Mercantile Bank Corporation

Good morning, and welcome to the Mercantile Bank Corporation 2024 Second Quarter Earnings Conference Call. All participants will be in a 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. I would now like to turn the conference over to Nicole Clatter, First Vice President, Chief Marketing Officer of Mercantile Bank. Please go ahead.

Good morning and thank you for joining us. Today we will cover the company's financial results for the second quarter of 2024. 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 the presentation, as well as the press release sent earlier today, by visiting merckbank.com. 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, in 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 commissions filings. The company assumes no obligation

Thank you, Nicole. My comments will focus on our loan-to-deposit ratio, deposit growth, loan growth, asset quality, and non-interest income. Over the last three years, commercial loan growth and mortgage loan growth has been strong. And while our deposit growth has been solid, it has not kept pace with total loan growth. As a result, the bank's loan-to-deposit ratio increased to 110% at year-end 2023. compared to 85% at year-end 2021 when deposits were elevated because of the PPP program and the resulting excess liquidity in the system. We believe the bank's elevated loan-to-deposit ratio is a contributing factor to our below-peer valuation despite a strong return profile. The following comments summarize the strategies we believe will contribute to further reductions in our loan-to-deposit ratio. We have undertaken a three-pronged approach to building our deposit base with the objective of reducing the loan to deposit ratio into the mid 90% range over time. First, we plan to grow the public and municipal realm through strategic personnel additions with existing relationships in this space. Second, placing additional focus on small business banking through more efficient underwriting and obtaining the full relationship that characterizes this type of business. Third, growing the retail customer focus base on total balances as opposed to activity hurdles such as transactions and card usage. These efforts led to an increase in local deposits in the first half of 2024 of approximately $260 million, a 14% annualized growth rate. Local deposits grew $153 million in the second quarter alone. Mortgage loans on the balance sheet 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 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 76% increase in mortgage banking income during the first six months of 2024 compared to the respective 2023 period and a nominal increase in mortgage loans on our balance sheet of $12 million year to date. Commercial loan growth in the first half of 2024 was $118 million, or 7% annualized. The current pipeline stands near the trend line established over the last three quarters, including commitments to fund commercial construction loans of $320 million and residential construction loans of $37 million. Customer reductions and loan balances from excess cash flow or asset sales of $76 million also impacted our commercial loan totals. Taking these factors into account, we do not expect to see a deceleration in commercial loan growth in the immediate future. Taken together, these strategies produced a loan-to-deposit ratio of 107% as of June 30, 2024, compared to 110% at year-end 2023. as deposit growth was approximately double total loan growth year to date. This ratio reduces to 102% when giving effect to our sweep account balances. During this period, the ratio of wholesale funds to total funds decreased from 13.8% to 12.1%, another demonstration of the strengthening of the funding side of the balance sheet. Asset quality remains very strong, as non-performing assets sold $9.1 million at quarter end, or 16 basis points of total assets, consisting of 25% residential real estate and 75% non-real estate commercial loans. There is no commercial real estate representation among the non-performing assets. Pass-through loans and dollars represent 14 basis points of total loans, and there is no outstanding ORE. Non-owner-occupied office exposure is $271 million, or 6% of total loans. The borrowers in this asset class have performed well and continue to be monitored closely. We remain vigilant in our underwriting standards and monitoring to identify any deterioration within our portfolio. Our lenders are the first line of observation and defense to recognize areas of emerging risk. 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 have not begun to experience the impacts of a potential recessionary environment in any systemic fashion. Total non-interest income grew 40% during the first half of 2024 compared to the first half of 2023, with growth reported in virtually every category. Mortgage banking income grew 76% based on the strategies outlined earlier and the resulting ability to sell a greater portion of the originations on the secondary market. Income from interest rate swaps grew 18% as we met our customers' desire for fixed rate financing, principally in the CRE market. Service charges on accounts grew 58%, reflecting higher activity levels and customer growth and less earnings credit offset to charges based on reduced balances and transaction accounts. Payroll services grew by 20% as our offerings continue to build traction in the marketplace. Finally, credit and debit card income grew 4% when adjusted for the receipt of a one-time payment from Visa associated with our contract renewal in the second quarter of 2023. That concludes my comments. I will now turn the call over to Chuck.