Mercantile Bank Corporation

Good morning and welcome to the Mercantile Bank Corporation 2024 Third Quarter Earnings 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. 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 third quarter of 2024. The team members joining me this morning include Ray Reisme, 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, 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. That is all I have for you today. I will now turn the meeting over to our President and Chief Executive Officer, Ray Reisme. Ray?

Thank you, Nicole. My comments will focus on our significant reduction in the loan-to-deposit ratio, very strong local deposit growth, strong local loan growth, Excellent asset quality and steadily growing non-interest income. Over the last three years, commercial loan growth and mortgage loan growth has been strong, and while deposit growth has been solid, it has not kept pace with loan growth. As a result, the bank's loan-to-deposit ratio increased to 110% at year-end 2023. We believe the bank's elevated loan-to-deposit ratio is a contributing factor to our below-fear 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 have broadened our focus on business deposits, including entities that have limited or no borrowings. Second, we plan to grow in the governmental and public realm through strategic personnel additions with existing relationships in this space. Third, we are growing the 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 local deposits in the first three quarters of 2024 of approximately $600 million, a 21% annualized growth rate. Local deposits grew $339 million in the third 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 49% increase in mortgage banking income during the first nine months of 2024 compared to the respective 2023 period and a nominal increase in mortgage loans on our balance sheet of $7 million year to date. Commercial loan growth in the first three quarters of 2024 was $233 million or 9% annualized. The current pipeline stands at $236 million, slightly below the trend line established over the last three quarters reflecting the strong funding activity in the third quarter. Commitments to fund commercial construction loans total $241 million and residential construction loans of $34 million at quarter end. Customer reductions in loan balances from excess cash flow or asset sales of $106 million also impacted our commercial loan totals. Taking these factors into account, we expect a slight deceleration in the commercial loan growth in the immediate future. Taken together, these strategies produced a loan-to-deposit ratio of 102% as of September 30, 2024, compared to 110% at year-end 2023, as deposit growth was approximately double total loan growth year-to-date. The ratio reduces to 97% when giving effect to our sweep account balances. During this period, the ratio of wholesale funds to total funds decreased from 14% to 11%, Another demonstration of the strengthening of the funding side of the balance sheet. Asset quality remains very strong as non-performing assets sold $9.9 million at quarter end or 17 basis points of total assets consisting of 32% residential real estate and 68% non-real estate commercial loans. There is no commercial real estate representation among the non-performing assets. Past due loans and dollars represent 13 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 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 27% during the first three quarters of 2024 compared to the first three quarters of 2023, with growth reported in several categories. Mortgage banking grew 49% based on the strategies outlined earlier and the resulting ability to sell a greater portion of originations on the secondary market. Service charges on accounts grew 46%, 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 continued to build traction in the marketplace. Finally, credit and debit card income grew 3% when adjusted for the receipt of a one-time payment from Visa associated with our contract renewal in the second quarter of 2023. Income from interest rate swaps declined 8%, as demand for interest rate protection by borrowers shifted with the borrower's future rate expectations. That concludes my comments. I will now turn the call over to Chuck.