Mercantile Bank Corporation

Good morning, and welcome to the Mercantile Bank Corporation 2024 Fourth 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.

Happy New Year, everyone, and thank you for joining us. Today, we will cover the company's financial results for the fourth 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. Let's begin, right?

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 impacts on the income statement, as well as our strong loan growth, excellent asset quality, and growing non-interest income. Taken together, these performance traits have allowed us to compile attractive compounded annual growth rates for the benefit of our shareholders. From the 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. 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 of to strengthen our on-balance sheet liquidity and overall financial profile. As described in previous calls, we undertook our 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. To reiterate, first, we 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. And 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 2024 of $816 million, a growth rate of more than 20%. Local deposits grew $216 million during the fourth quarter alone. The growth in local deposits not only funded our strong loan growth, but also allowed reduction in wholesale funding sources for the year, including an $81 million reduction in FHLBI advances and a $19 million reduction in broker deposits. Commercial loan growth for the fiscal year-end was $292 million, or 8.5% over the prior year-end, and was $59 million for the fourth quarter. Customer reductions and loan balances from excess cash flow or sale of assets of $88 million during the fourth quarter impacted our commercial loan tolls. The pipeline stands at $296 million and commitments to fund commercial construction loans total $245 million, which is slightly increased from the prior quarter end. Taking these factors into account, we expect commercial loan growth in the immediate future to approximate the pace of the recent past. 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 62% increase in mortgage banking income during fiscal 2024 compared to fiscal 2023 and a nominal decrease in mortgage loans on our balance sheet. Our mortgage team continues to build market share despite a challenging rate environment, allowing results that diverge from average in the market. While mortgage banking 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. The 22% growth in local deposits coupled with the 7% growth in the loan portfolio drove our loan to deposit ratio from 110% at year end 2023 to 98% at year end 2024 and contributed to a reduction in our reliance on wholesale funding from 14% at fiscal year end 2023 to 10% at fiscal year end 2024. Asset quality remains very strong as non-performing assets sold $5.7 million at year end or nine basis points of total assets consisting primarily of residential, real estate, and non-real estate commercial loans. There is only $42,000 in commercial real estate representation among non-performing assets. Past due loans and dollars represent 16 basis points of total loans and there is no outstanding ORE. 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 impacts of a potential recessionary environment in any systematic way. Total non-interest income grew 26% during 2024 compared to 2023, with growth reported in several categories. Mortgage banking income grew 62% based on the strategies outlined earlier and the resulting ability to sell a greater portion of originations on the secondary markets. Services charges on accounts grew 38%, reflecting higher activity levels and customer growth and less earnings credit offset to charges based on reduced balances and transaction accounts. Payroll services grew 22% as our offerings continued to build traction in the marketplace. Finally, credit and debit card income grew 2% 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 18% as demand by borrowers for interest rate protection shifted with borrowers' future rate expectations. The results for 2024 described above contribute to a solid five-year track record of compounded annual growth rates across key metrics, including total loans of 10%, total deposits of 11.8%, earnings per share of 10.1%, and tangible book value per share of 8.4%. That concludes my remarks. I will now turn the call over to Chuck.