MBWM Mercantile Bank Corporation

GRAND RAPIDS, Mich., Oct. 20, 2020 /PRNewswire/ -- Mercantile Bank Corporation (NASDAQ: MBWM) ("Mercantile") reported net income of $10.7 million, or $0.66 per diluted share, for the third quarter of 2020, compared with net income of $12.6 million, or $0.77 per diluted share, for the respective prior-year period.  Net income during the first nine months of 2020 totaled $30.1 million, or $1.85 per diluted share, compared to $36.1 million, or $2.20 per diluted share, during the first nine months of 2019.

"In light of the challenging operating environment created by the ongoing COVID-19 pandemic, we are pleased with our overall financial performance during the third quarter of 2020," said Robert B. Kaminski, Jr., President and Chief Executive Officer of Mercantile.  "We have implemented strategic initiatives to address the identifiable impacts of the pandemic, and we will continue to focus on appropriately planning for potential future risks posed by it." 

Third quarter highlights include:

• Strong capital position
• Continued solid asset quality metrics
• Ongoing strength in commercial loan and residential mortgage loan pipelines
• Substantial increase in mortgage banking income and growth in other key fee income categories
• Controlled overhead costs

Operating Results

Total revenue, which consists of net interest income and noninterest income, was $42.8 million during the third quarter of 2020, up $4.5 million, or 11.8 percent, from the prior-year third quarter.  Net interest income during the third quarter of 2020 was $29.5 million, down $2.1 million, or 6.6 percent, from the third quarter of 2019, reflecting a decreased net interest margin, which more than offset the positive impact of earning asset growth.  Noninterest income totaled $13.3 million during the third quarter of 2020, up $6.6 million from the respective 2019 period, mainly due to increased mortgage banking income.

The net interest margin was 2.86 percent in the third quarter of 2020, compared to 3.71 percent in the third quarter of 2019.  The yield on average earning assets was 3.45 percent during the third quarter of 2020, down from 4.73 percent during the prior-year third quarter, mainly due to a decreased yield on commercial loans, which equaled 4.06 percent in the current-year third quarter compared to 5.15 percent in the respective 2019 period.  The decreased yield on commercial loans primarily reflected reduced interest rates on variable-rate commercial loans resulting from the Federal Open Market Committee significantly lowering the targeted federal funds rate by a total of 225 basis points during the second half of 2019 and first three months of 2020.  A significant volume of excess on-balance sheet liquidity consisting of low-yielding deposits with the Federal Reserve Bank of Chicago and a correspondent bank negatively impacted the yield on average earning assets during the third quarter of 2020.  The excess funds are mainly a product of federal government stimulus programs as well as lower business and consumer investing and spending.  A lower yield on interest-earning deposits, reflecting the decreasing interest rate environment, also contributed to the reduced yield on average earning assets.

The cost of funds declined from 1.02 percent during the third quarter of 2019 to 0.59 percent during the current-year third quarter, primarily due to lower rates paid on local deposit accounts and borrowings, reflecting the declining interest rate environment.  A change in funding mix, consisting of an increase in lower-costing non-time deposits as a percentage of total funding sources, also contributed to the decrease in the cost of funds.

Mercantile recorded provision expense of $3.2 million during the third quarter of 2020, compared to $7.6 million during the second quarter of 2020 and $0.7 million during the third quarter of 2019.  The provision expense recorded during the current-year third quarter was primarily comprised of increased allocations associated with the downgrading of certain non-impaired commercial loan relationships, while the provision expense recorded during the second quarter of 2020 mainly consisted of an allocation associated with the newly-created COVID-19 pandemic environmental factor ("COVID-19 factor") and an increased allocation related to the existing economic conditions environmental factor.  The COVID-19 factor was added to address the unique challenges and economic uncertainty resulting from the pandemic and its potential impact on the collectability of the loan portfolio.  The provision expense recorded during the third quarter of 2019 mainly reflected ongoing net loan growth.

Noninterest income during the third quarter of 2020 was $13.3 million, representing an increase of $6.6 million, or 99.3 percent, from the $6.7 million recorded during the third quarter of 2019.  The higher level of noninterest income primarily reflected increased mortgage banking income stemming from a substantial upturn in refinance activity spurred by a decrease in residential mortgage loan interest rates, an increase in purchase activity, and the ongoing success of strategic initiatives that were implemented to boost market share.  Growth in credit and debit card income and payroll processing fees also contributed to the increased level of noninterest income.

Noninterest expense totaled $26.4 million during the third quarter of 2020, up $4.4 million, or 20.0 percent, from the prior-year third quarter.  The higher level of expense primarily resulted from increased compensation costs, mainly reflecting higher residential mortgage loan originator commissions and related incentives and an increased bonus accrual.  The higher level of commissions and associated incentives primarily depicted the significant increase in residential mortgage loan originations during the third quarter of 2020, which were up nearly 79 percent compared to the respective 2019 period. 

Mr. Kaminski commented, "The continuing success of strategic initiatives that were implemented to increase market penetration and enhance revenue, combined with strong residential mortgage loan production levels, allowed us to achieve another record breaking level of mortgage banking income during the third quarter of 2020.  Our residential mortgage lending team has put forth a tremendous effort to ensure the entire loan origination process, from the receipt of an application to closing, is completed in an efficient manner, often providing us with a competitive advantage.  We were pleased with the growth in service charges on accounts and credit and debit card income during the third quarter of 2020 compared to the linked quarter, primarily reflecting the relaxation of certain restrictions that were put in place as a result of the COVID-19 pandemic.  Controlling overhead costs remains an integral component of growth initiatives, and we will continue our efforts to ascertain opportunities to function more efficiently."

Balance Sheet

As of September 30, 2020, total assets were $4.42 billion, up $788 million, or 21.7 percent, from December 31, 2019.  Total loans increased $494 million during the first nine months of 2020, primarily reflecting Paycheck Protection Program loan originations of $555 million during the second and third quarters.  Commercial lines of credit remained relatively steady during the third quarter of 2020 after having declined $109 million during the second quarter of 2020 largely due to the impacts of the COVID-19 pandemic environment and federal government stimulus programs.  As of September 30, 2020, unfunded commitments on commercial construction and development loans totaled approximately $99 million, which are expected to be largely funded over the next 12 to 18 months.  Interest-earning deposits increased $315 million during the first nine months of 2020, mainly resulting from growth in certain local deposit account categories and sweep accounts.

Ray Reitsma, President of Mercantile Bank of Michigan, noted, "We are very pleased that our asset quality metrics remained solid throughout the third quarter of 2020, as we continue to closely monitor and evaluate the impact of the COVID-19 pandemic on the performance of our loan portfolio.  Our ongoing focus on sound credit underwriting has served us well during this period of uncertainty and weakened economic conditions.  Past due loan and nonperforming asset levels continue to be low, and a vast majority of commercial and retail loan customers that were granted loan payment deferrals under internally developed programs have reverted back to making full contractual loan payments. As part of our internal loan review program and reflective of our desire to identify potential loan problems in a timely manner, certain non-impaired commercial loan relationships were downgraded during the third quarter to bring the loan risk ratings in sync with the current economic environment and the borrowers' financial conditions, resulting in a substantial portion of the provision expense recorded during the quarter."

Mr. Reitsma added, "Although we continued to assist customers in obtaining funds under the Paycheck Protection Program and began helping loan recipients gather and submit required information to the Small Business Administration for a loan forgiveness determination during the third quarter of 2020, we remained focused on meeting the traditional credit needs of our existing clients and identifying potential new customer relationships.  We are pleased with the level of net commercial loan growth achieved during the third quarter, and based on the strength of our current pipeline, we expect to fund additional commercial loans in future periods."

Excluding the impact of Paycheck Protection Program loan originations, commercial and industrial loans and owner-occupied commercial real estate loans together represented approximately 55 percent of total commercial loans as of September 30, 2020, a level that has remained relatively consistent and in line with internal expectations. 

Total deposits at September 30, 2020, were $3.37 billion, up $682 million, or 25.3 percent, from December 31, 2019.  Local deposits were up $749 million during the first nine months of 2020, while brokered deposits were down $67.5 million during the same time period.  The growth in local deposits mainly reflected Paycheck Protection Program loan proceeds being deposited into customers' accounts at the time the loans were originated and remaining on deposit as of September 30, 2020, along with federal government stimulus payments and reduced business and consumer investing and spending.  Wholesale funds were $460 million, or approximately 12 percent of total funds, as of September 30, 2020, compared to $487 million, or approximately 15 percent of total funds, as of December 31, 2019.

Asset Quality

Nonperforming assets at September 30, 2020, were $4.7 million, or 0.1 percent of total assets, compared to $2.7 million, or 0.1 percent of total assets, at December 31, 2019, and $2.9 million, or 0.1 percent of total assets, at September 30, 2019.  During the third quarter of 2020, loan charge-offs totaled $0.1 million, while recoveries of prior-period loan charge-offs equaled $0.2 million, providing for net loan recoveries of $0.1 million, or an annualized 0.02 percent of average total loans.

Capital Position

Shareholders' equity totaled $432 million as of September 30, 2020, an increase of $15.3 million from year-end 2019.  The Bank's capital position remains above "well-capitalized" with a total risk-based capital ratio of 13.5 percent as of September 30, 2020, compared to 13.0 percent at December 31, 2019.  At September 30, 2020, the Bank had approximately $116 million in excess of the 10.0 percent minimum regulatory threshold required to be considered a "well-capitalized" institution.  Mercantile reported 16,243,124 total shares outstanding at September 30, 2020.

As part of a $20 million common stock repurchase program announced in May 2019 and instituted in conjunction with the completion of its existing program that was introduced in January 2015 and later expanded in April 2016, Mercantile repurchased approximately 222,000 shares for $6.3 million, or a weighted average all-in cost per share of $28.25, during the first quarter of 2020; no shares were repurchased during the second and third quarters of 2020.  Mercantile has elected to temporarily cease stock repurchases to preserve capital for lending and other purposes while management assesses the potential impacts of the COVID-19 pandemic.  Management has the ability to reinstate the buyback program as circumstances warrant.

Mr. Kaminski concluded, "As part of our COVID-19 pandemic response plan, we have continued to utilize information distributed by government agencies and health officials as a basis for pandemic-related actions designed to provide clients with needed banking services while protecting them and our employees from the spread of the coronavirus to the fullest extent possible.  We will continue to closely monitor new pandemic-related developments and revise the response plan as necessary.  We were pleased to announce earlier today that our Board of Directors declared a regular quarterly cash dividend.  Our sustained financial strength has allowed us to continue the cash dividend program and provide our shareholders with a cash return on their investments despite the uncertainty stemming from the pandemic and associated deterioration in economic conditions."

Investor Presentation

Mercantile has prepared presentation materials (the "Conference Call & Webcast Presentation") that management intends to use during its previously announced third quarter 2020 conference call on Tuesday, October 20, 2020, at 10:00 a.m. Eastern Time, and from time to time thereafter in presentations about the Company's operations and performance.  The Investor Presentation also contains more detailed information relating to Mercantile's COVID-19 pandemic response plan.  These materials have been furnished to the U.S. Securities and Exchange Commission concurrently with this press release, and are also available on Mercantile's website at www.mercbank.com.

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 $4.4 billion and operates 40 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 may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Any such comments 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, including the significant disruption to financial market and other economic activity caused by the outbreak of COVID-19; 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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