Mercantile Bank Corporation Reports Strong Second Quarter 2019 Results

GRAND RAPIDS, Mich., July 16, 2019 /PRNewswire/ -- Mercantile Bank Corporation (NASDAQ: MBWM) ("Mercantile") reported net income of $11.7 million, or $0.71 per diluted share, for the second quarter of 2019, compared with net income of $9.4 million, or $0.57 per diluted share, for the respective prior-year period.  Net income during the first six months of 2019 totaled $23.5 million, or $1.43 per diluted share, compared to $20.3 million, or $1.22 per diluted share, during the first six months of 2018.

A bank owned life insurance claim increased reported net income during the second quarter of 2019 by approximately $1.3 million, or $0.08 per diluted share.  Excluding the impact of this transaction, diluted earnings per share increased $0.06, or 10.5 percent, during the second quarter of 2019 compared to the prior-year second quarter.  Bank owned life insurance claims and a gain on the sale of a former branch facility increased reported net income during the first six months of 2019 by approximately $3.1 million, or $0.19 per diluted share, while the successful collection of certain nonperforming commercial loans increased reported net income during the respective 2018 period by approximately $1.7 million, or $0.10 per diluted share.  Excluding the impacts of these transactions, diluted earnings per share increased $0.12, or 10.7 percent, during the first six months of 2019 compared to the respective prior-year period.

"We are very pleased to conclude the first half of 2019 with another quarter of solid operating results," said Robert B. Kaminski, Jr., President and Chief Executive Officer of Mercantile.  "Our sound financial condition, sustained strength in commercial and residential mortgage loan originations, and expected new loan fundings elicit confidence that the strong results achieved during the first six months of the year will continue throughout the last half of the year."

Second quarter highlights include:

• Robust earnings performance and capital position
• Healthy net interest margin
• Increased fee income
• Controlled overhead costs
• Strong asset quality, as reflected by low levels of nonperforming assets and loans in the 30- to 89-days delinquent category
• Annualized net loan growth of almost 12 percent
• New commercial term loan originations of approximately $134 million
• Continued strength in commercial and residential loan pipelines

Operating Results

Total revenue, which consists of net interest income and noninterest income, was $37.5 million during the second quarter of 2019, up $3.7 million, or 10.9 percent, from the prior-year second quarter.  Reflecting a higher level of earning assets, net interest income of $31.1 million during the second quarter of 2019 was up $1.9 million, or 6.5 percent, from the second quarter of 2018. 

The net interest margin was 3.79 percent in the second quarter of 2019.  The yield on average earning assets equaled 4.85 percent during the second quarter of 2019, up from 4.60 percent during the respective 2018 period mainly due to an increased yield on commercial loans.  The improved yield on commercial loans primarily reflects the positive impact of higher interest rates on variable-rate commercial loans stemming from the Federal Open Market Committee's raising of the targeted federal funds rate by 25 basis points in each of June, September, and December 2018.  The cost of funds equaled 1.06 percent during the second quarter of 2019, up from 0.68 percent during the prior-year second quarter mainly due to an increased cost of time deposits and a change in funding mix. Increased reliance on more costly wholesale funds during the twelve months ended June, 30, 2019, most of which occurred in the second half of 2018 and January 2019, was necessitated by various funding requirements, including ongoing loan growth and seasonal deposit withdrawals by certain business customers for bonus and tax payments.

Net interest income and the net interest margin during the second quarters of 2019 and 2018, and the first six months of the current year and prior year, were affected by purchase accounting accretion and amortization associated with fair value measurements.  Increases in interest income on loans totaling $0.6 million and $0.8 million were recorded during the second quarters of 2019 and 2018, respectively, and increases of $0.8 million and $3.0 million were recorded during the first six months of 2019 and 2018, respectively.   Purchased loan accretion amounts vary from period to period as a result of periodic cash flow re-estimations, loan payoffs, and payment performance.  Increases in interest expense on subordinated debentures totaling $0.2 million were recorded during both the current-year and prior-year second quarters, and increases of $0.3 million were recorded during both the first six months of 2019 and 2018.

Mercantile recorded a $0.9 million provision for loan losses during the second quarter of 2019 compared to a $0.7 million provision during the respective 2018 period.  The provision expense recorded during the current-year second quarter mainly reflected ongoing net loan growth, while the provision expense recorded during the second quarter of 2018 primarily reflected loan growth and increased allocations related to certain environmental factors.

Noninterest income during the second quarter of 2019 was $6.3 million, compared to $4.6 million during the prior-year second quarter.  Noninterest income during the second quarter of 2019 included a bank owned life insurance claim of $1.3 million.  Excluding the impact of this transaction, noninterest income increased $0.5 million, or 10.9 percent, during the current-year second quarter compared to the respective 2018 period.  The higher level of noninterest income primarily reflected increased mortgage banking activity income and credit and debit card income.  The increased mortgage banking activity income mainly reflected the success of ongoing strategic initiatives that were instituted to increase market penetration, along with a higher level of refinance activity stemming from the recent decrease in residential mortgage loan interest rates.  Increased service charges on accounts and payroll processing fees also contributed to the improved level of noninterest income. 

Noninterest expense totaled $22.1 million during the second quarter of 2019, up $0.7 million, or 3.1 percent, from the prior-year second quarter.  The higher level of expense primarily resulted from increased salary costs, mainly reflecting annual employee merit pay increases and higher stock-based compensation expense.

Mr. Kaminski continued, "As anticipated, our net interest margin remained strong during the second quarter of 2019, depicting our ongoing emphasis on loan pricing discipline and sound underwriting.  We are pleased with the growth in key fee income categories, and we remain steadfast in our efforts to achieve growth initiatives in a cost-conscious manner.  The noteworthy increase in mortgage banking activity income reflects the success of continuing strategic initiatives designed to further market penetration, along with a spike in refinance activity spurred by the recent decline in residential mortgage loan interest rates."

Balance Sheet

As of June 30, 2019, total assets were $3.58 billion, up $212 million, or 6.3 percent, from December 31, 2018.  Total loans and interest-earning deposits increased $128 million and $82.3 million, respectively, over the same time period.  During the twelve months ended June 30, 2019, total loans were up $245 million, or 9.3 percent.  Approximately $134 million and $259 million in commercial term loans to new and existing borrowers were originated during the second quarter and first six months of 2019, respectively, as ongoing sales and relationship-building efforts resulted in increased lending opportunities.  As of June 30, 2019, unfunded commitments on commercial construction and development loans totaled approximately $129 million, which are expected to be largely funded over the next 12 to 18 months.  The growth in interest-earning deposits mainly stemmed from certain deposit-gathering initiatives and an increase in wholesale funds.

Ray Reitsma, President of Mercantile Bank of Michigan, noted, "Our lending team's continuing focus on identifying new customer relationships and meeting the needs of our existing customer base is evidenced by the solid net loan growth realized during the second quarter of 2019.  We are very pleased with the level of new commercial term loan originations during the quarter, which were commensurate with quarterly originations over the past several years.  We remain committed to growing the loan portfolio in a disciplined manner, with an ongoing emphasis on credit quality and risk-based pricing, and maintaining the combined commercial and industrial loan and owner-occupied commercial real estate loan portfolios at a minimum percentage of total commercial loans.  Based on anticipated new loan fundings, we are confident that we can continue to grow the commercial loan portfolio in future periods.  Depicting our efforts to increase market presence and a higher level of refinance activity, our residential mortgage loan portfolio expanded for the thirteenth consecutive quarter.  In light of the current strong pipeline, we are optimistic that the residential mortgage loan portfolio can also increase going forward."

As of June 30, 2019, commercial and industrial loans and owner-occupied commercial real estate loans combined represented approximately 58 percent of total commercial loans, a level that has remained relatively consistent and in line with internal expectations. 

Total deposits at June 30, 2019, were $2.62 billion, up $156 million from December 31, 2018.  Local deposits and brokered deposits were up $99.3 million and $56.2 million, respectively, during the first six months of 2019.  The growth in local deposits was mainly driven by a special time deposit campaign that was introduced mid first quarter and ended in early April, along with an increase in business money market accounts. Wholesale funds were $543 million, or approximately 17 percent of total funds, as of June 30, 2019, compared to $474 million, or approximately 16 percent of total funds, as of December 31, 2018.  A substantial portion of the growth in wholesale funds during the first six months of 2019 occurred in January; the monies were used primarily to fund strong loan growth recorded in late 2018 and early 2019 and offset typical and expected seasonal business deposit withdrawals used for bonus and tax payments, as well as to maintain sufficient balance sheet liquidity.

Asset Quality

Nonperforming assets at June 30, 2019, were $4.0 million, or 0.1 percent of total assets, compared to $5.0 million, or 0.2 percent of total assets, at December 31, 2018.  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.  During the second quarter of 2019, nominal net loan recoveries, representing an annualized 0.01 percent of average total loans, were recorded. 

Capital Position

Shareholders' equity totaled $400 million as of June 30, 2019, an increase of $24.9 million from year-end 2018.  The Bank's capital position remains above "well-capitalized" with a total risk-based capital ratio of 12.4 percent as of June 30, 2019, compared to 12.3 percent at December 31, 2018.  At June 30, 2019, the Bank had approximately $78 million in excess of the 10.0 percent minimum regulatory threshold required to be considered a "well-capitalized" institution.  Mercantile reported 16,440,356 total shares outstanding at June 30, 2019.

As part of a $20 million common stock repurchase program announced in January 2015, and later expanded by $15 million in April 2016, Mercantile repurchased approximately 119,000 shares for $3.6 million, or a weighted average all-in cost per share of $30.23, during the first quarter of 2019; no shares were repurchased during the second quarter of 2019.  Since the program's inception, Mercantile repurchased approximately 1,275,000 shares for $29.0 million, or a weighted average all-in cost per share of $22.77.  In conjunction with the anticipated completion of its existing program, Mercantile announced a new $20 million stock repurchase plan in May 2019.

Mr. Kaminski concluded, "With our strong financial performance during the first six months of 2019, we are well positioned to meet growth and profitability goals and further enhance shareholder value.  The ongoing cash dividend program, including the announcement of an increased third quarter regular dividend earlier today, exhibits our long-term commitment to enhancing total shareholder return.  We continue to gain new clients through our value-added approach and the offering of a wide-range of products and services, and we are excited about opportunities that we believe are available to us to expand our business in our markets.  Based on our sustained financial strength and healthy loan pipelines, we are confident in our ability to deliver robust performance not only during the remainder of the current year, but into the foreseeable periods as well."

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 $3.5 billion and operates 46 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.