Mercantile Bank Corp (MBWM) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the Mercantile Bank Corporation fourth-quarter and full-year earnings results conference call. (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 with Lambert Edwards Investor Relations. Sir, please go ahead.

Thank you, Jamie. Good morning, everyone, and thank you for joining the Mercantile Bank Corporation's conference call and webcast to discuss the Company's financial results for the fourth quarter and fiscal 2013. I'm Bob Burton, with Lambert Edwards, Mercantile's Investor Relations firm, and joining me are members of the 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 already 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?

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

Before going on, however, I'd like to update you on progress regarding the pending merger with Firstbank Corporation. At separate meetings of the shareholders of both companies in December, the merger was overwhelmingly approved. We continue to work with the appropriate regulatory agencies to obtain final approval. At the same time, our integration teams have made tremendous progress, and we are excited to bring this transformational project to fruition.

With regard to this quarter, it is worth noting that the as reported numbers for the fourth quarter include $500,000 in after-tax merger-related costs, and still the Company's results are excellent. Hopefully you've all had a chance to review the quarterly performance, which was highlighted by stronger net interest income, improved bottom-line profitability and continued success in loan originations. For the full-year 2013, we saw a 6 basis point gain in net interest margin, a 63% decline in nonperforming assets, and a 48% increase in net income attributable to common shares. Our near-term delinquent loans at the end of the year remain at negligible levels. As part of our improved capital position, earlier today we also announced another quarterly cash dividend of $0.12 per share.

2013 certainly was another year of accomplishment. The success of the past few years was critical to our ability to announce our exciting merger with Firstbank. As we look ahead, we are confident in the direction of economic recovery for both West and Central Michigan. The consummation of the merger will ensure that Mercantile remains well-positioned to continue as a market leader in 2014. We will continue to do this while remaining focused on building our franchises and helping the communities we serve to prosper.

At this time, I'd like to turn it over to Chuck.

Thanks, Mike. Good morning, everybody. This morning we announced net income attributable to common shares of $5.2 million for the fourth quarter of 2013, a 69% increase over the $3 million earned during the fourth quarter of 2012. Our net income attributable to common shares for all of 2013 was $17.0 million, a 48% increase over the $11.5 million earned during 2012. On a diluted earnings-per-share basis, the $0.59 we earned during the fourth quarter of 2013 was an increase of 69% over the $0.35 we recorded during the fourth quarter of 2012, while the $1.95 we earned during all of 2013 was an increase of 50% over the $1.30 we recorded during all of 2012. The results for 2013 include costs associated with the pending merger with Firstbank Corporation. On an after-tax basis, we expensed about $0.5 million during the fourth quarter and $1.2 million during all of 2013, nearly all of which was recorded during the third and fourth quarters. We expect expense further -- 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 when combined with significant recoveries on prior loan charge-offs supports our negative provision expense.

In addition, problem asset administration costs have substantially declined. Nonperforming assets have declined by $108 million or 91% since their peak level at March 31, 2010 and are currently at their lowest dollar volume since year-end 2006. Our improved earnings performance and financial condition also reflect many steps we have taken over the past five years, not only to mitigate the impact of asset quality related costs in the near-term, but also to establish an improved foundation for 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 and reliance on wholesale funding.

In addition, our improved financial condition and operating results have led to the resumption of quarterly cash dividend being paid 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 remain well above our historical levels. When combined with the collection of unaccrued interest on several larger nonaccrual commercial loan relationships that were paid off and the collection of prepayment fees associated with several larger performing commercial loan relationships, we recorded an increased level of net interest income. Net interest income during all 2013 was $0.8 million higher than all of 2012. Although average total loans during all of 2013 were virtually unchanged from the average during 2012, average total loans during the fourth quarter of 2013 were $33 million higher than during the fourth quarter of 2012, in large part reflecting growth in total loans during 2013 compared to a reduction in total loans during 2012.

Our net interest margin increased 6 basis points during 2013 when compared to 2012, in large part due to the previously mentioned collection of on accrued interest and prepayment fees, which helped to offset a relatively high level of short-term investments, namely federal funds sold.

During the past nine quarters, our net interest margin has averaged 3.69% and has been steady within a range of 18 basis points. We remain dedicated to maintaining a strong and steady net interest margin that is well above our historical average over the long-term even as we employ certain longer-term strategies that have a negative impact on our shorter-term net interest income. The majority of the strategies involve strengthening our interest rate risk position, which will benefit -- which we will benefit from when short-term interest rates begin to rise.

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 $7.2 million to the loan-loss reserve during 2013. We recorded a negative provision in each of the four quarters of 2013, including $2.5 million during the fourth quarter.

Gross loan charge-offs totaled $5.3 million during 2013, a 58% reduction from the 2012 level. We recorded a net loan recovery of $1.3 million during 2013 compared to a net loan charge-off of $4.8 million during 2012.

Our loan-loss reserve was $22.8 million as of year-end 2013 or 2.17% of total loans. Despite the significantly improved condition of our loan portfolio and reduction of loan-loss reserve in terms of dollars and as a percentage of total loans, our loan-loss reserve coverage ratio remained substantially higher than historical averages.

Local deposit and sweep accounts were up $45 million or 5% during 2013 and are up $411 million since year-end 2008. We experienced significant growth in our business checking accounts during 2013, primarily reflecting new business checking accounts that were opened as part of new commercial loan relationships that were established during the year. We have been able to reduce our level of wholesale funds by $1.16 billion since the end of 2008. As a percent of total funds, wholesale funds have declined from 71% at year-end 2008 to 21% at year-end 2013.

Problem asset administration and resolution costs totaled $0.6 million during all of 2013 compared to $5.9 million during all of 2012. This expense line item has been dramatically and positively affected by a lower volume of problem 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 December 31, 2013, our bank's total risk-based capital ratio was 15.7% and in dollars was $69 million higher than the 10% minimum required to be categorized as well capitalized.

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

Thanks, Chuck, and good morning, everyone. Mercantile concluded a very successful year in 2013 with the building of some great momentum and growing its loan portfolio. For the year, Mercantile generated new loans to new and existing customers of $227 million, $53.9 million of that in the fourth quarter. These robust loan growth numbers were generated through the ongoing relationship building efforts of our lenders and our entire sales team.

While net loan growth was tempered somewhat by the successes of our efforts to move problem assets off the books, we are still very pleased with the final results. The pipeline of new loans remains very healthy as our lenders continue to generate new loan opportunities and potential clients place importance of the ability of the lender to add value to the relationship through relationship banking.

As we have outlined in previous quarters, we have diligently managed our efforts to improve the quality of our loan portfolio. In the fourth quarter alone, in addition to the $2.6 million reduction in nonperforming assets, we had another $15.5 million in watchlist rated loans leave the bank either through sales of the underlying assets by the borrowers or the refinance of the debt by another institution. In other situations, we had some commercial real estate exposure leave the bank due to aggressive financing packages offered by other lenders with pricing and/or terms that in our opinion was not merited for the particular borrower.

We remain pleased with each of the metrics of asset quality measurement of the portfolio. NPAs continued their downward march. The allowance for loan losses sailed in at a very healthy 2.17% of loans for December 31. 30 to 89 day delinquencies were once again virtually zero, and our watchlist is at its lowest level since late 2006. We ended the year with a net loan recovery position, which validates our conservative approach to loss recognition.

Operationally, with our ongoing commitment to provide our customers with top-notch banking products and services, during the fourth quarter, we successfully implemented the rollout of our new innovative banking system to our retail client base. Commercial customers will be transitioned in the coming months.

Regarding activity related to the merger with Firstbank, integration committees from both organizations are working together to ensure a smooth transition. Our goal is to ensure a transparent integration for all of our customers, allowing them to quickly enjoy the benefits, with the combined organization we will be able to provide to the markets we serve.

Those are my prepared comments. I will be happy to answer questions during the Q&A, and I will now turn it back over to Mike.

Thanks, Bob, and thank you, Chuck, as well. Operator, if we could open it up for questions at this point, that would be great.

(Operator Instructions). Stephen Geyen, D.A. Davidson.

Maybe starting off with a question on the margin, Chuck, you talked a little bit about recoveries and unaccrued interest on NPLs and prepayments and fees. Can you kind of give us a -- what the benefit was this quarter versus and give us kind of a core number for the (multiple speakers)?

Yes, exactly, Stephen. We recorded an unaccrued interest on nonaccrual loans at time of payoff in the first quarter of about $1.5 million, and for all of 2013 -- and actually the difference is really more of a third-quarter event -- we did about $1.865 million. And, again, the difference is primarily in the third quarter. I don't have that in terms of basis points what that is, but those are the dollars.

You know, one of the things, as I mentioned in my prepared remarks, is we had a tremendous amount of excess liquidity, even more so than we've had in previous recent quarters, primarily seasonal increases in deposits. But, if you kind of back off the collection of unaccrued interest income and the excess level of fed funds, if you will, our margin was pretty close to what we did in the first and second quarters, down from the third quarter, but again the third quarter was also benefited from the collection of unaccrued interest income. So if you look at all four quarters throughout 2013, the core margin was about the same or in a pretty tight range.

Okay. Perfect. And maybe a question for Mike and Bob or for Bob. On loans you had some payouts towards the end of the quarter. How much do you think of that was seasonal?

I don't think necessarily think it was seasonal. We did have some line activity both up and down toward the end of the quarter as is typical for year-end. I think the paydowns that we saw were mainly term debt of assets that were sold by the customer paying off the underlying loan or some refis out of the bank. So that was probably more of the case than the seasonality.

Okay. All right. And maybe last question, for 2014, Mike, what are you hearing from commercial customers as far as their outlook and as far as their budgets for 2014?

Yes, I think that's a good question, John. We are hearing a lot of positives from customers, potential customers, and we are seeing a continuation of what we saw in 2013, which was a real opportunity to expand the portfolio and put some good new volume on.

As Chuck and Bob both mentioned and you can see by the numbers, we made some very nice gains in 2013 in new loan originations. But we continued to pare down the watchlist, and a lot of the payoffs we got during the course of the year came from the watchlist. And part of that was I think Bob alluded to a little bit some of our competitors have gotten pretty aggressive and decided that our watchlist was a good place to go shopping. We're not totally -- that doesn't hurt our feelings too much, and some of the other issues that came to bear in the fourth quarter for the first time in a long time is that the real estate market has recovered enough around here that people are -- who have hung on during the great recession with some real estate were able to sell it and either get out of it or make a little bit of money, and some of those underlying loans were paid off. We don't expect to see as much of that in 2014, but that remains to be seen. But we do feel pretty positive that 2014 is going to give us a real good opportunity to put some more volume on the books.

Great. Thanks for your time.

John Rodis, FIG Partners.

Chuck, maybe just a follow-up to the margin spread income. As far as, if you look at the core margins so it is sort of going forward, just for Mercantile, do you think you can sort of maintain it around the 3.60%, 3.65% level that was in the first half of the year?

Yes, I think one of the things we're still struggling with, and although it's coming down a little bit and we would expect it to come down a little bit further as the quarter goes on as we start getting and anticipated the drawdown of deposits, we do expect the Fed funds sold balance to decline. But that certainly is going to take a good part of the quarter, if not the entire quarter.

So I'd expect you know assuming no collection of some of the income that we did in the previous two quarters, that the core margin or resulting margin I should say would be probably more closer to 3.5%, 3.55%. And then going forward I'm kind of looking for a margin on a standalone basis of around 3.5% to 3.60%, certainly with a very low rate environment. And the excellent customers that we are bringing on obviously are deserving of some relatively low rates, especially in relation to the loans that we've got on the books, some of which were made in higher interest rate periods or several years ago. Some compression in our margin in 2014 in our core margin in comparison to what we did in 2013.

Okay. Okay. Fair enough. Just Chuck, I guess while I have you too just on the tax rate bumped up a little bit and I think it was probably related to the merger charges, is 31% sort of on a core basis again sort of the right place to be still?

Yes. I'm looking at 31%, 31.5%, yes, on a quarter.

Okay. And, Mike, maybe just a question for you on the deal, obviously it's been delayed a little bit. Is it still sort of your assumptions that the deal hopefully closes late February, March, and I guess is there anything else that you need to provide to the regulators at this time?

Yes. That's a great question. You know, we really -- it's hard to get any indication from the regulators exactly where in the process we are. Assuming that they are fairly far along because we have provided them with everything that they have asked for, we suspect that they're going to want some updated financial information from us, which Chuck is in the process of preparing and we'll send that their way. So it is a process where they don't give us a lot of leadership as far as where to expect certain answers and everything, but we like to think that by the end of the quarter we'll have clarity as to when we can close the deal.

Okay. And just maybe one more question, just as it relates to FBMI, without getting into specifics, are the results sort of in line with what you guys have been expecting, I guess, so to speak?

It's a great question to ask, but you can probably anticipate my answer, which is we elect FBMI. When they release next week, they will fill you in with all the details, but that's the best I can do for you on that one, John.

Okay. Fair enough. Thanks, guys.

(Operator Instructions). John Barber, KBW.

I was just wondering if we could talk a little bit about the $62 million of loan originations you had this quarter, what non-percent was from new borrowers versus existing customers? And also it was down a little bit from kind of the run rate of originations the last two quarters. If there was any particular reason for that?

Well, you know, John, I think the thing about loan originations is that it's sometimes a matter of timing when you make a new loan commitment with the customer. If they are paying off something with another bank or if they are purchasing an asset, sometimes you don't necessarily control the timing of that. So it ebbs and flows, and some things that maybe would've been booked in the fourth quarter got pushed to the first quarter. So you see that in a bit.

In terms of percentage of customers, of new customers in the bank, I'd say are probably about half of that $62 million was generated from new customers to the bank, and the rest of it was from new commitments to existing customers.

So, the bottom line is, it's hard to necessarily measure quarter to quarter with originations are because it's a moving target sometimes as far as when the deal could actually get closed. And then you have a closed commitment, you have funding, it takes some time as well. So it's a moving target.

Okay. Thanks for the color. And then just as it relates to the deal, I guess in the last release you guys had cited two kind of potential holdups. It was the CRA requirements and then funding for the special dividend. Is one of those issues taking longer than the other, or is it really both?

Well, it's really one question before the Fed, and those -- they had a few issues for us that they wanted further clarity on. We have provided them clarity on all the issues that they wanted. So, without really sitting in their office, John, it's hard to know you know if there is one that they are focusing on or not. I think they have just explained to us they have a very thorough process, and it was our responsibility to get all the information for the questions, which we, according to them, have done. So we are not privy to you know where they are or any of these specific issues that they may or may not still be looking at.

Okay. Thanks, Mike. And I guess the last question I had just about the deal as well, you know you mentioned that the integration teams have been working diligently. Any positive or negative surprises from those processes?

Well, I'll let Bob from our shop in Sam Stone from Firstbank have been leading those. But I can tell you from my perch, the only surprises have been very, very positive. And I'm not really all that surprised because we did a lot of due diligence beforehand and know that from our standpoint we were working with an extremely talented group of people at Firstbank, and it has gone very, very well from top to bottom, and I've been very, very happy with it, and Bob, can maybe add some more color.

Yes. The very exciting thing is that people from both organizations comprise these committees, and the teams have worked very, very closely, very, very well. Everyone is working with a common goal of making sure that the transition is as seamless to the customer, and all the excitement that we see with the opportunities with the bank mergers can be translated to the customers and make them see the same thing. So just all very positive, and obviously it's a ton of work. But we've got great teams on both sides, and they are all working hard to make sure that we accomplish our goals.

Great. Thank you.

Daniel Cardenas, Raymond James.

Just a quick question on the margin side. Are you seeing any change on the deposit costs? Are you starting to see increased competition on the upside?

No. It's a good question. But I think all of it -- the entire industry and certainly the banks that we compete with I think are having the same frustrations and struggles with a tremendous amount of liquidity on their balance sheets. While we have seen -- during 2013 we saw some deposit withdrawals by individuals going into buying some real estate, buying some new cars, those types of things. But net we saw a net increase. We did have the opportunity as we do on a regular basis, we do rates and had the opportunity periodically throughout 2013 to lower the rates a little bit, and we didn't see any negative impact in regards to any type of runoff as a result of that. So we've seen virtually no competition on the deposit side, especially in regards to rates.

Okay. Good. Good. And then what are you hearing from your commercial customers? Are they more willing now to draw down on lines of credit to reinvest in their businesses, or are they still sitting on the sidelines a bit and kind of waiting to see what happens here over the near-term?

I think the economic recovery in Michigan is still gaining some momentum, and I think people are -- our business customers are reacting positively and, of course, being very cautious still because of what the depth of the recession brought about to many companies. But I think you see some good excitement and some opportunities that they are starting to look at more closely and pursuing in some cases. So from our standpoint, it is encouraging.

Okay. Good, good. And then we've had some out-of-state competitors starting to enter the market recently, are you beginning to see them as you compete for loans?

I think from a competition standpoint, we've got plenty of competition here in the West Michigan with the banks that are based here right now, and that's where the primary competition that we've seen has come from to this point.

Okay. Great. Thanks, guys.

John Rodis, FIG Partners.

Mike, just to follow up on the question with the regulators and as it relates to the special dividend, as you understand it, the question is -- their question was more about you borrowing money to pay the special dividends, not so much paying the special dividend, if that makes sense.

Yes, John, this is Chuck. And just to make it clear, the Federal Reserve has a policy. It's not a regulation, but they do not like to see dividends funded with debt, and while I certainly would agree with that on a normal dividend basis, cash dividend basis that it should be a return of income, we felt we had a very good case that this was obviously part of a merger transaction and not necessarily something that we are going to do going forward, and we thought that that was appropriate. In trying to manage our capital position, ultimately the bank would have had to pay the dividend to pay the parent company to pay the debt off. We were just trying to manage those dollar amounts as it impacted Mercantile Bank.

We thought we had a good case. But obviously as you've seen and as you're talking about the Fed came back and had some issues with that, we have agreed with them and have submitted that with a 90 day -- we are going to borrow to fund part of that dividend by $11 million or $9 million -- excuse me, $9 million. We've committed that within 90 days after the consummation of the merger that we will fully repay that loan to the corresponding bank. That's not a huge deal. Again, we were just trying to massage the impact to the bank's capital position, and when we look at the cash position of both Mercantile Bank Corporation and Firstbank Corporation, the parents, there is sufficient cash already in existence at those two companies that we will be able to pay that loan off in full within the 90-day period.

Okay. So just to be clear, there is the special $2.00 dividend really shouldn't be in jeopardy at all.

No, it's not, no.

Correct. Okay. Okay. Thanks, guys.

And, gentlemen, at this time we will conclude our question-and-answer session. I'd like to turn the conference call back over to Mr. Price for any closing remarks.

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

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

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your telephone lines.