upgrades as the quality of the loan portfolio continued to improve.  

Noninterest expense totaled $20.7 million during the third quarter of 2014, up 109.0 percent from the prior-year third quarter. Pre-tax merger-related costs totaled $1.3 million during the third quarter of 2014, compared to $0.7 million in the third quarter of 2013.  Costs associated with the administration and resolution of problem assets, including legal expenses, property tax payments, appraisal costs and write-downs on foreclosed properties, were $0.2 million during the third quarter of 2014 compared to $0.4 million during the third quarter of 2013.  Gains on sales of other real estate, which are netted against problem asset costs, totaled $0.3 million during both the third quarter of 2014 and 2013.

Mr. Price continued: "We are extremely pleased to realize the projected improvement in our net interest margin and its very positive impact on profitability.  However, we have also seen our results negatively affected to a lesser degree by an industry-wide slowdown in mortgage banking activity as our mortgage banking income in the third quarter of 2014 was less than half of what the two companies added together achieved a year ago.  We are pleased with the quality of our loan portfolio.  During the third quarter, we recorded a $0.4 million negative provision, primarily reflecting continued recoveries of prior period loan charge-offs.  We will continue to take advantage of new business opportunities in our markets and remain flexible and opportunistic as we pursue disciplined growth for long-term performance." 

Balance Sheet

As of September 30, 2014, the balance sheet reflected the June consummation of the merger with Firstbank.  Total assets were $2.86 billion, an increase of $1.44 billion or 100.6 percent from December 31, 2013; total loans increased $1.02 billion, or 96.4 percent, to $2.07 billion over the same time period. Compared to September 30, 2013, total assets increased $1.44 billion, or 101.3 percent, and total loans increased $993 million, or 92.3 percent. Approximately $47 million in term loans to new and existing borrowers were funded during the third quarter of 2014. 

Robert B. Kaminski, Jr., Mercantile's Executive Vice President and Chief Operating Officer, noted: "We continue to take advantage of the expanded banking footprint resulting from the merger.  While new loan originations slowed in the third quarter generally, reflecting the timing of closing and funding loans in the pipeline, we saw ongoing strength in new loan opportunities, and the loan pipeline for the fourth quarter is expected to produce a rebound in funding.  Our September 30, 2014, loan total of $2.068 billion represents 2.4 percent net growth over the nine months, or just over 3 percent on an annualized basis. We are expecting that loan closings in the fourth quarter will increase this growth rate for the full year. Our pipeline includes, among other credits, over $140 million in unfunded commitments on commercial construction and development loans that are in the construction phase.   We have also added resources in the form of senior and experienced lending officers in the Grand Rapids and Lansing markets, positioning us for further growth." 

Commercial-related real estate loans continue to comprise a majority of Mercantile's loan portfolio, representing approximately 55 percent of total loans as of September 30, 2014.  Non-owner occupied commercial real estate ("CRE") loans and owner-occupied CRE loans equaled 28.3 percent and 19.9 percent of total loans, respectively, as of September 30, 2014.  Commercial and industrial loans represented 26.2 percent of total loans as of September 30, 2014. 

As of September 30, 2014, total deposits were $2.27 billion, up $1.15 billion from September 30, 2013.  Growth in local deposits was driven primarily by the merger, as well as new commercial loan relationships. Deposit totals were flat during the third quarter as emphasis remained on improving funding mix and reducing cost while additional funding was not needed.  Wholesale funds were $240 million, or less than 10 percent of total funds, as of September 30, 2014.

Asset Quality

Nonperforming assets ("NPAs") at September 30, 2014 were $8.7 million, or 0.3 percent of total assets, compared to $9.6 million as of December 31, 2013, and $12.2 million as of September 30, 2013 (0.7 percent and 0.9 percent of total assets, respectively).  This level of NPAs represents a decline of $0.9 million or 8.8 percent from the end of 2013 and a decline of $3.4 million or 28.2 percent from the year-ago quarter-end.

Mr. Kaminski commented: "The merger continues to support the positive trend of the past several years in improving asset quality and delivering meaningful reductions in nonperforming assets.  The combined Mercantile team will stay committed to sustaining this strong financial base while staying true to our community banking roots, maintaining a steady focus on meeting the needs of our existing customers and implementing innovative marketing initiatives." 

Nonperforming loans ("NPLs") totaled $6.1 million as of September 30, 2014, down $2.5 million from the year-ago quarter-end, while foreclosed real estate and repossessed assets decreased $0.9 million from the year-ago quarter-end.  As of September 30, 2014, CRE NPLs totaled $1.1 million.  Owner-occupied nonperforming CRE loans accounted for $0.8 million of total CRE NPLs, while investor-owned CRE NPLs accounted for $0.3 million.  Owner-occupied and rental residential NPLs totaled $4.4 million as of September 30, 2014.

Net loan charge-offs were $0.1 million during the third quarter of 2014 compared with net loan recoveries of $0.6 million for the linked quarter and $1.9 million for the prior-year quarter.

Capital Position

Shareholders' equity totaled $321 million as of September 30, 2014, an increase of $168 million from year-end 2013 primarily due to the merger with Firstbank. The Bank's capital position remains above "well-capitalized" with a total risk-based capital ratio of 14.0 percent as of September 30, 2014, compared to 15.7 percent at December 31, 2013.  At September 30, 2014, the Bank had approximately $93 million in excess of the 10.0 percent minimum regulatory threshold required to be considered a "well-capitalized" institution.  Mercantile reported 16,862,583 total shares outstanding at September 30, 2014, reflecting the issuance of 8,087,272 new shares to Firstbank shareholders effective on the merger consummation at June 1, 2014.

Mr. Price concluded: "We are very pleased with the excellent progress we have made in the integration of Firstbank and Mercantile. Today, the combined Mercantile operates with a strong and stable source of core funding, proven excellence in commercial lending and a robust offering of products and services.   The combined company has a strengthened competitive position with an expanded geographic footprint, an enhanced retail delivery system, a more diversified loan portfolio and greater loan origination capabilities. We are excited about the future of Mercantile and the opportunity to bring an extensive array of products and services to both existing and potential clients."

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 $2.9 billion and operates 53 banking offices serving communities in central and western 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; our ability to successfully integrate the operations of Mercantile and Firstbank and their respective subsidiary banks; the ability of the combined company to compete in the highly competitive banking and financial services industry; 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.