Mercantile Bank Corp (MBWM) 2013 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Mercantile Bank Corporation third-quarter 2013 earnings results conference call. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note that today's event is also being recorded.

At this time I would like to turn the conference call over to Mr. Robert Burton. Mr. Burton, please go ahead.

Thank you, Jamie. Good morning, everyone, and thank you for joining Mercantile Bank Corporation's conference call and webcast to discuss the Company's financial results for the third quarter of 2013. I am Bob Burton with Lambert, Edwards, Mercantile's investor relations firm, and joining me are members of their management team including Michael Price, Chairman, President and Chief Executive Officer; Robert Kaminski, Executive Vice President and Chief Operating Officer; and Chuck Christmas, Senior Vice President and Chief Financial Officer.

We will begin the call with management's prepared remarks and then open the call up to questions.

However, before we begin today's call it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure as well as statements on the plans and objectives of the Company's business. The Company's actual results could differ materially from any forward-looking statements made today due to the important factors described in the Company's latest Securities and Exchange Commission filings.

The Company assumes no obligation to update any forward-looking statements made during the call. If anyone does not a ready have a copy of the press release issued by Mercantile today, you can access it at the Company's website, www.mercbank.com.

At this time, I would like to turn the call over to Mercantile's CEO, Mike Price. Mike?

Thank you, Bob, and good morning, everyone, and thank you for joining us to discuss the third-quarter 2013 results for Mercantile Bank Corporation. On the call today our CFO, Chuck Christmas, will provide details of our financial results followed by COO Bob Kaminski with his comments regarding asset quality and other operational successes for the quarter.

Before going on however, I would like to revisit the significant announcement we made in mid-August regarding the pending merger with Firstbank Corporation. This very exciting project continues to be on track for a conclusion by year-end. Our integration teams have been carrying on with their work and we remain very encouraged regarding the regulatory hurdles, the upcoming shareholder meetings and the progress we are making in preparing to handle the integration process after shareholder approval.

With regard to this quarter, it is worth noting that the as reported numbers for the third quarter include $700,000 in after-tax merger-related costs and still the results are excellent. It is great to be heading into this transformational event with a momentum that this quarter's results and our results year to date represent.

Hopefully you have all had a chance to review our quarterly performance which was highlighted by new loan originations of approximately $74 million, improved bottom-line profitability, a 66% decline in nonperforming assets from a year ago and a strengthened net interest margin. Remarkably, our near-term delinquent loans at quarter end were at zero.

In this quarter as we have over the past several years, our efforts were focused on reducing nonperforming assets, enhancing our net interest margin and strengthening our well-capitalized position.

As part of our improved capital position earlier today we also announced another quarterly cash dividend of $0.12 per share. We remain committed to providing meaningful returns to our shareholders and are pleased to have accomplished this once again with internally generated funds.

Our bank has grown stronger each quarter and we are proud of the accomplishments that make us successful. As we look ahead, we are gaining increasing confidence in the direction of the economic recovery both for Michigan and for our region in the Western half of the state. Mercantile remains well-positioned to continue our success as a leader in our markets and our strong capital position creates many opportunities for us to fully participate in these trends as they play out in the final quarter of 2013 and into 2014. We will do this while remaining focused on building our franchise and helping our communities prosper.

At this time I will turn it over to Chuck.

Thanks, Mike, and good morning, everybody. This morning we announced net income attributable to common shares of $3.5 million for the third quarter of 2013, a 32% increase over the $2.6 million earned during the third quarter of 2012. Our net income attributable to common shares during the first nine months of 2013 was $11.9 million, a 40% increase over the $8.5 million earned during the first nine months of 2012. On a diluted earnings per share basis, the $0.40 we earned during the third quarter of this year was an increase of 33% over the $0.30 we recorded during the third quarter of 2012 while the $1.36 we earned during the first nine months of this year was an increase of 43% over the $0.95 we recorded during the first nine months of 2012.

As Mike mentioned, the results for 2013 include costs associated with the merger with Firstbank. On an after-tax basis, we expensed about $0.7 million during the first nine months of 2013 nearly all of which was expensed during the third quarter. We expect to expense further merger-related costs during the next three quarters although the exact amounts and timing are not currently known.

The quality of our loan portfolio continues to improve which combined with significant recoveries of prior loan charge-offs supports our negative provision expense. In addition, the level of problem asset administration costs has substantially declined. The level of nonperforming assets has declined over $105 million or almost 90% since the peak level at March 31, 2010 and is currently at its lowest dollar volume since year-end 2006.

Our improved earnings performance and financial condition also reflect the many positive steps we have taken over the past five years to not only mitigate the impact of asset quality related costs in the near term but also to establish an improved foundation for our longer-term performance. We have increased our net interest margin to well above historical levels, strengthened our regulatory capital ratios and enhanced our liquidity position through dramatic reductions in our reliance on wholesale funding.

In addition, our improved financial condition and operating results have led to the resumption of a quarterly cash dividend on our common shares.

We continue to believe we are very well-positioned to succeed as a strong Community Bank and to take advantage of lending and market opportunities.

2013 highlights include a steady net interest margin that remains well above our historical levels which when combined with a larger loan portfolio resulted in improved net interest income. Net interest income during the third quarter of 2013 was $0.4 million higher than the third quarter of 2012. Average total loans increased $30 million, or 3% during the third quarter of 2013 when compared to the third quarter of 2012.

Meanwhile, our net interest margin increased from 3.67% during the third quarter of 2012 to 3.76% during the third quarter of 2013. During the past eight quarters, our net interest margin has averaged 3.67% and has been steady within a range of 14 basis points during that time.

The steadiness of our net interest margin primarily reflects the lower cost of funds that has balanced a lower yield on assets. The lower cost of funds primarily results from the maturity of higher costing certificates of deposit and borrowed funds as well as reduced rates paid on local deposits.

The lower yield on assets results from a number of factors including lower loan yield reflecting a low interest rate environment, improved borrower financial performance and increased competition, a lower securities yield reflecting US Agency call and reinvestment activity as well as principal paydowns on higher-yielding mortgage-backed securities. A declining level of nonaccrual loans and the occasional collection of unaccrued interest on nonperforming commercial loan relationships have helped to offset the impact of lower asset yields.

We remain dedicated to maintaining a strong and steady net interest margin. While certain strategies have a negative impact on our shorter-term net interest income, we have been able to maintain a relatively steady net interest margin, one that is well above our historical average. This was completed in conjunction with strengthening our interest rate risk position which will be helpful especially if interest rates begin to increase.

The continued improvement in the quality of our loan portfolio and recoveries of prior period loan charge-offs have produced a positive impact on our loan-loss reserve calculations and allowed us to make a negative provision of $1.7 million to the loan-loss reserve during the third quarter of 2013. We recorded a negative provision expense of $1.5 million during both the first and second quarters of 2013. We recorded a net loan recovery of $1.9 million during the third quarter of 2013 and a net loan recovery of $1.2 million during the first nine months of 2013.

Our loan-loss reserve was $25.2 million as of September 30, 2013 or 2.34% of total loans. Despite the significant improved condition of our loan portfolio, our loan-loss reserve coverage ratio remains substantially higher than historical averages.

Local deposit of [soup] accounts were up $62 million during the third quarter of 2013 and are up $406 million since the end of 2008. We experienced significant growth in business and municipal deposits during the third quarter of this year while we experienced a decline in retail deposits primarily due to depositors using funds to buy stocks, real estate and automobiles.

We have been able to reduce our level of wholesale funds by $1.15 billion since the end of 2008. As a percent of total funds, wholesale funds have declined from 71% at the end of 2008 to 21% at the end of the third quarter.

Nonperforming asset administration and resolution costs totaled $0.4 million during the third quarter of 2013 and $0.8 million during the first nine months of this year. This compares very favorably to the $1.6 million and $4.9 million that was expensed during the third quarter and first nine months of 2012 respectively. This expense line item has been positively affected by a lower volume of nonperforming assets, gains on the sale of foreclosed properties, and lower instances of valuation write-downs on foreclosed properties.

We remain a well-capitalized banking organization. As of September 30, 2013, our bank's total risk-based capital ratio was 15.3% and in dollars was approximately $64 million higher than the 10% minimum required to be categorized as well-capitalized.

Those are my prepared remarks and I will now turn the call over to Bob.

Thanks, Chuck, and good morning, everyone. My comments this morning will focus on client acquisition, credit quality and the general operations of the bank.

The third quarter continued our nice trends of asset quality improvement and a resumption of steady loan growth. Mercantile's relationship banking model has continued to be an attractive banking approach to new clients in the markets we serve.

Since June 30, Mercantile lenders have funded $74.7 million in loans to new customers and increases in loans to existing customers. On a net basis, loans at the end of the quarter increased by $17 million reflecting encouraging new activity in our markets. The growth represented a blend of increases in commercial and industrial loans and commercial real estate loans.

Looking ahead to the coming months, the bank's pipeline remains solid with a good flow of new commitments in the backlog, replenishing commitments that have been funded. Our commercial lenders continue to find and develop new business opportunities as a result of their dedicated efforts to build relationships with entrepreneurs in our markets.

Mercantile's asset quality once again demonstrated its trend of continued improvement in the third quarter. Nonperforming assets were reduced $2.2 million since June 30 and $13.7 million since December 31, 2012.

During the third quarter, Mercantile enjoyed a net recovery position and loan losses of approximately $1.9 million. This is attributable to the proactive concern of write-downs of loan balances in the collection phase of the work-out process. As collateral banking loans are sold or debt is refinanced by other lending institutions, we are then able to realize loan recoveries.

Even after the negative provision for the quarter, our allowance for loan losses was a healthy 2.34% of total loans as of September 30. Strong credit quality metrics are also reflected in our problem loan list which is at its lowest point in six years.

Turning to the Firstbank merger, our transition and integration planning process has gotten off to a great start. Committees of staff members from both Mercantile and Firstbank have come together to make significant headway in a very dynamic process of first merging the corporations and then the banks. We look forward to continuing this work with our colleagues at Firstbank and are excited about the tremendous new opportunities this will present for the markets we serve.

Those are my prepared comments. I will be pleased to answer any questions during the Q&A session. But for now, I will turn it back over to Mike.

Thanks, Bob and thanks, Chuck, and operator at this time we would like to open the call for questions.

(Operator Instructions). John Barber, KBW.

Good morning.

Hi, John.

Bob, in your prepared remarks, you noted that the loan pipeline is still pretty solid heading into the fourth quarter. But I am just wondering are you noticing any impact from the government shutdown or the debt ceiling talks?

No, I think as far as boots on the ground here in Western Michigan and in the Lansing area at our markets right now, we haven't seen any direct impact there. Obviously any continued prolonged struggles with our government could change that. But we are not seeing anything right now.

Okay, that's good to hear. Thanks. And then I was hoping we could talk a little bit more about the margin and what drove the sequential increase this quarter. Also were there any interest recoveries that would have impacted the loan yields this quarter?

Hey, John, it's Chuck. Yes, I mean you heard that a little bit in my comments and I gave you some additional color on that. We recorded about $300,000 during the third quarter on unaccrued interest income on some commercial loans. We had several nonperforming commercial loans that were on nonaccrual that were paid off in full. And so we recorded about $300,000. That is about 8 or 9 basis points impact to the quarterly margin.

Okay, thank you. And the deal with Firstbank, how do you expect that to impact your asset sensitivity?

One of the things that we had looked at during the due diligence process is reviewing their models and the assumptions that were going into those models and they look actually quite similar to us especially in a rising interest rate environment which shows that both companies' net interest income would likely benefit under an increasing interest rate environment not hugely but some benefit there.

And again kind of lining the two companies up side-by-side and again very similar total assets, very similar results we would expect. So we feel very confident and very pleased with the interest rate risk position of both companies and therefore the combined entity.

Okay, thanks. And the last one I had was just related to the one-time merger-related charges. You commented that you expect over the next three quarters the total will be incurred. Is the total amount still supposed to be around $6 million? Is that the best estimate right now?

Yes, we have gone through throughout the third quarter different points in time and us sitting down with the folks over at Firstbank and looking at the estimates that we had put out there back in August and on an overall basis we feel pretty confident with the total numbers that we did provide. And again, it is just a matter of figuring out exactly in which particular quarter some of those expenses will be recorded. But the overall, we feel -- we remain confident with those figures.

Great. Thanks for taking my questions.

(Operator Instructions). Daniel Cardenas, Raymond James.

Good morning, guys.

Hi, Dan.

John asked a lot of my questions but just a couple of follow-ups. On the loan pipeline you said things are looking good. I mean are you expecting some seasonal softness in Q4?

I don't think we see any real seasonal issues that are cropping up.

No, no, I don't think we will. I think we are seeing pretty standard flow of things for the whole year and I don't think the seasonality of the fourth quarter will cause any adverse effects.

Okay. And then maybe just some comments on competition. You guys seem like you are doing a good job in winning loans. I mean is the competition on the pricing side still very intense and where is it coming from?

Yes, Dan, this is Mike. It certainly remains intense. It's a very competitive environment out there, has been for some time and we expect it to be for some time in the future.

Especially on pricing, I think what has held us in good stead though is we have gone back and we have talked about this for numerous quarters now and said we are always competitive on price but where we try to differentiate ourselves is really that Community Bank relationship and we have really won the deals based on that more than anything else.

Competition on price and competition in general is coming really all over the board. Certainly some of the larger players that is really what they are all about or at least that is what they seem to be selling on right now some of the larger regional and super regional banks but also some of the smaller banks in the area are really becoming more aggressive.

Our staff and calling officers has held firm to its knitting of going out there and selling on the quality of the product and services that we offer and we are seeing now the fruits of the labor of their work and some of these relationships and some of these loans that we have booked have been months and even years in the works. And that is very encouraging for them to see that you don't have to necessarily be punching away at the lowest price in the market to get good true long-standing relationship business.

Good. Then I know Firstbank I think is scheduled to release next week but I'm sure you guys have taken a peek at the numbers. Are you generally happy with what you saw in the third quarter results for the Company?

Well, Dan, we are certainly not in a position to comment on any of Firstbank's numbers. As you said, the release is coming up quite shortly.

Okay. And then maybe last question just on the dividend as the transaction consummates here by the end of the year and you double your share count, are we going to continue to expect steady dividend increases coming from you guys or is that something that you are going to decide on a quarterly basis?

Well, as always, the Board examines our dividend policy and we have been committed as you can tell through our records since we started the organization to maximizing the appropriate return for our shareholders and we are happy again to announce the $0.12 dividend and exactly within the context of your question, the Board will analyze what the appropriate dividend strategy is going forward.

But we look forward to putting these two companies together and moving forward.

Great. I will step back. Thanks, guys.

Thank you.

(Operator Instructions). Ross Haberman, Haberman Management Group.

Good morning, gentlemen. Nice quarter. Just a quick question, what part -- what areas are you seeing the best commercial loan growth coming from?

In terms of a geographic region?

Yes.

It has been pretty consistent through all of our markets whether it be here in West Michigan in Kent and Ottawa Counties as well as in Central Michigan in the Lansing area, it has been pretty consistent. We have seen nice new business opportunities in all those areas and that is what is most encouraging for all of our lending staff is that it has been a validation of our banking approach.

Okay. That was it. Thank you very much.

Thank you.

(Operator Instructions). Gentlemen, at this time it appears I am showing no additional questions.

Okay, thank you, Jamie. Mercantile's momentum is increasing and our team is motivated and dedicated to build on our success. As I stated earlier, our long-standing relationships have proven excellence in community banking are serving us well as we continue on the path of achieving efficient profitable growth.

Thank you for joining us this morning and for your interest in our Company. We look forward to talking with you again.

Ladies and gentlemen, that has concluded today's conference call. We thank you for attending. You may now disconnect your telephone lines.