Mercantile Bancorp in Grand Rapids, Mich., sought to assure investors that its underlying performance was strong despite balance sheet shrinkage that took place over the first quarter.

The $3.3 billion-asset company reported in a press release Tuesday that total loans fell 0.3% from the end of 2017, to $2.6 billion, while non-interest-bearing deposits decreased by 4%, to $830 million.

As for deposits, much of the decline was seasonal, reflecting tax-related expenses and employee bonus payouts by commercial clients, Chief Financial Officer Charles Christmas said during a conference call to discuss quarterly results. He added that noninterest checking relationships increased during the quarter.

While the company originated $111 million in loans during the quarter, those gains were partially offset by $42 million on runoff.

About half of the runoff involved loans on the company's watch list, or credits that CEO Robert Kaminski Jr. said he was “happy to see go.”

Citing a strong pipeline, which includes $130 million in construction loans, Kaminski told analysts that he is confident loan growth will resume in the second quarter and that Mercantile should have little difficulty hitting its growth target of mid-to-high single digits.

“I’m still very comfortable with that guidance — assuming a more normal level of payoffs,” Kaminski said.

Overall, Mercantile's first-quarter earnings rose 43% from a year earlier, to $10.9 million, or 66 cents a share. The 2017 results were boosted by a $1.1 million gain tied to a bank-owned life insurance policy.

Noninterest expenses rose by 7% to $21.1 million, largely reflecting a $1.1 million increase in salary and benefits.

Christmas said a tight labor market in Michigan is prompting companies across the state to increase salaries and benefits to keep employees. Mercantile is no exception; Christmas said the company had has increased salary for hourly employees, as well as its 401(k) match.

“We’re in a full-employment-type environment,” Christmas said. “Everybody is trying to hire and to keep existing employees on board.”

Christmas said he has heard of several companies in Mercantile’s footprint that plan to invest in labor-saving technology to boost the workforce productivity.

“Hopefully some of those businesses will come to us for loans,” Christmas said.

At March 31, nonperforming assets totaled $8.1 million, largely unchanged from the $7.8 million reported a year earlier. About a quarter of Mercantile’s nonperforming assets involve parcels of bank-owned real estate that management expects to sell over the next six months.

Charge-offs of $654,000, or 0.08% of average loans, were more than offset by $1.1 million in recoveries. There was no loan-loss provision in the first quarter, but Christmas projected quarterly provisioning of $500,000 to $1 million for the rest of this year to accommodate projected loan growth.

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