Mercantile ChoiceOne report healthy first quarter

April 30, 2012
| By Pete Daly |
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Mercantile Bank Corp. in Grand Rapids and ChoiceOne Financial Services in Sparta both reported good first quarters for their banks, although one executive said real estate values are still “pretty low,” and he expects that problem to continue.

Mercantile Bank reported net income attributable to common shares of $2.6 million, or 28 cents per diluted share, for the first quarter, compared to net income of $1.1 million, or 12 cents per diluted share, for the first quarter last year. Pre-tax net income was $4.1 million, compared to $1.4 million in the prior-year first quarter — an increase of 192 percent.

ChoiceOne reported net income of slightly over $1 million, compared to $704,000 in the first quarter last year. Earnings per share were 31 cents, compared to 21 cents in 2011.

“Our earnings continue to improve, and we have experienced growth in both our net interest income and our noninterest income in the first quarter of 2012,” said James Bosserd, president/CEO of ChoiceOne Financial Services Inc. “We are pleased with our continued growth in cash deposits and, as a result, our ability to provide funds for growth in total assets. Our loans declined in the first quarter of 2012, partly as a result of seasonal pay-downs on agricultural lines of credit. Our loans that were past due 30 to 89 days were significantly lower at March 31, 2012, than at Dec. 31, 2011.”

The increase in net income was due to higher net interest income, a lower provision for loan losses, and higher non-interest income. These were partially offset by higher non-interest expense in the first quarter, compared to the same period last year.

Net interest income of $4,419,000 in the first quarter was $74,000 higher than the same period in 2011. Average interest-earning assets were $16.3 million higher in the first quarter of 2012 than in the same quarter in 2011.

The ChoiceOne provision for loan losses was $825,000, compared to $1 million in the first quarter last year, with the lower provision in the first quarter based on lower net charge-offs than in the same period in the prior year. Net charge-offs were $702,000, compared to $998,000 in the first quarter of 2011.

At Mercantile Bank, the first quarter was highlighted by what it called “significant improvement” in profitability resulting from lower provision expense, decreased overhead costs, and an increased net interest margin. There was additional improvement in asset quality and continued decline in non-performing assets, which were down 31 percent from a year ago.

Mercantile’s level of loans in the 30-to-89-days delinquent category remains at virtually zero, and there was no provision expense during the quarter, compared to provision expense of $2.2 million in the first quarter last year.

Mercantile recorded a $1.8 million decline in nonperforming asset costs compared to the prior-year first quarter, and a record net interest margin of 3.73 percent.

In early April, Mercantile announced it had repurchased 50 percent of the $21 million in non-voting preferred stock issued in May 2009 to the U.S. Department of the Treasury under the Troubled Asset Relief Program (TARP).

“The first quarter was another period of strong financial performance that has provided the conditions necessary for the next chapter of growth for Mercantile,” said Michael Price, chairman/CEO. “Solid growth in profitability and continued effective balance sheet management set the stage for the recent repurchase of half of our outstanding preferred stock under TARP. We were able to accomplish this through internally generated cash flow, without the need to access outside capital, which is a testament to how we have managed through the challenges of the Great Recession and subsequent recovery.”

Price told the Business Journal that Mercantile expects to finish repurchasing the rest of the TARP shares “probably” before the end of the year.

Over the past several years, Mercantile has focused on reducing its exposure to loans secured by commercial real estate, although real estate loans still are a majority of the bank’s loan portfolio.

The loan shrinkage rate has subsided over the past several quarters as slightly improving economic conditions led to increased lending opportunities. As of March 31, total assets were $1.4 billion, down $31.6 million or 2.2 percent from Dec. 31. Total loans declined $20.7 million, or 1.9 percent, to $1.05 billion over the same period. Compared to March 31 last year, total assets declined $175 million, or 11.1 percent, and total loans declined $155 million, or 12.9 percent.

On March 31, real estate loans, excluding residential mortgage loans representing permanent financing of owner-occupied dwellings and home equity lines of credit, were $711 million or approximately 68 percent of total loans, representing a decline of $138 million, or 16.2 percent, from $848 million, or 70.3 percent of total loans on March 31 last year.

Price said there are some parts of the economy “that are certainly out of the recession. It’s nice to see automotive clearly doing better … far better than a couple of years ago. But the overhang continues to be — and I think it’s going to be, for a while — real estate, both residential and commercial,” he said.

Price said there are signs real estate has stabilized, but added that “stability has occurred at some pretty low values out there.”

“At least there are markets — buyers and sellers — and we’re seeing some movement in the market. Why it doesn’t feel as good as some other post-recession recoveries is because of that real estate overhang,” he said.

“We’re seeing the market for real estate better, but clearly because there is more activity and not higher values,” added Price.

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