Mercantile Bank Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
April 22, 2025

There are 8 speakers on the call.

Operator

Good morning, and welcome to the Mercantile Bank Corporation twenty twenty five First Quarter Earnings Results Conference Call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Nicole Clatter, Chief Marketing Officer of Mercantile Bank. Please go ahead.

Speaker 1

Hello and thank you for joining us. Today we will cover the company's financial results for the first quarter of twenty twenty five. The team members joining me this morning include Ray Reitzma, President and Chief Executive Officer, as well as Chuck Christmas, Executive Vice President and Chief Financial Officer. Our agenda will begin with prepared remarks by both Ray and Chuck and will include references to our presentation covering this quarter's results. You can access a copy of presentation, as well as the press release sent earlier today, by visiting mercbank.com.

Speaker 1

After our prepared remarks, we will then open the call to your 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. The 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. Let's begin.

Speaker 1

Ray?

Speaker 2

Thank you, Nicole. My comments will focus on the changes that have been made to the funding side of our balance sheet and the resulting impact on the income statement, as well as our loan growth, excellent asset quality and growing core noninterest income. Taken together, these performance traits have allowed us to compile attractive compounded annual growth rates for the benefit of our shareholders. From year end 2021 to year end 2023, commercial and mortgage loan growth was strong. And while deposit growth was solid, it did not keep pace with loan growth.

Speaker 2

The outflow of deposits from the banking system post COVID contributed to this trend. As a result, the bank's loan to deposit ratio increased to 110 at year end 2023. In 2024, we focused on reducing this ratio with the goal to strengthen our on balance sheet liquidity and overall financial profile, and succeeded in reducing the loan to deposit ratio to 98% by year end. As described in previous calls, we undertook a three 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. To reiterate, first, we broadened our focus on business deposits.

Speaker 2

Second, we dedicated resources to the governmental and public unit realm. Third, we restructured the retail customer focus away from activity and toward balances. These efforts led to increases in business deposits of 24% and personal deposits of 9% for the twelve month period ended 03/31/2025. Despite a long standing seasonal pattern of reduced first quarter deposits, our secular growth trend overcame the typical seasonal pattern and allowed us to report a loan to deposit ratio of 99% at the end of the first quarter of twenty twenty five compared to 108% at the end of the first quarter twenty twenty four. Commercial loan growth during the first three months of twenty twenty or I'm sorry, yes, during the first three months of twenty twenty five was $44,000,000 or an annualized rate of nearly 5%.

Speaker 2

Customer reductions in loan balances from excess cash flow or sales of assets of $55,000,000 during the first quarter of twenty twenty five impacted our commercial loan totals. The commercial loan pipeline stands at $234,000,000 and commitments to fund commercial construction loans totaled $210,000,000 which has decreased from prior quarter end. While commitments to fund have decreased, discussions in progress are at an all time high. Given the uncertainty in the environment, the pace at which these may turn into accepted commitments to fund is unknown. Taking these factors into account, we expect commercial loan growth in the immediate future to reduce slightly from the pace of the recent past.

Speaker 2

Mortgage loans on the balance sheet have grown substantially in the increasing rate environment experienced over the past few years as borrowers have opted for ARMs, which reside on our balance sheet, rather than fixed rate loans, which are sold in the secondary market. We have successfully executed changes within our portfolio mortgage programs, resulting in a greater portion of our mortgage production being sold rather than placed on our balance sheet. The positive outcomes include a 13% increase in mortgage banking income during the first quarter of twenty twenty five compared to first quarter of twenty twenty four, and a nominal decrease in mortgage loans on our balance sheet during the twelve month period ending 03/31/2025. Our mortgage team continues to build market share despite a challenging rate environment, allowing results that diverge from the average in the market. While mortgage banking production is certainly rate dependent, the level of earnings from this activity that can be considered core or somewhat independent of the rate environment is increasing.

Speaker 2

Asset quality remains very strong as non performing assets totaled $5,400,000 at 03/31/2025, or nine basis points of total assets, consisting primarily of residential real estate and non real estate commercial loans. There is only $41,000 in commercial real estate representation among the non performing assets. Past due loans in dollars represent three basis points of total loans and there is no outstanding ORE. We increased the allowance to loans ratio four basis points during the first three months of 2025, while the level of non performing loans to total loans remain constant to reflect the uncertainty inherent in the economic environment. Our lenders are the first line of observation in defense to recognize areas of emerging risk.

Speaker 2

Our risk rating model is robust with a continued emphasis on current borrower cash flow, providing prompt sensitivity to any emerging challenges within a borrower's finances. That said, our customers continue to report strong results to date, and we expect to see that continue as they report first quarter results. Early in the second quarter of twenty twenty five, a great deal of uncertainty has been present in the environment, and we expect to see varying impacts on our customers and their financial positions from very modest impact to improvement or decline based on the specifics of their situation. This has been and will continue to be a topic of discussion with borrowers and a focus of our lending teams. Total non interest income grew 12% in the core areas of payroll, treasury management and mortgage banking during the first quarter of twenty twenty five compared to the first quarter twenty twenty four.

Speaker 2

Mortgage banking income grew 13% based upon the strategies outlined earlier and the resulting ability to sell a greater portion of originations on the secondary market. Service charges on accounts grew 20%, reflecting higher activity levels and customer growth and less earnings credit offset charges based on reduced balances and transaction accounts. Payroll services grew 16% as our offerings continue to build traction in the marketplace. Finally, debit and credit card income grew 4%. Income from interest rate swaps declined to nominal levels as demand by borrowers for interest rate protection shifted with borrowers' future rate expectations and the timing of closings.

Speaker 2

Finally, a note about interest rate sensitivity. During the first quarter of twenty twenty five, immediately after the 100 basis point decrease in rates implemented by the Fed during the last four months of 2024, our net interest margin increased by six basis points compared to the fourth quarter of twenty twenty four, indicating our ability to manage the cost of funds and utilize our investment portfolio in a way that supports a durable net interest margin. We are pleased to report that our five year compounded annual growth rate of 8.4% for tangible book value and 10.4% for earnings per share growth places us in the top two of our proxy peer group. That concludes my remarks. I will now turn the call over to Chuck.

Speaker 3

Thanks, Ray. This morning, we announced net income of $19,500,000 or $1.21 per diluted share for the first quarter of twenty twenty five compared with net income of $21,600,000 or $1.34 per diluted share for the respective prior year period. Although net interest income increased, net income was negatively impacted by lower non interest income, increased non interest costs, and a higher provision expense. Interest income on loans increased during the first quarter of twenty twenty five compared to the respective prior year period, reflecting strong loan growth that more than offset a lower yield on loans. Average loans totaled $4,630,000,000 during the first quarter of twenty twenty five, compared to $4,300,000,000 during the first quarter of twenty twenty four.

Speaker 3

Our yield on loans during the first quarter of twenty twenty five was 34 basis points lower than the first quarter of twenty twenty four, largely reflecting the aggregate 100 basis point decline in the federal funds rate during the last four months of twenty twenty four. Interest income on securities increased during the first quarter of twenty twenty five compared to the respective prior year period, reflecting growth in the securities portfolio and the reinvestment of lower yielding investments in a higher interest rate environment. Interest income on interest earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, also increased during the first quarter of twenty twenty five compared to the respective prior year period, reflecting a higher average balance that more than offset a lower yield. In total, interest income was $3,600,000 higher during the first quarter of twenty twenty five compared to the first quarter of twenty twenty four. We recorded increased interest expense on deposits during the first quarter of twenty twenty five compared to the respective prior year period, primarily reflecting growth in money market and time deposit products.

Speaker 3

Average deposits totaled $4,590,000,000 during the first quarter of twenty twenty five, compared to $3,970,000,000 during the first quarter of twenty twenty four. The cost of deposits was down two basis points during the first quarter of twenty twenty five compared to the first quarter of twenty twenty four. Interest expense on Federal Home Loan Bank of Indianapolis advances declined during the first quarter of twenty twenty five compared to the respective prior year period, reflecting a lower average balance that more than offset a higher average cost. Interest expense on other borrowed funds declined during the first quarter of twenty twenty five compared to the respective prior year period, largely reflecting lower rates on our trust preferred securities due to the lower interest rate environment. In total, interest expense was $2,400,000 higher during the first quarter of twenty twenty five compared to the first quarter of twenty twenty four.

Speaker 3

Net interest income increased $1,200,000 during the first quarter of twenty twenty five compared to the respective prior year period. Impacting our net interest margin was our strategic initiative to lower ratio, which generally entails deposit growth exceeding loan growth and using the additional monies to purchase securities. A large portion of deposit growth was in the higher costing money market and time deposit products, while the purchased securities provide for a lower yield than loan products. Our net interest margin declined 27 basis points during the first quarter of twenty twenty five compared to the respective prior year period. Our yield on earning assets declined 32 basis points during that time period, largely reflecting the aggregate 100 basis point decline in the federal funds rate during the last four months of 2024, while our cost of funds declined five basis points, primarily reflecting lower rates paid on money market and deposits, which more than offset an increased mix of higher costing money market and time deposits.

Speaker 3

While average loans increased $330,000,000 or 7% from the first quarter of twenty twenty four to the first quarter of twenty twenty five, average deposits grew $622,000,000 or over 15% during the same time period, providing for a net surplus of funds totaling about $290,000,000 We used that net surplus of funds to grow our average securities portfolio by $151,000,000 and reduce our average Federal Home Loan Bank of Indianapolis Advanced portfolio by $84,000,000 A majority of the remainder of the net surplus of funds is on deposit with the Federal Reserve Bank of Chicago. As Ray noted in his opening remarks, our first quarter twenty twenty five net interest margin was six basis points higher than it was during the fourth quarter of twenty twenty four, coming on the heels of the aggregate 100 basis point reduction of federal funds rate in the last four months of 2024. We remain committed to managing our balance sheet in a manner that minimizes the impact of changing interest rate environments on our net interest margin. We recorded a provision expense of $2,100,000 during the first quarter of twenty twenty five, which primarily reflects an increased allocation necessitated by changes to the economic forecast.

Speaker 3

Specifically, we used a blend of the base and adverse economic scenarios compared to only using the base economic forecast as is our standard practice. The change in methodology reflects the enhanced current level of economic uncertainty. The recording of net loan recoveries and sustained strength in loan quality metrics largely mitigated additional reserves associated with loan growth. Noninterest expenses were $1,200,000 higher than the first quarter of twenty twenty five compared to the respective prior year time period. The increase largely reflects higher salary and benefit costs, including annual merit pay increases and market adjustments.

Speaker 3

Higher data processing costs also comprise a notable portion of the increased noninterest expense level, primarily reflecting higher transaction volumes and software support costs, along with the introduction of new cash management products and services. Contributions to the Mercantile Bank Foundation totaled $700,000 during the first quarter of twenty twenty four compared to a nominal level during the first quarter of twenty twenty five. We remain in a strong and well capitalized regulatory capital position. Our bank's total risk based capital ratio was 14% at the end of the first quarter of twenty twenty five, about $217,000,000 above the minimum threshold to be categorized as well capitalized. We did not repurchase shares during the first quarter of twenty twenty five.

Speaker 3

We have $6,800,000 available in our current repurchase plan. On slide 22 of the presentation, we share our latest assumptions on the interest rate environment and key performance metrics for the remainder of 2025, with the caveat that market conditions remain volatile, making forecasting difficult. This forecast is predicated on no changes in the federal funds rate during the remainder of 2025. We project loan growth in a range of 3% to 5%, and we are forecasting our net interest margin to be in a range of 3.45% to 3.55%. Expected quarterly results for non interest income and non interest expense, as well as our federal income tax rate are also provided for your reference.

Speaker 3

In closing, we are very pleased with our operating results and financial condition during the first quarter of twenty twenty five and believe we remain well positioned to continue to successfully navigate through the myriad of challenges faced by all financial institutions and our customers. That concludes my prepared remarks. I'll now turn the call back over to Ray. Thank

Speaker 2

you, Chuck. That concludes the prepared remarks from management, and we will now move to the question and answer portion of the call.

Operator

We will now begin the question and answer session. A question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press then 2. Our first question is from Brendan Nosal with Hovde Group.

Operator

Please go ahead.

Speaker 4

Hey, good morning, Ranger. Hope you guys are doing well.

Speaker 3

Good morning. Good morning.

Speaker 4

Maybe just starting off here on the outlook for loan growth. Looks like you guys tempered the loan growth outlook at least a little bit. I guess looking at other banks so far this quarter, some have done so, some haven't, just given kind of the myriad uncertainty in the outlook. So I'm just kind of curious with what you folks have done to the outlook. Are you just being conservative given the potential drag from tariffs at this point?

Speaker 4

Or are you seeing an actual slowdown in commercial loan demand so far?

Speaker 5

Thanks. So our

Speaker 2

approach to that was driven by the fact that our commercial pipeline has two components. One is committed to by the bank and accepted by the borrower when we're moving to closing. The other is discussions that are underway moving towards that end. And the proportion of the pipeline has moved with the uncertainty in the environment more towards discussion and gone lighter on the committed and accepted piece. Now, the overall pipeline is as big as it's ever been.

Speaker 2

But the uncertainty has just put more of it in the discussion category as opposed to moving to closed category. So with the estimation that the environment will remain somewhat uncertain in the near future, we decided to temper our expectations for loan growth in the numbers that we provide.

Speaker 4

Yes, that makes complete sense. Okay, thank you. Maybe one more for me turning to capital. Your capital ratios continue to build nicely. Just curious for your updated thoughts on deployment, particularly if loan growth is a bit more muted this year given the environment and how you think about share repurchase just given where shares are trading right now?

Speaker 4

Thanks.

Speaker 3

Yeah, Brad. It's Chuck. You know, as I always say, the the buyback is always on the stovetop and maybe in the back of the stove, but, not the front. But it's something that we work with regularly with the board. You know, clearly, you know, the stock prices of everybody went down quite a bit here over the last few weeks, which, you know, makes the the question of do we do buybacks a little more interesting than when our stock is performing well.

Speaker 3

You know, we look at ourselves as a growth company. And, you know, if there is some reduction in loan growth over the next few quarters or whatever that time may be, as Ray mentioned, we still have a very strong pipeline, and we wanna make sure that we've got sufficient capital to manage that asset growth, that loan growth specifically. And then also at the same time, we're growing our loan reducing our loan to deposit ratio, which makes asset growth even further. So at the end of the day, we want to make sure darn sure that we have sufficient capital to manage the growth plans of the company. Notwithstanding all the discussions and different forecasts that are out there, some more dire than others, if there is an overall slowdown in the economic environment, we want to make sure that we've got you know, this capital support to get us through those time periods as well.

Speaker 3

So we have the plan, we have dollars in the plan, it is something that we regularly look at. To date, we haven't obviously pulled the trigger, but it is something that we look at. But on an overall basis, specifically to your question, and Ray kind of already addressed it, we think the slowdown in loan growth is relatively short term. Don't know how to define that short term, But again, making sure that we have the capital to support great loan growth opportunities that we have and want to take advantage of is job one.

Speaker 4

Thank you for the thoughts, Chuck. Appreciate it.

Operator

The next question is from Daniel Tamayo with Raymond James. Please go ahead.

Speaker 6

Thank you. Good morning, guys. Maybe starting on the margin, so you took the margin guidance up from last quarter, it looks like just to mostly reflect the better than expected first quarter margin. First, just want to make sure, just clarify what you're assuming in terms of rate cuts in that margin guidance, Chuck. And then, I guess, can dig in a little bit after that.

Speaker 3

Yeah, sure. So I thought it best to put some guidance out there assuming that there's not going to be any rate cuts. Clearly, the bond market, for one, thinks there are going to be some rate cuts, and we're not necessarily disagreeing with that. But what we have to work with is a lot of folks such as Raymond James and everybody else has their own forecast. And so what I thought I would do, what we would do is kind of start with a base case and say, if there are no rate cuts, this is what we look at our margin, the range of our margin being in for the remainder of this year.

Speaker 3

And then we also and it's in our deck on slide 10, we also provide the results of our net interest income simulation, which you know, investors and analysts can look at and use in determining what they think that our company would operate under those different interest rate scenarios. I would say that, and I would think Endeavink does the same thing and when we're running our simulations, we're relatively conservative with our assumptions. And as you know, there's a tremendous amount of assumptions that go into simulations. But I think on an overall basis, it shows a realistic position of what may happen in those different interest rate environments. But because, again, because there was such a big unknown, we just provided the guidance without that.

Speaker 3

I think what you see with the with our margin actually improving in the first quarter, both Ray and I touched on in our scripts, is the fact that we have built a balance sheet, which is definitely short term, but we do that on purpose. What we have seen over the last five, ten, fifteen years is an incredibly volatile interest rate environment. And what we want to do is run our company with the idea that we don't care, I'm being somewhat flippant here, but we don't care what rates do, that our net interest margin will behave appropriately under all those different rate environments. That's what I think everybody should be striving to do and we've been working hard to get that to happen. Clearly, a lot of moving parts, and we can't be perfect on that.

Speaker 3

But we want to make sure that we're managing and concentrating on the core of what we do, that's build our balance sheet and maintain asset quality, grow fee income and make sure that we're an efficiently run organization. So that's our overall goal. And what we've seen at least for the first one hundred basis points is that, yes, while we did have assets repriced lower, obviously driven by the loan portfolio and what we have on the deposit with the Fed, is we have a lot of deposits that we were able to reduce basis point per basis point as well. Clearly on the money market side, we are able to do on the CD side. Obviously, is some lag on CD repricing, got to wait for the CDs to mature.

Speaker 3

But a vast majority of our CDs mature in less than a year. And then we have also both on fixed rate loans and fixed rate investments, we have those maturing on a pretty regular basis and we're able to redeploy those funds at much higher rates than what they're coming off at. So put that all in there and we're able to actually improve our margin somewhat coming off that 100 basis point relatively rapid decline from the Fed. And that's also at the same time that, of course, we've been moving our loan to deposit ratio down, which, as I mentioned, and as we all know, has a negative impact on margins as well just by the nature of what we're doing there. So that's kind of what we're thinking about and certainly happy to entertain any other specific questions you might have, Danny.

Speaker 6

That's helpful, Chuck. Yes, guess maybe on the CD side first, if you have any kind of detail on the repricing. You mentioned that's still happening here, but just curious kind of where those are repricing from and to and kind of the cadence that you're going to see over the next twelve months on the CD?

Speaker 2

Yes, I think if you look

Speaker 3

at our total CDs, I would say probably a good 90% of them are maturing in the next twelve months or so, relatively equally each month. We don't do any CD specials or anything like that. So there's really no lumpiness in our maturity schedule. And I would say on average, they're probably based on today's rates, we haven't adjusted our rates for all the uncertainty out there. They're coming down probably an average of about 75 basis points.

Speaker 6

Okay. And relatively even over the next year in terms of stuff that's renewing or maturing kind of back half of the year and into next year's, it's still you're still going to see that same 75 basis points?

Speaker 3

Would say it's pretty even. Maybe a little bit more dollars in the first six months than the back half of six months, but I think we call it even throughout the next twelve months. That's a fairly fair statement.

Speaker 6

Okay. And then on the loan side, so you had average loans at $6.31, it looks like, the first quarter. Where were the new loan yields that you were putting on? I think we're

Speaker 3

probably somewhere probably around 7% or so. Almost all the loans we put on are at floating rate. So I would say prime minus 50 to prime, somewhere in there if you wanna use it on a prime basis. And we have about one hundred and fifty to two hundred million dollars a year in loans that are earning some commercial loans that are earning somewhere in the 4.5% range. Those are the ones that I referenced that are maturing and getting obviously refinanced in today's rate environment.

Speaker 3

And then investment portfolio on top of that, probably this year I think we got $40,000,000 left, earning about 75 basis points. Then going forward, we have probably around $80,000,000 a year maturing and I would say in the next couple of years, that's probably like 1.25% to 1.5% that's maturing and we're getting about 4%, four point two five % now on our current investment strategies.

Speaker 6

Okay, great. And I guess the last just follow-up is competition on the loan yields. Did you see spreads tighten at all through the quarter or into the first quarter? Are you seeing that happen? Or has that been relatively stable?

Speaker 2

One of the things that we measure is the spread that we get in each of our risk rating categories, and those have been stable.

Speaker 6

Okay, terrific. All right, well thanks for taking my questions, guys.

Speaker 3

You're welcome. The

Operator

next question is from Damon DelMonte with KBW. Please go ahead.

Speaker 7

Hey, good morning, guys. Thanks for taking my questions here. Just to kind of close the loop here on the margin outlook. Chuck, should we kind of expect a similar level of securities purchases in the coming quarters like we've seen over the

Speaker 3

last three or four quarters? Yes. I mean, obviously, that's predicated continued local deposit growth, which we think will continue to be strong. But we're looking at, you know, if you put the dollars amount, we're expecting our loan growth in the terms of dollars and our securities growth in the terms of dollars to be relatively similar.

Speaker 7

Got it. Okay. Great. That's helpful. And then on the expense guide, it's good that we have a full expense number for the upcoming quarters.

Speaker 7

But as we kind of dig through some of those line items, can we expect an increase in salary and benefits? It seemed like this quarter was down from the fourth quarter. Do you kind of have like merit increases and things like that kicking in here in the second quarter?

Speaker 3

Well, yes, merit increases into account at the February. So there's a little bit more ramp up to get a full quarter of that. But in regards to the fourth quarter, '1 of the things that we had in the fourth quarter is we came through a very strong 2024. We did have an increase in our bonus accruals, which obviously we believe is a good thing. But it's predicated on our continued strength throughout 2024, which actually got stronger.

Speaker 3

We felt better about it as we're coming through and hitting more and more on our metrics, which has a sliding scale to it. So I would say in regards to 2024 salary and benefits, there was some I won't call it one time, but there was some increased bonus accruals in there.

Speaker 7

Got it. Okay, great. And then just one more. Obviously, credit trends are very strong, low NPAs, minimal charge offs, had some recoveries this quarter, I believe. You built the reserve four basis points.

Speaker 7

Kind of as you factor slower loan growth, but yet maybe a little bit of growing concern on the economic uncertainty. How do we think about the reserve level from this quarter going forward? Do we look for a little bit more reserve build over the coming quarters? Or do you feel like you addressed it enough here in this quarter?

Speaker 3

Yeah, think it was really hard to answer it specifically, Damon. Obviously, there's so much uncertainty out there. I think that we as a management team have always been working hard quite frankly to battle the accounting rules and the infamous CECL, which we have to talk about every quarter. It's a duration based model, and we are a short term commercial banker. And because of that, it's hard to get meaningful reserve coverage ratios.

Speaker 3

And then you add in, and that is what it is. That's who we are. And that's the model we have to work with. Then you add on top of that is a company that has very strong asset quality, especially since coming out of the Great Recession. So when you look at historical numbers, obviously are applied as part of our model, we're actually in a net recovery position.

Speaker 3

So we continue to fight the fight. We did see, like I said, we get different economic forecasts. Our policy is to use a base as long as that base passes the smell test and looks like the base forecast from other providers. But in this environment, when there is so much uncertainty, it's going to take a quarter or two to figure this all out. We thought it prudent to go ahead and blend that base case with a more adverse case and just use the average of the two.

Speaker 3

And that was just under a $2,000,000 impact. So a large percentage, you can see our provision for the quarter was $2,100,000 So I would say at least 90 percent of that provision expense was because of us going forward and blending those two economic forecasts together, which we think is the absolute prudent thing to do. So who knows what economic forecasts look like? Obviously, we get them from an independent source and they'll put their heads together and late June they'll issue their updates and we'll run that through our model. So that's always a pretty big unknown, but we definitely wanted to make sure that we weren't fooling ourselves that we're entering into a period of high uncertainty and we wanted to make sure that we were on the right side of that calculation and we'll just take it how it comes from this point forward.

Speaker 7

Got it. Okay, that's all very helpful. That's all

Speaker 3

that I had. Thank you. You're welcome, Ian.

Operator

The next question is from Nathan Race from Piper Sandler. Please go ahead.

Speaker 5

Hi, good morning This is Adam Kroll on for Nate Race and thank you for taking my questions. I guess to start on the lower loan growth guidance over the near term and if loan demand was to materially soften, is there any expense levers that you could pull to kind of help mitigate that lower loan growth?

Speaker 3

I don't think we try to operate as efficient as we can. I would think if the asset quality stays unchanged and we see a meaningful reduction in loan growth, clearly the provision expense would be impacted by that. But the way that we try to run our bank and structure our bank is for the long term. So while obviously we need to make sure that we're fortified for any bumps in the road like we have now, Who knows how big that bump is going to be? But we're not looking at just what happens in the next three months or six months when we're trying to structure our employee base, we're looking at new products and services, for example, maybe new markets to go into.

Speaker 3

We're looking at this with binoculars, looking way out into the future. So maybe if it was dire enough, we could maybe slow down some new projects and stuff like that. But we think long term, these projects are what we need. So we would have to take that on a case by case basis. But we want to make sure that we continue to build this company, bring on the people, train the people for our success in the long term.

Speaker 5

Got it. No, I appreciate the color. And then switching to fees, does your fee income guide for the rest of the year include some normalization higher in swap fees? Or should we assume a similar level to 1Q?

Speaker 3

No, 1Q was, I would call that an anomaly. The nature of that is we have to get term loan growth, generally speaking. I mean, the existing loans, we do swaps with them from time to time. But generally speaking, the driver of swap income is new term loan fundings. And we've already talked about it with the uncertainty.

Speaker 3

And most of our net loan growth in the first quarter was actually line draws. But I will say that, so far here we're three weeks into this quarter and this quarter is looking very normal like. So I think we know that's going to get lumpy from quarter to quarter and so we would expect, it to be more normalized going forward. And that is included in the guidance.

Speaker 5

Got it. That's super helpful. One last question from me is I thought mortgage origination volumes held in pretty well in 1Q. I was just curious if you guys are expecting that typical seasonal uptick in mortgage during 2Q or with the macro uncertainty and rate volatility that maybe the uptick in 2Q isn't as strong as in prior years?

Speaker 2

Yeah, that's possible that that could happen. I mean, until March 31, had an increase in the seasonal pattern. There's definitely a seasonal pattern here in Michigan in mortgages. You tend to shop for your home when the weather is a little bit more conducive to that. So right up until the end of the quarter, that pattern was increasing nicely.

Speaker 2

And then in the intervening time between the end of the quarter and today, that pattern has probably failed to continue to build as much as we'd like it to. In the last few days, it seems like it's picked up a bit. But this is the time of year where it would start to manifest itself. And I think the uncertainty has kinda kept it at bay a little bit. I don't really expect that to continue through the entire season, but major things like purchasing or refinancing a home, and there's a lot more purchases than refi is going on right now.

Speaker 2

Uncertainty is kind of the enemy of that process. So some stability would certainly help that to continue to grow.

Speaker 5

Got it. That's it for me. Thank you for taking the questions.

Speaker 2

Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Ray Reitzma for any closing remarks.

Speaker 2

I'd like to thank you for your participation in today's call and for your interest in Mercantile Bank. And that concludes today's call.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Mercantile Bank Q1 2025
00:00 / 00:00