Mercantile Bank Corporation (MBWM)

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Mercantile Bank Corporation (MBWM)

Q1 2010 Earnings Call Transcript

April 20, 2010 10:00 am ET


Mike Price – Chairman, President and CEO

Chuck Christmas – SVP, CFO and Treasurer

Bob Kaminski – EVP and COO


Stephen Geyen – Stifel Nicolaus

Dennis Klaeser – Raymond James

Terry McEvoy – Oppenheimer

Steve Covington – Stieven Capital



Welcome to the Mercantile Bank Corporation first quarter earnings conference call. There will be a question-and-answer period at the end of the presentation.

(Operator instructions)

Before we begin today’s call, I would like to remind everyone 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 or its management, statements on economic performance, and statements regarding the underlying assumptions of the company’s business.

The company’s actual results could differ materially from any forward-looking statements made today due to important factors described in the company’s latest Securities & Exchange Commission filings. The company assumes no obligation to update any forward-looking statements made during this 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 Web site, www.mercbank.com.

On the conference today for Mercantile Bank Corporation, we have Mike Price, Chairman, President and Chief Executive Officer; Bob 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. At this point, I would like to turn the call over to

Mr. Price.

Mike Price

Thank you, Karen. Good morning everyone and welcome. While we are beginning to see some positive signs in our marketplace, and especially within our other real estate owned portfolio, the distressed economic conditions negatively impacted our quarterly loan loss provision, and thus our overall results. Bob Kaminski will detail the entire dynamic of our loan portfolio and the provision for loan losses during his comments.

While we suffered another loss quarter, the significant improvements in net interest margin and overhead that were initiated in 2008 and 2009 continued to help mitigate the effects of the elevated loan loss provision costs. We expect these improvements to continue and allow our bank to weather the storm. Chuck Christmas and Bob will detail these actions in their comments. While our improvements were not robust enough to completely counteract the higher loan loss expense, they are continually improving and allowing us to maintain our well-capitalized position.

At this time, I will turn it over to Chuck Christmas.

Chuck Christmas

Thanks, Mike, good morning everybody. This morning we announced that we recorded a net loss of $3 million during the first quarter of 2010 compared to a net loss of $4.5 million during the first quarter of 2009.

On a pretax basis, which we believe provides a more accurate comparison given the establishment of a valuation allowance on our deferred tax asset during the fourth quarter of 2009, and the issuance of preferred stock during the second quarter of 2009, our net loss during the first quarter of 2010 was $3.1 million compared to a net loss of $7.3 million during the first quarter of 2009. While we are of course disappointed with the net loss, we are encouraged by the 58% improvement on a pretax basis, as well as with a continued improvement in many key areas of our financial condition and performance.

Our financial performance during the first quarter of 2010, like that throughout 2009 and 2008 was impacted by significant provision expense as we needed to increase our loan loss reserve in light of the quality of our loan portfolio, and to cover net loan losses. Unfortunately, continued state, regional and national economic struggles have negatively impacted some of our borrowers cash flows, and underlying collateral values leading to increased nonperforming assets, higher loan charge-offs, and increased overall credit risk within our loan portfolio when compared to the historical norms.

From the time we sensed the economic weakness over two years ago, we have been working with our borrowers to develop constructive dialog, which has strengthened our relationships and enhanced our ability to resolve complex issues. With the environment for the banking industry likely to remain stressed until economic conditions improve, credit quality will continue to be our major concern. We will remain relentlessly vigilant in the identification and administration of problem assets.

Unfortunately, provision expense as well as nonperforming asset administration and resolution costs will likely remain higher than historical levels dampening future earnings performance. But during the first quarter of 2010, we saw the continuation of very positive trends we reported throughout 2009 as well, and I would like to touch on some of them with you this morning.

Despite a reduction in our total earning assets, an improved net interest margin has provided for increased net interest income. Net interest income during the first quarter of 2010 was $2.5 million higher, that is an increase of 21% from the first quarter last year. Our net income margin during the first quarter of this year was 3.25% compared to 2.28% in the first quarter of 2009, an improvement of 97 basis points over 42%. The improvement is primarily due to a significant decline in our cost of funds, and we expect a continued reduction in our cost of funds during 2010, although at a slower pace than during the past several quarters.

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