NASDAQ:MBWM Mercantile Bank Q1 2024 Earnings Report $40.68 +0.37 (+0.92%) Closing price 04/17/2025 04:00 PM EasternExtended Trading$40.67 -0.01 (-0.01%) As of 04/17/2025 04:05 PM Eastern Extended trading is trading that happens on electronic markets outside of regular trading hours. This is a fair market value extended hours price provided by Polygon.io. Learn more. Earnings HistoryForecast Mercantile Bank EPS ResultsActual EPS$1.34Consensus EPS $1.14Beat/MissBeat by +$0.20One Year Ago EPSN/AMercantile Bank Revenue ResultsActual Revenue$58.23 millionExpected Revenue$55.20 millionBeat/MissBeat by +$3.03 millionYoY Revenue GrowthN/AMercantile Bank Announcement DetailsQuarterQ1 2024Date4/16/2024TimeN/AConference Call DateTuesday, April 16, 2024Conference Call Time10:00AM ETUpcoming EarningsMercantile Bank's Q1 2025 earnings is scheduled for Tuesday, April 22, 2025, with a conference call scheduled at 10:00 AM ET. Check back for transcripts, audio, and key financial metrics as they become available.Q1 2025 Earnings ReportConference Call ResourcesConference Call AudioConference Call TranscriptSlide DeckPress Release (8-K)Quarterly Report (10-Q)Earnings HistoryCompany ProfileSlide DeckFull Screen Slide DeckPowered by Mercantile Bank Q1 2024 Earnings Call TranscriptProvided by QuartrApril 16, 2024 ShareLink copied to clipboard.There are 8 speakers on the call. Operator00:00:00Good morning, and welcome to the Mercantile Bank Corp. 2024 First Quarter Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. Operator00:00:27I would now like to turn the conference over to Nicole Klatter, First Vice President, Chief Marketing Officer of Mercantile Bank. Please go ahead. Speaker 100:00:36Good morning and thank you. Welcome to the Mercantile Bank Corporation's conference call and webcast to discuss the company's financial results for the Q1 of 2024. Joining me today is Bob Kaminski, President and Chief Executive Officer Chuck Christmas, Executive Vice President and Chief Financial Officer and Ray Reitzma, Chief Operating Officer and the President of the Bank. We will begin with prepared remarks and a presentation reviewing the quarter's results and open the call to questions. Before we begin, 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. Speaker 100:01:28The company's actual results could differ materially from any forward looking statements made today due to factors described in the company's latest Securities and Exchange Commission's 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 Q1 2024 press release and presentation deck issued by Mercantile today, you can access it on the company's website atwww.mercbank.com. At this time, I would like to turn the call over to Mercantile's President and Chief Executive Officer, Bob Kaminski. Bob? Speaker 200:02:10Thank you, Nicole, and thanks to all of you for joining us on the conference call today. This morning Mercantile released its Q1 2024 earnings, which reflected a strong start to the year. For the quarter, Mercantile earned $1.34 per share on revenues of $58,200,000 We also announced a cash dividend of $0.35 per share payable on June 19, 2024. Key themes demonstrated in this performance include solid core local deposit growth, strong asset quality, continuation of our strong commercial loan pipeline and ongoing focus on near term and long term strategic initiatives. Ray and Chuck will have the full details on the Q1 performance shortly. Speaker 200:03:00For 26 years Mercantile Bank has been setting the standard for what a relationship focused community bank should be. Our customers are at the center of all that our team does. At Mercantile, we understand that the key to developing and maintaining long term customer relationships is focusing on our customers and delivering what's best for them. We work diligently to understand customers' needs and then craft solutions that provide them the tools to help them reach their financial goals. This is how Mercantile was built and continues to operate today. Speaker 200:03:36Many financial institutions seem to place a higher priority on advancing their products ahead of what is optimal for the client. Another tenet for Mercantile is the desire to develop strong partnerships within the communities we serve. This helps to make better places where we live and work. The manner in which we do business with our clients while operating as a strong corporate citizen will continue to promote and enhance the sustainability of our company and our communities. Those are my prepared remarks. Speaker 200:04:10I'll now turn the call over to Ray and then to Chuck for their comments. Ray? Speaker 300:04:15Thank you, Bob. My comments will focus on rightsizing our loan to deposit ratio, deposit growth, loan growth, asset quality, non interest income and cost control. Over the last 3 years, commercial loan growth and mortgage loan growth has been strong, while deposit growth has been solid, it has not kept pace with total loan growth. As a result, the bank's loan to deposit ratio has when deposits were elevated because of the PPP program and the resulting excess liquidity in the system. We believe that the bank's elevated loan to deposit ratio, which has been a long term trade at the bank, is a contributing factor to our below peer valuation despite a strong return profile. Speaker 300:05:03We are now embarking on a path to alter that element of our business model. The following comments summarize the management initiatives that will contribute to a reduced loan to deposit ratio over time. We have undertaken a 3 pronged approach to building our deposit base with the objective of reducing the loan to deposit ratio into the mid-ninety percent range over time. First, we will grow the public and municipal realm through strategic personnel additions with existing relationships in this space. 2nd, an additional focus on small business banking through more efficient underwriting and obtaining the full relationship that characterizes this type of business. Speaker 300:05:443rd, our retail customer focus based on total balances as opposed to activity hurdles such as transactions or card usage. These efforts led to an increase in deposits in the Q1 of approximately $107,000,000 an 11% annualized growth rate despite the contrary seasonal pattern typical of the Q1 of reduced deposits as our commercial customers pay bonuses, partnership distributions and taxes. Mortgage loans have grown substantially over the past few years as borrowers have opted for ARMs rather than fixed rates in the increasing rate environment. We have altered and successfully The positive outcomes include a 117% increase in income on sale of mortgage loans on a year over year basis and a nominal increase during the quarter in mortgage loans on our balance sheet. Commercial loan growth in the Q1 was $14,000,000 or 1.7 percent annualized. Speaker 300:06:56The Q4 of 2023 featured commercial loan growth of 22% annualized, so it is natural that the funding in the current quarter would be somewhat depressed as the pipeline is rebuilt. That has been the case as the current pipeline stands near the long term trend line established over the last 3 years including commitments to fund commercial construction loans of $345,000,000 and residential mortgage loans of $36,000,000 A reduction in line usage of $27,000,000 during the quarter also impacted our percent as of March 31, 2024 compared to 110% at year end 2023. This ratio reduces to 102% when giving effect to our sweep account balances. These strategies will also contribute to a more stable net interest margin over time as the cost of growing money market deposits correlates strongly with our asset sensitive balance sheet and the increase in the relative size of our securities portfolio will provide a greater protection to the net interest margin should rates fall at some point in the future. Asset quality remains very strong as non performing assets sold $6,200,000 atquarterend or 11 basis points of total assets. Speaker 300:08:22Past due loans number 24 and in dollars represent 2 basis points of total loans. Non owner occupied office exposure is $271,000,000 or 6% of total loans. The borrowers in this asset class have performed well and continue to be monitored closely. We remain vigilant in all of our underwriting standards and monitoring to identify deterioration within our portfolio. Our lenders are the first line of observation in defense to recognize areas of emerging risk. Speaker 300:08:53Our risk rating model is robust with a continued emphasis on current borrower cash flow, providing prompt sensitivity to any emergency any emergency excuse me, any emerging challenges within a borrower's finances. That said, our customers continue to report strong results today and have not begun to experience the impacts of a potential recessionary environment in any systemic fashion. Total non interest income grew 56% during the Q1 of 2024 compared to the Q1 of 2023 with growth reported in every category. Mortgage banking income grew 93% based upon the strategies outlined earlier in the resulting ability to sell a greater portion of originations on the secondary market. Income from swaps, interest rate swaps grew 29% as we met our customers' needs for fixed rate financing. Speaker 300:09:51Service charges on accounts grew 56%, reflecting higher activity levels and customer growth and less earnings credit offset to charges based on reduced balances and transaction accounts. Payroll services grew 20% as our offerings continue to build traction in the marketplace. Credit and debit card income grew 3%. Cost control is an ongoing focus and S and P reports that efficiency ratios have been under pressure in the banking sectors. We are pleased to report that our efficiency ratio is 51% for the Q1 consistent with the preceding 4 quarters. Speaker 300:10:31That concludes my comments. I will now turn the call over to Chuck. Speaker 400:10:35Thanks, Frank. Good morning to everybody. As noted on slide 5, this morning we announced net income of $21,600,000 or $1.34 per diluted share for the Q1 of 2024 compared with net income of $21,000,000 or $1.31 per diluted share for the respective prior year period. The improvement primarily reflects a higher level of non interest income, which more than offset a lower level of net interest income, larger provision expense and increased non interest expenses. Turning to slide 7, interest income on loans increased during the Q1 of 20 24 compared to the respective prior year period, reflecting an increased interest rate environment and solid growth in commercial and residential mortgage loans. Speaker 400:11:23Our Q1 of 2024 loan yield was 75 basis points higher than the Q1 of 2023 with average loans up over 9% over the respective period. The improved loan yield largely reflects combined impact of an aggregate 100 basis point increase in the federal funds rate since the beginning of 2023 and approximately 2 thirds of our commercial loans having a floating rate. Interest income on securities also increased during the Q1 of 2024 compared to the Q1 of 2023, reflecting growth in the securities portfolio and the higher interest rate environment. Interest income on other earning assets, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, increased during the Q1 of 2024 compared to the Q1 of 2023 in large part reflecting a higher average balance and an increased yield. In total, interest income was up $16,200,000 during the Q1 of 2024 compared to the respective prior year period. Speaker 400:12:32We recorded interest increased interest expense on deposits in our sweep account product during the Q1 of 2024 compared to the Q1 of 2023, reflecting the increased interest rate environment, money market and time deposit growth, transfers of deposits from no or low cost deposit products to higher costing deposit products and enhanced competition for deposits. Our Q1 of 2024 cost of deposits was 138 basis points higher than the Q1 of 2023. Interest expense on Federal Home Loan Bank of Indianapolis advances also increased during the Q1 of 2024 compared to the respective prior year period, reflecting growth in the advanced portfolio and the higher interest rate environment. Interest expense on other borrowed funds increased during the Q1 of 2024 compared to the Q1 of 2023 reflecting the higher interest costs of our trust preferred securities. In total, interest expense was up $17,300,000 during the Q1 of 2024 compared to the respective prior year period. Speaker 400:13:43Net interest income decreased $1,000,000 during the Q1 of 2024 compared to the Q1 of 2023. Our net interest margin declined 54 basis points during the Q1 of 2024 compared to the same quarter in 2023. Although our yield on earning assets increased 71 basis points during that time period, our cost of funds was up 125 basis points. While we experienced rapid growth in our earning asset yield during the period of March of 2022 through July of 2023, when the FOMC raised the federal funds rate by 5 25 basis points, meaningful increases in our cost of funds did not begin to materialize until the latter part of 2022 when competition for deposit balances increased deposit rates and depositors began to move funds from no and lower costing deposit types to higher costing deposit products. Our net interest margin peaked during the latter part of 2022 and the early stages of 2023. Speaker 400:14:48We recorded a provision expense of $1,300,000 during Q1 of 2024 compared to $600,000 during the Q1 of 2023. The Q1 2024 provision expense primarily reflects a specific allocation for a non performing commercial loan relationship. Additional allocations were needed to reflect loan growth and a change in a commercial loan environmental factor, while reduced allocations were made due to an improved economic forecast and changes in loan portfolio composition. Non interest expenses increased $1,300,000 during the Q1 of 2024 compared to the Q1 of 2023, primarily reflecting increased compensation and benefit costs. Slide numbers 15 through 17 depict information on our investment portfolio. Speaker 400:15:40There were only nominal changes to our investment portfolio during the Q1 of 2024, largely limited to ordinary purchases of municipal bonds and maturities of U. S. Government agency bonds and municipal bonds. All of our investments remain categorized as available for sale. As of March 31, 2024, about 63% of our investment portfolio was comprised of U. Speaker 400:16:02S. Government agency bonds with approximately 32% comprised of municipal bonds, all of which were issued by municipal entities within the state of Michigan and a high percentage within our market areas. Mortgage backed securities, all of which are guaranteed by U. S. Government agencies, comprise only about 5% of the investment portfolio. Speaker 400:16:24The maturities of the U. S. Government agency and municipal bond segments are generally structured on a laddered basis. A significant majority of the U. S. Speaker 400:16:33Government agency bonds mature within the next 7 years with over 3 fourths of our municipal bonds maturing over the next 10 years. The net unrealized loss totaled $67,000,000 as of March 31, 2024 compared to $64,000,000 at year end 2023 $71,000,000 as of March 31, 2023. Slide numbers 19 through 21 depict data on our deposit base. You will note that we include sweep accounts in our deposit tables and calculations as those accounts reflect monies from entities, primarily municipalities and other larger customers who have elected to place their funds in a sweep account that is fully secured by U. S. Speaker 400:17:16Government agency bonds. On slide number 21, we depict our deposit balances as of March 31, 2024 and year end 2023. As a commercial bank, majority of our deposits are comprised of commercial accounts. Non interest bearing checking accounts equated to 27% of deposits in sweep accounts as of March 31, 2024, similar to historical levels. A large portion of these funds are associated with commercial lending relationships, especially commercial and industrial companies. Speaker 400:17:49As typical, non interest bearing checking account balances declined during the early stages of the Q1, reflecting withdrawals by commercial customers to make bonus and tax payments in partnership distributions. We experienced solid growth within our money market and time deposit portfolios during the Q1 of 2020 24, reflecting growth from existing customers and initial deposits from new customers. The level of uninsured deposits totaling about 48% as of March 31, 2024 has remained relatively steady over many years. On slide number 20, we provide information on depositors with balances of $5,000,000 or more. At the end of the Q1, we had 76 relationships, which aggregated $1,200,000,000 About 80% of the relationships and approximately 83% of the total deposits were with businesses and or individuals with the remaining comprised of public entities. Speaker 400:18:46When compared to 5 years ago, we had 41 relationships with deposit balances over $5,000,000 aggregating $521,000,000 Of those 41 relationships, 32 continue to have balances over 5 $1,000,000 and have grown those deposit balances by almost $300,000,000 in aggregate. We remain in a strong and well capitalized regulatory capital position. Our bank's total risk based cash capital ratio was 13.8% at the end of the first quarter, almost $200,000,000 above the minimum threshold to be categorized as well capitalized. We did not repurchase shares during the Q1 of 2024. We have $6,800,000 available in our current repurchase plan. Speaker 400:19:35While net unrealized gains and losses in our investment portfolio are excluded from regulatory capital calculations, on slide number 18, we depict our Tier 1 leverage capital ratio and our total risk based capital ratios assuming the calculation did include that adjustment. While our regulatory cap ratios were negatively impacted by the pro form a calculations, our capital position remains strong. As of March 31, 2024, our Tier 1 capital ratio declines from 12.3% to 11.3% and our total risk based capital ratio declines from 13.8% to 13%. Our excess capital as measured by the total risk based capital ratio is also negatively impacted. However, it totaled a strong $150,000,000 over the minimum regulatory amount to be categorized as well capitalized. Speaker 400:20:27On slide 23, we share our latest assumptions on the interest rate environment and key performance metrics for the remainder of 2024 with a caveat that market conditions remain volatile making forecasting difficult. This forecast is predicated on the federal funds rate staying unchanged during the Q2 of this year and then declining by 25 basis points during both 3rd and 4th quarters. We continue to project loan growth in a range of 4% to 6%, where our forecast in our net interest margin to decline during the second and third quarters in large part reflecting continued growth in higher costing money market and time deposits along with a higher portion of our asset base invested in securities and on deposit with the Federal Reserve Bank of Chicago. We expect non interest income and non interest expense to be relatively stable during the remainder of this year. In closing, we are very pleased with our Q1 20 24 operating results and financial condition and believe we remain well positioned to continue to successfully navigate through the myriad of challenges faced by all financial institutions. Speaker 400:21:38Those are my prepared remarks. I'll now turn the call back over to Bob. Speaker 200:21:42Thank you, Chuck. That concludes management's prepared comments and we'll now open the call to the Q and A session. Operator00:21:49We will now begin the question and answer The first question comes from Brendan Nosal with Hovde Group. Please go ahead. Speaker 500:22:24Hey, good morning guys. Hope you're doing well. Speaker 300:22:26Good morning. Good morning. Speaker 600:22:29Maybe just to start Speaker 500:22:30off here, there was a pretty meaningful transaction announced in your neck of the woods yesterday afternoon. I know there were less than 24 hours out since it was announced, but any preliminary thoughts on how it may impact your market and Mercantile and where you might like to capitalize on any talent dislocation opportunities that might arise? Speaker 300:22:51Yes. That is exactly our thought that there may be some opportunity surrounding this announcement and employees, customers will both be in play over some period of time and we will seek to take advantage of that. Speaker 500:23:14All right, perfect. Perhaps one more for me before I step back. Maybe just on the margin kind of longer term. I know the idea of an aggressive Fed cut or cuts keeps getting pushed out. But just kind of curious how you think about the margin, when and if the Fed does start cutting meaningfully? Speaker 500:23:35Like are you still very asset sensitive in scenario? Or have you taken enough margin pain over the last 12 months that Fed cuts aren't as impactful as they once may have been? Speaker 400:23:46Yes, this is Chuck. I think one of the things that we've seen as was fully expected is our balance sheet fully repriced over the last few years. Our margin has settled down kind of back to its historical average of 3.5%, 3.6%. And as I stated a few minutes ago, it's kind of where we expect it to settle out as we get towards the end of this year. I think clearly, we look at our asset to try to manage through changing interest rate environments. Speaker 400:24:28I think clearly if the Fed was to lower rates 500 basis points like they just raised them, it's a very different scenario than what it's really is being talked about out there is maybe some interest rate declines the back half of this year and maybe several more next year. Very aggressively lower interest rates, that would have a bigger upfront impact, just because our assets would be priced faster than our liabilities, kind of going through the opposite of what we just went through and then our everything else would catch up. I think we've been working very hard and Ray kind of commented, made a couple of comments on it in his prepared remarks of working with the deposit portfolio, wanting to grow that as meaningful as we can, but also with an eye to helping to manage interest rate risk and changing interest rate environment, especially in a decline interest rate environment. Speaker 500:25:33All right, fantastic. Thank you for taking my questions. Speaker 400:25:36You bet. Operator00:25:38The next question is from Daniel Tamayo with Speaker 400:25:48Raymond James. Speaker 700:25:50Maybe we just start on credit. Obviously, things still very strong for you guys. I mean NPL trends slightly up, but still very low. But just curious first on your thoughts on where you might expect those NPL trends to continue from here. I mean, I noticed you took reserves up a little bit, a few basis points. Speaker 700:26:15And just curious also kind of what the driver was for that and where you see might see reserves go? Speaker 300:26:26Well, in general, in the very near future, we have a few events that we're planning or that our customers are planning in helping us to reduce the NPLs that are on our books. And I'd expect that will continue in the foreseeable future in a similar sort of range that we're in now. Obviously, it wouldn't take much to change that because the NPL amounts are so small. But there's good credit quality throughout all segments of our portfolio and we feel that the economies that we operate in continue to be strong and our borrowers continue to report good results. Speaker 400:27:15This is Chuck, Danny. I would make just a couple of comments on the loan loss reserve, obviously using the CECL model. I think as everybody knows, there's really 2 areas. And there's a lot of different inputs that but there's really 2 that would have the most significant input. 1 obviously is the economic forecast, which we use a 3rd party independent forecast. Speaker 400:27:34Those continue to be relatively favorable. And I think match what the market is really expecting and even some of the Fed forecasts that are out there. And then of course the other big driver would be our loan loss reserve is highly predicated on the grading system through our commercial loan portfolio. So if we were to see meaningful grade changes, that would have an impact on the reserve calculation as well. Again, kind of based on our comments, we really don't see we're not really forecasting any significant change in the economy. Speaker 400:28:08And with that, we would expect the grades within our commercial loan portfolio to stay relatively steady as well. Speaker 700:28:16Appreciate all that color. That's helpful. Maybe I'd just dig a little bit more into the office portfolio. I think I heard you guys say it was 271,000,000 dollars of non owner occupied office. Is that correct? Speaker 700:28:33Correct. Okay. Is there anything else you can provide us in terms of data on that portfolio in terms of LTVs or occupancy rates or geography of the location of those office buildings? Just curious what other details you have on those loans? Speaker 300:28:57Well, the majority of those loans are in Grand Rapids and in terms of geography. In terms of credit characteristics, the vast, vast majority of them have personal recourse. All of them continue to have positive cash flow and debt coverage ratios at this time. We're watching that very closely. The tenant situations in each of the projects appears to be stable and that's obviously something that can change. Speaker 300:29:34So we're watching that closely, but so far so good. And so with those traits, we feel that there is some sustainability to that 6% of our loan portfolio. Speaker 700:29:51Okay. And are there have there been any transactions of office buildings in Grand Rapids that have give you a sense for how much or if prices have moved in the last few years? Speaker 300:30:06None leap to mind in very recent times. I could be wrong about that, but I can't think of any at the moment. Speaker 700:30:15Okay. Thanks for taking my questions. Speaker 300:30:18You bet. Thanks, Danny. Operator00:30:20The next question is from Damon DelMonte with KBW. Please go ahead. Speaker 600:30:25Hey, good morning guys. Hope everybody is doing well today. Good morning. Good morning. Just wanted to start off with on fee income this quarter, it looks like treasury management, which I believe is captured in the other line item, was particularly strong. Speaker 600:30:41I guess, first, Chuck, can you confirm is that the line that it was categorized in? And then secondly, kind of what's your thought on the outlook there over the next few quarters? Speaker 400:30:52Yes. I think most of our when we talk about treasury management, there's kind of a handful of prongs there. From your normal day to day cash calculation that takes place. We would also include our payroll, human capital management products, as well as our card products, our debit and credit card products. That's dominated by commercial customers using them for their some of their cash flow needs. Speaker 400:31:24So when we talk about treasury management, it's kind of those 3 fraud categories that we think about. We expect all of those to continue to grow as they have been as we continue to grow our customer base, especially in the C and I segment of our loan portfolio as we bring those customers on, get the deposit full deposit relationships and are able to also offer them all a myriad of different cash management, treasury management products. On Page 23, we gave guidance in regards to our fee income. There was we had a very solid quarter for swap income, kind of like commercial loan growth that can be lumpy from quarter to quarter just given the attributes within that commercial loan portfolio. But we're obviously very pleased to have that product not only the income upfront, which is great, obviously. Speaker 400:32:21But really the primary reason for getting into that product and staying in that product is to manage longer term interest rate risk of meaningfully sized credits. We're not going to offer we're generally not going to offer fixed rates too. So we feel that that's a significant interest rate risk management tool, but obviously provides some solid fee income upfront. Very pleased with our mortgage banking operation in the Q1. That performed very well, well above what we had budgeted. Speaker 400:32:51And the pipeline and the conditions are looking positive for that as well. The big item in the other income was we are we do have a relatively small investment in a local Michigan based private equity fund that makes investments that qualify for CRA credit. That fund has been performing very well and we were able to run some of that reflect some of that within our income statement for the Q1. Again, some of the stuff gets a little bit lumpy from quarter to quarter, whether it's SWAS, mortgage banking or private equity, those types of things. But on Page 23, we gave our thoughts for the remainder of 2024. Speaker 400:33:35Relative to the Q1, we're not expecting fee income to be as strong, but we do expect it to be solid and meaningful to our overall operations and operating performance. Speaker 600:33:46Got it. Okay. Appreciate that color and clarification on kind of how the treasury management fees are captured. And then with respect to the margin and the outlook, I think Ray may have said it or Chuck, you may have said it in the prepared remarks about the kind of the revised outlook and kind of the driver of the lower outlook or lower range for the margin. Was that more attributable to the ongoing efforts to bring on deposits? Speaker 600:34:15Or is that just a function of the asset sensitivity and maybe expectation of rate cuts later in the year? Speaker 400:34:22No, I think there's definitely a little bit on the rate cuts there, Damon. As we mentioned, we've got a couple in the back half. But I think we're pretty well balanced when you're only looking at say 50 basis points of decline over 6 months. We don't really have any significant timing issues that are there. I think the base, which obviously we're trying very hard to grow local deposits. Speaker 400:34:50And obviously in this environment most of that's going to come in the money market and the deposit categories, which obviously are the higher cost deposits that we have in there. Now having said that, we do expect our non interest bearing checking accounts to have meaningful growth as well, especially as our current customers rebuild after paying their payments that they do generally in January of each year, but also as we continue to get growth within the C and I segment of our loan portfolio. I think there's also some benefits. We do have some, I would say, very low yielding investments that are set to mature over the next several years. And whether we reinvest those into investments or put those in the loan portfolio, more likely to go on the investment portfolio at this point in time. Speaker 400:35:37Those will reprice very appreciably, which will help set off some of the extra costs or additional costs that we'll have in our deposit structure. And we do have some loans that were made 3 5 years ago that are coming up for maturity balloons that we'll be able to reprice as well. So on an overall basis, we think the margin will stay relatively steady. I guess I should add one more thing is, in addition to growing the investment portfolio as a percent of assets over the next several years, we are operating with a higher level of on balance sheet liquidity, which while at the Fed, it's not a bad rate. Certainly, it's a lower rate than what we would get in the loan portfolio. Speaker 400:36:17So there's a little bit of a dampening of our margin that standpoint as well. But given the environment, our overall balance sheet structure, we think it's prudent to operate with a higher level of overnight liquidity at the current time. Speaker 600:36:31Got it. Okay, great. And then just lastly, on the loan guide, is that in any way being constrained by trying to not outpace the deposit growth that you're targeting to achieve? Or is the 4% to 6% loan growth just kind of indicative of the market opportunities that are in front of you guys right now? Speaker 300:36:52That's a great question. And we think that it does reflect the opportunities in the market. We're not dialing back our loan growth. There may be a very sliver of selectivity within that where we look at our existing portfolio and say, hey, this relationship those may de select out of the bank and have a bit of a dampening effect. But the overall addition of new credits and new opportunities to the bank, we don't expect to see that decrease at all. Speaker 600:37:35Got it. Okay, great. That's all that I had. Thank you very much. Speaker 200:37:38Thank you. Thanks, Dan. Operator00:37:40This concludes our question and answer session. I would like to turn the conference back over to Bob Kaminski for any closing remarks. Speaker 200:37:47Thank you, Gary. On a personal note, this is my final conference call as President and CEO of Mercantile Bank Corporation as I will retire at the end of May. It's been my pleasure to interact with you on these calls over the years with the last seven being in this leadership position. Our company views these calls as important avenues of communication and transparency with our stakeholders. Rayanne Chuckle will be with you in July reporting on our Q2 results and highlights. Speaker 200:38:16Thank you very much for your interest in our company. Best wishes to you all. This call has now ended. Operator00:38:23The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallMercantile Bank Q1 202400:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsSlide DeckPress Release(8-K)Quarterly report(10-Q) Mercantile Bank Earnings HeadlinesMercantile Bank (MBWM) Projected to Post Earnings on TuesdayApril 20 at 1:13 AM | americanbankingnews.comTamilnad Mercantile Bank Schedules Earnings Call for Financial ResultsApril 8, 2025 | tipranks.comTrump’s Top Secret $9 Trillion AI SuperweaponJeff Brown spotted Nvidia at $1. Now he’s revealing a new AI superweapon — and the Musk-connected stocks that could benefit.April 20, 2025 | Brownstone Research (Ad)Mercantile Bank Corporation Announces First Quarter 2025 Results Conference Call and WebcastMarch 31, 2025 | investing.comMercantile Bank Corporation Announces First Quarter 2025 Results Conference Call and WebcastMarch 31, 2025 | prnewswire.comMercantile Bank Adopts New Executive Bonus PlanMarch 20, 2025 | tipranks.comSee More Mercantile Bank Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like Mercantile Bank? Sign up for Earnings360's daily newsletter to receive timely earnings updates on Mercantile Bank and other key companies, straight to your email. Email Address About Mercantile BankMercantile Bank (NASDAQ:MBWM) operates as the bank holding company for Mercantile Bank of Michigan that provides commercial and retail banking services to small- to medium-sized businesses and individuals in the United States. It accepts various deposit products, including checking, savings, and term certificate accounts; time deposits; and certificates of deposit. The company also provides commercial and industrial loans; vacant land, land development, and residential construction loans; owner and non-owner occupied real estate loans; multi-family and residential rental property loans; single-family residential real estate loans; home equity line of credit programs; and consumer loans, such as new and used automobile and boat loans, and credit cards, as well as overdraft protection services; and residential mortgage and instalment loans. In addition, it offers courier services and safe deposit facilities; and insurance products, such as private passenger automobile, homeowners, personal inland marine, boat owners, recreational vehicle, dwelling fire, umbrella policies, small business, and life insurance products. The company was incorporated in 1997 and is headquartered in Grand Rapids, Michigan.View Mercantile Bank ProfileRead more More Earnings Resources from MarketBeat Earnings Tools Today's Earnings Tomorrow's Earnings Next Week's Earnings Upcoming Earnings Calls Earnings Newsletter Earnings Call Transcripts Earnings Beats & Misses Corporate Guidance Earnings Screener Earnings By Country U.S. Earnings Reports Canadian Earnings Reports U.K. Earnings Reports Latest Articles Archer Aviation Unveils NYC Network Ahead of Key Earnings Report3 Reasons to Like the Look of Amazon Ahead of EarningsTesla Stock Eyes Breakout With Earnings on DeckJohnson & Johnson Earnings Were More Good Than Bad—Time to Buy? 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There are 8 speakers on the call. Operator00:00:00Good morning, and welcome to the Mercantile Bank Corp. 2024 First Quarter Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. Operator00:00:27I would now like to turn the conference over to Nicole Klatter, First Vice President, Chief Marketing Officer of Mercantile Bank. Please go ahead. Speaker 100:00:36Good morning and thank you. Welcome to the Mercantile Bank Corporation's conference call and webcast to discuss the company's financial results for the Q1 of 2024. Joining me today is Bob Kaminski, President and Chief Executive Officer Chuck Christmas, Executive Vice President and Chief Financial Officer and Ray Reitzma, Chief Operating Officer and the President of the Bank. We will begin with prepared remarks and a presentation reviewing the quarter's results and open the call to questions. Before we begin, 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. Speaker 100:01:28The company's actual results could differ materially from any forward looking statements made today due to factors described in the company's latest Securities and Exchange Commission's 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 Q1 2024 press release and presentation deck issued by Mercantile today, you can access it on the company's website atwww.mercbank.com. At this time, I would like to turn the call over to Mercantile's President and Chief Executive Officer, Bob Kaminski. Bob? Speaker 200:02:10Thank you, Nicole, and thanks to all of you for joining us on the conference call today. This morning Mercantile released its Q1 2024 earnings, which reflected a strong start to the year. For the quarter, Mercantile earned $1.34 per share on revenues of $58,200,000 We also announced a cash dividend of $0.35 per share payable on June 19, 2024. Key themes demonstrated in this performance include solid core local deposit growth, strong asset quality, continuation of our strong commercial loan pipeline and ongoing focus on near term and long term strategic initiatives. Ray and Chuck will have the full details on the Q1 performance shortly. Speaker 200:03:00For 26 years Mercantile Bank has been setting the standard for what a relationship focused community bank should be. Our customers are at the center of all that our team does. At Mercantile, we understand that the key to developing and maintaining long term customer relationships is focusing on our customers and delivering what's best for them. We work diligently to understand customers' needs and then craft solutions that provide them the tools to help them reach their financial goals. This is how Mercantile was built and continues to operate today. Speaker 200:03:36Many financial institutions seem to place a higher priority on advancing their products ahead of what is optimal for the client. Another tenet for Mercantile is the desire to develop strong partnerships within the communities we serve. This helps to make better places where we live and work. The manner in which we do business with our clients while operating as a strong corporate citizen will continue to promote and enhance the sustainability of our company and our communities. Those are my prepared remarks. Speaker 200:04:10I'll now turn the call over to Ray and then to Chuck for their comments. Ray? Speaker 300:04:15Thank you, Bob. My comments will focus on rightsizing our loan to deposit ratio, deposit growth, loan growth, asset quality, non interest income and cost control. Over the last 3 years, commercial loan growth and mortgage loan growth has been strong, while deposit growth has been solid, it has not kept pace with total loan growth. As a result, the bank's loan to deposit ratio has when deposits were elevated because of the PPP program and the resulting excess liquidity in the system. We believe that the bank's elevated loan to deposit ratio, which has been a long term trade at the bank, is a contributing factor to our below peer valuation despite a strong return profile. Speaker 300:05:03We are now embarking on a path to alter that element of our business model. The following comments summarize the management initiatives that will contribute to a reduced loan to deposit ratio over time. We have undertaken a 3 pronged approach to building our deposit base with the objective of reducing the loan to deposit ratio into the mid-ninety percent range over time. First, we will grow the public and municipal realm through strategic personnel additions with existing relationships in this space. 2nd, an additional focus on small business banking through more efficient underwriting and obtaining the full relationship that characterizes this type of business. Speaker 300:05:443rd, our retail customer focus based on total balances as opposed to activity hurdles such as transactions or card usage. These efforts led to an increase in deposits in the Q1 of approximately $107,000,000 an 11% annualized growth rate despite the contrary seasonal pattern typical of the Q1 of reduced deposits as our commercial customers pay bonuses, partnership distributions and taxes. Mortgage loans have grown substantially over the past few years as borrowers have opted for ARMs rather than fixed rates in the increasing rate environment. We have altered and successfully The positive outcomes include a 117% increase in income on sale of mortgage loans on a year over year basis and a nominal increase during the quarter in mortgage loans on our balance sheet. Commercial loan growth in the Q1 was $14,000,000 or 1.7 percent annualized. Speaker 300:06:56The Q4 of 2023 featured commercial loan growth of 22% annualized, so it is natural that the funding in the current quarter would be somewhat depressed as the pipeline is rebuilt. That has been the case as the current pipeline stands near the long term trend line established over the last 3 years including commitments to fund commercial construction loans of $345,000,000 and residential mortgage loans of $36,000,000 A reduction in line usage of $27,000,000 during the quarter also impacted our percent as of March 31, 2024 compared to 110% at year end 2023. This ratio reduces to 102% when giving effect to our sweep account balances. These strategies will also contribute to a more stable net interest margin over time as the cost of growing money market deposits correlates strongly with our asset sensitive balance sheet and the increase in the relative size of our securities portfolio will provide a greater protection to the net interest margin should rates fall at some point in the future. Asset quality remains very strong as non performing assets sold $6,200,000 atquarterend or 11 basis points of total assets. Speaker 300:08:22Past due loans number 24 and in dollars represent 2 basis points of total loans. Non owner occupied office exposure is $271,000,000 or 6% of total loans. The borrowers in this asset class have performed well and continue to be monitored closely. We remain vigilant in all of our underwriting standards and monitoring to identify deterioration within our portfolio. Our lenders are the first line of observation in defense to recognize areas of emerging risk. Speaker 300:08:53Our risk rating model is robust with a continued emphasis on current borrower cash flow, providing prompt sensitivity to any emergency any emergency excuse me, any emerging challenges within a borrower's finances. That said, our customers continue to report strong results today and have not begun to experience the impacts of a potential recessionary environment in any systemic fashion. Total non interest income grew 56% during the Q1 of 2024 compared to the Q1 of 2023 with growth reported in every category. Mortgage banking income grew 93% based upon the strategies outlined earlier in the resulting ability to sell a greater portion of originations on the secondary market. Income from swaps, interest rate swaps grew 29% as we met our customers' needs for fixed rate financing. Speaker 300:09:51Service charges on accounts grew 56%, reflecting higher activity levels and customer growth and less earnings credit offset to charges based on reduced balances and transaction accounts. Payroll services grew 20% as our offerings continue to build traction in the marketplace. Credit and debit card income grew 3%. Cost control is an ongoing focus and S and P reports that efficiency ratios have been under pressure in the banking sectors. We are pleased to report that our efficiency ratio is 51% for the Q1 consistent with the preceding 4 quarters. Speaker 300:10:31That concludes my comments. I will now turn the call over to Chuck. Speaker 400:10:35Thanks, Frank. Good morning to everybody. As noted on slide 5, this morning we announced net income of $21,600,000 or $1.34 per diluted share for the Q1 of 2024 compared with net income of $21,000,000 or $1.31 per diluted share for the respective prior year period. The improvement primarily reflects a higher level of non interest income, which more than offset a lower level of net interest income, larger provision expense and increased non interest expenses. Turning to slide 7, interest income on loans increased during the Q1 of 20 24 compared to the respective prior year period, reflecting an increased interest rate environment and solid growth in commercial and residential mortgage loans. Speaker 400:11:23Our Q1 of 2024 loan yield was 75 basis points higher than the Q1 of 2023 with average loans up over 9% over the respective period. The improved loan yield largely reflects combined impact of an aggregate 100 basis point increase in the federal funds rate since the beginning of 2023 and approximately 2 thirds of our commercial loans having a floating rate. Interest income on securities also increased during the Q1 of 2024 compared to the Q1 of 2023, reflecting growth in the securities portfolio and the higher interest rate environment. Interest income on other earning assets, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, increased during the Q1 of 2024 compared to the Q1 of 2023 in large part reflecting a higher average balance and an increased yield. In total, interest income was up $16,200,000 during the Q1 of 2024 compared to the respective prior year period. Speaker 400:12:32We recorded interest increased interest expense on deposits in our sweep account product during the Q1 of 2024 compared to the Q1 of 2023, reflecting the increased interest rate environment, money market and time deposit growth, transfers of deposits from no or low cost deposit products to higher costing deposit products and enhanced competition for deposits. Our Q1 of 2024 cost of deposits was 138 basis points higher than the Q1 of 2023. Interest expense on Federal Home Loan Bank of Indianapolis advances also increased during the Q1 of 2024 compared to the respective prior year period, reflecting growth in the advanced portfolio and the higher interest rate environment. Interest expense on other borrowed funds increased during the Q1 of 2024 compared to the Q1 of 2023 reflecting the higher interest costs of our trust preferred securities. In total, interest expense was up $17,300,000 during the Q1 of 2024 compared to the respective prior year period. Speaker 400:13:43Net interest income decreased $1,000,000 during the Q1 of 2024 compared to the Q1 of 2023. Our net interest margin declined 54 basis points during the Q1 of 2024 compared to the same quarter in 2023. Although our yield on earning assets increased 71 basis points during that time period, our cost of funds was up 125 basis points. While we experienced rapid growth in our earning asset yield during the period of March of 2022 through July of 2023, when the FOMC raised the federal funds rate by 5 25 basis points, meaningful increases in our cost of funds did not begin to materialize until the latter part of 2022 when competition for deposit balances increased deposit rates and depositors began to move funds from no and lower costing deposit types to higher costing deposit products. Our net interest margin peaked during the latter part of 2022 and the early stages of 2023. Speaker 400:14:48We recorded a provision expense of $1,300,000 during Q1 of 2024 compared to $600,000 during the Q1 of 2023. The Q1 2024 provision expense primarily reflects a specific allocation for a non performing commercial loan relationship. Additional allocations were needed to reflect loan growth and a change in a commercial loan environmental factor, while reduced allocations were made due to an improved economic forecast and changes in loan portfolio composition. Non interest expenses increased $1,300,000 during the Q1 of 2024 compared to the Q1 of 2023, primarily reflecting increased compensation and benefit costs. Slide numbers 15 through 17 depict information on our investment portfolio. Speaker 400:15:40There were only nominal changes to our investment portfolio during the Q1 of 2024, largely limited to ordinary purchases of municipal bonds and maturities of U. S. Government agency bonds and municipal bonds. All of our investments remain categorized as available for sale. As of March 31, 2024, about 63% of our investment portfolio was comprised of U. Speaker 400:16:02S. Government agency bonds with approximately 32% comprised of municipal bonds, all of which were issued by municipal entities within the state of Michigan and a high percentage within our market areas. Mortgage backed securities, all of which are guaranteed by U. S. Government agencies, comprise only about 5% of the investment portfolio. Speaker 400:16:24The maturities of the U. S. Government agency and municipal bond segments are generally structured on a laddered basis. A significant majority of the U. S. Speaker 400:16:33Government agency bonds mature within the next 7 years with over 3 fourths of our municipal bonds maturing over the next 10 years. The net unrealized loss totaled $67,000,000 as of March 31, 2024 compared to $64,000,000 at year end 2023 $71,000,000 as of March 31, 2023. Slide numbers 19 through 21 depict data on our deposit base. You will note that we include sweep accounts in our deposit tables and calculations as those accounts reflect monies from entities, primarily municipalities and other larger customers who have elected to place their funds in a sweep account that is fully secured by U. S. Speaker 400:17:16Government agency bonds. On slide number 21, we depict our deposit balances as of March 31, 2024 and year end 2023. As a commercial bank, majority of our deposits are comprised of commercial accounts. Non interest bearing checking accounts equated to 27% of deposits in sweep accounts as of March 31, 2024, similar to historical levels. A large portion of these funds are associated with commercial lending relationships, especially commercial and industrial companies. Speaker 400:17:49As typical, non interest bearing checking account balances declined during the early stages of the Q1, reflecting withdrawals by commercial customers to make bonus and tax payments in partnership distributions. We experienced solid growth within our money market and time deposit portfolios during the Q1 of 2020 24, reflecting growth from existing customers and initial deposits from new customers. The level of uninsured deposits totaling about 48% as of March 31, 2024 has remained relatively steady over many years. On slide number 20, we provide information on depositors with balances of $5,000,000 or more. At the end of the Q1, we had 76 relationships, which aggregated $1,200,000,000 About 80% of the relationships and approximately 83% of the total deposits were with businesses and or individuals with the remaining comprised of public entities. Speaker 400:18:46When compared to 5 years ago, we had 41 relationships with deposit balances over $5,000,000 aggregating $521,000,000 Of those 41 relationships, 32 continue to have balances over 5 $1,000,000 and have grown those deposit balances by almost $300,000,000 in aggregate. We remain in a strong and well capitalized regulatory capital position. Our bank's total risk based cash capital ratio was 13.8% at the end of the first quarter, almost $200,000,000 above the minimum threshold to be categorized as well capitalized. We did not repurchase shares during the Q1 of 2024. We have $6,800,000 available in our current repurchase plan. Speaker 400:19:35While net unrealized gains and losses in our investment portfolio are excluded from regulatory capital calculations, on slide number 18, we depict our Tier 1 leverage capital ratio and our total risk based capital ratios assuming the calculation did include that adjustment. While our regulatory cap ratios were negatively impacted by the pro form a calculations, our capital position remains strong. As of March 31, 2024, our Tier 1 capital ratio declines from 12.3% to 11.3% and our total risk based capital ratio declines from 13.8% to 13%. Our excess capital as measured by the total risk based capital ratio is also negatively impacted. However, it totaled a strong $150,000,000 over the minimum regulatory amount to be categorized as well capitalized. Speaker 400:20:27On slide 23, we share our latest assumptions on the interest rate environment and key performance metrics for the remainder of 2024 with a caveat that market conditions remain volatile making forecasting difficult. This forecast is predicated on the federal funds rate staying unchanged during the Q2 of this year and then declining by 25 basis points during both 3rd and 4th quarters. We continue to project loan growth in a range of 4% to 6%, where our forecast in our net interest margin to decline during the second and third quarters in large part reflecting continued growth in higher costing money market and time deposits along with a higher portion of our asset base invested in securities and on deposit with the Federal Reserve Bank of Chicago. We expect non interest income and non interest expense to be relatively stable during the remainder of this year. In closing, we are very pleased with our Q1 20 24 operating results and financial condition and believe we remain well positioned to continue to successfully navigate through the myriad of challenges faced by all financial institutions. Speaker 400:21:38Those are my prepared remarks. I'll now turn the call back over to Bob. Speaker 200:21:42Thank you, Chuck. That concludes management's prepared comments and we'll now open the call to the Q and A session. Operator00:21:49We will now begin the question and answer The first question comes from Brendan Nosal with Hovde Group. Please go ahead. Speaker 500:22:24Hey, good morning guys. Hope you're doing well. Speaker 300:22:26Good morning. Good morning. Speaker 600:22:29Maybe just to start Speaker 500:22:30off here, there was a pretty meaningful transaction announced in your neck of the woods yesterday afternoon. I know there were less than 24 hours out since it was announced, but any preliminary thoughts on how it may impact your market and Mercantile and where you might like to capitalize on any talent dislocation opportunities that might arise? Speaker 300:22:51Yes. That is exactly our thought that there may be some opportunity surrounding this announcement and employees, customers will both be in play over some period of time and we will seek to take advantage of that. Speaker 500:23:14All right, perfect. Perhaps one more for me before I step back. Maybe just on the margin kind of longer term. I know the idea of an aggressive Fed cut or cuts keeps getting pushed out. But just kind of curious how you think about the margin, when and if the Fed does start cutting meaningfully? Speaker 500:23:35Like are you still very asset sensitive in scenario? Or have you taken enough margin pain over the last 12 months that Fed cuts aren't as impactful as they once may have been? Speaker 400:23:46Yes, this is Chuck. I think one of the things that we've seen as was fully expected is our balance sheet fully repriced over the last few years. Our margin has settled down kind of back to its historical average of 3.5%, 3.6%. And as I stated a few minutes ago, it's kind of where we expect it to settle out as we get towards the end of this year. I think clearly, we look at our asset to try to manage through changing interest rate environments. Speaker 400:24:28I think clearly if the Fed was to lower rates 500 basis points like they just raised them, it's a very different scenario than what it's really is being talked about out there is maybe some interest rate declines the back half of this year and maybe several more next year. Very aggressively lower interest rates, that would have a bigger upfront impact, just because our assets would be priced faster than our liabilities, kind of going through the opposite of what we just went through and then our everything else would catch up. I think we've been working very hard and Ray kind of commented, made a couple of comments on it in his prepared remarks of working with the deposit portfolio, wanting to grow that as meaningful as we can, but also with an eye to helping to manage interest rate risk and changing interest rate environment, especially in a decline interest rate environment. Speaker 500:25:33All right, fantastic. Thank you for taking my questions. Speaker 400:25:36You bet. Operator00:25:38The next question is from Daniel Tamayo with Speaker 400:25:48Raymond James. Speaker 700:25:50Maybe we just start on credit. Obviously, things still very strong for you guys. I mean NPL trends slightly up, but still very low. But just curious first on your thoughts on where you might expect those NPL trends to continue from here. I mean, I noticed you took reserves up a little bit, a few basis points. Speaker 700:26:15And just curious also kind of what the driver was for that and where you see might see reserves go? Speaker 300:26:26Well, in general, in the very near future, we have a few events that we're planning or that our customers are planning in helping us to reduce the NPLs that are on our books. And I'd expect that will continue in the foreseeable future in a similar sort of range that we're in now. Obviously, it wouldn't take much to change that because the NPL amounts are so small. But there's good credit quality throughout all segments of our portfolio and we feel that the economies that we operate in continue to be strong and our borrowers continue to report good results. Speaker 400:27:15This is Chuck, Danny. I would make just a couple of comments on the loan loss reserve, obviously using the CECL model. I think as everybody knows, there's really 2 areas. And there's a lot of different inputs that but there's really 2 that would have the most significant input. 1 obviously is the economic forecast, which we use a 3rd party independent forecast. Speaker 400:27:34Those continue to be relatively favorable. And I think match what the market is really expecting and even some of the Fed forecasts that are out there. And then of course the other big driver would be our loan loss reserve is highly predicated on the grading system through our commercial loan portfolio. So if we were to see meaningful grade changes, that would have an impact on the reserve calculation as well. Again, kind of based on our comments, we really don't see we're not really forecasting any significant change in the economy. Speaker 400:28:08And with that, we would expect the grades within our commercial loan portfolio to stay relatively steady as well. Speaker 700:28:16Appreciate all that color. That's helpful. Maybe I'd just dig a little bit more into the office portfolio. I think I heard you guys say it was 271,000,000 dollars of non owner occupied office. Is that correct? Speaker 700:28:33Correct. Okay. Is there anything else you can provide us in terms of data on that portfolio in terms of LTVs or occupancy rates or geography of the location of those office buildings? Just curious what other details you have on those loans? Speaker 300:28:57Well, the majority of those loans are in Grand Rapids and in terms of geography. In terms of credit characteristics, the vast, vast majority of them have personal recourse. All of them continue to have positive cash flow and debt coverage ratios at this time. We're watching that very closely. The tenant situations in each of the projects appears to be stable and that's obviously something that can change. Speaker 300:29:34So we're watching that closely, but so far so good. And so with those traits, we feel that there is some sustainability to that 6% of our loan portfolio. Speaker 700:29:51Okay. And are there have there been any transactions of office buildings in Grand Rapids that have give you a sense for how much or if prices have moved in the last few years? Speaker 300:30:06None leap to mind in very recent times. I could be wrong about that, but I can't think of any at the moment. Speaker 700:30:15Okay. Thanks for taking my questions. Speaker 300:30:18You bet. Thanks, Danny. Operator00:30:20The next question is from Damon DelMonte with KBW. Please go ahead. Speaker 600:30:25Hey, good morning guys. Hope everybody is doing well today. Good morning. Good morning. Just wanted to start off with on fee income this quarter, it looks like treasury management, which I believe is captured in the other line item, was particularly strong. Speaker 600:30:41I guess, first, Chuck, can you confirm is that the line that it was categorized in? And then secondly, kind of what's your thought on the outlook there over the next few quarters? Speaker 400:30:52Yes. I think most of our when we talk about treasury management, there's kind of a handful of prongs there. From your normal day to day cash calculation that takes place. We would also include our payroll, human capital management products, as well as our card products, our debit and credit card products. That's dominated by commercial customers using them for their some of their cash flow needs. Speaker 400:31:24So when we talk about treasury management, it's kind of those 3 fraud categories that we think about. We expect all of those to continue to grow as they have been as we continue to grow our customer base, especially in the C and I segment of our loan portfolio as we bring those customers on, get the deposit full deposit relationships and are able to also offer them all a myriad of different cash management, treasury management products. On Page 23, we gave guidance in regards to our fee income. There was we had a very solid quarter for swap income, kind of like commercial loan growth that can be lumpy from quarter to quarter just given the attributes within that commercial loan portfolio. But we're obviously very pleased to have that product not only the income upfront, which is great, obviously. Speaker 400:32:21But really the primary reason for getting into that product and staying in that product is to manage longer term interest rate risk of meaningfully sized credits. We're not going to offer we're generally not going to offer fixed rates too. So we feel that that's a significant interest rate risk management tool, but obviously provides some solid fee income upfront. Very pleased with our mortgage banking operation in the Q1. That performed very well, well above what we had budgeted. Speaker 400:32:51And the pipeline and the conditions are looking positive for that as well. The big item in the other income was we are we do have a relatively small investment in a local Michigan based private equity fund that makes investments that qualify for CRA credit. That fund has been performing very well and we were able to run some of that reflect some of that within our income statement for the Q1. Again, some of the stuff gets a little bit lumpy from quarter to quarter, whether it's SWAS, mortgage banking or private equity, those types of things. But on Page 23, we gave our thoughts for the remainder of 2024. Speaker 400:33:35Relative to the Q1, we're not expecting fee income to be as strong, but we do expect it to be solid and meaningful to our overall operations and operating performance. Speaker 600:33:46Got it. Okay. Appreciate that color and clarification on kind of how the treasury management fees are captured. And then with respect to the margin and the outlook, I think Ray may have said it or Chuck, you may have said it in the prepared remarks about the kind of the revised outlook and kind of the driver of the lower outlook or lower range for the margin. Was that more attributable to the ongoing efforts to bring on deposits? Speaker 600:34:15Or is that just a function of the asset sensitivity and maybe expectation of rate cuts later in the year? Speaker 400:34:22No, I think there's definitely a little bit on the rate cuts there, Damon. As we mentioned, we've got a couple in the back half. But I think we're pretty well balanced when you're only looking at say 50 basis points of decline over 6 months. We don't really have any significant timing issues that are there. I think the base, which obviously we're trying very hard to grow local deposits. Speaker 400:34:50And obviously in this environment most of that's going to come in the money market and the deposit categories, which obviously are the higher cost deposits that we have in there. Now having said that, we do expect our non interest bearing checking accounts to have meaningful growth as well, especially as our current customers rebuild after paying their payments that they do generally in January of each year, but also as we continue to get growth within the C and I segment of our loan portfolio. I think there's also some benefits. We do have some, I would say, very low yielding investments that are set to mature over the next several years. And whether we reinvest those into investments or put those in the loan portfolio, more likely to go on the investment portfolio at this point in time. Speaker 400:35:37Those will reprice very appreciably, which will help set off some of the extra costs or additional costs that we'll have in our deposit structure. And we do have some loans that were made 3 5 years ago that are coming up for maturity balloons that we'll be able to reprice as well. So on an overall basis, we think the margin will stay relatively steady. I guess I should add one more thing is, in addition to growing the investment portfolio as a percent of assets over the next several years, we are operating with a higher level of on balance sheet liquidity, which while at the Fed, it's not a bad rate. Certainly, it's a lower rate than what we would get in the loan portfolio. Speaker 400:36:17So there's a little bit of a dampening of our margin that standpoint as well. But given the environment, our overall balance sheet structure, we think it's prudent to operate with a higher level of overnight liquidity at the current time. Speaker 600:36:31Got it. Okay, great. And then just lastly, on the loan guide, is that in any way being constrained by trying to not outpace the deposit growth that you're targeting to achieve? Or is the 4% to 6% loan growth just kind of indicative of the market opportunities that are in front of you guys right now? Speaker 300:36:52That's a great question. And we think that it does reflect the opportunities in the market. We're not dialing back our loan growth. There may be a very sliver of selectivity within that where we look at our existing portfolio and say, hey, this relationship those may de select out of the bank and have a bit of a dampening effect. But the overall addition of new credits and new opportunities to the bank, we don't expect to see that decrease at all. Speaker 600:37:35Got it. Okay, great. That's all that I had. Thank you very much. Speaker 200:37:38Thank you. Thanks, Dan. Operator00:37:40This concludes our question and answer session. I would like to turn the conference back over to Bob Kaminski for any closing remarks. Speaker 200:37:47Thank you, Gary. On a personal note, this is my final conference call as President and CEO of Mercantile Bank Corporation as I will retire at the end of May. It's been my pleasure to interact with you on these calls over the years with the last seven being in this leadership position. Our company views these calls as important avenues of communication and transparency with our stakeholders. Rayanne Chuckle will be with you in July reporting on our Q2 results and highlights. Speaker 200:38:16Thank you very much for your interest in our company. Best wishes to you all. This call has now ended. Operator00:38:23The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.Read morePowered by