GRAND RAPIDS, Mich., Oct. 14, 2008 (GLOBE NEWSWIRE) -- Mercantile Bank Corporation (Nasdaq:MBWM) reported net income of $1.1 million, or $0.13 per diluted share, for the third quarter of 2008 compared with net income of $2.4 million, or $0.28 per diluted share, for the third quarter of 2007. For the nine-month 2008 period, a net loss of $5.3 million, or $0.62 per diluted share, was recorded, compared with net income of $8.9 million, or $1.05 per diluted share, for the prior-year nine months.
Mercantile returned to profitability during the third quarter of 2008 after reporting net losses for the first two quarters of 2008, primarily reflecting a significantly lower provision for loan and lease losses. Mercantile's year-to-date 2008 performance has been impacted by several factors: net interest margin compression resulting from the rapid interest rate decline that began during the third quarter of last year; sizable provisions for loan and lease losses taken in response to deteriorating asset quality; and write-downs on foreclosed properties to reflect lower estimated market values.
Chairman and CEO Michael Price commented, "While we continue to face some very strong headwinds with the economy and within the banking industry, it is gratifying to see that our aggressive approach to identifying and administering problem credits may be starting to yield results. Over a year ago, we became concerned with the deteriorating financial condition of certain borrowers and the status of underlying projects in our commercial real estate portfolio, especially within the residential real estate development segment. The early identification of problem loans has provided us the opportunity to closely work with our distressed borrowers, and during the third quarter we saw notable improvement in a number of larger relationships. Nonperforming and other delinquent loans remain at elevated levels, and further hard work remains. However, we are pleased with our progress thus far. We are cautiously optimistic that we are near the peak in asset quality challenges, but we remain appropriately reserved and vigilant."
Mr. Price continued, "A second priority has been to improve our net interest margin, which has been impacted by the series of aggressive interest rate cuts implemented by the Federal Reserve beginning in September 2007 and continuing through April 2008, as well as by an elevated level of nonperforming assets and price competition for loans and deposits. This quarter, we began to reverse the decline with a 15 basis point improvement in the net interest margin over the second quarter. A steady prime rate and the initial benefits of several loan-pricing initiatives have stabilized our loan yield, while our cost of funds continues to decline.
"Although we were hopeful the improved trend would continue, last week's 50 basis point prime rate reduction will once again negatively impact our net interest margin over the near term. Further anticipated declines in our cost of funds are expected to largely offset the impact of the prime rate cut, and a relatively steady rather than improving net interest margin is the likely fourth quarter outcome. We expect the loan pricing initiatives that were initiated during the third quarter to increase in scope and value in future periods. However, the extreme volatility in financial markets makes it difficult to forecast net interest income and the net interest margin with any precision.
"The outstanding performance of our employees throughout this critical period has made a huge difference in the results we've been able to achieve. Our employees continue to provide our customers with an exceptional banking experience, and the difficult banking environment has provided us the opportunity to strengthen our position within our markets. We continue to see much more rational commercial loan pricing and terms, which should positively impact our earnings performance in future periods."
Operating Results
Third quarter 2008 total revenue, consisting of net interest income plus noninterest income, was $13.5 million, down 12.9 percent from the $15.6 million reported for the prior-year third quarter. Net interest income totaled $11.7 million, a decline of $2.3 million, or 16.5 percent, from the $14.1 million generated in the year-ago quarter. The net interest margin declined from 2.86 percent in the prior-year third quarter to 2.30 percent in the current-year third quarter, a decrease of 56 basis points, or 19.6 percent. The negative impact of the lower net interest margin on net interest income was partially offset by an $81.7 million increase in average earning assets. Noninterest income was $1.8 million in the third quarter of 2008, up $0.3 million, or 20.6 percent, from the $1.5 million reported in last year's third quarter, primarily due to increased service charge and bank-owned life insurance policy income.
The provision for loan and lease losses totaled $17.2 million for the first nine months of 2008, including $1.9 million expensed during the third quarter. In comparison, the provision expense equaled $6.2 million during the first nine months of 2007, including $2.8 million recorded in the third quarter. The larger provision expense recognized during the first nine months of 2008 reflects a higher level of net loan and lease charge-offs and loan and lease growth in 2008. In addition, higher reserve levels relative to the prior year were necessary to provide for possible future losses in the existing loan and lease portfolio. The allowance for loan and lease losses equaled 1.58 percent of total loans and leases as of September 30, 2008, compared to 1.73 percent at June 30, 2008, and 1.38 percent at September 30, 2007.
Noninterest expense for the third quarter of 2008 was $10.5 million, an increase of $0.9 million, or 9.9 percent, over the prior-year third quarter. Compared with the second quarter of 2008, third quarter noninterest expense declined $0.3 million, or 2.4 percent. For the first nine months of 2008, noninterest expense was $31.6 million, up $3.3 million, or 11.5 percent, from $28.3 million for the same time period in 2007. A majority of the 2008 noninterest expense growth relates to costs associated with the administration and resolution of problem assets, including legal expenses, property tax payments, appraisal costs, and write-downs on foreclosed properties. These costs totaled $2.3 million during the first nine months of 2008, including $0.8 million expensed during the third quarter of 2008. By comparison, costs related to problem assets totaled $0.6 million for the first nine months of 2007, with $0.3 million of costs incurred in the third quarter. Write-downs on foreclosed properties accounted for $0.9 million of the $2.3 million in costs related to problem assets incurred during the first nine months of 2008.
Asset Quality
"While we saw a small increase in the level of nonperforming assets in the third quarter, the rate of increase was considerably lower than over the past several quarters," noted Mr. Price. "The marked slowdown in borrowing relationships that deteriorated to nonperforming status had a positive impact on our provision expense for the third quarter. However, the majority of our nonperforming loans are real estate-related, secured by collateral that has illiquid characteristics in the current market. Updated appraisals often reflect significant declines from the original estimated values, requiring additional reserves for potential future loan and lease losses."
At September 30, 2008, nonperforming assets totaled $47.8 million, or 2.17 percent of total assets, up from $46.6 million (2.16 percent of total assets) at June 30, 2008 and $25.9 million (1.23 percent of total assets) at September 30, 2007. Approximately 36 percent of nonperforming loans were contractually current on payments as of September 30, 2008. The net increase in nonperforming assets during the third quarter of 2008 was $1.2 million, reflecting the addition of $11.5 million of new nonperforming loans, less the return of loans to accruing status, loan paydowns, sales of foreclosed real estate and write-downs of foreclosed properties totaling $6.6 million and net loan and lease charge-offs of $3.7 million.
Commercial-related nonperforming assets were $26.7 million as of September 30, 2008, compared to $28.7 million as of June 30, 2008. Nonperforming loans and foreclosed properties associated with the development and construction of residential real estate totaled $15.9 million, with an additional $5.2 million in nonperforming loans secured by, and foreclosed properties consisting of, residential properties at September 30, 2008. At June 30, 2008, the levels were $14.7 million and $3.2 million, respectively.
Net loan and lease charge-offs in the third quarter of 2008 were $4.3 million, or an annualized 0.91 percent of average total loans and leases, compared to $4.3 million (0.95 percent) and $5.0 million (1.11 percent) during the second and first quarters of 2008, respectively. Net loan and lease charge-offs associated with commercial-related loans and residential-related loans totaled $3.6 million and $0.7 million during the third quarter, and $10.0 million and $3.6 million during the first nine months of 2008, respectively. Of the $4.5 million in gross loan and lease charge-offs during the third quarter, approximately $3.0 million, or 66 percent, reflect the charge-off of specific reserves that were created through provisions for loan and lease losses in prior quarters.
Balance Sheet
Total assets were $2.21 billion as of September 30, 2008, an increase of $100.9 million, or 4.8 percent, since September 30, 2007. Total loans and leases increased $73.8 million, or 4.1 percent, over the past twelve months, with $30.0 million of the growth occurring in the third quarter of 2008. Approximately 72 percent of Mercantile's loan portfolio is secured by real estate, with construction and land development loans accounting for $277.4 million, or 14.8 percent of total loans and leases. Deposits totaled $1.58 billion as of September 30, 2008, a decline of $65.3 million since September 30, 2007, in part reflecting the shifting of a portion of brokered deposits into lower-rate Federal Home Loan Bank advances, which increased $150.0 million over the past twelve months.
Shareholders' equity totaled $171.3 million at September 30, 2008, a decline of $6.8 million, or 3.8 percent, from the level of equity at December 31, 2007. Total shares outstanding at the end of the third quarter of 2008 were 8,532,535. The Bank remains "well-capitalized" under regulatory capital requirements, with a total risk-based capital ratio of 10.9 percent as of September 30, 2008. The Bank's total regulatory capital equaled $226.1 million at September 30, 2008, approximately $15.3 million in excess of the amount required to provide for the minimum "well-capitalized".
In conclusion, Mr. Price commented, "Our third quarter results represent a significant improvement over the previous three quarters. While we expect the third quarter is the beginning of a trend, the future is difficult to predict due to the unprecedented challenges facing the banking industry. Our focus on asset quality remains unwavering, and we believe we are well-positioned to weather this difficult period."
About Mercantile Bank Corporation
Mercantile Bank Corporation is the bank holding company for Mercantile Bank of Michigan. Headquartered in Grand Rapids, the Bank provides a wide variety of commercial banking services through its five full-service banking offices in greater Grand Rapids, and its full-service banking offices in Holland, Lansing, Ann Arbor and Oakland County, 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; 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.
Mercantile Bank Corporation Third Quarter 2008 Results MERCANTILE BANK CORPORATION CONSOLIDATED FINANCIAL HIGHLIGHTS (Unaudited) Quarterly ---------------------------------------------------- 2008 2008 2008 2007 2007 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr ---------- --------- --------- --------- --------- (dollars in thousands except per share data) EARNINGS Net interest income $ 11,728 10,592 11,383 13,074 14,051 Provision for loan and lease losses $ 1,900 6,200 9,100 4,900 2,800 Noninterest income $ 1,817 1,758 1,890 1,534 1,507 Noninterest expense $ 10,513 10,777 10,329 10,008 9,570 Net income (loss) $ 1,079 (2,612) (3,738) 95 2,367 Basic earnings (loss) per share $ 0.13 (0.31) (0.44) 0.01 0.28 Diluted earnings (loss) per share $ 0.13 (0.31) (0.44) 0.01 0.28 Average basic shares outstanding 8,472,569 8,469,097 8,465,148 8,462,260 8,458,601 Average diluted shares outstanding 8,530,347 8,469,097 8,465,148 8,485,035 8,491,612 PERFORMANCE RATIOS Return on average assets 0.20% (0.49%) (0.71%) 0.02% 0.45% Return on average common equity 2.53% (6.09%) (8.44%) 0.21% 5.32% Net interest margin (fully tax-equivalent) 2.30% 2.15% 2.33% 2.64% 2.86% Efficiency ratio 77.62% 87.26% 77.82% 68.51% 61.51% Full-time equivalent employees 307 318 317 306 302 CAPITAL Period-ending equity to assets 7.76% 7.75% 8.24% 8.40% 8.44% Tier 1 leverage capital ratio 9.34% 9.50% 9.69% 9.97% 10.06% Tier 1 risk- based capital ratio 9.61% 9.71% 10.05% 10.14% 10.19% Total risk-based capital ratio 10.86% 10.96% 11.33% 11.39% 11.40% Book value per share $ 20.08 19.66 20.43 20.89 20.96 Cash dividend per share $ 0.04 0.08 0.15 0.14 0.14 ASSET QUALITY Gross loan charge-offs $ 4,462 4,431 5,137 3,988 795 Net loan charge-offs $ 4,271 4,275 4,957 3,943 743 Net loan charge-offs to average loans 0.91% 0.95% 1.11% 0.87% 0.17% Allowance for loan and lease losses $ 29,511 31,881 29,957 25,814 24,857 Allowance for losses to total loans 1.58% 1.73% 1.67% 1.43% 1.38% Nonperforming loans $ 42,047 43,297 35,259 29,809 23,070 Other real estate and repossessed assets $ 5,743 3,322 5,371 5,895 2,820 Nonperforming assets to total assets 2.17% 2.16% 1.92% 1.68% 1.23% END OF PERIOD BALANCES Loans and leases $1,870,799 1,840,793 1,794,310 1,799,880 1,796,962 Total earning assets (before allowance) $2,099,408 2,048,703 2,006,373 2,011,908 2,005,136 Total assets $2,207,359 2,163,354 2,115,948 2,121,403 2,106,427 Deposits $1,575,713 1,544,704 1,554,750 1,591,181 1,640,984 Shareholders' equity $ 171,348 167,713 174,295 178,155 177,724 AVERAGE BALANCES Loans and leases $1,852,848 1,812,898 1,793,726 1,791,510 1,773,151 Total earning assets (before allowance) $2,073,787 2,029,494 2,015,210 2,006,940 1,992,075 Total assets $2,172,859 2,125,731 2,115,468 2,104,212 2,096,597 Deposits $1,550,544 1,531,853 1,578,545 1,618,825 1,632,153 Shareholders' equity $ 169,241 171,902 177,632 178,583 176,482 Year-To-Date ---------------------- (dollars in thousands except per share data) 2008 2007 ----------- --------- EARNINGS Net interest income $ 33,703 42,483 Provision for loan and lease losses $ 17,200 6,170 Noninterest income $ 5,465 4,336 Noninterest expense $ 31,619 28,348 Net income (loss) $ (5,271) 8,871 Basic earnings (loss) per share $ (0.62) 1.05 Diluted earnings (loss) per share $ (0.62) 1.05 Average basic shares outstanding 8,468,951 8,450,524 Average diluted shares outstanding 8,468,951 8,488,226 PERFORMANCE RATIOS Return on average assets (0.33%) 0.57% Return on average common equity (4.06%) 6.78% Net interest margin (fully tax-equivalent) 2.26% 2.94% Efficiency ratio 80.73% 60.55% Full-time equivalent employees 307 302 CAPITAL Period-ending equity to assets 7.76% 8.44% Tier 1 leverage capital ratio 9.34% 10.06% Tier 1 risk-based capital ratio 9.61% 10.19% Total risk-based capital ratio 10.86% 11.40% Book value per share $ 20.08 21.00 Cash dividend per share $ 0.27 0.41 ASSET QUALITY Gross loan charge-offs $ 14,030 3,287 Net loan charge-offs $ 13,503 2,724 Net loan charge-offs to average loans 0.99% 0.21% Allowance for loan and lease losses $ 29,511 24,857 Allowance for losses to total loans 1.58% 1.38% Nonperforming loans $ 42,047 23,070 Other real estate and repossessed assets $ 5,743 2,820 Nonperforming assets to total assets 2.17% 1.23% END OF PERIOD BALANCES Loans and leases $ 1,870,799 1,796,962 Total earning assets (before allowance) $ 2,099,408 2,005,136 Total assets $ 2,207,359 2,106,427 Deposits $ 1,575,713 1,640,984 Shareholders' equity $ 171,348 177,724 AVERAGE BALANCES Loans and leases $ 1,819,944 1,756,688 Total earning assets (before allowance) $ 2,039,622 1,970,420 Total assets $ 2,138,152 2,076,983 Deposits $ 1,553,636 1,640,838 Shareholders' equity $ 172,912 174,993 Mercantile Bank Corporation Third Quarter 2008 Results MERCANTILE BANK CORPORATION CONSOLIDATED REPORTS OF INCOME THREE THREE NINE NINE MONTHS MONTHS MONTHS MONTHS ENDED ENDED ENDED ENDED Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2008 2007 2008 2007 ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) (Unaudited) (Unaudited) INTEREST INCOME Loans and leases, including fees $ 27,161,000 $ 34,077,000 $ 82,707,000 $101,012,000 Investment securities 2,641,000 2,530,000 8,067,000 7,521,000 Federal funds sold 40,000 168,000 157,000 343,000 Short-term investments 1,000 5,000 6,000 13,000 ------------ ------------ ------------ ------------ Total interest income 29,843,000 36,780,000 90,937,000 108,889,000 INTEREST EXPENSE Deposits 14,180,000 19,357,000 46,144,000 57,361,000 Short term borrowings 483,000 900,000 1,506,000 2,598,000 Federal Home Loan Bank advances 2,839,000 1,759,000 7,834,000 4,343,000 Long term borrowings 613,000 713,000 1,750,000 2,104,000 ------------ ------------ ------------ ------------ Total interest expense 18,115,000 22,729,000 57,234,000 66,406,000 ------------ ------------ ------------ ------------ Net interest income 11,728,000 14,051,000 33,703,000 42,483,000 Provision for loan and lease losses 1,900,000 2,800,000 17,200,000 6,170,000 ------------ ------------ ------------ ------------ Net interest income after provision for loan and lease losses 9,828,000 11,251,000 16,503,000 36,313,000 NONINTEREST INCOME Service charges on accounts 488,000 402,000 1,472,000 1,184,000 Other income 1,329,000 1,105,000 3,993,000 3,152,000 ------------ ------------ ------------ ------------ Total noninterest income 1,817,000 1,507,000 5,465,000 4,336,000 NONINTEREST EXPENSE Salaries and benefits 5,584,000 5,425,000 17,031,000 17,330,000 Occupancy 967,000 881,000 2,899,000 2,462,000 Furniture and equipment 482,000 530,000 1,502,000 1,524,000 Other expense 3,480,000 2,734,000 10,187,000 7,032,000 ------------ ------------ ------------ ------------ Total noninterest expense 10,513,000 9,570,000 31,619,000 28,348,000 ------------ ------------ ------------ ------------ Income (loss) before federal income tax expense (benefit) 1,132,000 3,188,000 (9,651,000) 12,301,000 Federal income tax expense (benefit) 53,000 821,000 (4,380,000) 3,430,000 ------------ ------------ ------------ ------------ Net income (loss) $ 1,079,000 $ 2,367,000 $ (5,271,000)$ 8,871,000 ============ ============ ============ ============ Basic earnings (loss) per share $0.13 $0.28 ($0.62) $1.05 Diluted earnings (loss) per share $0.13 $0.28 ($0.62) $1.05 Average basic shares outstanding 8,472,569 8,458,601 8,468,951 8,450,524 Average diluted shares outstanding 8,530,347 8,491,612 8,468,951 8,488,226 Mercantile Bank Corporation Third Quarter 2008 Results MERCANTILE BANK CORPORATION CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, 2008 2007 2007 ---- ---- ---- (Unaudited) (Audited) (Unaudited) ASSETS Cash and due from banks $ 25,694,000 $ 29,138,000 $ 28,764,000 Short-term investments 87,000 292,000 534,000 Federal funds sold 4,820,000 0 0 -------------- -------------- -------------- Total cash and cash equivalents 30,601,000 29,430,000 29,298,000 Securities available for sale 144,019,000 136,673,000 135,243,000 Securities held to maturity 64,002,000 65,330,000 64,863,000 Federal Home Loan Bank stock 15,681,000 9,733,000 7,534,000 Loans and leases 1,870,799,000 1,799,880,000 1,796,962,000 Allowance for loan and lease losses (29,511,000) (25,814,000) (24,857,000) -------------- -------------- -------------- Loans and leases, net 1,841,288,000 1,774,066,000 1,772,105,000 Premises and equipment, net 32,958,000 34,351,000 34,492,000 Bank owned life insurance policies 41,459,000 39,118,000 32,962,000 Accrued interest receivable 9,044,000 9,957,000 11,143,000 Other assets 28,307,000 22,745,000 18,787,000 -------------- -------------- -------------- Total assets $2,207,359,000 $2,121,403,000 $2,106,427,000 ============== ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 109,154,000 $ 133,056,000 $ 121,336,000 Interest-bearing 1,466,559,000 1,458,125,000 1,519,648,000 -------------- -------------- -------------- Total deposits 1,575,713,000 1,591,181,000 1,640,984,000 Securities sold under agreements to repurchase 105,986,000 97,465,000 88,683,000 Federal funds purchased 0 13,800,000 3,300,000 Federal Home Loan Bank advances 285,000,000 180,000,000 135,000,000 Subordinated debentures 32,990,000 32,990,000 32,990,000 Other borrowed money 19,393,000 4,013,000 3,839,000 Accrued interest and other liabilities 16,929,000 23,799,000 23,907,000 -------------- -------------- -------------- Total liabilities 2,036,011,000 1,943,248,000 1,928,703,000 SHAREHOLDERS' EQUITY Common stock 172,480,000 172,938,000 172,793,000 Retained earnings (deficit) (1,593,000) 4,948,000 6,037,000 Accumulated other comprehensive income (loss) 461,000 269,000 (1,106,000) -------------- -------------- -------------- Total shareholders' equity 171,348,000 178,155,000 177,724,000 -------------- -------------- -------------- Total liabilities and shareholders' equity $2,207,359,000 $2,121,403,000 $2,106,427,000 ============== ============== 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