Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This report contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and our company. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “projects,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. We undertake no obligation to update, amend, or clarify forward looking-statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise.
Future Factors include, among others, changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional 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 risk factors described in our annual report on Form 10-K for the year ended December 31, 2017 or in this report. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a forward-looking statement.
Introduction
The following discussion compares the financial condition of Mercantile Bank Corporation and its consolidated subsidiaries, including Mercantile Bank of Michigan (“our bank”) and our bank’s two subsidiaries, Mercantile Bank Real Estate Co., LLC and Mercantile Insurance Center, Inc., at September 30, 2018 and December 31, 2017 and the results of operations for the three months and nine months ended September 30, 2018 and September 30, 2017. This discussion should be read in conjunction with the interim consolidated financial statements and footnotes included in this report. Unless the text clearly suggests otherwise, references in this report to “us,” “we,” “our” or “the company” include Mercantile Bank Corporation and its consolidated subsidiaries referred to above.
Critical Accounting Policies
Accounting principles generally accepted in the United States of America are complex and require us to apply significant judgment to various accounting, reporting and disclosure matters. We must use assumptions and estimates to apply these principles where actual measurements are not possible or practical. Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited financial statements included in this report. For a discussion of our significant accounting policies, see Note 1 of the Notes to our Consolidated Financial Statements included on pages F-42 through F-50 in our Form 10-K for the fiscal year ended December 31, 2017 (Commission file number 000-26719). Our critical accounting policies are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements, and actual results may differ from those estimates. We have reviewed the application of these policies with the Audit Committee of our Board of Directors.
MERCANTILE BANK CORPORATION
Allowance for Loan Losses
: The allowance for loan losses (“allowance”) is maintained at a level we believe is adequate to absorb probable incurred losses identified and inherent in the originated loan portfolio. Our evaluation of the adequacy of the allowance is an estimate based on past loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, guidance from bank regulatory agencies, and assessments of the impact of current and anticipated economic conditions on the loan portfolio. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off. Loan losses are charged against the allowance when we believe the uncollectability of a loan is likely. The balance of the allowance represents our best estimate, but significant downturns in circumstances relating to loan quality or economic conditions could result in a requirement for an increased allowance in the future. Likewise, an upturn in loan quality or improved economic conditions may result in a decline in the required allowance in the future. In either instance, unanticipated changes could have a significant impact on the allowance and operating results.
The allowance is increased through a provision charged to operating expense. Uncollectable loans are charged-off through the allowance. Recoveries of loans previously charged-off are added to the allowance. A loan is considered impaired when it is probable that contractual interest and principal payments will not be collected either for the amounts or by the dates as scheduled in the loan agreement. Impairment is evaluated on an individual loan basis. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. The timing of obtaining outside appraisals varies, generally depending on the nature and complexity of the property being evaluated, general breadth of activity within the marketplace and the age of the most recent appraisal. For collateral dependent impaired loans, in most cases we obtain and use the “as is” value as indicated in the appraisal report, adjusting for any expected selling costs. In certain circumstances, we may internally update outside appraisals based on recent information impacting a particular or similar property, or due to identifiable trends (e.g., recent sales of similar properties) within our markets. The expected future cash flows exclude potential cash flows from certain guarantors. To the extent these guarantors provide repayments, a recovery would be recorded upon receipt. Loans are evaluated for impairment when payments are delayed, typically 30 days or more, or when serious deficiencies are identified within the credit relationship. Our policy for recognizing income on impaired loans is to accrue interest unless a loan is placed on nonaccrual status. We put loans into nonaccrual status when the full collection of principal and interest is not expected.
Income Tax Accounting
: Current income tax assets and liabilities are established for the amount of taxes payable or refundable for the current year. In the preparation of income tax returns, tax positions are taken based on interpretation of federal and state income tax laws for which the outcome may be uncertain. We periodically review and evaluate the status of our tax positions and make adjustments as necessary. Deferred income tax assets and liabilities are also established for the future tax consequences of events that have been recognized in our financial statements or tax returns. A deferred income tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences that can be carried forward (used) in future years. The valuation of our net deferred income tax asset is considered critical as it requires us to make estimates based on provisions of the enacted tax laws. The assessment of the realizability of the net deferred income tax asset involves the use of estimates, assumptions, interpretations and judgments concerning accounting pronouncements, federal and state tax codes and the extent of future taxable income. There can be no assurance that future events, such as court decisions, positions of federal and state tax authorities, and the extent of future taxable income will not differ from our current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings.
MERCANTILE BANK CORPORATION
Accounting guidance requires that we assess whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, we consider both positive and negative evidence and analyze changes in near-term market conditions as well as other factors which may impact future operating results. Significant weight is given to evidence that can be objectively verified.
Securities and Other Financial Instruments:
Securities available for sale consist of bonds and notes which might be sold prior to maturity due to changes in interest rates, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as available for sale are reported at their fair value. Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other than temporary losses, management considers: (1) the length of time and extent that fair value has been less than carrying value; (2) the financial condition and near term prospects of the issuer; and (3) the Company’s ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Fair values for securities available for sale are obtained from outside sources and applied to individual securities within the portfolio. The difference between the amortized cost and the current fair value of securities is recorded as a valuation adjustment and reported in other comprehensive income.
Mortgage Servicing Rights:
Mortgage servicing rights are recognized as assets based on the allocated fair value of retained servicing rights on loans sold. Servicing rights are carried at the lower of amortized cost or fair value and are expensed in proportion to, and over the period of, estimated net servicing income. We utilize a discounted cash flow model to determine the value of our servicing rights. The valuation model utilizes mortgage prepayment speeds, the remaining life of the mortgage pool, delinquency rates, our cost to service loans, and other factors to determine the cash flow that we will receive from serving each grouping of loans. These cash flows are then discounted based on current interest rate assumptions to arrive at the fair value of the right to service those loans. Impairment is evaluated quarterly based on the fair value of the servicing rights, using groupings of the underlying loans classified by interest rates. Any impairment of a grouping is reported as a valuation allowance.
Goodwill:
Generally accepted accounting principles require us to determine the fair value of all of the assets and liabilities of an acquired entity, and record their fair value on the date of acquisition. We employ a variety of means in determination of the fair value, including the use of discounted cash flow analysis, market comparisons, and projected future revenue streams. For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to use our own calculation of the value. In other cases, where the value is not easily determined, we consult with outside parties to determine the fair value of the asset or liability. Once valuations have been adjusted, the net difference between the price paid for the acquired company and the value of its balance sheet is recorded as goodwill.
Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified. A more frequent assessment is performed if conditions in the market place or changes in the company’s organizational structure occur. We use a discounted income approach and a market valuation model, which compares the inherent value of our company to valuations of recent transactions in the market place to determine if our goodwill has been impaired.
MERCANTILE BANK CORPORATION
Financial Overview
We reported net income of $10.1 million, or $0.61 per diluted share, for the third quarter of 2018. During the third quarter of 2017, we earned $8.3 million, or $0.51 per diluted share. Net income for the first nine months of 2018 totaled $30.5 million, or $1.83 per diluted share, compared to $23.3 million, or $1.41 per diluted share, during the first nine months of 2017.
Interest income related to purchased loan accounting entries increased net income during the third quarter of 2018 by $0.3 million, or $0.02 per diluted share, and net income during the first nine months of 2018 by $2.7 million, or $0.16 per diluted share. During the respective time periods in 2017, net income increased $1.1 million, or $0.07 per diluted share, and $2.6 million, or $0.15 per diluted share as a result of purchased loan accounting entries. A bank owned life insurance claim during the first quarter of 2017 increased net income during the first nine months of 2017 by $1.2 million, or $0.07 per diluted share. Excluding the impacts of these transactions, diluted earnings per share increased $0.15, or about 34%, during the third quarter of 2018 over the third quarter of 2017, and by $0.48 per diluted share, or about 40%, during the first nine months of 2018 compared to the same time period in 2017.
Net income during the third quarter and first nine months of 2018 also benefited from a reduction in the corporate federal income tax rate, which was lowered from 35% to 21% effective January 1, 2018 due to the enactment of the Tax Cuts and Jobs Act. Our 2018 year-to-date effective tax rate has been about 19%, compared to approximately 31% during the same time period in 2017.
The overall quality of our loan portfolio remains strong, with nonperforming loans equaling only 0.18% of total loans as of September 30, 2018. Gross loan charge-offs equaled $0.2 million during the third quarter of 2018, and totaled $1.1 million for the first nine months of the year, while recoveries of prior period loan charge-offs equaled $0.3 million and $2.2 million during the respective time periods. Net loan recoveries, as a percent of average total loans, equaled an annualized 0.02% and 0.06% during the third quarter and first nine months of 2018, respectively. We continue our collection efforts on charged-off loans, and expect to record recoveries in future periods; however, given the nature of these efforts, it is not practical to forecast the dollar amount and timing of the recoveries.
New commercial term loan originations totaled approximately $119 million during the third quarter of 2018, bringing the year-to-date total to approximately $372 million. We also experienced net increases in commercial lines of credit during those time periods, in large part reflecting lines that are part of new commercial lending relationships established during recent quarterly periods. Net loan growth equaled $60.6 million and $139 million during the third quarter and first nine months of 2018, respectively. The new loan pipeline remains strong, and at September 30, 2018, we had $152 million in unfunded loan commitments on commercial construction and development projects that are in the construction phase. We believe our loan portfolio remains well diversified, with commercial and industrial loans and commercial real estate non-owner occupied loans both comprising 30%, commercial real estate owner occupied loans comprising 20% and residential mortgage and consumer loans aggregating 15% of total loans at September 30, 2018. As a percent of total commercial loans, commercial and industrial loans and commercial real estate owner occupied loans combined equaled 59% at September 30, 2018.
We recorded a provision for loan losses of $0.4 million during the third quarter of 2018, in large part driven by commercial loan growth. The provision for loan losses totaled $1.1 million for the first nine months of 2018, also driven by commercial loan growth but also a second quarter change in the “competitive environment” environmental qualitative factor within our loan loss reserve methodology.
We believe our funding structure also remains well diversified. As of September 30, 2018, noninterest-bearing checking accounts comprised 31% of total funds, interest-bearing checking and sweep accounts combined for 16%, savings deposits and money market accounts aggregated to 29% and local time deposits accounted for 13%. Wholesale funds, comprised of brokered deposits and Federal Home Loan Bank of Indianapolis (“FHLBI”) advances, represented 11% of total funds.
MERCANTILE BANK CORPORATION
Financial Condition
Our total assets increased $13.4 million during the first nine months of 2018, and totaled $3.30 billion as of September 30, 2018. Total loans increased $139 million, while securities available for sale were down $9.2 million and interest-earning deposits decreased $117 million. Total deposits decreased $13.6 million and securities sold under agreements to repurchase (“sweep accounts”) were down $6.4 million, while FHLBI advances were up $20.0 million during the first nine months of 2018. The decline in interest-earning deposits primarily reflects the use of on balance sheet liquidity to fund loan growth, and was largely drawn from our deposit account at the Federal Reserve Bank of Chicago.
Commercial loans increased $103 million during the first nine months of 2018, and at September 30, 2018 totaled $2.31 billion, or 85.5% of the loan portfolio. As of December 31, 2017, the commercial loan portfolio comprised 86.1% of total loans. The increase in commercial loans during the first nine months of 2018 primarily reflects new commercial term loans to existing and new borrowers. Commercial and industrial loans were up $64.3 million, non-owner occupied commercial real estate (“CRE”) loans increased $20.1 million, owner occupied CRE loans grew $16.4 million, and vacant land, land development and residential construction loans increased $9.5 million, while multi-family and residential rental loans decreased $7.8 million. As a percent of total commercial loans, commercial and industrial loans and owner occupied CRE loans combined equaled 59.0% as of September 30, 2018, compared to 58.1% at December 31, 2017.
We are very pleased with the approximately $2.0 billion in new commercial term loan fundings since the beginning of 2015, including $372 million during the first nine months of 2018. As of September 30, 2018, availability on existing construction and development loans totaled $152 million, which we expect to be drawn over the next 12 to 18 months. Our loan pipeline reports indicate continued strong commercial loan funding opportunities in future periods, including approximately $152 million in new lending commitments, a majority of which we expect to be accepted and funded over the next 12 to 18 months. Our commercial lenders also report substantial additional opportunities they are currently discussing with existing and potentially new borrowers.
We continue to experience commercial loan principal paydowns and payoffs. While a portion of the principal paydowns and payoffs received have been welcomed, such as on stressed loan relationships, we have also experienced instances where well-performing relationships have been refinanced at other financial institutions or non-bank entities, and other situations where the borrower has sold the underlying asset. In many of those instances where the loans were refinanced elsewhere, we believed the terms and conditions of the new lending arrangements were too aggressive, generally reflecting the very competitive banking environment in our markets. We remain committed to prudent underwriting standards that provide for an appropriate yield and risk relationship, as well as concentration limits we have established within our commercial loan portfolio. Usage of existing commercial lines of credit has remained relatively steady.
Residential mortgage loans increased $47.2 million during the first nine months of 2018, totaling $302 million, or 11.2% of total loans, as of September 30, 2018. Despite increasing residential mortgage loan interest rates and an ongoing shortage of housing inventory in our markets, most notably West Michigan, we originated $170 million in residential mortgage loans during the first nine months of 2018, which was 5.7% higher than originations during the first nine months of 2017. We sold $74.6 million of the residential mortgage loans originated during the first nine months of 2018, or almost 44%, generally consisting of longer-term fixed rate residential mortgage loans. The remaining portion was added to our balance sheet, in large part comprised of adjustable rate residential mortgage loans. Despite the headwinds of higher interest rates and a housing inventory shortage, we are pleased with the success of our strategic initiative to grow our residential mortgage banking operation over the past couple of years, and are optimistic that origination volumes will continue to grow in future periods. As of September 30, 2018, the level of residential mortgage loan pre-qualifications was near an all-time high, and about double the level at September 30, 2017.
Other consumer-related loans declined $10.9 million during the first nine months of 2018, and at September 30, 2018 totaled $89.5 million, or 3.3% of total loans. Other consumer-related loans comprised 3.9% of total loans at December 31, 2017. We expect this loan portfolio segment to decline in future periods as scheduled payments exceed anticipated new loan origination volumes.
MERCANTILE BANK CORPORATION
The following table summarizes our loan portfolio over the past twelve months:
|
|
9/30/18
|
|
|
6/30/18
|
|
|
3/31/18
|
|
|
12/31/17
|
|
|
9/30/17
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial
|
|
$
|
818,112,000
|
|
|
$
|
776,995,000
|
|
|
$
|
739,805,000
|
|
|
$
|
753,764,000
|
|
|
$
|
776,563,000
|
|
Land Development & Construction
|
|
|
39,396,000
|
|
|
|
37,868,000
|
|
|
|
31,438,000
|
|
|
|
29,873,000
|
|
|
|
28,575,000
|
|
Owner Occupied Commercial RE
|
|
|
542,731,000
|
|
|
|
533,075,000
|
|
|
|
531,152,000
|
|
|
|
526,328,000
|
|
|
|
485,347,000
|
|
Non-Owner Occupied Commercial RE
|
|
|
811,767,000
|
|
|
|
818,376,000
|
|
|
|
794,206,000
|
|
|
|
791,685,000
|
|
|
|
805,167,000
|
|
Multi-Family & Residential Rental
|
|
|
94,101,000
|
|
|
|
95,656,000
|
|
|
|
96,428,000
|
|
|
|
101,918,000
|
|
|
|
119,170,000
|
|
Total Commercial
|
|
|
2,306,107,000
|
|
|
|
2,261,970,000
|
|
|
|
2,193,029,000
|
|
|
|
2,203,568,000
|
|
|
|
2,214,822,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family Mortgages
|
|
|
301,765,000
|
|
|
|
283,657,000
|
|
|
|
264,996,000
|
|
|
|
254,559,000
|
|
|
|
236,074,000
|
|
Home Equity & Other Consumer Loans
|
|
|
89,545,000
|
|
|
|
91,229,000
|
|
|
|
93,179,000
|
|
|
|
100,425,000
|
|
|
|
103,376,000
|
|
Total Retail
|
|
|
391,310,000
|
|
|
|
374,886,000
|
|
|
|
358,175,000
|
|
|
|
354,984,000
|
|
|
|
339,450,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,697,417,000
|
|
|
$
|
2,636,856,000
|
|
|
$
|
2,551,204,000
|
|
|
$
|
2,558,552,000
|
|
|
$
|
2,554,272,000
|
|
Our credit policies establish guidelines to manage credit risk and asset quality. These guidelines include loan review and early identification of problem loans to provide effective loan portfolio administration. The credit policies and procedures are meant to minimize the risk and uncertainties inherent in lending. In following these policies and procedures, we must rely on estimates, appraisals and evaluations of loans and the possibility that changes in these could occur quickly because of changing economic conditions. Identified problem loans, which exhibit characteristics (financial or otherwise) that could cause the loans to become nonperforming or require restructuring in the future, are included on an internal watch list. Senior management and the Board of Directors review this list regularly. Market value estimates of collateral on impaired loans, as well as on foreclosed and repossessed assets, are reviewed periodically; however, we have a process in place to monitor whether value estimates at each quarter-end are reflective of current market conditions. Our credit policies establish criteria for obtaining appraisals and determining internal value estimates. We may also adjust outside and internal valuations based on identifiable trends within our markets, such as recent sales of similar properties or assets, listing prices and offers received. In addition, we may discount certain appraised and internal value estimates to address distressed market conditions.
Nonperforming assets, comprised of nonaccrual loans, loans past due 90 days or more and accruing interest, foreclosed properties and former bank facilities no longer used for operations, totaled $5.8 million (0.2% of total assets) as of September 30, 2018, compared to $9.4 million (0.3% of total assets) as of December 31, 2017. Given the low level of nonperforming loans and accruing loans 30 to 89 days delinquent, combined with the manageable and steady level of watch list credits and what we believe are strong credit administration practices, we remain pleased with the overall quality of the loan portfolio.
MERCANTILE BANK CORPORATION
The following tables provide a breakdown of nonperforming assets by collateral type:
NONPERFORMING LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/18
|
|
|
6/30/18
|
|
|
3/31/18
|
|
|
12/31/17
|
|
|
9/30/17
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Construction
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Owner Occupied / Rental
|
|
|
3,498,000
|
|
|
|
3,104,000
|
|
|
|
3,269,000
|
|
|
|
3,381,000
|
|
|
|
3,403,000
|
|
|
|
|
3,498,000
|
|
|
|
3,104,000
|
|
|
|
3,269,000
|
|
|
|
3,381,000
|
|
|
|
3,403,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
35,000
|
|
|
|
50,000
|
|
Construction
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Owner Occupied
|
|
|
1,005,000
|
|
|
|
1,661,000
|
|
|
|
1,831,000
|
|
|
|
2,241,000
|
|
|
|
2,583,000
|
|
Non-Owner Occupied
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
46,000
|
|
|
|
|
1,005,000
|
|
|
|
1,661,000
|
|
|
|
1,831,000
|
|
|
|
2,276,000
|
|
|
|
2,679,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Assets
|
|
|
331,000
|
|
|
|
180,000
|
|
|
|
620,000
|
|
|
|
1,444,000
|
|
|
|
2,126,000
|
|
Consumer Assets
|
|
|
18,000
|
|
|
|
20,000
|
|
|
|
22,000
|
|
|
|
42,000
|
|
|
|
23,000
|
|
|
|
|
349,000
|
|
|
|
200,000
|
|
|
|
642,000
|
|
|
|
1,486,000
|
|
|
|
2,149,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,852,000
|
|
|
$
|
4,965,000
|
|
|
$
|
5,742,000
|
|
|
$
|
7,143,000
|
|
|
$
|
8,231,000
|
|
OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/18
|
|
|
6/30/18
|
|
|
3/31/18
|
|
|
12/31/17
|
|
|
9/30/17
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Construction
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Owner Occupied / Rental
|
|
|
410,000
|
|
|
|
546,000
|
|
|
|
302,000
|
|
|
|
193,000
|
|
|
|
245,000
|
|
|
|
|
410,000
|
|
|
|
546,000
|
|
|
|
302,000
|
|
|
|
193,000
|
|
|
|
245,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Construction
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Owner Occupied
|
|
|
538,000
|
|
|
|
296,000
|
|
|
|
2,082,000
|
|
|
|
2,031,000
|
|
|
|
2,044,000
|
|
Non-Owner Occupied
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
36,000
|
|
|
|
38,000
|
|
|
|
|
538,000
|
|
|
|
296,000
|
|
|
|
2,082,000
|
|
|
|
2,067,000
|
|
|
|
2,082,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Assets
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer Assets
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
948,000
|
|
|
$
|
842,000
|
|
|
$
|
2,384,000
|
|
|
$
|
2,260,000
|
|
|
$
|
2,327,000
|
|
MERCANTILE BANK CORPORATION
The following tables provide a reconciliation of nonperforming assets:
NONPERFORMING LOANS RECONCILIATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3rd Qtr
|
|
|
2nd Qtr
|
|
|
1st Qtr
|
|
|
4th Qtr
|
|
|
3rd Qtr
|
|
|
|
2018
|
|
|
2018
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
4,965,000
|
|
|
$
|
5,742,000
|
|
|
$
|
7,143,000
|
|
|
$
|
8,231,000
|
|
|
$
|
6,450,000
|
|
Additions, net of transfers to ORE
|
|
|
748,000
|
|
|
|
51,000
|
|
|
|
928,000
|
|
|
|
354,000
|
|
|
|
3,081,000
|
|
Returns to performing status
|
|
|
0
|
|
|
|
0
|
|
|
|
(175,000
|
)
|
|
|
0
|
|
|
|
(120,000
|
)
|
Principal payments
|
|
|
(857,000
|
)
|
|
|
(778,000
|
)
|
|
|
(1,557,000
|
)
|
|
|
(687,000
|
)
|
|
|
(1,089,000
|
)
|
Loan charge-offs
|
|
|
(4,000
|
)
|
|
|
(50,000
|
)
|
|
|
(597,000
|
)
|
|
|
(755,000
|
)
|
|
|
(91,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,852,000
|
|
|
$
|
4,965,000
|
|
|
$
|
5,742,000
|
|
|
$
|
7,143,000
|
|
|
$
|
8,231,000
|
|
OTHER REAL ESTATE OWNED & REPOSSESSED ASSETS RECONCILIATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3rd Qtr
|
|
|
2nd Qtr
|
|
|
1st Qtr
|
|
|
4th Qtr
|
|
|
3rd Qtr
|
|
|
|
2018
|
|
|
2018
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
842,000
|
|
|
$
|
2,384,000
|
|
|
$
|
2,260,000
|
|
|
$
|
2,327,000
|
|
|
$
|
789,000
|
|
Additions
|
|
|
257,000
|
|
|
|
266,000
|
|
|
|
527,000
|
|
|
|
48,000
|
|
|
|
1,918,000
|
|
Sale proceeds
|
|
|
(147,000
|
)
|
|
|
(1,807,000
|
)
|
|
|
(299,000
|
)
|
|
|
(101,000
|
)
|
|
|
(373,000
|
)
|
Valuation write-downs
|
|
|
(4,000
|
)
|
|
|
(1,000
|
)
|
|
|
(104,000
|
)
|
|
|
(14,000
|
)
|
|
|
(7,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
948,000
|
|
|
$
|
842,000
|
|
|
$
|
2,384,000
|
|
|
$
|
2,260,000
|
|
|
$
|
2,327,000
|
|
Gross loan charge-offs equaled $0.2 million during the third quarter of 2018, and totaled $1.1 million for the first nine months of the year, while recoveries of prior period loan charge-offs equaled $0.3 million and $2.2 million during the respective time periods. Net loan recoveries, as a percent of average total loans, equaled an annualized 0.02% and 0.06% during the third quarter and first nine months of 2018, respectively. We continue our collection efforts on charged-off loans, and expect to record recoveries in future periods; however, given the nature of these efforts, it is not practical to forecast the dollar amount and timing of the recoveries.
In each accounting period, we adjust the allowance to the amount we believe is necessary to maintain the allowance at an adequate level. Through the loan review and credit departments, we establish portions of the allowance based on specifically identifiable problem loans. The evaluation of the allowance is further based on, but not limited to, consideration of the internally prepared allowance analysis, loan loss migration analysis, composition of the loan portfolio, third-party analysis of the loan administration processes and portfolio, and general economic conditions.
MERCANTILE BANK CORPORATION
The allowance analysis applies reserve allocation factors to non-impaired outstanding loan balances, the result of which is combined with specific reserves to calculate an overall allowance dollar amount. For non-impaired commercial loans, reserve allocation factors are based on the loan ratings as determined by our standardized grade paradigms and by loan purpose. Our commercial loan portfolio is segregated into five classes: 1) commercial and industrial loans; 2) vacant land, land development and residential construction loans; 3) owner occupied real estate loans; 4) non-owner occupied real estate loans; and 5) multi-family and residential rental property loans. The reserve allocation factors are primarily based on the historical trends of net loan charge-offs through a migration analysis whereby net loan losses are tracked via assigned grades over various time periods, with adjustments made for environmental factors reflecting the current status of, or recent changes in, items such as: lending policies and procedures; economic conditions; nature and volume of the loan portfolio; experience, ability and depth of management and lending staff; volume and severity of past due, nonaccrual and adversely classified loans; effectiveness of the loan review program; value of underlying collateral; loan concentrations; and other external factors such as competition and regulatory environment. Adjustments for specific lending relationships, particularly impaired loans, are made on a case-by-case basis. Non-impaired retail loan reserve allocations are determined in a similar fashion as those for non-impaired commercial loans, except that retail loans are segmented by type of credit and not a grading system. We regularly review the allowance analysis and make needed adjustments based upon identifiable trends and experience.
A migration analysis is completed quarterly to assist us in determining appropriate reserve allocation factors for non-impaired loans. Our migration analysis takes into account various time periods, with most weight placed on the time frame from December 31, 2010 through September 30, 2018. We believe this time period represents an appropriate range of economic conditions, and that it provides for an appropriate basis in determining reserve allocation factors given current economic conditions and the general consensus of economic conditions in the near future.
Although the migration analysis provides a historical accounting of our net loan losses, it is not able to fully account for environmental factors that will also very likely impact the collectability of our commercial loans as of any quarter-end date. Therefore, we incorporate the environmental factors as adjustments to the historical data. Environmental factors include both internal and external items. We believe the most significant internal environmental factor is our credit culture and the relative aggressiveness in assigning and revising commercial loan risk ratings, with the most significant external environmental factor being the assessment of the current economic environment and the resulting implications on our commercial loan portfolio. During the second quarter of 2018, we adjusted the “other external factors such as competition and regulatory environment” qualitative factor to reflect the ongoing, and in some cases, enhanced competitive environment for commercial loans.
The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of collateral, and timeliness of scheduled payments. We have a policy of requesting and reviewing periodic financial statements from commercial loan customers, and we have a disciplined and formalized review of the existence of collateral and its value. The primary risk element with respect to each residential real estate loan and consumer loan is the timeliness of scheduled payments. We have a reporting system that monitors past due loans and have adopted policies to pursue creditor’s rights in order to preserve our collateral position.
The allowance for originated loans equaled $21.1 million as of September 30, 2018, or 0.9% of total originated loans outstanding, compared to $19.1 million, or 0.9% of total originated loans outstanding at December 31, 2017. We also had an allowance for acquired loans as of September 30, 2018 and December 31, 2017, equaling $0.6 million and $0.4 million, respectively. The allowance equaled 447% of nonperforming loans as of September 30, 2018, compared to 273% as of December 31, 2017. The increase in this coverage ratio during the first nine months of 2018 in large part reflects a $2.3 million, or 32.1%, reduction in nonperforming loans, combined with a $2.2 million balance increase in the allowance.
MERCANTILE BANK CORPORATION
As of September 30, 2018, the allowance for originated loans was comprised of $20.1 million in general reserves relating to non-impaired loans, $0.3 million in specific reserve allocations relating to nonaccrual loans, and $0.7 million in specific reserves on other loans, primarily accruing loans designated as troubled debt restructurings. Troubled debt restructurings totaled $12.4 million at September 30, 2018, consisting of $1.1 million that are on nonaccrual status and $11.3 million that are on accrual status. The latter, while considered and accounted for as impaired loans in accordance with accounting guidelines, is not included in our nonperforming loan totals. Impaired loans with an aggregate carrying value of $0.6 million as of September 30, 2018 had been subject to previous partial charge-offs aggregating $0.8 million. Those partial charge-offs were recorded as follows: less than $0.1 million in 2018, $0.3 million in 2017, less than $0.1 million in 2016, 2015, 2013 and 2012, and $0.4 million in 2011. As of September 30, 2018, there were no specific reserves allocated to impaired loans that had been subject to a previous partial charge-off.
The following table provides a breakdown of our originated and acquired loans categorized as troubled debt restructurings:
|
|
9/30/18
|
|
|
6/30/18
|
|
|
3/31/18
|
|
|
12/31/17
|
|
|
9/30/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
11,300,000
|
|
|
$
|
5,985,000
|
|
|
$
|
9,876,000
|
|
|
$
|
6,128,000
|
|
|
$
|
9,350,000
|
|
Nonperforming
|
|
|
1,129,000
|
|
|
|
1,661,000
|
|
|
|
1,920,000
|
|
|
|
2,434,000
|
|
|
|
2,603,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,429,000
|
|
|
$
|
7,646,000
|
|
|
$
|
11,796,000
|
|
|
$
|
8,562,000
|
|
|
$
|
11,953,000
|
|
Although we believe the allowance is adequate to absorb loan losses in our originated loan portfolio as they arise, there can be no assurance that we will not sustain loan losses in any given period that could be substantial in relation to, or greater than, the size of the allowance.
Securities available for sale decreased $9.2 million during the first nine months of 2018, totaling $327 million as of September 30, 2018. Purchases during the first nine months of 2018, consisting primarily of U.S. Government agency bonds ($23.1 million), U.S. Government issued or guaranteed mortgage-backed securities ($11.4 million) and municipal bonds ($1.2 million), totaled $35.7 million. Proceeds from matured and called U.S. Government agency bonds and municipal bonds during the first nine months of 2018 totaled $4.3 million and $19.9 million, respectively, with another $7.4 million from principal paydowns on U.S. Government agency issued or guaranteed mortgage-backed securities. At September 30, 2018, the portfolio was primarily comprised of U.S. Government agency bonds (55%), municipal bonds (32%) and U.S. Government agency issued or guaranteed mortgage-backed securities (13%). All of our securities are currently designated as available for sale, and are therefore stated at fair value. The fair value of securities designated as available for sale at September 30, 2018 totaled $327 million, including a net unrealized loss of $16.9 million. We maintain the securities portfolio at levels to provide adequate pledging and secondary liquidity for our daily operations. In addition, the securities portfolio serves a primary interest rate risk management function. We expect purchases during the remainder of 2018 and into 2019 to generally consist of U.S. Government agency bonds, U.S. Government agency issued or guaranteed mortgage-backed securities and municipal bonds, with the securities portfolio maintained at about 11% of total assets.
FHLBI stock totaled $11.1 million as of September 30, 2018, compared to $11.0 million as of December 31, 2017. The $0.1 million increase reflects additional stock purchased in association with an increase in outstanding advances during the first nine months of 2018. Our investment in FHLBI stock is necessary to engage in their advance and other financing programs. We have regularly received quarterly cash dividends, and we expect a cash dividend will continue to be paid in future quarterly periods.
MERCANTILE BANK CORPORATION
Market values on our U.S. Government agency bonds, mortgage-backed securities issued or guaranteed by U.S. Government agencies and municipal bonds are generally determined on a monthly basis with the assistance of a third-party vendor. Evaluated pricing models that vary by type of security and incorporate available market data are utilized. Standard inputs include issuer and type of security, benchmark yields, reported trades, broker/dealer quotes and issuer spreads. The market value of certain non-rated securities issued by relatively small municipalities generally located within our markets is estimated at carrying value. We believe our valuation methodology provides for a reasonable estimation of market value, and that it is consistent with the requirements of accounting guidelines.
Interest-earning balances, primarily consisting of excess funds deposited at the Federal Reserve Bank of Chicago, are used to manage daily liquidity needs and interest rate sensitivity. During the first nine months of 2018, the average balance of these funds equaled $82.7 million, or 2.7% of average earning assets. We expect the level of these funds to average approximately 1% to 2% of average earning assets in future quarters.
Net premises and equipment equaled $48.1 million at September 30, 2018, an increase of $2.2 million during the first nine months of 2018. Net purchases during the first nine months of 2018 totaled $5.1 million, while the transfer of a former branch facility into other real estate owned equaled $0.3 million and depreciation expense aggregated $2.6 million. Other real estate owned equaled $0.9 million as of September 30, 2018, compared to $2.3 million as of December 31, 2017. While we expect further transfers from loans to other real estate owned in future periods reflecting our collection efforts on some impaired lending relationships, we believe the overall strong quality of our loan portfolio will limit any overall increase in, and average balance of, this particular nonperforming asset category in future periods.
Total deposits decreased $13.6 million during the first nine months of 2018, totaling $2.51 billion at September 30, 2018. Out-of-area deposits decreased $21.4 million during the first nine months of 2018, and as a percent of total deposits, equaled 3.2% as of September 30, 2018, compared to 4.1% as of December 31, 2017.
Noninterest-bearing checking accounts increased $13.1 million during the first nine months of 2018, in large part reflecting growth from deposit account openings as part of recently established commercial lending relationships. Interest-bearing checking accounts decreased $37.7 million, while savings deposits declined $16.0 million. Money market deposit accounts increased $77.6 million, primarily reflecting new funds being deposited and transfers from other deposit account types into relatively high-paying accounts from current customers. Local time deposits under $100,000 increased $9.8 million, while local time deposits $100,000 and over declined $38.9 million. The reduction in larger time deposits generally reflects time deposits from certain public unit, time deposit only, depositors that were offered aggressive rates by competitor banks at the time of maturity.
Sweep accounts decreased $6.4 million during the first nine months of 2018, totaling $112 million as of September 30, 2018. Total balances in this product have been on a declining trend over the past few years, in large part reflecting customers closing sweep accounts and depositing the funds into stand-alone noninterest-bearing checking accounts. Our sweep account program entails transferring collected funds from certain business noninterest-bearing checking accounts and savings deposits into over-night interest-bearing repurchase agreements. Such sweep accounts are not deposit accounts and are not afforded federal deposit insurance, and are accounted for as secured borrowings.
FHLBI advances increased $20.0 million during the first nine months of 2018, reflecting new advances obtained primarily to fund loan growth. As of September 30, 2018, FHLBI advances totaled $240 million. The FHLBI advances are generally collateralized by a blanket lien on our residential mortgage loan portfolio and certain commercial real estate loans. Our borrowing line of credit as of September 30, 2018 totaled $786 million, with remaining availability of $540 million.
Shareholders’ equity was $379 million at September 30, 2018, compared to $366 million at December 31, 2017. The $13.6 million increase during the first nine months of 2018 primarily reflects the positive impact of net income totaling $30.5 million, along with the negative impact of cash dividends on common shares totaling $11.1 million and an $8.5 million after-tax decline in the market value of our available for sale securities portfolio reflecting the increase in market interest rates during that time period.
MERCANTILE BANK CORPORATION
Liquidity
Liquidity is measured by our ability to raise funds through deposits, borrowed funds, and capital, or cash flow from the repayment of loans and securities. These funds are used to fund loans, meet deposit withdrawals, maintain reserve requirements and operate our company. Liquidity is primarily achieved through local and out-of-area deposits and liquid assets such as securities available for sale, matured and called securities, federal funds sold and interest-earning balances. Asset and liability management is the process of managing our balance sheet to achieve a mix of earning assets and liabilities that maximizes profitability, while providing adequate liquidity.
To assist in providing needed funds, we have regularly obtained monies from wholesale funding sources. Wholesale funds, primarily comprised of deposits from customers outside of our market areas and advances from the FHLBI, totaled $321 million, or 11.2% of combined deposits and borrowed funds, as of September 30, 2018, compared to $323 million, or 11.3% of combined deposits and borrowed funds, as of December 31, 2017. Wholesale funds are generally obtained to assist in funding loan growth.
Sweep accounts decreased $6.4 million during the first nine months of 2018, totaling $112 million as of September 30, 2018. Total balances in this product have been on a declining trend over the past few years, in large part reflecting customers closing sweep accounts and depositing the funds into stand-alone noninterest-bearing checking accounts. Our sweep account program entails transferring collected funds from certain business noninterest-bearing checking accounts and savings deposits into over-night interest-bearing repurchase agreements. Such sweep accounts are not deposit accounts and are not afforded federal deposit insurance, and are accounted for as secured borrowings. Information regarding our repurchase agreements as of September 30, 2018 and during the first nine months of 2018 is as follows:
Outstanding balance at September 30, 2018
|
|
$
|
112,378,000
|
|
Weighted average interest rate at September 30, 2018
|
|
|
0.25
|
%
|
Maximum daily balance nine months ended September 30, 2018
|
|
$
|
123,046,000
|
|
Average daily balance for nine months ended September 30, 2018
|
|
$
|
99,961,000
|
|
Weighted average interest rate for nine months ended September 30, 2018
|
|
|
0.24
|
%
|
As a member of FHLBI, we have access to FHLBI advance borrowing programs. FHLBI advances increased $20.0 million during the first nine months of 2018, reflecting new advances primarily obtained to assist in funding loan growth. As of September 30, 2018, FHLBI advances totaled $240 million, and based on available collateral we could borrow an additional $540 million.
We also have the ability to borrow up to $50.0 million on a daily basis through a correspondent bank using an established unsecured federal funds purchased line of credit. To provide temporary liquidity, we accessed this line of credit periodically during the first nine months of 2018. In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged $79.1 million during the first nine months of 2018. We also have a line of credit through the Discount Window of the Federal Reserve Bank of Chicago. Using certain municipal bonds as collateral, we could have borrowed up to $18.5 million as of September 30, 2018. We did not utilize this line of credit during the first nine months of 2018 or at any time during the previous nine fiscal years, and do not plan to access this line of credit in future periods.
MERCANTILE BANK CORPORATION
The following table reflects, as of September 30, 2018, significant fixed and determinable contractual obligations to third parties by payment date, excluding accrued interest:
|
|
One Year
|
|
|
One to
|
|
|
Three to
|
|
|
Over
|
|
|
|
|
|
|
|
or Less
|
|
|
Three Years
|
|
|
Five Years
|
|
|
Five Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits without a stated maturity
|
|
$
|
2,045,805,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,045,805,000
|
|
Time deposits
|
|
|
196,152,000
|
|
|
|
197,367,000
|
|
|
|
69,486,000
|
|
|
|
0
|
|
|
|
463,005,000
|
|
Short-term borrowings
|
|
|
112,378,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
112,378,000
|
|
Federal Home Loan Bank advances
|
|
|
30,000,000
|
|
|
|
70,000,000
|
|
|
|
100,000,000
|
|
|
|
40,000,000
|
|
|
|
240,000,000
|
|
Subordinated debentures
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
46,029,000
|
|
|
|
46,029,000
|
|
Other borrowed money
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,169,000
|
|
|
|
3,169,000
|
|
Property leases
|
|
|
336,000
|
|
|
|
557,000
|
|
|
|
386,000
|
|
|
|
1,468,000
|
|
|
|
2,747,000
|
|
In addition to normal loan funding and deposit flow, we must maintain liquidity to meet the demands of certain unfunded loan commitments and standby letters of credit. As of September 30, 2018, we had a total of $1.01 billion in unfunded loan commitments and $22.4 million in unfunded standby letters of credit. Of the total unfunded loan commitments, $855 million were commitments available as lines of credit to be drawn at any time as customers’ cash needs vary, and $152 million were for loan commitments generally expected to close and become funded within the next 12 to 18 months. We regularly monitor fluctuations in loan balances and commitment levels, and include such data in our overall liquidity management.
We monitor our liquidity position and funding strategies on an ongoing basis, but recognize that unexpected events, changes in economic or market conditions, a reduction in earnings performance, declining capital levels or situations beyond our control could cause liquidity challenges. While we believe it is unlikely that a funding crisis of any significant degree is likely to materialize, we have developed a comprehensive contingency funding plan that provides a framework for meeting liquidity disruptions.
Capital Resources
Shareholders’ equity was $379 million at September 30, 2018, compared to $366 million at December 31, 2017. The $13.6 million increase during the first nine months of 2018 primarily reflects the positive impact of net income totaling $30.5 million, along with the negative impact of cash dividends on common shares totaling $11.1 million and an $8.5 million after-tax decline in the market value of our available for sale securities portfolio reflecting the increase in market interest rates during that time period.
On January 30, 2015, we announced that our Board of Directors had authorized a program to repurchase up to $20.0 million of our common stock from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations. On April 19, 2016, we announced that our Board of Directors had authorized a $15.0 million expansion of the existing common stock repurchase program. Since inception, we have purchased approximately 956,000 shares of common stock at a total price of $19.5 million, at an average price of $20.38; no shares were purchased during the first nine months of 2018. The stock buybacks have been funded from cash dividends paid to us from our bank. Additional repurchases may be made in future periods under the authorized plan, which would also likely be funded from cash dividends paid to us from our bank.
MERCANTILE BANK CORPORATION
We and our bank are subject to regulatory capital requirements administered by state and federal banking agencies. Failure to meet the various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. Under the BASEL III capital rules that became effective on January 1, 2015, there is a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not meet this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in cash dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement is being phased in over three years beginning in 2016. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5% and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019. We believe that, as of September 30, 2018, our bank would meet all capital adequacy requirements under the BASEL III capital rules on a fully phased-in basis as if all such requirements were currently in effect.
As of September 30, 2018, our bank’s total risk-based capital ratio was 12.8%, compared to 12.6% at December 31, 2017. Our bank’s total regulatory capital increased $25.0 million during the first nine months of 2018, in large part reflecting the net impact of net income totaling $34.6 million and cash dividends paid to us aggregating $12.1 million. Our bank’s total risk-based capital ratio was also impacted by a $154 million increase in total risk-weighted assets, primarily resulting from commercial loan growth. As of September 30, 2018, our bank’s total regulatory capital equaled $396 million, or approximately $87 million in excess of the 10.0% minimum which is among the requirements to be categorized as “well capitalized.” On October 11, 2018, our Board of Directors declared a special $0.75 per share cash dividend on our common stock. To provide the necessary funds, on the same day our bank’s Board of Directors declared and paid a special cash dividend to us, which on a pro forma basis reduces our bank’s total risk-based capital ratio by about 40 basis points as of September 30, 2018. Our and our bank’s capital ratios as of September 30, 2018 and December 31, 2017 are disclosed in Note 12 of the Notes to Condensed Consolidated Financial Statements.
Results of Operations
We recorded net income of $10.1 million, or $0.61 per basic and diluted share, for the third quarter of 2018, compared to net income of $8.3 million, or $0.51 per basic and diluted share, for the third quarter of 2017. We recorded net income of $30.5 million, or $1.83 per basic and diluted share, for the first nine months of 2018, compared to net income of $23.3 million, or $1.41 per basic and diluted share, for the first nine months of 2017.
Interest income related to purchased loan accounting entries increased net income during the third quarter of 2018 by $0.3 million, or $0.02 per diluted share, and net income during the first nine months of 2018 by $2.7 million, or $0.16 per diluted share; during the respective 2017 periods, net income increased $1.1 million, or $0.07 per diluted share, and $2.6 million, or $0.15 per diluted share, as a result of these entries. A bank owned life insurance claim during the first quarter of 2017 increased reported net income during the first nine months of 2017 by $1.2 million, or $0.07 per diluted share. Excluding the impacts of these transactions, diluted earnings per share increased $0.15, or 34.1%, during the third quarter of 2018 compared to the prior-year third quarter, and $0.48, or 40.3%, during the first nine months of 2018 compared to the respective 2017 period.
Net income during the third quarter of 2018 and the first nine months of 2018 also benefited from a reduction in our federal corporate income tax rate, which was lowered from 35.0% to 21.0% on January 1, 2018, as a result of the enactment of the Tax Cuts and Jobs Act. Our effective tax rate was 19.0% during both the third quarter and first nine months of 2018, down from 30.8% and 30.7% during the respective prior-year periods.
MERCANTILE BANK CORPORATION
The higher level of net income during the third quarter of 2018 compared to the prior-year third quarter mainly resulted from increased net interest income and decreased federal income tax expense, which more than offset increased noninterest expense. Lower provision expense and higher noninterest income also contributed to improved net income. The increased net interest income resulted from a higher level of earning assets and an improved net interest margin, while the decreased federal income tax expense primarily reflects the previously-mentioned reduction in our federal corporate income tax rate. The higher level of noninterest expense mainly resulted from increased salary costs; in addition, planned increases in various other overhead costs stemming from our ongoing investments in employees, facilities, and technology contributed to the higher level of expense. The increased noninterest income primarily resulted from higher credit and debit card fees, service charges on accounts, and payroll processing revenue.
The improved net income in the first nine months of 2018 compared to the respective prior-year period primarily reflects increased net interest income and decreased federal income tax expense, which more than offset lower noninterest income and higher noninterest expense. Decreased provision expense also contributed to the increased net income. The increase in net interest income resulted from a higher level of earning assets and an improved net interest margin. The lower federal income tax expense mainly resulted from the aforementioned reduction in our federal corporate income tax rate. Noninterest income during the first nine months of 2017 was elevated primarily as a result of the bank owned life insurance death benefits claim. Excluding this transaction, noninterest income during the first nine months of 2018 increased compared to the respective 2017 period, mainly reflecting higher credit and debit card fees, payroll processing revenue, and service charges on accounts, along with a gain on sale of a former branch. The higher level of noninterest expense primarily reflects increased salary costs, along with increases in various other overhead costs related to our continuing investments in employees, facilities, and technology.
Interest income during the third quarter of 2018 was $35.5 million, an increase of $2.5 million, or 7.4%, from the $33.0 million earned during the third quarter of 2017. The increase in interest income resulted from a higher yield on, and growth in, average earning assets. The yield on average earning assets was 4.60% during the third quarter of 2018, compared to 4.41% during the prior-year third quarter. The increased yield on average earning assets primarily resulted from a higher yield on loans and a change in earning asset mix. The increase in the yield on loans from 4.81% during the third quarter of 2017 to 4.91% during the third quarter of 2018 was primarily due to a higher yield on commercial loans, which equaled 5.01% in the current-year third quarter compared to 4.82% during the prior-year third quarter. Excluding interest income related to purchased loan accounting entries, the yield on loans equaled 4.86% in the third quarter of 2018, compared to 4.54% during the prior-year third quarter. Interest income related to purchased loan accounting entries totaled $0.4 million during the third quarter of 2018, compared to $1.8 million during the prior-year third quarter. The increased commercial loan yield primarily resulted from higher interest rates on certain variable-rate loans stemming from the Federal Open Market Committee (“FOMC”) raising the targeted federal funds rate by 25 basis points in each of December 2017 and March, June, and September 2018. The change in earning asset mix mainly reflects loan growth and a reduction in interest-earning deposits. On average, higher-yielding loans represented 86.8% of earning assets during the third quarter of 2018, up from 84.8% during the third quarter of 2017, while lower-yielding interest-earning deposits represented 2.0% of earning assets during the current-year third quarter, down from 3.9% during the respective 2017 period. Higher yields on securities and interest-earning deposits, primarily reflecting the continuing rising rate environment, also contributed to the increased yield on average earning assets. Average earning assets equaled $3.06 billion during the third quarter of 2018, up $72.2 million, or 2.4%, from the level of $2.99 billion during the third quarter of 2017; average loans increased $124 million, average interest-earning deposits were down $55.0 million, and average securities increased $3.5 million.
MERCANTILE BANK CORPORATION
Interest income during the first nine months of 2018 was $105 million, an increase of $12.1 million, or 13.1%, from the $92.6 million earned during the first nine months of 2017. The increase in interest income resulted from a higher yield on, and growth in, average earning assets. The yield on average earning assets was 4.63% during the first nine months of 2018, compared to 4.32% during the first nine months of 2017. The higher yield on average earning assets primarily resulted from an increased yield on loans, which equaled 4.99% during the first nine months of 2018, compared to 4.68% during the respective 2017 period. Excluding interest income related to purchased loan accounting entries, the yield on loans equaled 4.81% during the first nine months of 2018, compared to 4.47% during the respective 2017 period. Interest income related to purchased loan accounting entries totaled $3.4 million during the first nine months of 2018, compared to $3.9 million during the respective prior-year period. The increased yield on loans mainly stemmed from a higher yield on commercial loans, which equaled 5.07% and 4.67% during the first nine months of 2018 and 2017, respectively. The higher yield on commercial loans primarily resulted from higher interest rates on certain variable-rate loans resulting from the FOMC raising the targeted federal funds by 25 basis points in each of March, June, and December 2017 and March, June and September 2018. Higher yields on securities and interest-earning deposits, mainly reflecting the ongoing rising interest rate environment, also contributed to the increased yield on average earning assets. Average earning assets equaled $3.03 billion during the first nine months of 2018, up $149 million, or 5.2%, from the level of $2.88 billion during the respective 2017 period; average loans were up $137 million, average interest-earning deposit balances increased $7.7 million, and average securities were up $5.1 million.
Interest expense during the third quarter of 2018 was $5.6 million, an increase of $1.2 million, or 28.6%, from the $4.4 million expensed during the third quarter of 2017. The increase in interest expense is attributable to a higher weighted average cost of interest-bearing liabilities, which equaled 1.11% in the third quarter of 2018, compared to 0.85% in the third quarter of 2017. The increase in the weighted average cost of interest-bearing liabilities primarily reflects higher costs of certain non-time deposit accounts, time deposits, and borrowed funds. The cost of interest-bearing non-time deposit accounts increased from 0.35% during the third quarter of 2017 to 0.56% during the third quarter of 2018, primarily reflecting increased interest rates on certain account categories in response to the increasing interest rate environment. The cost of time deposits increased from 1.26% during the prior-year third quarter to 1.64% during the current-year third quarter, mainly reflecting higher rates paid on local certificates of deposit, public unit certificates of deposit $100,000 and over, and brokered certificates of deposit $100,000 and over; the increased rates primarily reflect the rising interest rate environment. The cost of borrowed funds increased from 1.75% during the third quarter of 2017 to 2.14% during the respective 2018 period, mainly reflecting higher costs of FHLBI advances and subordinated debentures and a change in borrowing mix. The cost of FHLBI advances increased from 1.70% during the third quarter of 2017 to 1.98% during the current-year third quarter; longer-term advances totaling $40 million were obtained during the first nine months of 2018 to meet loan funding and interest rate risk management needs. The cost of subordinated debentures was 6.64% during the current-year third quarter, up from 5.50% during the respective 2017 period due to increased Libor rates stemming from the rising interest rate environment. Average higher-costing FHLBI advances and subordinated debentures represented 61.9% and 12.0% of average borrowed funds, respectively, during the third quarter of 2018, up from 60.4% and 11.5%, respectively, during the prior-year third quarter. Average lower-costing sweep accounts represented 25.2% and 27.3% of average borrowed funds during the third quarters of 2018 and 2017, respectively. Average interest-bearing liabilities were $2.01 billion during the third quarter of 2018, down $30.0 million, or 1.5%, from the $2.04 billion average during the third quarter of 2017; average time deposits were down $53.0 million, average interest-bearing non-time deposits were up $33.1 million, and average borrowings decreased $10.1 million.
MERCANTILE BANK CORPORATION
Interest expense during the first nine months of 2018 was $15.5 million, an increase of $4.2 million, or 37.4%, from the $11.3 million expensed during the first nine months of 2017. The increase in interest expense is primarily attributable to a higher weighted average cost of interest-bearing liabilities, which equaled 1.02% during the first nine months of 2018 compared to 0.77% during the respective 2017 period. The increase in the weighted average cost of interest-bearing liabilities primarily reflects higher costs of certain non-time deposit account categories, time deposits, and borrowed funds. The cost of interest-bearing non-time deposit accounts increased from 0.24% during the first nine months of 2017 to 0.52% during the first nine months of 2018, mainly reflecting increased rates on certain account categories in response to the increasing interest rate environment; the increased cost also reflects a large depositor transferring funds from time deposits into a money market account product at rates higher than the average rate on the money market product at the time of transfer and the offering of a high balance money market account product with a higher rate, both of which occurred during the second quarter of 2017. The cost of time deposits increased from 1.21% during the first nine months of 2017 to 1.50% during the respective current-year period, primarily reflecting higher rates paid on local certificates of deposit, public unit certificates of deposit $100,000 and over, and brokered certificates of deposit $100,000 and over; the increased rates primarily reflect the rising interest rate environment. The cost of borrowed funds increased from 1.66% during the first nine months of 2017 to 2.00% during the first nine months of 2018, mainly reflecting higher costs of subordinated debentures and FHLBI advances and a change in borrowing mix. The cost of subordinated debentures was 6.35% during the first nine months of 2018, up from 5.42% during the respective 2017 period due to increased Libor rates stemming from the rising interest rate environment. The cost of FHLBI advances increased from 1.63% during the first nine months of 2017 to 1.83% during the respective 2018 period; longer-term advances totaling $130 million were obtained during the last ten months of 2017 and first nine months of 2018 to meet loan funding and interest rate risk management needs. Average higher-costing FHLBI advances and subordinated debentures represented 60.3% and 12.2% of average borrowed funds, respectively, during the first nine months of 2018, up from 56.8% and 11.8%, respectively, during the same 2017 period. Average lower-costing sweep accounts represented 26.6% and 30.5% of average borrowed funds during the first nine months of 2018 and 2017, respectively. An increase in interest-bearing liabilities also contributed to the higher level of interest expense. Average interest-bearing liabilities were $2.03 billion during the first nine months of 2018, up $69.7 million, or 3.6%, from the $1.96 billion average during the first nine months of 2017; average interest-bearing non-time deposits were up $112 million, average time deposits were down $35.4 million, and average borrowings decreased $7.2 million.
Net interest income during the third quarter of 2018 was $29.8 million, an increase of $1.2 million, or 4.2%, from the $28.6 million earned during the third quarter of 2017. The increase in net interest income was due to growth in average earning assets and a higher net interest margin. The net interest margin increased from 3.83% in the third quarter of 2017 to 3.87% in the current-year third quarter due to a higher yield on average earning assets, primarily reflecting an increased yield on commercial loans and a change in earning asset mix, which more than offset a higher cost of funds, mainly reflecting increased costs of certain non-time deposit accounts, time deposits, and borrowed funds. The increased yield on commercial loans primarily reflects the positive impact of higher interest rates on certain variable-rate loans stemming from the FOMC raising the targeted federal funds rate by 25 basis points in each of June and December 2017 and March, June and September 2018. The change in earning asset mix mainly reflects loan growth and a reduction in interest-earning deposits. Excluding interest income associated with purchased loan accounting entries, as well as adjusting for excess liquidity maintained at the Federal Reserve, our core net interest margin was 3.83% during the third quarter of 2018, compared to 3.65% during the third quarter of 2017.
MERCANTILE BANK CORPORATION
Net interest income during the first nine months of 2018 was $89.3 million, an increase of $7.9 million, or 9.7%, from the $81.4 million earned during the first nine months of 2017. The increase was due to a higher level of average earning assets and an improved net interest margin. The net interest margin increased from 3.80% during the first nine months of 2017 to 3.95% during the first nine months of 2018 due to a higher yield on average earning assets, primarily reflecting an increased yield on commercial loans, which more than offset an increased cost of funds, mainly reflecting increased costs of certain non-time deposit account categories, time deposits, and borrowed funds. The higher yield on commercial loans primarily resulted from higher interest rates on certain variable-rate loans resulting from the FOMC raising the targeted federal funds by 25 basis points in each of March, June, and December 2017 and March, June, and September 2018. Excluding interest income associated with purchased loan accounting entries, as well as adjusting for excess liquidity maintained at the Federal Reserve, our core net interest margin was 3.82% during the first nine months of 2018, compared to 3.65% during the respective 2017 period.
The following tables set forth certain information relating to our consolidated average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the third quarters and first nine months of 2018 and 2017. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the period presented. Tax-exempt securities interest income and yield for the third quarters and first nine months of 2018 and 2017 have been computed on a tax equivalent basis using a marginal tax rate of 21% and 35%, respectively. Securities interest income was increased by $60,000 and $213,000 in the third quarters of 2018 and 2017, respectively, and $210,000 and $581,000 in the first nine months of 2018 and 2017, respectively, for this non-GAAP, but industry standard, adjustment. This adjustment equated to a one basis point increase in our net interest margin during both the third quarter and first nine months of 2018, compared to a three basis point increase and a two basis point increase in the respective 2017 periods.
MERCANTILE BANK CORPORATION
|
|
Quarters ended September 30,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
(dollars in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
2,658,092
|
|
|
$
|
32,918
|
|
|
|
4.91
|
%
|
|
$
|
2,534,364
|
|
|
$
|
30,746
|
|
|
|
4.81
|
%
|
Investment securities
|
|
|
342,593
|
|
|
|
2,315
|
|
|
|
2.70
|
|
|
|
339,125
|
|
|
|
2,119
|
|
|
|
2.50
|
|
Other interest-earning assets
|
|
|
61,810
|
|
|
|
313
|
|
|
|
1.98
|
|
|
|
116,851
|
|
|
|
382
|
|
|
|
1.28
|
|
Total interest-earning assets
|
|
|
3,062,495
|
|
|
|
35,546
|
|
|
|
4.60
|
|
|
|
2,990,340
|
|
|
|
33,247
|
|
|
|
4.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(21,661
|
)
|
|
|
|
|
|
|
|
|
|
|
(18,918
|
)
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
254,295
|
|
|
|
|
|
|
|
|
|
|
|
248,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,295,129
|
|
|
|
|
|
|
|
|
|
|
$
|
3,220,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
1,628,346
|
|
|
$
|
3,574
|
|
|
|
0.87
|
%
|
|
$
|
1,648,235
|
|
|
$
|
2,652
|
|
|
|
0.64
|
%
|
Short-term borrowings
|
|
|
97,090
|
|
|
|
63
|
|
|
|
0.26
|
|
|
|
107,355
|
|
|
|
45
|
|
|
|
0.17
|
|
Federal Home Loan Bank advances
|
|
|
237,609
|
|
|
|
1,201
|
|
|
|
1.98
|
|
|
|
238,043
|
|
|
|
1,033
|
|
|
|
1.70
|
|
Other borrowings
|
|
|
49,131
|
|
|
|
808
|
|
|
|
6.44
|
|
|
|
48,512
|
|
|
|
660
|
|
|
|
5.32
|
|
Total interest-bearing liabilities
|
|
|
2,012,176
|
|
|
|
5,646
|
|
|
|
1.11
|
|
|
|
2,042,145
|
|
|
|
4,390
|
|
|
|
0.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
|
893,181
|
|
|
|
|
|
|
|
|
|
|
|
805,650
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
12,198
|
|
|
|
|
|
|
|
|
|
|
|
13,126
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
377,574
|
|
|
|
|
|
|
|
|
|
|
|
359,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
3,295,129
|
|
|
|
|
|
|
|
|
|
|
$
|
3,220,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
29,900
|
|
|
|
|
|
|
|
|
|
|
$
|
28,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.49
|
%
|
|
|
|
|
|
|
|
|
|
|
3.56
|
%
|
Net interest spread on average assets
|
|
|
|
|
|
|
|
|
|
|
3.60
|
%
|
|
|
|
|
|
|
|
|
|
|
3.56
|
%
|
Net interest margin on earning assets
|
|
|
|
|
|
|
|
|
|
|
3.87
|
%
|
|
|
|
|
|
|
|
|
|
|
3.83
|
%
|
MERCANTILE BANK CORPORATION
|
|
Nine months ended September 30,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
(dollars in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
2,602,718
|
|
|
$
|
97,087
|
|
|
|
4.99
|
%
|
|
$
|
2,466,156
|
|
|
$
|
86,406
|
|
|
|
4.68
|
%
|
Investment securities
|
|
|
343,983
|
|
|
|
6,838
|
|
|
|
2.65
|
|
|
|
338,901
|
|
|
|
6,175
|
|
|
|
2.43
|
|
Other interest-earning assets
|
|
|
82,700
|
|
|
|
1,071
|
|
|
|
1.73
|
|
|
|
75,029
|
|
|
|
641
|
|
|
|
1.14
|
|
Total interest-earning assets
|
|
|
3,029,401
|
|
|
|
104,996
|
|
|
|
4.63
|
|
|
|
2,880,086
|
|
|
|
93,222
|
|
|
|
4.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(20,824
|
)
|
|
|
|
|
|
|
|
|
|
|
(18,641
|
)
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
250,576
|
|
|
|
|
|
|
|
|
|
|
|
245,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,259,153
|
|
|
|
|
|
|
|
|
|
|
$
|
3,106,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
1,651,186
|
|
|
$
|
9,921
|
|
|
|
0.80
|
%
|
|
$
|
1,574,293
|
|
|
$
|
6,543
|
|
|
|
0.56
|
%
|
Short-term borrowings
|
|
|
100,165
|
|
|
|
181
|
|
|
|
0.24
|
|
|
|
116,985
|
|
|
|
142
|
|
|
|
0.16
|
|
Federal Home Loan Bank advances
|
|
|
226,154
|
|
|
|
3,134
|
|
|
|
1.83
|
|
|
|
217,125
|
|
|
|
2,690
|
|
|
|
1.63
|
|
Other borrowings
|
|
|
48,988
|
|
|
|
2,286
|
|
|
|
6.15
|
|
|
|
48,386
|
|
|
|
1,920
|
|
|
|
5.23
|
|
Total interest-bearing liabilities
|
|
|
2,026,493
|
|
|
|
15,522
|
|
|
|
1.02
|
|
|
|
1,956,789
|
|
|
|
11,295
|
|
|
|
0.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
|
849,337
|
|
|
|
|
|
|
|
|
|
|
|
785,940
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
12,318
|
|
|
|
|
|
|
|
|
|
|
|
12,882
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
371,005
|
|
|
|
|
|
|
|
|
|
|
|
351,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
3,259,153
|
|
|
|
|
|
|
|
|
|
|
$
|
3,106,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
89,474
|
|
|
|
|
|
|
|
|
|
|
$
|
81,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.61
|
%
|
|
|
|
|
|
|
|
|
|
|
3.55
|
%
|
Net interest spread on average assets
|
|
|
|
|
|
|
|
|
|
|
3.67
|
%
|
|
|
|
|
|
|
|
|
|
|
3.52
|
%
|
Net interest margin on earning assets
|
|
|
|
|
|
|
|
|
|
|
3.95
|
%
|
|
|
|
|
|
|
|
|
|
|
3.80
|
%
|
A loan loss provision expense of $0.4 million was recorded during the third quarter of 2018, compared to a provision expense of $1.0 million during the third quarter of 2017. A loan loss provision expense of $1.1 million was recorded during the first nine months of 2018, compared to a provision expense of $2.4 million during the first nine months of 2017. The provision expense recorded during the 2018 periods primarily reflects ongoing loan growth; in addition, the provision expense recorded during the first nine months of 2018 depicts an increased allocation related to our “competitive environment” environmental factor. The provision expense recorded during the prior-year periods mainly reflects ongoing loan growth and an increased allocation related to our “economic conditions" environmental factor.
MERCANTILE BANK CORPORATION
Net loan recoveries were $0.1 million and $1.1 million during the third quarter of 2018 and first nine months of 2018, respectively, compared to net loan charge-offs of $0.1 million and $1.1 million during the respective 2017 periods. Loan charge-offs associated with one commercial loan relationship accounted for approximately 45% of net loan charge-offs and about 42% of gross loan charge-offs during the first nine months of 2017. The allowance for originated loans, as a percentage of total originated loans, was 0.9% as of both September 30, 2018, and September 30, 2017. Our allowances for originated loans and acquired loans totaled $21.1 million and $0.6 million, respectively, as of September 30, 2018, compared to $18.8 million and $0.4 million, respectively, as of September 30, 2017.
Noninterest income during the third quarter of 2018 was $4.7 million, an increase of $0.1 million, or 2.2%, from the $4.6 million earned during the prior-year third quarter. The increase in noninterest income primarily reflects higher credit and debit card fees, service charges on accounts, and payroll processing revenue. Mortgage banking activity income declined in the third quarter of 2018 compared to the respective 2017 period, primarily reflecting the impacts of rising residential mortgage loan interest rates and a limited supply of homes for sale in our markets. Although headwinds persist, we believe that our current level of residential mortgage loan pre-qualifications, which is about two times higher than the level at the same time last year, along with our ongoing efforts to increase market penetration and sell a greater percentage of originated mortgage loans, will produce solid mortgage banking activity income in future periods.
Noninterest income during the first nine months of 2018 was $13.6 million, compared to $14.5 million during the same time period in 2017. Noninterest income during the first nine months of 2017 included a bank owned life insurance death benefits claim of $1.4 million; excluding this transaction, noninterest income increased $0.5 million, or 4.1%, in the first nine months of 2018 compared to the respective 2017 period. The increase in noninterest income primarily reflects higher credit and debit card fees, payroll processing revenue, and service charges on accounts, along with the recording of a $0.2 million gain associated with the sale of a former bank branch. Mortgage banking activity income declined during the first nine months of 2018 compared to the respective 2017 period, primarily reflecting the impacts of the increasing interest rate environment and shortage of housing inventory in our markets.
Noninterest expense during the third quarter of 2018 was $21.6 million, an increase of $1.4 million, or 7.1%, from the $20.2 million expensed during the third quarter of 2017. Noninterest expense during the first nine months of 2018 was $64.2 million, an increase of $4.3 million, or 7.3%, from the $59.9 million expensed during the same time period in 2017. The higher level of expense in both periods primarily resulted from increased salary costs, mainly reflecting annual employee merit pay increases, the hiring of additional staff, and higher stock-based compensation expense. In addition, all hourly employees received a pay increase effective April 1, 2018. The increased salary expense during the first nine months of 2018 also reflects a larger bonus accrual. Increases in various other overhead costs stemming from our ongoing investments in employees, facilities, and technology, reflecting our efforts to meet growth objectives, maintain operationally efficient facilities and equipment, and invest in products and services that meet the needs of our customers, also contributed to the higher level of expense in both periods.
During the third quarter of 2018, we recorded income before federal income tax of $12.5 million and a federal income tax expense of $2.4 million. During the third quarter of 2017, we recorded income before federal income tax of $12.0 million and a federal income tax expense of $3.7 million. During the first nine months of 2018, we recorded income before federal income tax of $37.6 million and a federal income tax expense of $7.1 million. During the first nine months of 2017, we recorded income before federal income tax of $33.6 million and a federal income tax expense of $10.3 million. The lower level of federal income tax expense during the 2018 periods compared to the respective 2017 periods primarily reflects a reduced corporate income tax rate stemming from the enactment of the Tax Cuts and Jobs Act; the rate was lowered from 35.0% to 21.0% effective January 1, 2018. Our effective tax rate was 19.0% during both the third quarter and first nine months of 2018, compared to 30.8% and 30.7% during the respective prior-year periods.
MERCANTILE BANK CORPORATION