Q4 2020 Mercantile Bank Corp Earnings Call
Good morning, and welcome to the Mercantile Bank Corporation fourth quarter 2020 earnings results call and webcast.
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I would now like to turn the conference over to tailored Burton from Lambert Mercantile Investor Relations for <unk>. Please go ahead.
Thanks Grant good morning, everyone and thank you for joining mercantile Bank Corporation's conference call and webcast to discuss the company's financial results for the fourth quarter 2020 on tailored or with Lambert IR Mercantile's Investor Relations firm and joining me today are members of their management team, including Bob Kaminski, President and Chief Executive Officer.
Chuck Christmas Executive Vice President and Chief Financial Officer, and Ray Reitsma, President of Mercantile Bank, Michigan, We will begin the call with management's prepared remarks and presentation to review the quarters results then open the call up to questions. However, before I begin today's call and it's my responsibility to inform you that this call may and.
Certain forward looking statements such as projections of revenue earnings and capital structure as well as statements on the plans and objectives on the company's business.
The company's actual results could differ materially from any forward looking statements made today due to the factors described and 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 fourth quarter of 2020 press release and presentation deck issued by mercantile today, you can access it at the company's website Www Dot Merck Bank Dot com.
At this time I would like to turn the call over to Mark <unk>, President and Chief Executive Officer, Bob Kaminski Bob.
Thanks, Tyler and good morning, everyone.
On the call. This morning, we will provide you with detailed information on the company's performance and the fourth quarter and full year amidst an unprecedented and challenging operating environment as well as an update on continued activities specifically related to the pandemic.
And really reflect on 'twenty and 'twenty. It is paramount that I again applaud the incredible efforts of our dedicated mercantile team for their and men's resiliency and adaptability across the board to navigate the many unique challenges presented from the pandemic throughout the year.
And as we have consistently stated throughout the pandemic. Our focus has been on the health and safety of our employees and customers, which has required flexibility from all team members, who have transparently adapted to working remotely and and new environments.
The efforts of our entire staff helped mercantile delivered strong results again in the fourth quarter and throughout 2020, while successfully pivoting and with our customers as needed to fulfill their banking needs and a variety of ways.
This positivity is reflected and mercantile has strong financial performance again in the fourth quarter with per share earnings of 87 cents.
Our company's sustained areas, our financial strength allowed our board to increase on a regular cash dividend for the first quarter of 2021 to 29 cents per share.
We are pleased to provide a consistent and competitive cash return to our shareholders within this often challenging and environment and.
And after electing to pause and stock repurchases and March we have also reinstated our buyback program during the fourth quarter and as a result of our structured framework and prudent and focus on maintaining strong capital levels.
Chuck will provide further updates on the many moving parts of our financial statements for the quarter and and year to date and 2020.
Okay.
As mentioned throughout 'twenty, and 'twenty and across our day to day operations and safety of our employees and customers remains our top priority using the guidelines and best practices on government agencies, including the CDC.
While our facilities reopened in late June growing concern and increased cases, and Michigan led us to again close our branches for in person meetings in November.
Our team and clients have adapted and seamlessly to alternative methods of banking activity engagement and as we continue to closely monitor for developments and revise our plans accordingly.
The full time line of Covid related activities can be viewed on slide 10 of our deck.
Our lending teams efforts on the forgiveness phase of the PPP program continued into the fourth quarter as we work to assist clients with the gathering and submitting other required information to allow the rendering of a forgiveness determination by the SBA.
Additionally, as we enter the early weeks of 'twenty 'twenty, one with the latest government stimulus package work on a new round of PPP applications has begun.
The efficient efforts of our lending group had been recognized across the marketplace, helping to create a new loan and deposit customer relationship opportunities with numerous businesses within our communities they face challenges and the application process through incumbent banks.
Having met the P. P P and needs of these new clients and the application process. We are now and are positioned to capitalize on these efforts to grow those relationships.
And so that's the ability has been masked by the perseverance shown within our local economies and we are thrilled to partner with these resilient companies.
Our team's commitment to our markets as illustrated by our engagement with these businesses to further advance our collective work as we strive toward economic recovery and growth.
Although our team devoted a significant amount of time, assisting both new and existing customers and meeting pandemic related challenges, we remain focused on identifying and attracting new client relationships and continuing to meet the traditional needs of our existing customers.
Ray will provide you with a full update on the performance of our loan portfolio later on this call.
Our asset quality remained very strong throughout 2020 as did our unwavering focus on sound credit underwriting, which has led to low levels of past dues and nonperforming assets.
Our ability to deliver a record breaking level of mortgage banking income in 'twenty and 'twenty reflects our strong residential mortgage loan production and ongoing success of strategic initiatives that we designed to boost market share and increase and increase revenue.
Our team has continued their efforts.
Towards ensuring a strong pipeline and levels remain incredibly solid even through the seasonality of the winter months.
And focused on positioning ourselves to produce solid mortgage banking income in future periods as evidenced by the opening of mortgage lending centers in Midland, Michigan, and Cincinnati, Ohio During 2020.
Our lenders have done a magnificent job within a difficult climate and our teams have leveraged opportunities to see pent up demand and increased market penetration to enhance revenue achieving strong residential mortgage loan production levels.
Again matching and the efficiencies of our teams across the board our residential mortgage group put forth a tremendous effort to ensure the entire loan origination process on the receipt of an application to closing is completed and a structured and timely manner.
And as mentioned earlier and my comments, our diligence and adaptability throughout the year has created a significant competitive advantage and open doors to new and exciting potential relationships ran Chuck will share more detail on this and their comments.
Turning to operations with our ongoing strategic focus on digital and digital delivery and conjunction with branch optimization, we continue to engage our customers through a holistic and personalized approach to their knees needs as their patterns and preferences and interaction with us are evolving, especially and deals.
Challenges brought about by COVID-19.
The deployment of technology and alternative delivery channel has been a strategy of mercantile for many years, we consistently aim to analyze and evaluate our interactions across the board conformance conforming to industry best practices, while leveraging data to best capture efficiencies customized client.
And refine internal systems.
Our current footprint and summary on strategic initiatives can be viewed on slides three and four of the deck.
Our strategic initiatives also demonstrated and ongoing focus on our people and reinforces our commitment to pursuing and best practices and environmental social and governance with particular emphasis on the social component.
Our board of directors, which included 2020 introductions of members with diverse business experience, our management team and all of our employees remain committed to fulfilling their continually evolving roles as purposeful and dedicated and community leaders.
Throughout 2020, we have expanded our internal diversity equity and inclusion programs and facilitate the ongoing engagement with guest speakers, who we have brought in virtually to provide forms for our employees.
We have had ongoing purpose driven discussions within our organization, where staff are able to listen and learn about our community and introspection and about themselves and this <unk>.
Must be the way of life for us all.
Our management group ESG Committee and our entire team are firmly committed to enhancing these sound corporate practices built on and integrity integrity and trust, while working diligently to cultivate and strengthen our critical relationships with our diverse communities our employees our customers and our shareholders.
And late 'twenty and 'twenty, our team decided that we needed to take some bold action to help address the hunger and shelter crises and our communities.
And we partner with local nonprofit agencies to invest $100000 and the direct donation for the purchase of items to help support these basic human needs across our markets.
We challenge ourselves as an organization and as individuals for continual involvement.
Improvement and progress.
Set a high bar as we engage our diverse relationships and all facets of our work.
And we're incredibly pleased with our efforts in 'twenty and 'twenty across all levels of our operation as we have built an incredible foundation to sustain and continue the development of these initiatives towards the collective future success of all of our constituents.
And those are my introductory remarks, and then I'll turn the call over to Ray.
Thank you Bob our total loan portfolio decreased to $134 million during the quarter, including a reduction of our C&I portfolio of $176 million.
Both of these reductions were directly impacted by $189 million of PPP forgiveness experienced within the quarter on.
And are occupied CRE decreased $20 million, however, non owner occupied CRE increased by $51 million and the mortgage and retail loan portfolios grew by $10 million during the quarter.
In general our C&I loan funding net of P. P. P activity remained similar to the pre pandemic levels as we continue to add targeted new commercial relationships around our PPP activity and by serving existing relationships.
Additionally, our construction pipeline remains solid with $99 million of commitments and commercial construction and development loans, which we expect to fund over the next 12 to 18 months.
Asset quality remains strong as nonperforming assets totaled just $4 $1 million or 0.9% of our total assets at December 31 and 2020.
This breakdown can be found and the financial portion of our presentation on slides 24 and 'twenty five.
Additionally, accrue and commercial past due loans at quarter, and our nominal and dollar terms totaling $1 1 million representing eight borrowers.
Overall pass through information can be found on slides 16 and 17.
The following recaps, our provisioning activities during COVID-19 during the COVID-19 impacted time periods and.
The second quarter of 2020 provision expense of $7 $6 million was generated entirely through increases to environmental factors.
The third quarter of 2020 provision expense.
$3 $2 million was driven by risk rating of just adjustments to 159 specific credits.
And of which moved to the watch list.
The fourth quarter provision expense of $2 $5 million was driven by a $3 $9 million increase and qualitative and environmental factors.
These actions bring the allowance for loan losses to total loans to 133% net of PPP loans up 49% from eight 4% at December 31 2019.
Payment deferrals at the peak of the program in mid July impacted 738, borrowers and represented $719 million and exposure.
Presently as of December 31 extensions are in place beyond that date for 18 borrowers representing $14 million of exposure is seen and slide 11.
Modest current deferral numbers, when combined with our expectations for a limited future requests and our strong past due performance are positive indicators.
The risk rating process depicts a portfolio of strong characteristics, reflecting strength similar to that and the pre crisis economy as seen in slide 15.
Maintaining accurate risk ratings will remain a key focus and the upcoming quarters as our borrowers continue to report results impacted by the pandemic.
We continue to monitor the financial condition and performance of credits, particularly in the following segments.
Tells and lodging assisted living and restaurants and entertainment.
None of these individually.
<unk> account for more than five 1% of commercial loans and the composition of these segments can be seen in slide 13.
We recorded noninterest income during the fourth quarter of $14 $3 million up $7 million or <unk>, 96% from the prior year fourth quarter.
As can be seen on slide 20, this improved level of non.
Interest income was largely driven by a 200% quarter over quarter increase and mortgaging banking income, reflecting the success of ongoing strategic initiatives designed to increase market share a higher level of refinance activity stemming from historically low rates and increased share and the purchase market.
And an increase and the percentage of loans sold.
For the fourth quarter of 2020 purchase mortgage.
Mortgage loans originated were up 101% over the comparable quarter and the prior year, while refinance activity increased by 95% is seen and slide 23.
January applications and backlog suggests that refinance opportunities will persist into the near future and purchase applications are seasonally high levels.
Continuing to enhance mortgage banking income through increased market share, including an increased share and the purchase market remains a priority and we will continue to hire proven mortgage loan originators as we are able and.
As in the case of our new mortgage office and the Cincinnati area, which opened during the fourth quarter of 2020.
Noninterest income from payroll services was flat despite high levels of unemployment during the quarter relative to the prior year comparable quarter and increased seven 4% over the course of the year.
Service charges on accounts for the year were also flat due primarily to larger balances offsetting charges.
Got it and debit card income increased by approximately four 8% on a quarter over quarter basis as activity within the accounts began to recover from reduced activity during the pandemic and the monthly activity level in December to 16% above the activity level and January demonstrating.
The recovery that has taken place during 2020.
Finally, we reported $932000 of swap income.
Reflecting interest rate risk management products introduced and put into place for our clients during the quarter.
And that concludes my comments I will now turn the call over to Chuck.
Thank you Ray and good morning to everybody and as noted on Slide 16. This morning, we announced net income of $14 $1 million or 87 per diluted share for the fourth quarter of 2020, compared with net income of $13 $3 million or <unk> 81 per diluted share for the fourth quarter of two <unk>.
And 19.
Net income for the full year, 2020 totaled $44 $1 million or $2.71 per diluted share compared to $49 $5 million or $3.01 per diluted share during the full year 2019.
Excluding non core income and expense transactions diluted earnings per share increased by <unk> 10.
Or about 12% during the fourth quarter of 2020 compared to the fourth quarter of 2019.
Well, it's included earnings per share decreased seven or about two 5% during 2020 compared to full year 2019.
Generally speaking increased mortgage banking income mitigated a lower level of net interest income and higher loan loss provisions during 2020.
Turning to slide 19 interest income on loans declined to 2020 periods compared to the 2019 periods, primarily due to the <unk> rate cuts aggregating 225 basis points since the beginning on the third quarter and 2019 with 150 basis points of those rate on those.
Cuts occurring in the first quarter of 2020.
Interest income on securities during 2020 benefited from accelerated discount accretion from called U S government agency bonds totaling $3.01 million during the year.
In total interest income declined $1 $9 million during the fourth quarter of 2020 compared to the fourth quarter of 2019 and was down $10 million for the full year 2020 compared to the full year 2019.
Interest expense declined in all categories during 2020 periods compared to the 2019 periods, reflecting the declining interest rate environment.
And total interest expense declined $2 $6 million during the fourth quarter of 2020 compared to the fourth quarter of 2019 and was down $7 $7 million for the full year 2020 compared to the full year 2019.
Net interest income increase of zero point $7 million during the fourth quarter of 2020 compared to the fourth quarter of 2019 in large part reflect and accelerated PPP net fee income recognition stemming from forgiveness payments from the federal government during the just completed quarter.
Net interest income declined $2 $3 million for the full year 2020 compared to the full year 2019.
Provision expense increased significantly and the 2020 periods compared to the 2019 periods, primarily reflecting the corona virus pandemic and its impact on the economic environment.
Provision expense totaled $2 $5 million during the fourth quarter of 2020, and $14 $1 million for the full year 2020, compared to a negative zero point $7 million during the fourth quarter of 2019 and $1 $8 million for the full year 2019.
Approximately 80% of the provision expense recorded during 2020 is reflective of increased allocations associated with qualitative factors, namely economic conditions loan review and value of underlying collateral dependent commercial loans and as well as the creation of the COVID-19 pandemic environmental factor.
The COVID-19 pandemic environmental factor developed during the second quarter is designed to address the unique challenges and economic uncertainty, resulting from the pandemic and its potential impact on the collectability of the loan portfolio.
The provision expense recorded during the fourth quarter of 2020 was fully reflective of increased allocations associated with the previously mentioned qualitative factors.
We have elected to continue to postpone the adoption of seasonal as permitted by the cares Act and the stimulus Bill passed in late December.
We continue to run our seasonal model concurrently.
With our incurred loss model based on preliminary results on a loan loss reserve balance determined by the seasonal model is about $2 $5 million lower than the loan loss reserve balance is determined by our incurred loss model as of year end 2020.
Continuing on slide 20.
Fee income increased in 2020 periods compared to 2019 periods, primarily reflecting significantly higher mortgage banking income.
Excluding certain one time items fee income during the full year 2020 increased $21 $7 million or <unk>, 92% when compared to the full year 2019.
Reflecting increased refinancing and purchase activity along with the successful implementation of strategic initiatives over the past few years, we delivered mortgage banking income substantially higher during the 2020 periods compared to the 2019 periods.
Fourth quarter 2020 mortgage banking income was $6 $4 million higher than in the fourth quarter of 2019 and.
Net income during the full year 2020 was almost $21 million higher and the full year 2019.
Credit and debit card income return to pre COVID-19 levels during the third and fourth quarters, reflecting a recovery and transaction volume from the second quarter will not quite returning to pre COVID-19 levels service charge on accounting income during the third and fourth quarters was much improved and the second quarter and large part reflecting higher transaction levels.
Business customers.
Continuing on slide 21 overhead cost increase and the 2020 periods compared to the 2019 periods, primarily reflecting higher compensation costs and the expansion of our main office.
Salary and benefit costs were up one $6 million during the fourth quarter of 2020, when compared to the fourth quarter of 2019.
Mortgage banking related compensation costs were up zero point $9 million, while the bonus accrual increase zero point $4 million.
Salary and benefit costs were up $6.0 million are and our full year 2020, when compared to the full year 2019.
Mortgage banking related compensation costs were up $4 $5 million, while base salary costs were up zero point $8 million, mainly due to annual merit increases while the bonus accrual was up zero point $4 million.
Occupancy furniture and equipment costs were up a combined zero point $2 million during the fourth quarter of 2020, when compared to the fourth quarter of 2019 and up a combined $1 $7 million during the full year 2020, when compared to the full year 2018, and large part reflecting the fall of 2019 completion.
Of our main office expansion.
On to slide 22, our net interest margin was 3.00% during the fourth quarter of 2020.
14 basis points from the third quarter of 2020, but down 63 basis points when compared to the fourth quarter of 2019.
The yield on earning assets increased 10 basis points during the fourth quarter of 2020, when compared to the third quarter of 2020, while the cost of funds declined four basis points. During the same time period.
And comparing the fourth quarter of 2020 with the fourth quarter of 2019, the yield on earning assets declined to 106 basis points, while the cost of funds declined 43 basis points.
The yield on loans was up 31 basis points during the fourth quarter of 2020 compared to the third quarter of 2020.
But down 67 basis points, when compared to the fourth quarter of 2019, non ladder and large part reflecting the <unk>.
<unk> aggregate 175 basis point reduction and the targeted federal funds rate during the fourth quarter of 2019, and the first quarter of 2020.
We are recording the origination fees and direct origination cost of PPP loans equating to a $15 million net increase and interest income on commercial loans using the level yield method.
Fourth quarter, 2020, net accretion totaled $5 $4 million and increase of $2 $4 million from the level recorded during the third quarter of 2020 refer.
Reflecting accelerated accretion, resulting from PPP loan forgiveness payments received during the fourth quarter.
Unrecognized PPP fee income totaled $3 $8 million at year end 2020.
Based on recent trends it appears that a vast majority of the remaining PPP loans will be forgiven. During the first two quarters of 2021. However, we note that we have received no forgiveness payments on any of our PPP loans exceeding $2 million.
Implications for about 70% of this segment had been filed with the SBA.
On accreted PPP loan fee income associated with this segment equates to about 20% of the $3 $8 million still unrecognized.
The yield on securities during the full year 2020 benefited from accelerated discount accretion I called U S. Government agency bonds accelerated discount accretion totaled three point is there a $1 million during the year positively impacting the period's net interest margin by eight basis points.
Negatively impacting our net interest margin during the 2020 period since around mid second quarter was a significant volume of excess on balance sheet liquidity the predicted by low yielding deposits with the federal Reserve Bank of Chicago and a correspondent bank.
The excess funds are primarily a product with federal government stimulus programs as well as lower business and consumer investing and spending.
Overnight deposits average $560 million during the fourth quarter of 2020 and $357 million during the full year 2020, compared to our typical average balance of $50 million to $75 million.
We expect the level of overnight deposits to stay at elevated levels well into 2021.
This excess liquidity lowered our net interest margin during the fourth quarter of 2020 by about 40 basis points.
The cost of funds has also been on declining trend, primarily reflecting the falling interest rate environment, but in terms of magnitude and scale not to the degree experienced on our yield on loans.
As noted on slide 23 mortgage loan originations increased substantially during the 2020 periods and especially during the second third and fourth quarters of the year in large part reflecting significant refinance activity stemming from the decreased interest rate environment, coupled with the ongoing success of strategic initiatives that were.
Designed to expand market penetration enhanced gain activities and operate more efficiently.
Mortgage loan originations totaled $219 million during the fourth quarter of 2020 compared to a $111 million during the fourth quarter of 2019 and increase of almost 100%.
Mortgage loans originations totaled $865 million during the full year 2020 compared to $369 million during the full year 2019 and increase of about 135%.
About 54% of the mortgage volume during the fourth quarter of 2020 consisted of refinance applications similar to the level during the fourth quarter of 2019.
Approximately 73% of the mortgage loan originations during the fourth quarter of 2020 have been or will be sold on the secondary market.
Also similar to the level during the fourth quarter of 2019.
Can you continue on slides 24, and 25 are standard quality metrics and loan portfolio remained very strong with continued low levels of nonperforming loans and loan charge offs non.
Nonperforming loans as a percent of average loans equaled only 11 basis points at December 31, 2020.
The balance of other real estate owned was zero point $7 million at quarter end and consisted almost entirely of former branch facilities.
Gross loan charge offs total zero point $3 million during the fourth quarter of 2020, while recoveries of prior period loan charge offs total zero point $2 million.
And the resulting net loan recoveries.
Charge offs of zero point $1 million equated to one basis points of average total loans annualized.
For the full year 2020, we recorded loan charge offs recoveries of zero point $8 million.
Additions to nonperforming assets totaled $1.01 million during the fourth quarter of 2020 with a net decrease of zero six zero point $6 million recorded and nonperforming assets during the quarter.
Over the past 12 months the balance of our loan loss reserve has increased $14 $1 million or about 59% with the coverage ratio, excluding PPP loans growing from 84 basis points up to 133%.
As shown on slide 26, we remain and a strong and well capitalized regulatory capital position the tier one leverage capital ratio was nine 8% and a total risk based capital ratio was 13, 8% as of year end 2020.
The tier one leverage capital ratio continues to be impacted by the PPP loan portfolio and excellent liquidity.
With no similar impact on risk based capital ratio is both components are assigned a zero percent risk weighted.
The total risk based capital ratio was $118 million above the minimum threshold be capitalized as well.
To be categorized as well capitalized.
We repurchased about 220000 shares for $6 $3 million at a weighted average cost of $28 25 per share during the first quarter of 2020.
After electing to temporarily cease share repurchase activity in March to preserve capital for lending and other purposes due to the uncertainty surrounding the COVID-19 pandemic, we reinstated the buyback program during the fourth quarter and purchased about 14000 shares for zero point $3 million at a weighted average cost of 22.
$2 five.
Per share, we currently have about $10 million available and our repurchase plan.
On slide 27 and <unk>.
To conclude my prepared remarks due to the high degree of uncertainty that currently exists we will not be providing earnings guidance as we have done on past conference calls. However, we are able to offer key considerations that should be factored into any earnings forecast of our company as noted on the slide.
Clearly economic conditions asset quality, PPP forgiveness activity and mortgage banking operations are expected to have the most impact on our operating results for 2021.
In closing, while uncertainties remain that may impact mercantile its financial condition and operating performance and future periods. We note. We entered this stressed environment with strong asset quality and a solid capital position.
We are pleased with our fourth quarter and full year 2020 operating results and financial condition as of year end 2020, and believe we are well positioned to continue to navigate through the unprecedented environment created by the coronavirus pandemic and other events.
Those are my prepared remarks, I'll now turn the call back over to Bob.
Thank you Scott that now concludes management's prepared comments and <unk>.
And I'll open the call up for the question and answer period.
We will now begin the question and answer session and ask a question you May Press Star then one on your Touchtone phone.
And if youre using a speakerphone please pick up your handset before pressing the keys book.
Draw. Your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question today and will come from Brendan Nosal with Piper Sandler.
Please go ahead.
Hey, good morning, everybody how are you.
Lauren brand and Oreo.
Great Thanks and.
Just wanted to start off on some of the Covid impacted industries, just hoping you can kind of take us through the state of the hotel and restaurant and entertaining books today and just how those customers are sharing versus.
The height of Covid last year.
And this is ray I'll talk about the hotel industry a bit.
We're obviously continuing to be impacted very heavily compared to pre pandemic levels.
They are.
Functioning at a higher level and they did earlier and the pandemic from on occupancy standpoint.
Focusing a lot on expense reductions and alike.
And our portfolio has performed quite well.
We have a very strong sponsor group.
Amongst the portfolio, which has helped sustain those particular assets.
And has the ability to continue to do that we feel like we've got them well positioned in terms of the structure of the Ams and the wide we've had a number of.
The operators bring additional capital to the table to reduce our loans.
<unk> has been.
Yeah.
Well received by US and shows the commitment of those operating groups to those assets.
So.
And most direct answer to your question is is that there are slightly improved over where they were at the depths of the pandemic.
Got it that's helpful color. Thank you.
And then one more from me.
Just thinking about kind of reserve coverage as we were at the start up and in the year here.
And I found it interesting that your seasonal reserve hypothetically you, he's actually lowered and the incurred loss reserving today. So.
And so just curious as you kind of look at the outlook for the year do you see much more of and need to continue building reserves or based on what you know today do you think youre at a.
Sufficient level.
Yes, Brad and this is Chuck and I'll take the first stab at that and as I mentioned in my prepared remarks.
80% of our provision that we did in 2020 was due to the environmental and.
And.
As you saw from our metrics, we continue and have very strong asset quality and.
We've been able to build the reserve based on those environmental.
And not so much so on and on specific credit deterioration, which as Ray mentioned most of that took place with our extended review during the third quarter.
And as long as those.
Quality number stays consistently strong.
On the ability to grow your reserve.
It continues to primarily rely on on the environmental so at.
It seems to us debt if we continue on the pattern that we're doing.
And that our provision will certainly be much lower than it was in 2020.
And so knock on wood that we can continue to do that but again, we continue to.
And have our loan review program all the communications that we have internally clearly we have very close eyes on the credits.
On all credits, but certainly those that are in the industries that are.
And most heavily impacted and I don't think we'd be surprised anyone saying we have regular contact.
And with those borrowers. So overall, we feel pretty good and regards to specifically with seasonal and I think.
This is my opinion and we started to see it last week late last week with the Mega banks reporting.
And in talking with other Cfos.
Bank CFO as I think one of the common themes that's out there with the seasonal models is that the economic forecasts are starting to improve and.
And that was one of our CSO model throughout 2020 was much closer to our incurred model.
The $2 $5 million or so that we see at year end 2020.
It's quite a bit higher than difference was quite a bit higher than what we were seeing and most of that was because of the economic forecast improvement.
And like most banks, we certainly use a third party.
As our primary source, but also have another third party that we we throw into the model as well.
Just a test to make sure that.
But the models, we're using are somewhat similar and consensus with the markets that are out there and the reserve allocated for.
And for the economic factor fell quite dramatically.
So I think that that might be a trend that we see we will see over the next couple of weeks.
But and I think that makes sense from a seasonal standpoint is we saw a lot of build taking place earlier in 2020 because of the degradation of the economic environment and the forecasts.
But now with the economic forecasts coming out.
Better with improved results.
Those using a CSO model because of the seasonal model.
It does result in some reserve release release and of course, what you do overall it depends on all the other factors and calculations that go into it.
Perfect and Bob.
I would say that.
As we've talked about on past calls, we have years and years of experience with the incurred loss model.
And we felt very comfortable with.
The levels of reserve that requires us to have during all kinds of economic conditions, whether it be challenging times such as we experienced in 2020 are good economic times, and and we think that.
But as Chuck said Thats, the best way for us to have a good solid reserve that reflects the risk and the portfolio.
And it keeps us where we need to be and just as we have throughout <unk>.
Other economic cycles, and the past will continue to evaluate we'll continue to look at the qualitative factors and obviously you look at our at our credit.
Our relationships and making sure as we always do that.
Risk ratings are accurate and where they need to be as well.
And we will do that obviously and in conjunction with what we're seeing on the parallel seasonal model.
Because as Chuck said.
And interesting dynamics that take place based upon what that model is based on and and but we'll take all that into consideration and continue to.
And to make the evaluation as each quarter as to where the reserve needs to be but we feel really good about where it's currently at and the process that we have here and make sure it stays there.
Excellent. Thank you for taking my questions.
You bet.
Our next question will come from Damon Delmonte with Ww. Please go ahead.
Good morning, guys. How are you doing today.
My name and how are you.
So first question Chuck I, just wanted to talk a little bit about the margin.
Can you I think you had said how much the.
And the PPP loan forgiveness on a dollar basis was could.
Could you just repeat that and do you know what that was off the top of your head.
A basis point standpoint.
Yes, let me.
Catch up to myself here.
On the.
The growth was about two to three if you compare fourth quarter with third quarter.
The increase and the fourth quarter was about $2 $3 million to $4 million higher than what we did in the third quarter.
And a vast vast majority if not all of that was related to the forgiveness payments and acceleration on the fee income net took place as a result.
We got our first.
Forgiveness payment I think it was October 30th whatever the last business day was of October and then they were they have been since that time pretty irregular as far as.
Pretty wide range, we get somewhere between $2 million to $6 million a day.
And that and that has continued here into January on a book.
<unk> pointed out two to $3 million to $4 million.
Added about 25 basis points to our margin for the quarter.
So we got the way I look at it and we got a 25 basis point improvement because of that and then as I mentioned about a 40 basis point negative impact.
On.
Two our margin because of the excess liquidity.
And.
So not that would put us at about a three 5% if you will core.
Margin and Thats pretty similar to what we've talked about on past calls.
Got it Okay. And then you had said that you expect the majority of the remaining forgiveness to occur and the first three quarters.
Was that is that accurate.
Yes, I'd, probably say first two quarters hopefully that's what I said I know its what I said in my script the first two quarters.
The ones under $2 million continue to come in and of course, we have to wait for the borrowers to put their applications together, we review it and we submitted to the SBA and.
And then of course wait for the SBA.
To do what they need to do before and incentives to <unk>. So we have a pretty small part as far as the timing of all that goes.
But like I said, it's been pretty regular steady on the amount of forgiveness that we got coming through so based on what we saw the last two months and as well as what we've seen so far here in January and through the first two weeks I would expect most of those will be paid off by the end of the second quarter and again I threw that out there on the two.
And we're just not sure what the government's doing.
With that segment clearly on way back and the second quarter.
Indicated loans that were over $2 million were going to get additional scrutiny.
It certainly appears that way the applications forgiveness application.
Process and the application itself is much much more lumpy as much more longer.
Much more involved we have instances, where they're asking for additional information on some of them. So it's definitely taken a longer time period.
And then what we see what those loans under $2 million. So it's a gas debt, it's going to be at the end of the second quarter feel pretty confident about those that are under $2 million.
And we're hopeful that the government will start accepting are improving on the forget and applications and paying off those over $2 million as well as of yearend.
Over $2 million portfolio was about 50% of our outstanding balance, it's about 100 $185 million.
And that segment, so it's a pretty pretty large segment on our balance sheet.
Forgiveness.
The net origination fee is about 20%.
And I think $3 $8 million left.
Got it okay.
And then on expenses, obviously, you guys and good cost savings from the branch closures.
And what do you feel is a reasonable Mike.
Core run rate that we should we should start to model from this point forward going into 2021.
And I kind of throw the word core and with them the word normal these tissues and.
Trying to figure out.
On where we're at.
There were some additional we don't talk about them, both and we're definitely some some costs and their related to PPP stay at home work for work from home.
And there, but I would say if you get down to the core I would say that the increase in 2021 from 2000, and 'twenty will be somewhere between one 5% and 2%.
Okay, and that would be off of like call it $98 million or so 98 and five nine.
No, yes, I don't have that number in front of me, but whatever.
And whenever it gets down to the core that debt we threw in there I think thats, a pretty a pretty good guess.
Okay got it and then just one well.
Two quick ones here and one on fee income the swap fee income.
You guys broke out this quarter.
It's something that.
Is that kind of a new focus for you guys, but we should start to incorporate and a measure of that each quarter or was that more of a onetime.
No it's definitely a new program and it's a back to back swap program.
No.
Clearly a lot of banks have been doing this.
And what it is it's a way to manage interest rate risk from what I would call our longer term commercial loans. So those are typically five year balloons occasionally we do seven year balloons.
Historically, we use the <unk> and to a lesser degree the broker deposit program.
To kind of match fund those.
But clearly what we've seen as while we continue to book a five year fixed rate balloons and the occasional seven year, we certainly don't need to go on the FHA Ob and get advanced money.
So what we have found it started really in 2019, but certainly throughout 2020 and.
We really didn't have the ability from and on balance sheet standpoint to really effectively hedge those longer term fixed rate commercial loans.
So we started to explore the opportunity to do swaps with certain customers is not going to be something that we go out there with our customers, but generally are those that are of larger size and of sufficient sophistication.
We wanted to make sure that we treat this program delicately.
And when you introduce a swap too many borrowers not all but many borrowers it is a new a new tool for them and we do have a third party and well known and third party that we have hooked up with us and adviser.
And then not only helps us directly but also has interaction and materials for our borrowers as well.
And so what this is is for.
<unk> identified borrowers again there'll be larger balance more sophisticated borrowers.
Instead of historically offer all of our borrowers are fixed and floating rate what will do going forward on these particular borrowers as we will only offer them a floating rate if they want to go fixed rate they will enter into and interest rate swap with the bank directly to.
To get on the fixed rate of course that gives us what we don't want fixed rate again.
So we immediately simultaneously go to a correspondent bank and enter into the opposite swap.
And so the swap exposure is basically nil.
Some remnants of some credit exposure, there which of course, we we underwrite that with our borrowers part of our underwriting.
Loan to adjusted on the collateral values.
And because of that we're able to because of the difference and rates, we're able to get some upfront fee income activities. So again I'm sure. This is common with many of your banks and so it's a program that we rolled out and the fourth quarter. It's a program that will continue to go with.
It is going to be a transactional type activities. So my guess is that some quarters will be larger and.
And fee income and others will be lower and fee income.
But I would say somewhere between our budget to be honest is about $50 to 70000 a month.
As what we have been budgeting and there.
Again, it's pretty new for us of course, but we certainly see the opportunity and quite frankly, the need to do this to manage that longer interest rate risk exposure.
Got it Okay. That's great and then if I could squeeze one more quick one in for Bob.
Any thoughts on the recent piece.
Tcs sales to H band and possible follow from there I think there might be some branch divestitures coming and maybe your thoughts on that and possibly picking up some.
Maybe new lenders.
Thanks.
Yes.
As we talked about in the past whenever there's.
Disruption that may be caused theirs.
Our bank M&A type of transaction and any of our markets that does provide some potential opportunities and.
And like we have and the past and with this particular, one that you referenced we will continue to look and and see if there's any.
Any way for us to.
The strength and ourselves because of some of the transitions that are taking place in the marketplace for those bank. So we will continue to take along and look at any opportunities that come on down the pike and and make the best decisions from a strategic standpoint for mercantile and.
It seems like whenever there's a there's disruptions.
Customers, usually end up experiencing some.
<unk>.
Some frustration and some issues like that as well as some employees as well so well keep our options open and keep looking to see what the opportunities may may avail themselves to us as we as we all go through the next several quarters.
Great. Thank you very much for taking all my questions. This morning.
You bet. Thank you Damian.
Our next question will come from Bryce Rowe with <unk>. Please go ahead.
Thanks, Good morning.
Good morning, Brian and Brian.
And.
Appreciate you taking the questions here this morning.
Hi.
And one on kind of the mortgage commentary debt.
You offered sounded sounded like you've got a <unk>.
Good outlook in terms of of mortgage despite some of the some of the higher <unk>.
10 year rates that we've seen over the over the last months. So maybe you could you could help us think about.
On the mortgage market share takeaway relative to what kind of current market volumes might be reflective of higher higher 10 year rates.
Yes. This is Chuck and I'll take the first stab at that and.
I'll, let Barbara and are re comment on that I think trying to forecast mortgage banking.
And certainly a very very difficult.
Especially in regards to the refinance activity.
I think market data and kind of what we've seen from third parties is that maybe up to a third of mortgage borrowers up there.
Had the opportunity to refinance and of course, that's going to change almost every day as mortgage rates change, but clearly mortgage rates continue to stay relatively low and there are some opportunities out there.
Certainly expect debt rates, probably won't go any lower.
And if any high if anything maybe a little bit higher as you mentioned price.
So we certainly are not anticipating debt refinance activity in 2021 will be that as it was in 2020 so on.
Net and refinancings, we're expecting less income.
From that.
And so.
This is something we want to focus on all the time, but I think this period of time really focuses on the fact that on a mortgage banking program you got to make sure that <unk> got the ability to make mortgages on the purchase side.
It's great to make a lot of fee income when rates decline and everybody has the opportunity to or most of them have the opportunity to refinance but.
But to keep a strong operation and to keep it go and you really have to have.
A solid and lender base that has the appropriate contacts that can make sure that we get.
Our share and if you will on the purchase mortgage market and that is something that we definitely concentrate when we're talking to potential new lenders coming on board.
And is looking at their experience their expertise their history.
And regards to that purchase market.
So that's part of the strategic initiatives.
And I mentioned, I think ray mentioned as well.
Certainly growing that not just new offices like Midland and Cincinnati last year, but also adding.
New lenders to us and our existing markets as well so we're going to continue to look for opportunities.
And our current markets, we're definitely going to continue to look at other markets.
Adjacent markets or other opportunities that come up to add to the team.
And that will help on that we believe will definitely the expectation would be debt that will help us on the purchase side. So.
Net where does that fall, it's really almost impossible to tell.
But I think the net overall aspect is as we expect a decline in refinance to some degree.
But we would expect.
Given the current markets, both economic and interest rate that we'll see a pickup and purchase activity.
So along answered and I didn't give a specific answer too.
And that's how we look at it.
Okay.
And again.
A bit of additional color would be that since.
And the turning of the calendar to 2021, and our pipeline has gone up.
And about 20%, which would not be seasonally expected and it's maintained its proportions as it relates to refinance and purchase.
So.
Both forces are still on effect and.
And very strong both seasonally and in absolute terms so.
Whatever the correct number of people is out there or proportion of people and that can benefit from refinance that.
And that pool still exists and there is still actively pursuing that and we've definitely seen that.
On a rather consistent basis from the first of the year till now.
Okay. That's helpful. I appreciate it.
Yes, I wanted to ask.
And I guess the question I got two more questions one around GBP.
And any any indication from.
From borrowers on this on this this latest round of the PPP in terms of how.
Much interest there might be.
Here here and here in 2021.
It's interesting.
On the first go around we had over 2000 loans.
$550 million during the <unk>.
Course of debt.
Program.
We're just getting started we already have 300 applications that we have received to the tune of about $75 million. So.
The interest out of the gate was pretty strong.
<unk>.
Toned down a bit already and so.
So how the path will be going forward from a trajectory of applications and apps approved.
Remains to be seen our senses that it'll be somewhat less and.
What degree.
It's way too early to tell but that's the current as of yesterday morning.
Data.
Okay.
That's helpful and.
And interesting commentary around.
Forgiveness.
Of these loans with two 2 million or more.
And balances.
I'm curious what what's the reaction from from those borrowers with with maybe more scrutiny being placed on.
On the forgiveness process.
Don't know how much how much involvement and <unk> had with those particular customers, but if you have any kind of anecdotal commentary that would be that would be interesting.
Honestly.
And I've had very limited conversations about that.
They're just.
Anticipating what's coming next reading everything that they can find and trying to.
Offer information that'll support the activity that they undertook in the program, which they.
Ill.
To a person believe was appropriate and they're just looking forward to the opportunity to lay out whatever information needs to be provided to.
In <unk> case.
Okay.
That's helpful.
And then maybe maybe last last one for me here.
Talk about.
Loan yields and the impact from.
From <unk>.
PPP and and forgiveness.
And as well as some commentary around.
And the excess liquidity.
And I was wondering.
With with with.
I guess, the economic outlook, possibly having gotten a bit better here as we move into 'twenty one.
What what are competitors doing from a promote.
Maybe a lot on pricing.
Perspective now.
Relative to what it looked like in the and and the heat of the pandemic and just kind of trying to understand.
And if there's if there's pricing pressure coming down.
On the Pike and 'twenty, one relative to what we might have seen last year.
Okay.
Okay.
I have not really.
Witnessed or experienced or felt any additional pricing pressure.
Debt.
And it's happened.
And the time periods that you referenced.
I'd say.
There is pricing pressure, but it hasnt really changed.
Okay.
Okay.
Very helpful. Thank you all.
Thank you Bryce.
This will conclude our question and answer session.
Like to turn the conference back over to Bob Kaminski for any closing remarks.
Thank you grant and thank you all very much for your interest and Mercantile Bank Corporation, we hope that you and your families stay healthy and safe and we look forward to speaking with you again at the conclusion of the first quarter and April This call has now concluded.
Also on costs now concluded. Thank you for attending today's presentation.
And now disconnect.