Mercantile Bank Corporation Reports Strong Fourth Quarter and Full Year 2013 Results

GRAND RAPIDS, Mich., Jan. 21, 2014 /PRNewswire/ -- Mercantile Bank Corporation (NASDAQ: MBWM) ("Mercantile") reported net income attributable to common shares of $5.2 million, or $0.59 per diluted share, for the fourth quarter of 2013, compared with net income attributable to common shares of $3.0 million, or $0.35 per diluted share, for the prior-year period. For the full year 2013, Mercantile reported net income attributable to common shares of $17.0 million, or $1.95 per diluted share, compared with net income attributable to common shares of $11.5 million, or $1.30 per diluted share, for the full year 2012.

The fourth quarter and year were highlighted by:

• Increased profitability driven by improved asset quality
• Nonperforming assets declined 63 percent from a year ago; currently represent only 0.7 percent of total assets
• Level of loans in the 30- to 89-days delinquent category were negligible throughout 2013
• New term loan originations of approximately $62 million during the fourth quarter and $230 million during the full year
• Net interest margin remained well-above historical average levels
• Announced first quarter cash dividend of $0.12 per common share, reflecting a current annual yield of approximately 2.3 percent
• Definitive merger agreement signed with Firstbank Corporation; shareholders of both companies overwhelmingly voted to approve merger

"Mercantile delivered very strong performance through all of 2013, continuing our growth trajectory for a fourth consecutive year," said Michael Price, Chairman and CEO of Mercantile.  "Over the past several years, Mercantile has demonstrated consistent leadership in our markets by delivering strong operating results and gains in financial strength in an improving regional economy. We are encouraged by what we are seeing in new business development in our markets and we are confident that significant opportunities await our bank in 2014 as we consummate the pending merger."

Operating Results

Total revenue, which consists of net interest income and noninterest income, was $14.3 million during the fourth quarter of 2013, up $0.5 million or 3.5 percent from the prior-year fourth quarter. The increase in total revenue resulted from higher net interest income, which more than offset lower noninterest income. Net interest income during the fourth quarter of 2013 was $12.7 million, up $1.0 million or 8.2 percent from the fourth quarter of 2012, reflecting a 2.8 percent increase in average earning assets and an 18 basis point increase in the net interest margin. Total revenue was $54.3 million during the full year 2013, down $0.4 million or 0.7 percent from 2012. The decrease in total revenue resulted from lower noninterest income, which more than offset higher net interest income. Net interest income was $47.5 million in 2013, up $0.8 million or 1.6 percent from the prior year, reflecting a six basis point increase in the net interest margin, which more than offset a slight decrease in average earning assets. The yield on average earning assets was relatively stable throughout 2013 as the collection of unaccrued interest on nonaccrual commercial loan relationships that were paid off and commercial loan prepayment fees substantially offset the high level of lower-yielding federal funds sold. The cost of funds declined during 2013 mainly due to maturing fixed-rate certificates of deposit being renewed at lower rates, replaced by lower-costing funds, or allowed to runoff.

Noninterest income during the fourth quarter of 2013 was $1.6 million, down 22.9 percent from the prior-year fourth quarter. Noninterest income for 2013 was $6.9 million, down 14.0 percent from 2012. The decrease in noninterest income during the 2013 periods primarily resulted from lower rental income on foreclosed properties, as many such properties have been sold, and reduced residential mortgage banking fee income.

Mercantile recorded a negative $2.5 million provision for loan losses during the fourth quarter of 2013 and a negative $7.2 million provision during 2013 compared to a $0.3 million provision and a negative $3.1 million provision during the respective 2012 periods.  The negative provision expense is the result of several factors, including continued progress in loan recoveries and collections, a reduced level of loan-rating downgrades and ongoing loan-rating upgrades as the quality of the loan portfolio continues to improve. Loan recoveries totaled $2.5 million during the fourth quarter of 2013, while loan charge-offs not specifically reserved for in prior periods amounted to $0.6 million, resulting in a net positive impact of $1.9 million on provision expense.  Loan recoveries totaled $6.6 million during 2013, while loan charge-offs not specifically reserved for in prior periods amounted to $1.4 million, resulting in a net positive impact of $5.2 million on provision expense.

Noninterest expense totaled $9.1 million during the fourth quarter of 2013, down 1.0 percent from the prior-year fourth quarter. Noninterest expense for 2013 was $36.4 million, down 8.1 percent from 2012. 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 negative $0.2 million during the fourth quarter of 2013 and $0.6 million during 2013 compared to $0.9 million and $5.9 million during the respective 2012 periods.  Gains on sales of other real estate, which are netted against problem asset costs, totaled $0.6 million during the fourth quarter of 2013 compared to $0.7 million during the fourth quarter of 2012 and $2.3 million during 2013 compared to $1.3 million during 2012. The reduction in problem asset costs reflects the continuation of Mercantile's aggressive approach to managing and resolving problem assets. Pre-tax merger-related costs totaled $0.5 million during the fourth quarter of 2013 and $1.2 million during 2013.

Mr. Price continued: "We remain particularly pleased with the improvement in the financial performance of our loan portfolio.  In 2013, we recorded a $7.2 million negative provision in large part reflecting significant recoveries and reductions in nonperforming and other stressed lending relationships.  We will continue our efforts to strengthen the makeup of our loan portfolio while taking advantage of new business opportunities presented by improving economic conditions in our markets.  We will strive to remain flexible and opportunistic as we pursue disciplined growth for long-term performance." 

Balance Sheet

As of December 31, 2013, total assets were $1.43 billion, an increase of $4.0 million or 0.3 percent from December 31, 2012; total loans increased $12.1 million, or 1.2 percent, to $1.05 billion over the same time period.  Approximately $62 million and $230 million in new term loans to new and existing borrowers were originated during the fourth quarter and full year 2013, respectively, as continuing relationship building efforts have led to increased lending opportunities. 

Commercial-related real estate loans continue to comprise a majority of Mercantile's loan portfolio, representing approximately 66 percent of total loans as of December 31, 2013.  Non-owner occupied commercial real estate ("CRE") loans, comprising 34.6 percent of total loans as of December 31, 2013, increased 12.1 percent during the last twelve months.  Owner-occupied CRE loans, equaling 24.9 percent of total loans at the end of the current year, increased 1.0 percent since December 31, 2012.  Commercial and industrial loans, representing 27.2 percent of total loans as of December 31, 2013, increased slightly during 2013.

Mercantile has continued its efforts to improve liquidity by growing local deposits and reducing wholesale funding.  As of December 31, 2013, total deposits were $1.12 billion, down $16.3 million from December 31, 2012.  By comparison, local deposits increased $40.4 million to $906 million over the past year, representing 81.0 percent of total deposits as of December 31, 2013 compared to 76.2 percent at December 31, 2012.  Growth in local deposits was driven primarily by new commercial loan relationships, as well as the introduction of innovative new products, various deposit-gathering initiatives and enhanced advertising and branding campaigns. 

Wholesale funds were $258 million, or 20.9 percent of total funds, as of December 31, 2013, compared to $305 million, or 24.7 percent of total funds, as of December 31, 2012.

Short-term investments, consisting of federal funds sold and interest-bearing bank deposits, averaged $138.1 million during the fourth quarter of 2013.  In addition to its short-term investments, Mercantile had approximately $169 million of borrowing capacity through various established lines of credit to meet potential funding needs, as well as approximately $43 million of unpledged U.S. Government securities as of December 31, 2013.

Asset Quality

Nonperforming assets ("NPAs") at December 31, 2013 were $9.6 million, or 0.7 percent of total assets, compared to $25.9 million as of December 31, 2012, or 1.8 percent of total assets.  This represents a reduction of $16.3 million or 63.1 percent from the end of 2012.

Robert B. Kaminski, Jr., Mercantile's Executive Vice President and Chief Operating Officer, noted: "We remain pleased with the long term trends we have established in improving asset quality and delivering meaningful reductions in nonperforming assets.  These trends reflect our aggressive stance to move troubled assets off our balance sheet.  Nonperforming assets now represent 0.67 percent of our total assets and our 30- to 89-day delinquent loans continue at a nominal level. The entire Mercantile team has worked hard on this initiative, while staying true to our community banking roots, maintaining a steady focus on meeting the needs of our existing customers and driving the growth of new relationships in our markets.  Our markets are competitive, but Mercantile is implementing robust sales programs and marketing initiatives to complement the overall value that we bring to clients.  We believe these efforts are bearing fruit, as evidenced by the $230 million in term loans to new and existing borrowers we originated in 2013." 

Nonperforming loans ("NPLs") totaled $6.7 million as of December 31, 2013, down $12.3 million from the year-ago quarter-end, while foreclosed real estate and repossessed assets declined $4.1 million from the year-ago quarter-end.  As of December 31, 2013, CRE NPLs totaled $1.1 million.  Owner-occupied nonperforming CRE loans accounted for $0.9 million of total CRE NPLs, while investor-owned CRE NPLs accounted for $0.2 million.  Owner-occupied and rental residential NPLs totaled $4.2 million as of December 31, 2013.

During the fourth quarter of 2013, Mercantile added $1.9 million of NPAs to its problem asset portfolio, while disposing of $4.5 million mainly through a combination of principal payments and asset sales ($3.9 million) and loan charge-offs ($0.6 million). In total, NPAs decreased by a net $2.6 million, or 21.3 percent, during the fourth quarter of 2013.  During the 12-month period ended December 31, 2013, Mercantile added $3.9 million of problem assets to its NPA portfolio, successfully disposed of $16.5 million, and charged-off or wrote down an additional $3.8 million.  In total, NPAs declined by a net $16.4 million since December 31, 2012.

Net loan recoveries were $0.1 million during the fourth quarter of 2013 compared with net loan recoveries of $1.9 million and net loan recoveries of $0.6 million for the linked- and prior-year quarters, respectively. Net loan recoveries totaled $1.3 million during 2013, compared with net loan charge-offs of $4.8 million during 2012.

Capital Position

Shareholders' equity totaled $153.3 million as of December 31, 2013, an increase of $6.7 million from year-end 2012. The Bank remains "well-capitalized" with a total risk-based capital ratio of 15.7 percent as of December 31, 2013, compared to 14.7 percent at December 31, 2012.  At December 31, 2013, the Bank had approximately $69 million in excess of the 10.0 percent minimum regulatory threshold required to be considered a "well-capitalized" institution.  Mercantile reported 8,739,108 total shares outstanding at December 31, 2013.

Reflecting the continued strength of Mercantile's operating performance and capital position, on January 16, 2014, the Board of Directors declared a cash dividend of $0.12 per common share, which is payable on March 10, 2014 to shareholders of record on February 10, 2014.

Mr. Price concluded: "While we recorded an outstanding year from virtually every benchmark, we were also making steady progress toward the consummation of our merger with Firstbank Corporation.  We believe that this business combination will bring together two very strong community banks to create a major Michigan financial institution that combines strong customer relationships and a growing pipeline of new business opportunities.  Our expectation is to create a combined business enterprise that can deliver disciplined growth and increasing value to our shareholders, together with improved financial performance, a strong capital position and the capacity to capitalize on new market opportunities in western and central Michigan." 

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