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Mercantile Bank Corp. Reports Operating Results (10-Q)

August 07, 2009 | About:

Mercantile Bank Corp. (MBWM) filed Quarterly Report for the period ended 2009-06-30.

Mercantile Bank Corporation serves businesses and consumers across Grand Rapids and Kent County with a full range of mortgage lending deposit and checking products and services in a friendly hometown banking environment. Mercantile Bank Corp. has a market cap of $32.7 million; its shares were traded at around $3.8 with and P/S ratio of 0.3. The dividend yield of Mercantile Bank Corp. stocks is 1%. Mercantile Bank Corp. had an annual average earning growth of 12.5% over the past 5 years.

Highlight of Business Operations:

During the first six months of 2009, our total assets decreased from $2,208.0 million on December 31, 2008, to $2,071.4 million on June 30, 2009. This represents a decrease in total assets of $136.6 million, or 6.2%. The decline in total assets was comprised primarily of a $148.4 million decrease in total loans and leases and a reduction of $6.2 million in securities, partially offset by a $13.1 million increase in cash and cash equivalents. The reduction in total assets provided for a $120.9 million decline in deposits and a decrease of $35.0 million in Federal Home Loan Bank advances, partially offset by a $15.2 million increase in securities sold under agreements to repurchase (repurchase agreements).

As of December 31, 2007, nonperforming assets totaled $35.7 million, or 1.68% of total assets, an increase from the $9.6 million, or 0.46% of total assets, as of December 31, 2006. As of December 31, 2007, nonperforming loans secured by real estate, combined with foreclosed properties, totaled $28.6 million, or about 80% of total nonperforming assets. Nonperforming loans and foreclosed properties associated with the development of residential real estate totaled $11.1 million, with another $3.2 million in nonperforming loans secured by, and foreclosed properties consisting of, residential properties. Net loan and lease charge-offs during 2007 totaled $6.7 million, or 0.38% of average total loans and leases. Net loan and lease charge-offs during the fourth quarter of 2007 totaled $3.9 million, or about 58%, of the total net loan and lease charge-offs for all of 2007. During 2006, net loan and lease charge-offs totaled $4.9 million, or 0.29% of average total loans and leases.

Deposits decreased $120.9 million during the first six months of 2009, totaling $1,478.6 million at June 30, 2009. Local deposits increased $149.4 million, while out-of-area deposits decreased $270.3 million. As a percent of total deposits, local deposits equaled 41.9% on June 30, 2009, an increase from 29.4% as of December 31, 2008. Noninterest-bearing demand deposits, comprising 8.3% of total deposits, increased $11.7 million during the first six months of 2009. Savings deposits (3.0% of total deposits) decreased $5.2 million, interest-bearing checking deposits (4.0% of total deposits) increased $8.7 million and money market deposit accounts (1.3% of total deposits) decreased $5.9 million during the first six months of 2009. Local certificates of deposit, comprising 25.3% of total deposits, increased $140.1 million during the first six months of 2009, with the growth primarily reflecting an influx of new depositors resulting from a one year certificate of deposit campaign we ran during the latter part of the first quarter and from municipal depositors.

We recorded a net loss attributable to common shares for the second quarter of 2009 of $6.4 million ($0.75 per basic and diluted share), compared with a net loss of $2.6 million ($0.31 per basic and diluted share) recorded during the second quarter of 2008. We recorded a net loss attributable to common shares for the first six months of 2009 of $10.9 million ($1.28 per basic and diluted share), compared with a net loss of $6.4 million ($0.75 per basic and diluted share) recorded during the first six months of 2008. The net losses attributable to common shares for the second quarter of 2009 and the first six months of 2009 include a $1.2 million ($0.76 million after-tax) expense associated with the consolidation of the mid- and eastern Michigan regions of our banking activities and a $0.9 million ($0.62 million after-tax) charge for the bank industry-wide FDIC special assessment. Excluding the impact of these one-time charges from ongoing operations, the second quarter 2009 net loss attributable to common shares was $5.0 million ($0.59 per basic and diluted share), and the six-month 2009 net loss attributable to common shares was $9.5 million ($1.12 per basic and diluted share).

Interest income during the second quarter of 2009 was $26.9 million, a decrease of 7.8% from the $29.1 million earned during the second quarter of 2008. Interest income during the first six months of 2009 was $54.9 million, a decrease of 10.2% from the $61.1 million earned during the first six months of 2008. The reduction in interest income is attributable to a declining yield on earning assets, primarily resulting from a decreased interest rate environment, an increased level of nonperforming assets and an increased percentage of low-yielding federal funds sold to total earning assets. The negative impact of the decreased yield on earning assets on interest income more than offset the positive impact resulting from earning asset growth. During the second quarter of 2009, earning assets averaged $2,050.1 million, $20.6 million higher than average earning assets of $2,029.5 million during the second quarter of 2008. Average federal funds sold increased $56.4 million, average securities increased $23.5 million, and average short term investments, consisting mainly of certificates of deposit, increased $3.7 million, which more than offset a decline in average loans and leases of $63.0 million. During the first six months of 2009, earning assets averaged $2,102.4 million, $80.0 million higher than average earning assets of $2,022.4 million during the same time period in 2008. Average federal funds sold were up $60.6 million, average securities were up $27.0 million, and average short term investments, consisting mainly of certificates of deposit, were up $10.2 million, while average loans and leases were down $17.8 million. During the second quarter of 2009 and 2008, earning assets had an average yield (tax equivalent-adjusted basis) of 5.32% and 5.82%, respectively. During the first six months of 2009 and 2008, earning assets had an average yield of 5.33% and 6.12%, respectively. With approximately 60% of our total loans and leases tied to Prime or LIBOR rates, our earning asset yield has been substantially impacted by the steep reduction in market interest rates since late third quarter of 2007. Between mid-September 2007 and early-October 2008, the Federal Open Market Committee (FOMC) lowered the targeted federal funds rate by a total of 375 basis points. The resulting similar decline in the Prime and LIBOR rates, combined with an increased level of nonperforming assets, has significantly lowered our yield on earning assets and level of interest income. Although the FOMC lowered the targeted federal funds rate by another 50 basis points in late October 2008 and an additional 75 basis points in mid-December 2008, we kept the Mercantile Bank Prime Rate unchanged at 4.50% in an effort to shield interest income from further erosion. Virtually all of our prime-based commercial floating rate loans are tied to the Mercantile Bank Prime Rate. A higher level of nonperforming assets has also negatively impacted the yield on earning assets, increasing from 2.16% of total assets at June 30, 2008, to 4.18% at June 30, 2009. A significant temporary increase in average federal funds sold and short term investments during the first six months of 2009 also had an adverse effect on earning asset yield.

Interest expense during the second quarter of 2009 was $14.4 million, a decrease of 22.3% from the $18.5 million expensed during the second quarter of 2008. Interest expense during the first six months of 2009 was $30.6 million, a decrease of 21.7% from the $39.1 million expensed during the first six months of 2008. The reduction in interest expense is primarily attributable to a declining interest rate environment, which more than offset an increase in interest-bearing liabilities necessitated by asset growth. During the second quarter of 2009, interest-bearing liabilities averaged $1,838.0 million, $15.1 million higher than average interest-bearing liabilities of $1,822.8 million during the second quarter of 2008. Average interest-bearing deposits were up $21.4 million, while average FHLB advances were down $11.8 million, average long-term borrowings were up $5.2 million and average short-term borrowings were up $0.3 million. During the first six months of 2009, interest-bearing liabilities averaged $1,897.7 million, $83.0 million higher than average interest-bearing liabilities of $1,814.7 million during the same time period in 2008. Average interest-bearing deposits were up $51.5 million, while average FHLB advances were up $22.5 million, average long-term borrowings were up $9.9 million and average short-term borrowings were down $0.9 million. A decline in the average cost of interest-bearing liabilities resulted in the reduction of interest expense. During the second quarter of 2009 and 2008, interest-bearing liabilities had an average rate of 3.15% and 4.08%, respectively. During the first six months of 2009 and 2008, interest-bearing liabilities had an average rate of 3.26% and 4.32%, respectively. The lower weighted average cost of interest-bearing liabilities is primarily due to the decline in market interest rates.

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