Mercantile Bank Corporation Reports Strong Second Quarter 2015 Results

GRAND RAPIDS, Mich., July 21, 2015 /PRNewswire/ -- Mercantile Bank Corporation (NASDAQ: MBWM) ("Mercantile") reported net income of $6.6 million, or $0.39 per diluted share, for the second quarter of 2015, compared with net income of $1.5 million, or $0.13 per diluted share, for the prior-year period.  The second quarter of 2014 results included $3.5 million in pre-tax merger-related costs, which amounted to $2.4 million after tax, or $0.21 per share.  Excluding these costs, adjusted net income in the year-ago quarter was $3.9 million and adjusted earnings per diluted share was $0.34.  The year-ago second quarter included the consolidated results of Firstbank Corporation ("Firstbank") for June only.

Second quarter 2015 highlights:

• Core profitability remains strong
• Net interest margin remains stable and robust
• Significant increase in mortgage banking income
• New commercial term loan originations of approximately $120 million
• Commercial loan pipeline remains strong
• Significant reduction in nonperforming assets
• Volume of loans past due 30- to 89-days remains low
• Approximately 463,000 shares repurchased during the first six months of 2015
• Capital ratios remain strong

"Mercantile continued its strong 2015 performance with a healthy quarter that reflects sustained strength in core profitability and our position as a leader in our markets," said Michael Price, Chairman and Chief Executive Officer of Mercantile.  "Our sound balance sheet and earnings performance, along with our success in fostering new customer relationships, gives us confidence that the strong performance in the first half of 2015 will extend into the remainder of the year."

Operating Results

Total revenue, which consists of net interest income and noninterest income, was $29.1 million during the second quarter of 2015, up $11.2 million or 62.9 percent from the prior-year second quarter.  Net interest income during the second quarter of 2015 was $25.0 million, up $9.5 million or 61.0 percent from the second quarter of 2014, reflecting an increase in average earning assets of 52.2 percent and an increased net interest margin.

The net interest margin was 3.83 percent in the second quarter of 2015, up from 3.62 percent in the second quarter of 2014.  The increase in the net interest margin was due to a decline in the cost of funds, in large part reflecting Firstbank's lower-cost deposit base.  Compared to the first quarter of 2015, the yield on total earning assets remained virtually unchanged despite the continuing low interest rate environment and competitive pressure on loan yields.  The yield on total earning assets remained relatively stable as earning assets were shifted out of low-yielding securities and overnight funds into the higher-yielding loan portfolio, capitalizing on an opportunity presented by the merger with Firstbank.  Average loans represented about 81 percent of average earning assets during the second quarter of 2015, up from approximately 80 percent during the first quarter of 2015, and management believes that Mercantile has further opportunity to improve the earning asset mix.

As expected, net interest income and the net interest margin were affected during the second quarter of 2015 by purchase accounting accretion and amortization entries associated with the fair value measurements recorded effective June 1, 2014.  An increase of $1.5 million in interest income on loans and a decrease of $0.6 million in interest expense on deposits and FHLB advances were recorded during the second quarter of 2015.  In addition, an increase in interest expense on subordinated debentures totaling $0.2 million was recorded.  Mercantile expects to continue to record adjustments in interest income on loans and interest expense on subordinated debentures in future periods; however, the adjustments to interest expense on deposits and FHLB advances will no longer occur after July of 2015 in accordance with our fair value measurements at the time of the merger.  It is anticipated that the resulting increase in interest expense will negatively affect the net interest margin by approximately eight to ten basis points after July 31, 2015.  Mercantile expects to partially mitigate this negative impact by continuing to reallocate the earning asset mix by investing excess lower-yielding overnight funds and cash flows from lower-yielding investments into higher-yielding loans.

Noninterest income during the second quarter of 2015 was $4.0 million, up $1.7 million or 75.7 percent from the prior-year second quarter.  Substantially all categories of fee income were higher in the current-year second quarter compared to the respective 2014 period as a result of the merger, most notably mortgage banking income, credit and debit card income and service charges on accounts.  Compared to the first quarter of 2015, mortgage banking income increased approximately 45 percent, primarily reflecting a seasonal increase in purchase activity.

Mercantile recorded a negative $0.6 million provision for loan losses during the second quarter of 2015 compared to a negative $0.7 million provision during the respective 2014 period.  The negative provisions are the result of several factors, including recoveries of previously charged-off loans, reversals of specific reserves and ongoing loan-rating upgrades as the quality of the loan portfolio continues to improve.

Noninterest expense totaled $20.4 million during the second quarter of 2015, up $4.3 million or 26.7 percent from the prior-year second quarter.  The increase in noninterest expense was mainly attributable to higher costs necessary to operate the combined company, as second quarter 2014 results included only one month of costs operating as a combined company, but also included merger-related costs of $3.5 million.

Mr. Price continued: "We are very pleased with our ability to maintain the stability of our net interest margin in light of industry-wide margin compression.  Our ongoing strategic initiative to fund loan growth through reductions in lower-yielding securities and overnight investments should continue to help mitigate the negative impact of competitive loan pricing pressures on our earning asset yield during the remainder of 2015.  We have also implemented certain fee enhancement and cost reduction initiatives that should have a positive impact on profitability during future periods."

Balance Sheet

Total loans increased $82.6 million, or 4.0 percent, to $2.17 billion in the first half of 2015.  Loan growth in the six-month period was at an approximately 8 percent annualized rate.  As of June 30, 2015, total assets were $2.88 billion, down $17.4 million or 0.6 percent from December 31, 2014.  Compared to June 30, 2014, total assets decreased $3.3 million, or 0.1 percent, and total loans increased $98.4 million, or 4.7 percent.

Approximately $120 million and $220 million in new commercial term loans to new and existing borrowers were originated during the second quarter and first six months of 2015, respectively, as ongoing sales and relationship building efforts have led to increased lending opportunities.  As of June 30, 2015, unfunded commitments on commercial construction and development loans totaled approximately $125 million; these commitments are expected to be largely funded over the next 12 to 18 months. 

Robert B. Kaminski, Jr., Mercantile's Executive Vice President and Chief Operating Officer, noted: "We are very pleased with the level of new loan originations during the second quarter of 2015, continuing the momentum generated during the past few years.  Our lending staff has taken advantage of the business opportunities afforded us in our expanded market area by developing new relationships and has continued to meet the credit needs of our existing customers, while maintaining a disciplined approach to loan quality and pricing.  Based on the strength of our existing loan pipeline and our continuing focus on building new relationships, we are confident that we will continue to grow the loan portfolio during upcoming periods."

Commercial-related real estate loans continue to comprise a majority of Mercantile's loan portfolio, representing 55 percent of total loans as of June 30, 2015.  Non-owner occupied commercial real estate ("CRE") loans and owner-occupied CRE loans equaled 28 percent and 19 percent of total loans, respectively, as of June 30, 2015.  Commercial and industrial loans represented 29 percent of total loans as of June 30, 2015. 

As of June 30, 2015, total deposits were $2.28 billion, up $1.9 million from December 31, 2014, and down $24.5 million from June 30, 2014; local deposits were up $41.6 million since year-end 2014 and $27.5 million since June 30, 2014.  The decline in total deposits from June 30, 2014, primarily reflects the strategy of reducing wholesale funding enabled by the strong core funding base provided by the merger with Firstbank.  Growth in local deposits was primarily driven by new commercial loan relationships.  Wholesale funds were $184 million, or approximately 7 percent of total funds, as of June 30, 2015.

Asset Quality

Nonperforming assets ("NPAs") at June 30, 2015 were $10.1 million, or 0.4 percent of total assets, compared to $27.9 million, or 1.0 percent of total assets, as of March 31, 2015, and $31.4 million, or 1.1 percent of total assets, as of December 31, 2014.  The substantial reduction in NPAs during the second quarter of 2015 was primarily due to the resolution of one commercial loan relationship, which accounted for approximately 76 percent of total NPAs at March 31, 2015.  Mercantile and the borrower worked cooperatively to achieve an orderly sale of the company, and while the sale did result in a significant charge-off, the charge-off was less than the amount that had been established as a specific reserve in prior quarters.

Net loan charge-offs were $3.9 million during the second quarter of 2015 compared with net loan recoveries of $1.4 million and $0.6 million during the linked quarter and prior-year second quarter, respectively.  Of the $4.4 million in gross loan charge-offs recorded during the second quarter of 2015, $4.2 million was related to the commercial loan relationship referenced above.

Capital Position

Shareholders' equity totaled $329 million as of June 30, 2015, an increase of $0.8 million from year-end 2014.  The Bank's capital position remains above "well-capitalized" with a total risk-based capital ratio of 13.8 percent as of June 30, 2015, compared to 14.4 percent at December 31, 2014.  At June 30, 2015, the Bank had approximately $94 million in excess of the 10.0 percent minimum regulatory threshold required to be considered a "well-capitalized" institution.  Mercantile reported 16,571,474 total shares outstanding at June 30, 2015.  As part of a $20 million common stock repurchase program announced in January of 2015, Mercantile repurchased approximately 463,000 shares at a weighted average all-in cost per share of $19.67 during the first six months of 2015, representing approximately 46 percent of the authorized program.

"It is fair to say that the Mercantile/Firstbank merger assimilation process is complete, and the staff is working together very well as one team focused on common forward-looking strategic goals," observed Samuel G. Stone, Executive Vice President of Mercantile.  "The most important priority right now, as identified in our strategic plan, is to grow revenues profitably from quality customers, leveraging the resources of the combined company.  With this in mind and the financial performance that is being achieved this year, I am pleased to look forward to beginning my retirement in January after participating in the strategic planning process this fall."

Mr. Price concluded: "We believe Mercantile is well-positioned to continue its success in future periods.  Our 2015 performance thus far is in line with our high expectations and has benefitted from the full realization of cost saves that were expected as a result of our merger with Firstbank.  Our margin reflects the realization of balance sheet opportunities brought about by the merger, and the potential for ongoing benefit remains.  We will continue to focus on being a premier community bank by developing strong customer relationships and delivering a wide-range of products and services.  Based on our strong balance sheet, the earnings momentum generated during the first half of the year, and our continuing efforts to identify new business opportunities, we are optimistic about our ability to further enhance shareholder value."

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 realize the anticipated benefits of our merger with Firstbank Corporation; our ability 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.