Published in Finance

Mercantile Bank beefs up loan-loss reserves to brace for weaker economy

BY Tuesday, July 21, 2020 12:16pm

GRAND RAPIDS — Mercantile Bank Corp. reported lower earnings for the second quarter, partly from increasing loan-loss reserves in light of “weakened economic conditions” resulting from the COVID-19 pandemic.

Mercantile Bank (Nasdaq: MBWM) this morning reported quarterly net income of $8.6 million, or 54 cents per diluted share. That compares with $11.7 million in net income, or 71 cents per diluted share, in the same period a year earlier. The previous year’s results included a $1.3 million gain, or 8 cents per share, from the sale of a bank-owned life insurance claim.

Mercantile President and CEO Robert Kaminski COURTESY PHOTO

Given the economic fallout of the current public health crisis and “the unique and persistent challenges presented by the COVID-19 pandemic,” President and CEO Robert Kaminski said the bank “demonstrated solid performance” in the second quarter.

The second quarter 2020 results include a quarterly loan-loss provision expense of $7.6 million, which compares with $900,000 in the second quarter of 2019.

The significant increase in the loan loss provision reflects the pandemic and “its impact on the economic environment,” CFO Chuck Christmas said. The higher expense consists primarily of allocations for a new “COVID-19 pandemic environmental factor” and existing economic conditions, he said.

“The COVID-19 factor was added to address the unique challenges and economic uncertainties resulting from the pandemic and its potential impact on the collectability of the loan portfolio,” Christmas said.

The bank entered the pandemic-induced recession with a solid capital position and strong asset quality, although “many uncertainties” may affect Mercantile’s financial condition and operating performance in the future, Christmas said.

Executives at Mercantile are pleased with the quarterly operating results and the bank’s financial condition and “believe we are well-positioned to navigate through the unprecedented environment created by the coronavirus and other events,” Christmas added.

Mercantile Bank produced record mortgage refinancing activity in the second quarter and increased total loans during the first six months of 2020 by $476 million to $3.33 billion. The net loan growth included $549 million in loans during the second quarter for the federal government’s Paycheck Protection Program (PPP).

The bank is now working with PPP borrowers to secure loan forgiveness from the U.S. Small Business Administration. During the PPP, “we have engaged numerous potential new relationship opportunities from businesses that approached or were referred to Mercantile when their incumbent banks were slow with their PPP application,” Kaminiski said.

Lines of credit declined $109 million in the second quarter, largely because of stay-at-home orders that hurt sales for certain customers “and the resulting reduction in borrowing needs,” the bank said. Unfunded commitments for commercial construction and development loans that Mercantile expects to largely fund in the next 12 to 18 months totaled about $78 million.

Mercantile Bank in the second quarter also said it planned to close three offices (Alma, Ionia and Lakeview) later this year, reducing its branch network across the Lower Peninsula to 37 offices, Kaminski said. The branches targeted to close are within two or three miles of another Mercantile office.

The planned closures result from the rise of digital banking that has branch offices handling fewer transactions.

“We continue to engage our customers so we can fully understand their needs and patterns as preferences of interacting with us are evolving, especially in view of the challenges brought about by COVID-19,” Kaminski said.

In April, Grand Rapids-banked Independent Bank (Nasdaq: IBCP) said it planned to consolidate eight offices into nearby branches as consumers increasingly use online and mobile banking.

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