Mercantile Bank Corporation Reports Second Quarter 2010 Results

GRAND RAPIDS, Mich., July 20, 2010 (GLOBE NEWSWIRE) -- Mercantile Bank Corporation (Nasdaq:MBWM) ("Mercantile") reported a second quarter 2010 net loss attributable to common shares of $0.7 million, or ($0.08) per diluted common share, compared to a net loss of $6.4 million, or ($0.75) per diluted common share, for the year-ago quarter. For the six months year-to-date, Mercantile recorded a net loss attributable to common shares of $3.6 million, or ($0.43) per diluted common share, compared with a net loss of $10.9 million, or ($1.28) per diluted common share, for the prior-year six month period.

With the establishment of the deferred tax asset valuation allowance in the fourth quarter of 2009, comparing after-tax 2010 results to earlier periods is distorted. On a pre-tax basis, the 2010 second quarter and year-to-date loss was $1.2 million and $4.3 million, respectively, an improvement of 87 percent and 75 percent compared to the 2009 second quarter and six-month pre-tax loss of $9.6 million and $16.9 million, respectively. Increased levels of net interest income and lower provisions to the allowance for loan and lease losses have led to the improvement in pre-tax results for 2010.

Excluding the impact of nonrecurring items from 2010 and 2009 quarters, namely, a total of $0.7 million of pre-tax gains from the sale of tax-exempt securities and SBA loans in the first quarter of 2010, and one-time pre-tax charges in the second quarter of 2009 totaling $2.1 million from branch consolidations and the industry-wide FDIC special assessment, the 2010 second quarter and six-month pre-tax operating loss was $1.2 million and $5.0 million, respectively, compared to a pre-tax operating loss of $7.5 million and $14.8 million for the comparable 2009 periods.

Michael Price, Chairman and CEO of Mercantile Bank Corporation, commented, "We are pleased with the improving trends reflected in our second quarter results; they provide increasing evidence that our strategic initiatives are succeeding. As we have done in the past, we continue to address our problem assets aggressively. Since the beginning of the year, we moved approximately $35 million of nonperforming assets off of our balance sheet, including $16 million of write-offs and write-downs. We still have much work to do and a long way to go before problem assets are reduced to a comfortable level. However, the difference this quarter, and the reason for our cautious optimism, relates to the lower level of new problem assets, the lowest increase in many quarters. Currently, our past due accruing loans 30 to 89 days delinquent total only $0.4 million, another encouraging sign that we may have finally turned the corner.

"We almost swung back to profitable status this quarter; in fact our Bank did record a small profit. The improvement we have experienced in the real estate markets has allowed us to reduce our 2010 provisions for loan and lease losses when compared to 2009. However, conditions remain stressed, and it will take additional effort and costs over an extended period of time to work through our nonperforming commercial real estate loans and assets, which include maintaining our allowance for loan and lease losses at an elevated level. Hopefully, the worst of the economic downturn is over, and we have managed through this period without compromising our well capitalized status. Furthermore, the many enhancements to our loan administration practices and core operations that we created and implemented throughout this challenging period have positioned us for lower risk and greater efficiencies as the economy improves."

Operating Results

For the second quarter of 2010, total revenue, consisting of net interest income and noninterest income, was $16.4 million, up $2.1 million, or 14.7 percent, from the $14.3 million generated in the 2009 second quarter. Net interest income was $14.4 million, an increase of $2.0 million, or 15.8 percent, compared to the $12.4 million for the prior-year quarter. Net interest income growth was principally derived from an 81 basis point expansion of the net interest margin, partially offset by a 13.6 percent decline in average earning assets. "We anticipate margin expansion to moderate over the next two quarters; we have now repriced downward a substantial portion of higher rate deposits and borrowed funds as they matured, and the loan pricing strategies we implemented over the past year have successfully stabilized loan yields that were pressured by lost interest income from higher nonperforming assets," added Price.

Noninterest income for the second quarter of 2010 was $2.0 million, an increase of 7.1 percent from the 2009 second quarter. Excluding the net aggregate gain of $0.7 million recognized from the sale of SBA-guaranteed commercial loans and tax-exempt municipal securities recorded during the first quarter of 2010, noninterest income during the first six months of 2010 totaled $4.0 million, an increase of 1.4 percent over the same time period in 2009. Growth in rental income from foreclosed properties and increased bank-owned life insurance yields together have offset lower mortgage banking fee income.

The second quarter of 2010 provision for loan and lease losses was $6.2 million, compared to $8.4 million and $11.5 million in the linked and year-ago quarters, respectively. During the first six months of 2010, Mercantile provided $14.6 million to the allowance for loan and lease losses, compared to $21.9 million in the first half of 2009. In general, the reduced provision expense reflects a lower volume of loan and lease downgrades and improved real estate market conditions. Gross loan and lease charge-offs during the first six months of 2010 totaled $16.7 million, a slight reduction from the $16.9 million charged-off during the same time period in 2009; however, loan and lease recoveries increased from $0.4 million during the first six months of 2009 to $2.0 million during the first half of 2010. The Company's allowance for loan and lease losses was 3.38 percent of total loans and leases at June 30, 2010, compared to 3.11 percent and 1.91 percent of total loans and leases as of December 31, 2009 and June 30, 2009, respectively.

Noninterest expense for the second quarter of 2010 was $11.4 million, down 1.7 percent and 7.5 percent, from the first quarter of 2010 and second quarter of 2009, respectively. Excluding the one-time charges recorded during the second quarter of 2009, noninterest expense has increased primarily due to the increased costs associated with the administration and resolution of problem assets (i.e., legal expenses, property tax payments, appraisal costs and write-downs on foreclosed properties) as well as higher FDIC insurance premiums. These credit- and regulatory-related costs totaled $3.6 million and $7.3 million during the second quarter of 2010 and first six months of 2010, respectively, compared to $2.0 million and $3.6 million during the same time periods in 2009. Increased rental income from foreclosed properties, which totaled $0.8 million during the first six months of 2010, partially offset the impact of rising credit administration costs. Mercantile has also partially offset the growth of credit and FDIC expenses through ongoing efforts to reduce those operating expenses within its control, namely, salaries and benefits, occupancy, and furniture and equipment costs. During the second quarter of 2010, these expenses totaled $5.7 million, a reduction of $0.9 million from the second quarter of 2009. The consolidation of the Company's Eastern and Mid-Michigan banking activities during the second quarter of 2009 accounted for much of the subsequent savings, although cost reductions have been achieved throughout the organization.

Balance Sheet

Total assets as of June 30, 2010 were $1.80 billion, down $102 million, or 5.4 percent, from December 31, 2009, with total loans and leases declining by $129 million, or 8.4 percent, over the past six months, to $1.41 billion. Compared to June 30, 2009, total assets declined by $267 million, or 12.9 percent, with total loans and leases declining by $298 million, or 17.4 percent.

Real estate loans, particularly loans secured by commercial properties, continue to comprise a majority of Mercantile's loan and lease portfolio, although the Company has been aggressively down-sizing its real estate exposures. Excluding residential mortgage loans representing permanent financing of owner-occupied dwellings and home equity lines of credit, real estate loans totaled $964 million at June 30, 2010, representing a decline of $70.8 million from year-end 2009 and $170 million over the past twelve months. Non-owner occupied commercial real estate ("CRE") loans totaled $513 million at June 30, 2010, down $25.1 million since year-end 2009 and $32.7 million over the past twelve months. Owner-occupied CRE loans were $303 million at June 30, 2010, a decline of $21.7 million since year-end 2009 and $56.8 million over the past twelve months. Total vacant land, construction and land development ("C&D") loans, including both residential and commercial projects, totaled $149 million at June 30, 2010, down $24.1 million in 2010 and $80.1 million during the past twelve months.

Mercantile's liquidity position has improved substantially over the past 18 months. Increased local deposits, especially consumer NOW accounts, as well as consumer and business money market deposit accounts, have allowed Mercantile to reduce its reliance on wholesale funding. At June 30, 2010, total deposits were $1.34 billion, a decline of $61.5 million during the first six months of 2010 and a reduction of $259 million since year-end 2008. During the past 18 months, local deposits increased by $211 million and represented 50.8 percent of total deposits as of June 30, 2010, compared to 29.4 percent at December 31, 2008. During this same timeframe, interest-bearing checking and money market deposit accounts increased by $132 million, primarily reflecting new and innovative products, various deposit-gathering initiatives, and enhanced advertising campaigns that have successfully attracted new deposits as well as transfers from maturing certificate of deposit accounts.

Wholesale funds totaled $834 million, or 51.4 percent of total funds, as of June 30, 2010, compared to $1.41 billion, or 71.5 percent of total funds, as of December 31, 2008. The $580 million decline in wholesale funding reflects both the increase in local deposits as well as the $446 million decline in total loans and leases, which has allowed Mercantile to run-off maturing brokered deposits and Federal Home Loan Bank advances.

Short-term investments averaged $68.6 million during the second quarter of 2010, essentially the same level as a year-ago, but well above historical levels due to the currently stressed economic and operating environments. Since Mercantile is not in a position to fully utilize tax-exempt income in the near term, the Company sold approximately one-third of its tax-exempt municipal securities portfolio during the first quarter of 2010. Proceeds were reinvested in taxable securities, and all securities (taxable and remaining tax-exempt) are now included in the available-for-sale portfolio. In addition to its short-term investments, Mercantile has $115 million of borrowing capacity through various established lines of credit.

Asset Quality

Nonperforming assets ("NPAs") at June 30, 2010 were $111 million, or 6.1 percent of total assets, compared to $118 million (6.2 percent of total assets) as of March 31, 2010, and $86.6 million (4.2 percent of total assets) at June 30, 2009. While this represents an increase of $24.0 million from the year-ago level of nonperforming assets, it represents a decline of $7.0 million from the previous quarter-end.

Robert B. Kaminski Jr., Executive Vice President and Chief Operating Officer of Mercantile Bank Corporation, commented on the progress Mercantile has made toward improving asset quality and reducing portfolio risk. "We are getting more optimistic that the improvements we have experienced in the first half of 2010 represent real progress in our turnaround strategy. Loans delinquent 30 to 89 days and still accruing interest were almost nonexistent at the end of the second quarter, and additions to our nonperforming loan portfolio were sharply lower than in the first quarter; in fact, quarterly problem loan additions were the lowest level since early 2008. We continue to charge-off problem loans and adjust the carrying values of foreclosed properties as necessary, but we have also benefited more recently from improved sales activity, a higher level of principal repayments and credit relationship upgrades. We fully understand and appreciate the delicacy of the current economic environment; there is still a significant amount of improvement necessary before we reach any level of normalcy. In the meantime, we will continue to exercise the same vigilance as always in administering our loan portfolio and nonperforming assets.

"A majority of the various categories of problem assets experienced some level of improvement this quarter; however, non-owner occupied commercial real estate remains a significant challenge. The good news is that the aggregate balance of these types of loans and foreclosed assets remained almost unchanged at the end of the second quarter in comparison to growing levels in earlier quarters. The bad news is that the resolution of these loans and/or the sale of collateral will likely require an extended period of time; the economy is just not strong enough yet to absorb the inventory that exists in our markets."

Approximately $63 million, or 57 percent, of Mercantile's NPAs consist of CRE, with investor-owned properties accounting for about 75 percent of the CRE category. Whereas owner-occupied CRE loans have stabilized in the range of $16 million to $21 million over the past twelve months, non-owner occupied CRE has increased from $28.1 million at June 30, 2009 to its present level of $46.7 million. Nonperforming C&D assets, including both residential and commercial assets, were $34.4 million at June 30, 2010, down $4.1 million from the linked quarter, and up $8.8 million during the past twelve months. Of this total, residential-related assets represent the largest share: 92 percent of nonperforming C&D assets, or $31.8 million, as of June 30, 2010. Nonperforming non-real estate commercial loans and repossessed assets were $7.0 million at June 30, 2010, a decline of $3.6 million from June 30, 2009. Owner-occupied and rental residential NPAs increased by $1.2 million during the past twelve months, to $6.2 million at June 30, 2010. 

Nonperforming loans, which accounted for $87.5 million of total NPAs as of June 30, 2010, declined by $6.9 million from March 31, 2010; foreclosed real estate and repossessed assets remained virtually unchanged at $23.0 million. During the quarter, Mercantile added $13.1 million of NPAs to its problem asset portfolio, but successfully disposed of $11.0 million through a combination of asset sales, principal paydowns and a return to performing status. Loan charge-offs accounted for a reduction of $8.2 million, and foreclosed asset valuation write-downs were $0.9 million. Nonperforming assets decreased a net $7.0 million from the end of the first quarter of 2010. Year-to-date, Mercantile added a total of $36.2 million of problem assets to its NPA portfolio, successfully disposed of $21.2 million and wrote-off or down an additional $16.1 million. 

Net loan and lease charge-offs for the 2010 second quarter were $8.6 million, or 2.4 percent of average loans and leases (annualized), compared with $6.2 million (1.6 percent annualized) and $10.8 million (2.5 percent annualized) for the linked and year-ago quarters, respectively. Mr. Kaminski added, "We are pleased with the growing level of recoveries, which we believe is reflective of our loan administration practices." 

Capital Position

Shareholders' equity totaled $139 million as of June 30, 2010, a decrease of $42.6 million, or 23.5 percent, from June 30, 2009. However, the Bank experienced significant increases in its regulatory capital ratios during the first six months of 2010. The Bank remains "well-capitalized," with a total risk-based capital ratio of 11.9 percent as of June 30, 2010 compared to 11.2 percent and 11.1 percent at March 31, 2010 and December 31, 2009, respectively. As of June 30, 2010, the Bank had approximately $29.2 million in excess of the 10.0 percent minimum regulatory threshold required to be considered "well-capitalized". Mercantile's total shares outstanding at second quarter-end were 8,594,307.

Mr. Price concluded, "It is heartening to see tangible signs of improvement in so many areas. This has been a difficult period, but I believe we have used the time constructively to strengthen Mercantile's operations throughout our organization." 

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.