Mercantile Bank Corporation

Good morning, and welcome to the Mercantile Bank Corporation third quarter 2021 earnings results conference call. Please note this event is being recorded. We will now begin the call with management's prepared remarks and presentation to review the quarter's results, then open up the call to questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Before I turn the call over to management, 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 the factors described in the company's latest securities and exchange commission 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 third quarter 21 press release and presentation deck issued by Mercantile today, you can access it at the company's website, www.mercbank.com. At this time, I would like to turn the call over to Mercantile's President and Chief Executive Officer, Bob Kaminsky.

Thank you, Anthony. Good morning, everyone. Thank you for joining our call today. Our Mercantile team continues to generate outstanding financial results that illustrates the strength of the high-touch, relationship-based approach to banking that has allowed us to build long-term relationships with our clients. For the third quarter, we earned net income of $15.1 million, or $0.95 per share, a nearly 41% increase from the third quarter of 2020. Through the first nine months of the year, net income of $47.4 million is up more than 57% from the prior year period. Dropping those strong bottom line results are two key components, robust organic double-digit loan growth leading to healthy net interest income expansion and very strong non-interest income generation that contributes nearly a third of our total revenue. The success of these two revenue components starts with one thing, our people. Mercantile has a clear strategy and client-centric culture that permeates all levels of the organization. Our team executes on that strategy in our markets each and every day. We believe Mercantile will again be distinguished by our commercial loan production in the third quarter with a 25% annualized growth rate, excluding PPP loans. The growth is well balanced and diversified among the various loan categories. Ray will explore our loan portfolio in more detail later in this call, but I would like to provide some insights into how we achieve these results and why we have confidence in our ability to continue doing so. Supporting our local communities is at the forefront of who we are. Challenging as it has been, the pandemic gave us the opportunity to prove that we can service our clients at the highest level under any circumstances. We answered the call for Michigan businesses, sometimes when their incumbent banks did not, and these companies were able to experience the Mercantile way firsthand. Our responsive local decision-making An high-touch approach is clearly resonating with business leaders. Many of them need more from their bank than simply a place to conduct transactions. They need a true financial partner. Our core commercial loan growth in the third quarter, our solid and sustained pipeline, show that our approach is an effective one. I'd like to note that even as we've grown loans and navigated the ongoing pandemic, our asset quality remains strong. We continue to report low levels of past due loans and non-performing assets, illustrating our commitment to sound underwriting as well as strong performance of our commercial borrowers and their management teams. On the mortgage side, our nimbleness and in-market local lenders also contribute significantly to our success. That leads me to a second key element of our success I would like to highlight, the strength and diversity of our non-interest income of which mortgage banking is the largest component. Our mortgage banking income totaled a solid $6.6 million for the third quarter and $23 million year-to-date, up 17% for the first nine months of last year. These results are driven by our ability to generate purchase originations, which in turn results from our success in hiring mortgage bankers who are well-connected in their communities. We believe we're well positioned to capture more market share in upcoming periods based upon our team's proven efforts and the positive application and pipeline volume trends we continue to see. Another strategic decision that has proven beneficial was the interest rate swap program we launched in late 2020. This new revenue stream helps us ensure we remain competitive with a broader base of commercial customers. Swaps generated $3.9 million in fees for the three months ended September 30, 2021, making up a quarter of our non-interest income this period. Total non-interest income was up more than 17% from the prior year third quarter. We remain committed to the strategic focus on diversifying and growing our fee income sources. For the last 12 months, non-interest income has made up more than 31% of operating revenue compared to 22% at the median $5 to $10 billion bank range in the most recent quarter. As I mentioned earlier, our people are behind these results, and we've long supported them through investment in technology. Digital adoption accelerated since 2020, and some banks find themselves playing catch up. Within our operations, we adapt industry best practices while leveraging available data to capture efficiency customize unique client interactions, and refine our internal systems. We have long made investment in technology an important aspect of our business model and will continue to do so as our customers' needs continue to evolve. Our combination of people, products, services, and technology are clearly driving financial strength and organic growth. Importantly, this supports our ongoing focus on creating shareholder value in a truly sustainable organization. Today, we announced a fourth quarter cash dividend of 30 cents per share. Regarding our stock buyback program, we're able to repurchase an additional 288,900 shares of Mercantile stock, bringing year-to-date purchases to 635,800 shares. Overall, we believe our strategy, talent, culture, and business model all support our continued and consistent high performance for the benefit of our clients, communities, and shareholders. We have a strong foundation, momentum headed into the fourth quarter and 2022, and are prepared to capitalize on the ongoing M&A-related disruption in our markets, both in terms of attracting talent and expanding client relationships. That concludes my introductory remarks. I'll now turn the call over to Ray.

Thanks, Bob. Today, my comments will center around three topics and evidence in the third quarter results. strong core commercial loan growth, strategic growth and sustainable managed income, and increasing efficiency in operations. First, core commercial loan growth. For the third quarter, we are reporting core commercial loan growth of $162 million, representing a 25% annualized growth rate, 62% of which is C&I credit. Year-to-date core commercial loan growth is $298 million, representing a 16% annualized growth rate, 60% of which is C&I credit. I'd like to stress that the growth consists primarily of C&I credit in line with our strategic objectives. This growth has been possible due to the efforts of our commercial team and their focus on relationship building in the business community bank value proposition. The pandemic and the PPP program gave us the opportunity to prove in action what we have marketed in concept, namely, that Mercantile represents the capacity and technology they need, coupled with timely local decision-making and exceptional service. We delivered when many faltered. As a result of our robust growth, we increased our provision expense largely to support that growth. We have also dialed back our stock repurchase program in recognition of the fact that this robust level of growth requires robust capital support. Our backlog remains consistent with prior periods as we fund this impressive level of core growth. Secondly, strategic growth in sustainable non-interest income. During the first nine months of 2021, we reported year-to-date non-interest income of $42.5 million net of gain on a branch sale compared to $30.8 million last year, an increase of 38% and $11.7 million. How do we make the case that this is sustainable performance? Swaps represented $6.1 million of the growth and represent meeting customer demand for fixed rates without taking on the balance sheet risk of a conventional fixed rate, which is very important to margin sustainability in the present environment. Our term debt funding has been nearly 50% fixed over a long period of time, and we do not expect the mix to change meaningfully. Our mortgage activity represents $3.3 million of the growth in non-interest income year to date as our team has grown production from $645 million last year to $742 million this year. The case for sustainability in this business is supported by the fact that last year's volume represented a mix of 30% purchase activity to 70% refinance activity, while the present year mix is a 50-50 split between purchase and refinance activity, and of course, Lesser but important contributors to the non-interest income picture are the role of service charges on accounts and credit and debit card income, which increased by 17% and 19% respectively during the third quarter, reflecting the growth in the number of relationships served as well as increased activity within the accounts as the economy recovers from the pandemic. In sum, non-interest income made up 32% of revenue for the first nine months of 2021, up from 25% in the prior period. The final topic of my comments is increasing efficiency in operations. Here to date, we are reporting an efficiency ratio of 57.4% compared to 59.9% for the comparable period last year. Our consistent spending on technology over the years has served us well, allowing our customers to utilize numerous digital channels as alternatives to visiting a branch and providing the ability to reallocate resources towards further enhancements in an already up-to-date digital platform. It's worth noting that during this period of robust loan and non-interest income growth, our FTE increased by only 11 from the prior year period to a total of 629, and that year-to-date revenue growth of 11.4% outpaces non-interest expense growth of 6.8%. That concludes my comments. I will now turn the call over to Joe.