GRAND RAPIDS, Mich., April 16, 2019 /PRNewswire/ -- Mercantile Bank Corporation (NASDAQ: MBWM) ("Mercantile") reported net income of $11.8 million, or $0.72 per diluted share, for the first quarter of 2019, compared with net income of $10.9 million, or $0.66 per diluted share, for the respective prior-year period. A bank owned life insurance claim and a gain on the sale of a former branch facility during the first quarter of 2019 increased net income by approximately $1.8 million, or $0.11 per diluted share, while the successful collection of certain commercial loan relationships during the prior-year first quarter increased reported net income by approximately $1.7 million, or $0.10 per diluted share. Excluding the impacts of these specific transactions, diluted earnings per share increased $0.05, or nearly 9 percent, during the current-year first quarter compared to the prior-year first quarter.
"We are very pleased to start 2019 with a quarter that depicts continued strength in core profitability and loan originations," said Robert B. Kaminski, Jr., President and Chief Executive Officer of Mercantile. "Our robust financial results reflect a strong net interest margin, increased fee income, and controlled overhead costs. Based on our healthy loan pipelines and sound financial condition, we are confident that our demonstrated solid operating results will continue in future periods, and we are in a position to take advantage of future growth opportunities."
First quarter highlights include:
- Strong earnings and capital position
- Robust net interest margin
- Growth in key fee income categories
- Controlled overhead costs
- Sound asset quality, as depicted by low levels of nonperforming assets and loans in the 30- to 89-days delinquent category
- Annualized net loan growth of nearly 7 percent
- New commercial term loan originations of approximately $125 million
- Continued strength in commercial and residential loan pipelines
- Increased regular quarterly cash dividend
Operating Results
Total revenue, which consists of net interest income and noninterest income, was $37.3 million during the first quarter of 2019, up $2.7 million, or 7.8 percent, from the prior-year first quarter. Net interest income during the first quarter of 2019 was $30.6 million, up $0.4 million, or 1.5 percent, from the first quarter of 2018, primarily reflecting a higher level of earning assets.
The net interest margin was 3.88 percent in the first quarter of 2019. The yield on average earning assets equaled 4.89 percent during the first quarter of 2019, up from 4.70 percent during the prior-year first quarter primarily due to a change in earning mix and an increased yield on commercial loans, the latter mainly reflecting the positive impact of higher interest rates on variable-rate commercial loans stemming from the Federal Open Market Committee raising the targeted federal funds rate by 25 basis points in each of March, June, September, and December 2018. On average, higher-yielding loans represented 86.8 percent of earning assets during the first quarter of 2019, up from 84.4 percent during the prior-year first quarter, while lower-yielding interest-earning deposits represented 2.1 percent of earning assets during the current-year first quarter, down from 4.1 percent during the respective 2018 period. The cost of funds equaled 1.01 percent during the first quarter of 2019, up from 0.64 percent during the respective 2018 period mainly due to increased costs of time deposits, borrowed funds, and certain non-time deposit accounts, and a change in funding mix. Increased reliance on more costly wholesale funds during the first quarter of 2019 was necessitated by various funding requirements, including loan growth and seasonal deposit withdrawals by certain business customers for bonus and tax payments. The net interest margin of 4.06 percent during the prior-year first quarter benefited from the successful collection of certain nonperforming commercial loan relationships that were paid in full, while a higher level of interest-earning deposits negatively impacted the margin during the same time period. Excluding the impacts of these factors, the net interest margin equaled approximately 3.85 percent during the first quarter of 2018.
Net interest income and the net interest margin during the first quarter of 2019 and the prior-year first quarter were affected by purchase accounting accretion and amortization entries associated with the fair value measurements recorded effective June 1, 2014. Increases in interest income on loans totaling $0.2 million and $2.3 million were recorded during the first quarters of 2019 and 2018, respectively. An increase in interest expense on subordinated debentures totaling $0.2 million was recorded during both the current-year first quarter and prior-year first quarter. Purchased loan accretion amounts vary from period to period as a result of periodic cash flow re-estimations, loan payoffs, and payment performance.
Mercantile recorded provision expense of $0.9 million during the first quarter of 2019, compared to no provision expense during the respective 2018 period. The provision expense recorded during the current-year first quarter mainly reflected ongoing net loan growth. No provision expense was made during the prior-year first quarter in light of net loan recoveries being recorded during the period.
Noninterest income during the first quarter of 2019 was $6.6 million, compared to $4.4 million during the prior-year first quarter. Noninterest income during the first quarter of 2019 included a bank owned life insurance claim of $1.3 million and a gain on the sale of a former branch facility of $0.6 million. Excluding the impacts of these transactions, noninterest income increased $0.4 million, or 8.2 percent, during the current-year first 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. Increased service charges on accounts and payroll processing fees also contributed to the higher level of noninterest income.
Noninterest expense totaled $21.8 million during the first quarter of 2019, up $0.7 million, or 3.2 percent, from the prior-year first quarter. The higher level of expense primarily resulted from increased salary costs, mainly reflecting pay increases for all hourly employees that went into effect on April 1, 2018, and annual employee merit pay increases.
Mr. Kaminski continued, "As expected, our net interest margin remained robust during the first quarter of 2019, reflecting our continuing focus on risk-based loan pricing and prudent underwriting. We are pleased to report growth in certain fee income categories, illustrating the success of ongoing strategic initiatives, and remain committed to controlling overhead costs. The enhancement of mortgage banking activity income through increased market share remains a priority. To further our market penetration, we continue to hire proven mortgage loan originators when opportunities arise. We are also hopeful that recent declines in residential mortgage loan rates will spur increased refinance activity and create additional mortgage banking activity income."
Balance Sheet
As of March 31, 2019, total assets were $3.55 billion, up $188 million, or 5.6 percent, from December 31, 2018. Interest-earning deposits and total loans increased $158 million and $46.6 million, respectively, over the same time period. The growth in interest-earning deposits mainly stemmed from certain deposit-gathering initiatives and an increase in wholesale funds. During the twelve months ended March 31, 2019, total loans were up $248 million, or 9.7 percent. Approximately $125 million in commercial term loans to new and existing borrowers were originated during the first quarter of 2019, as ongoing sales and relationship-building efforts resulted in increased lending opportunities. As of March 31, 2019, unfunded commitments on commercial construction and development loans totaled approximately $147 million, which are expected to be largely funded over the next 12 to 18 months.
Ray Reitsma, President of Mercantile Bank of Michigan, noted, "We are very pleased with the net loan growth achieved during first quarter of 2019, which was largely fueled by increases in commercial and industrial loans and owner-occupied commercial real estate loans. New commercial term loan originations during the quarter were once again in line with quarterly originations over the past few years. Members of our lending team continue to identify and attract new client relationships and meet the needs of our existing customers with a continuing commitment to sound quality and appropriate pricing. We also remain mindful of growing the portfolio in adherence with internal initiatives, which includes maintaining the combined commercial and industrial loan and owner-occupied commercial real estate loan portfolios at a minimum percentage of total commercial loans. Our residential mortgage portfolio grew for the twelfth consecutive quarter, a majority of which consists of adjustable rate residential mortgage loans, reflecting the continuing success of strategic initiatives intended to increase our market penetration. Based on our current commercial loan and residential mortgage loan pipelines, we are confident that solid loan growth can be realized in future periods."
As of March 31, 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 proportional initiatives.
Total deposits at March 31, 2019 were $2.61 billion, up $147 million from December 31, 2018. Local deposits and brokered deposits were up $75.0 million and $72.3 million, respectively, during the first three months of 2019. The growth in local deposits was mainly driven by a special time deposit campaign that was introduced in mid first quarter and that has since ended, along with an increase in business money market accounts. Wholesale funds were $570 million, or approximately 18 percent of total funds, as of March 31, 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 quarter 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 March 31, 2019, were $4.5 million, or 0.1 percent of total assets, compared to $5.0 million, or 0.2 percent of total assets, at December 31, 2018, and $8.1 million, or 0.3 percent of total assets, at March 31, 2018. The decline in nonperforming assets during the twelve months ended March 31, 2019, mainly reflects successful loan collection efforts and sales of bank-owned properties that were no longer being used or considered for use as bank facilities. 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 first quarter of 2019, loan charge-offs totaled $0.2 million while recoveries of prior period charge-offs equaled $0.1 million, providing for net loan charge-offs of $0.1 million, or an annualized 0.01 percent of average total loans.
Capital Position
Shareholders' equity totaled $384 million as of March 31, 2019, an increase of $8.5 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 March 31, 2019, compared to 12.3 percent at December 31, 2018. At March 31, 2019, the Bank had approximately $77 million in excess of the 10.0 percent minimum regulatory threshold required to be considered a "well-capitalized" institution. Mercantile reported 16,421,025 total shares outstanding at March 31, 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. 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. Future share repurchases totaling $6.0 million can be made under the program.
Mr. Kaminski concluded, "In light of our continuing financial strength, we are well-positioned to further enhance shareholder value and meet targeted growth goals. Our sustained cash dividend program and related competitive dividend yield demonstrate our commitment to increasing shareholder value. As reflected by growth in the commercial and residential loan portfolios and deposits, our emphasis on building and cultivating value-added relationships continues to successfully attract new customers as well as retain existing clients. We are very excited about Mercantile's future and are confident that the sound financial results achieved during the first quarter of 2019 will continue in the current year and beyond."
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.
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SOURCE Mercantile Bank Corporation