Q1 2021 Mercantile Bank Corp Earnings Call
[music].
Good morning, and welcome to the Mercantile Bank Corporation first quarter 'twenty 'twenty, One earnings results conference call and webcast all participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two.
Note. This event is being recorded I would like now to turn the conference over to Tyler dirt from Lambert Mercantile Investor Relations firm. Please go ahead.
Thanks, Matt 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 first quarter 2021.
Tyler <unk> 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 quarter's results and then open up the call to questions. However, before we begin today's call and it's 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 debt.
The company's actual results could differ materially from any forward looking statements made today due to the factors described and the Companys latest Securities and Exchange Commission filings.
The company assumes no obligation to update any forward looking statements made during the call if.
If anyone does not already have a copy of the first quarter 2021 press release and presentation deck issued by mercantile today, you can access it at the Companys website, Www Dot Merck Bank Dot com at.
And at this time I would like to turn the call over to mercantile President and Chief Executive Officer, Bob Kaminski Bob.
Thank you Tyler and good morning, everyone.
On the call. This morning, we will provide you with detailed information on the company's performance and the first quarter as well and updates on the current operating and operating environment, which continues to be impacted by the COVID-19 pandemic.
And as it's been outlined and are released this morning, mercantile and extremely strong quarter to start 2021.
And the wonderful work of our team across all fronts throughout 2020 and during the first quarter and position us well for success and the rest of this year and beyond.
Despite the recent surges of Covid experience throughout the country, and specifically and the state of Michigan, we remain optimistic due to the increasing pace of vaccinations.
To closely monitor pandemic related developments, while prioritizing the health and safety of our customers and employees.
And are constantly finding ways to seamlessly transition as needed to navigate these new and changing environments.
Our full timeline a pandemic related activities can be found on slide 10 of our deck.
And the mercantile team once again demonstrated resiliency and adaptability during the first quarter delivering another solid financial performance, we achieved net income of $14.2 million and per share earnings of 87 cents per share.
We also announced this morning, the declaration of a cash dividend and the amount of 29 cents per share payable on June 16.
Later in this call Chuck will dive deeper into the details of our financial statements as of March 31, which.
Which include the ongoing strength in mortgage banking income sound asset quality solid growth and core commercial loans and managed overhead costs.
In addition to our commercial lending teams continued efforts on the forgiveness phase of round, one PPP and the first quarter.
We also work to assist passed and new loan recipient clients. The second round PPP funding requests.
These new opportunities for relationship building and speak to not only the dedicated and efficient efforts of our lending group, but also the adaptability and perseverance of the local economies and businesses throughout our communities.
They are fully engaged to meet the evolving needs of our customers and we understand their challenges related to the pandemic.
We also continue to evaluate new product and service opportunities and further strengthen our relationships within these markets and support of our communities as they transition to a recovery from the pandemic and a more robust economic growth.
While our dedication to the needs of our new and existing customers requires a significant amount of time and effort and we remain committed to growing our customer relationships. This.
And this work as demonstrated by our solid and sustained new business pipelines and.
Ray will provide you with an update on our growth and ongoing new business development later in this call.
The ongoing success of strategic initiatives and mortgage banking and we designed to boost market share and increase revenue was especially evident and the first quarter.
Our mortgage team and clean those at our new lending offices exceeded expectations and continued to leverage opportunities. We produced solid loan production numbers.
Their work has allowed us to position ourselves extremely well to leverage the strong demand and capitalize on this market to look to deliver robust mortgage banking income. Additionally.
Additionally, higher.
Higher levels of refinance activity remain persistent through the first quarter and why did the historically low interest rate environment.
Once again.
And our relationship based approach of mercantile will provide us the ability to generate.
<unk> solid mortgage production and times when interest rate and market conditions are favorable and are favorable such as with <unk>.
Currently enjoy and also at times when conditions aren't as accommodating rate will share more details on this and his comments.
Turning to our operations, we are constantly evaluating and our processes across the board to ensure an adaptation of industry best practices leveraging available debt to capture efficiencies.
<unk> unique client interactions and optimize our internal systems.
We remain focused on expanding our non interest income revenue streams and continuing to identify opportunities to build on the strength of this income as we have over the past five years.
While noninterest income growth has been strongly driven by our robust mortgage banking production. We have also implemented ongoing initiatives with the strategic focus on enhancing the customer experience through digital delivery and the development of advancing technology.
Four years mercantile is focused on investments and the evolution of banking and this change and the manner in which banks do business has been has only been accelerated and the current environment.
And this investment and new ways of banking has enabled the recent branch consolidations and.
Ensuring the efficient optimization of each over each of our relationship centers.
This allows our staff to fully engage clients. So we can meet their new banking needs, while more routine and repetitive transactions can be serviced at their convenience through our digital channels.
Mercantile its current footprint can be viewed on slide three of the deck.
All of our initiatives illustrate our resolute focus on our people, which continues to heighten our commitment to pursuing best practices and environmental social and governance with particular emphasis on the social component as we work to meet the needs of our shareholders customers and communities.
And the first quarter, we and we approved a supplier diversity program and diversity equity and equity and inclusion policies.
And our entire D E and team has been continuously providing access to enrich learning and growth opportunities or the mercantile staff.
There are a wide variety of methods.
These include live virtual speaking engagements videos books articles group discussions training and creating and safe spaces for employees to ask questions and engage in conversations.
All of our supervisors have been provided with best practice overviews resources and other tools to engage their teens and D E and I work.
And are strongly encouraged to collaborate with other supervisors to share ideas across the organization.
The bank's diversity Council and Brian comprised of a wide cross section of employees and departments is also actively working to implement additional supportive dei strategies and constantly developing new ideas.
And we remain committed to providing enhanced knowledge and growth opportunities for all of our team members.
Sure that diversity equity inclusion and not reactive measures and a natural part of our workspace culture, where everyone is equipped to be a leader and their specific roles.
And as I close my comments I wanted to reemphasize, our optimism for the year ahead across all of our markets and business lines as our team has proven their their leadership capabilities well beyond traditional banking.
Remain focused on building on these foundational efforts throughout our company capitalize on sustained strategies, our future success of all of our customers employees communities and shareholders.
Those are my prepared remarks, I'll now turn the call over to Ray.
Thanks, Bob our.
Our total loan portfolio increased $171 million during the quarter comprised of $89 million and growth and P. P. P loans and $84 million and growth of core commercial loan categories, and $49 million of which related to C&I categories.
Core commercial loan growth is 14% on an annualized basis.
In general our C&I loan funding net of P. P. P activity remained similar to pre pandemic levels as we continue to add targeted new commercial relationships around our P. P. P activity and also serve existing relationships.
Additionally, our construction pipeline remains solid with $135 million of commitments and commercial construction and development loans, which we expect to fund over the next 12 to 18 months.
Accruing commercial past due loans at quarter and our nominal in dollar terms totaling $1 $2 million representing four borrowers.
Our overall overall pass through information can be found on slides 17 and 18.
Asset quality remains strong as nonperforming loans totaled just $2 $8 million or 0.8, I'm sorry, 0.08% of total loans at March 31, 2021. This breakdown can be found and the financial portion of our presentation on slides 25, and 2000 and so.
Thanks.
The following recaps, our provisioning activities during the COVID-19 impacted time periods and.
And the second quarter of 2020 provision expense of $7 $6 million was generated entirely through increases to environmental factors and the.
The third quarter of 2020, you provision expense of $3 $2 million was driven by risk rating adjustments to a 159 specific credits eight of which moved to the watch list.
Fourth quarter 2020 provision expense of $2 $5 million was driven by a $3 $9 million increase and qualitative and environmental factors our loan loss provision expense.
For the current quarter totaled $300000, primarily driven by loan growth.
Actions room, and the allowance for losses to total loans to 133% net of PPP loans up 55% from 86 basis points at March 31, and 2020.
Payment deferrals at the peak of the program in mid July impacted 738, borrowers and represented $719 million and exposure.
Presently as of March 31 extension, there and place beyond that date for 12 borrowers representing $2 $6 million of exposure as seen on slide 11.
The current modest 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 with solid characteristics, reflecting strength similar to that of the pre crisis economy has seen.
And in slide 16.
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.
Hotels and lodging.
Assisted living and restaurants and entertainment.
None of these individual segments account for more than four 8% of commercial loans and the composition of these segments can be seen in our on slide 13.
We recorded noninterest income during the first quarter of $13 5 million.
Up six $9 million or 106% from the prior year first quarter.
As can be seen on slide 21. This improved level of noninterest income was largely driven.
By a 235% quarter over quarter increase and mortgage banking income, reflecting the success of our 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 increased percentage of loans sold.
For the first quarter of 2021 purchase mortgage loans originated were up 75% over the comparable quarter and the prior year, while refinance activity increased by 90% as can be seen and slide 24.
April applications and backlog suggests debt refinance opportunities will exist into the near future and purchase applications are at seasonally high levels.
Continuing to enhance mortgage banking income through increased market share, including expanding share and the purchase market remains a priority and we will continue to hire proven and 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.
And the Pitofsky, Michigan loan production office, which opened during the second quarter of 2021.
Noninterest income from payroll services decreased three 5% due to high levels of unemployment during the quarter relative to the prior year comparable quarter.
<unk> charges and accounts for the year decreased five 5% due primarily to larger balances offsetting charges.
And debit card income increased by approximately 23% on a quarter over quarter basis and <unk>.
Acuity within the accounts recovered from reduced activity during the pandemic and the base of activity grew as new relationships came to the bank and existing relationships where more fully developed.
Finally, we reported $653000 of swap income.
Collecting interest rate risk management products put into place for clients during the quarter.
That concludes my comments I will now turn the call over to Chuck.
Thanks, Ray and good morning to everybody and as noted on Slide 19. This morning, we announced net income of $14 $2 million or <unk> 87 per diluted share for the first quarter of 2021, compared with net income of $10 $7 million or <unk> 65 per diluted share for the first quarter of 2020.
Generally speaking increased mortgage banking income more than offset a lower level of net interest income and higher overhead costs during the quarter.
Turning to slide 'twenty interest income on loans decline and the first quarter of 2021 compared to the first three months of 2020, primarily due to the epilepsy rate cuts totaling 150 basis points during March of 2020.
Interest income on securities during the first quarter of 2020 benefited from accelerated discount accretion and.
Called U S government agency bonds totaling $1.8 million.
And total interest income declined $3 $1 million during the first quarter of 2021 compared to the first quarter of 2020, primarily reflecting a lower interest rate environment that could not be fully offset with growth in earning assets.
Interest expense declined in all categories. During the first quarter of 2021 compared to the first three months of 2020, reflecting the declining interest rate environment.
And total interest expense declined $2 $4 million during the first quarter of 2021 compared to the first quarter of 2020.
Net interest income decrease zero point $8 million during the first quarter of 2021 compared to the first three months of 2020.
The provision expense recorded during the first quarter of 2021 total zero point $3 million compared to zero point $7 million are and the first three months of last year.
And bind with net loan recoveries of zero point $4 million.
Loan loss reserve increased.
Zero point $7 million during the first quarter of this year.
We have elected to postpone the adoption of seasonal until January one 2022. However, we continue to run our seasonal model concurrently with our incurred loss model.
Based on preliminary results the reserve balance under the seasonal methodology is about $5 million lower than our reserve balance as of March 31, and.
And as determined using the incurred loss methodology.
The primary difference between the two reserve models and as of March 31 is with the economic forecast aspect of the calculation.
And your seasonal the employed economic forecasts have shown significant improvement over the past couple of quarters under our incurred model, we have not modified our economic qualitative factor rating as we believe it is premature to do so given the spike in Covid cases, and Michigan over the past several weeks and beyond going state.
Mandated restrictions.
Continuing on slide 22 overhead cost increased $2 $2 million during the first quarter of 2021 compared to the first three months of 2020, primarily reflecting higher salaries and benefit costs as well as zero point $5 million and onetime costs associated with two of our branch facilities.
Salary and benefit costs were up $1 $6 million during the first quarter of 2021 compared to the prior year first quarter, mainly reflecting increased mortgage banking related compensation costs and employee merit pay increases.
In addition, we accrued for our bonus programs during the first quarter of 2021, we did not accrue any monies from the bonus programs. During the first quarter of last year, given the onset of the Corona virus pandemic.
Continuing on slide 23.
Our net interest margin was 277% during the first quarter of 2020, one down 23 basis points from the fourth quarter of 'twenty, and 'twenty and down 86 basis points when compared to the first quarter of 2020.
The yield on earning assets decreased 29 basis points, while the cost of funds declined six basis points. During the first three months of 2021, when compared to the fourth quarter.
The yield on loans declined 31 basis points and large part, reflecting a lower level of PPP net fee income accretion, which had spiked during the fourth quarter due to forgiveness activity and.
On slide 12.
Net fee income accretion totaled $2 $8 million during the first three months of 2020, one compared to $5 $4 million during the fourth quarter of 2020.
The yield on loans during the first quarter of 2021 was equal to the yield on loans during the third quarter of 2020, the level of Pp net Inc. Net fee income accretion was similar during these two periods.
As of quarter and unrecognized PPP net fee income totaled $8 $2 million, a majority of which is related to PPP round number two fundings made during the first quarter.
Our net interest margin continues to be negatively impacted by a significant volume of excess on balance sheet liquidity depicted by low yielding deposits with the federal Reserve Bank of Chicago and a correspondent bank the.
And the excess funds, our product and increased local deposits, which are primarily a product and federal government stimulus programs as well as lower business and consumer investing and spending.
Overnight deposits average $587 million during the first quarter of 2021 up from the $560 million during the average during the fourth quarter of 2020 and substantially higher than our typical average balance of $50 million to $75 million.
The excess liquidity lowered our net interest margin during the fourth quarter or first quarter of 2021 by about 37 basis points.
We expect the level of overnight deposits stay elevated well into the foreseeable future.
The cost of funds has also been on the declining trend, primarily reflecting the falling interest rate environment, and we expect that trend to continue throughout 2021 as time deposits originated in the higher interest rate environments.
And prior periods mature.
As shown on slide 27.
We remain and a strong and well capitalized regulatory capital position the tier one leverage capital ratio was nine 7% and the total risk based capital ratio was 13, 5% as of March 31.
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 ratios as both components are assigned a zero percent risk weighted.
The total risk based capital ratio was $124 million above the minimum threshold to be categorized as well capitalized.
We repurchased about 118000 shares from three $5 million and a weighted average cost of $29 and 91 per share during the first quarter of 2021.
As of quarter, and we had $6 $3 million available.
And our repurchase plan.
On slide 28 and to conclude my prepared remarks, we have some comments on the 2021 and forecasts.
Due to the high degree of uncertainty that currently exists we will again not be providing earnings performance guidance. However, we are able to offer key considerations that should be factored into any earnings forecast and our company.
Clearly economic conditions asset quality, PPP forgiveness activity and mortgage banking operations are expected to have the most impact on our operating results for this year.
In closing we are pleased with our first quarter of 2021 operating results and financial condition as of quarter and 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 Chuck that concludes management's prepared comments and we will now open the call for the Q&A session.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time your question and that's been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question will come from Brendan Nosal with Piper Sandler. Please go ahead.
Hey, good morning, everybody how are you.
Hi, and Brendan how are you.
Thanks.
Just wanted to start off here on the excess liquidity that you folks mentioned and I. Appreciate your comments that it's probably going to stick around for quite some time.
I was wondering if you guys have considered using those excess funds to pay down some of the wholesale borrowings that you have on the sheet and.
To try and find a way to support the margin.
Yes, Brian.
Chuck.
I'll tackle that one and then.
Short answer is yes, we definitely have considered that and we can we continue to consider that.
The broker deposits about $30 million and we don't have the capacity to prepay them.
But they are scheduled to mature over the next 12 months.
So 12 15 months, so those will take care of themselves most of our wholesale funding is and federal home bank advances.
We have and the average rate is about 2.06, there's some advances and there that are well below 1%.
And were taken out earlier in 2020, and then there's some other advances that are over 3%, which were taken out and.
Higher rate environments and of course some in between.
It is important to remember that the reason why we got those.
<unk> advances to manage interest rate risk.
And while we don't match fund and our loan by loan basis, We certainly match fund on a portfolio by portfolio basis.
And it is rather common that we do five year fixed rate.
Balloon nodes, especially on commercial real estate loans and occasionally we will do some seven year stuff and.
And those advances were obtained when we needed the liquidity.
But also and reflection of our fixed rate lending operations.
So we did it to protect our margin.
And in the event of an increasing interest rate environment and it's important to note that a vast majority of those loans are still out there.
So the portfolio at least based on the original intent is still doing his job it.
It is match funding those longer term fixed rate loans.
And so if we do prepay the FHA advances and as again, it's something that we look at pretty regularly we do need to do that knowing that we are exposing potentially exposing at least part of our balance sheet too.
And to an increase in interest rate environment and of course.
The idea of and inflationary pressures is out there every day.
And regards to what's going on and our economy and whether there is inflation.
To be out there that will result in higher interest rates as we move forward. So that is something that we again, we are carefully considering doing lots of calculations lots of analysis.
And we'll just see where we go from here, but it is something on our radar.
Yes, that's fantastic Chuck. Thank you so much for those those thoughts that's helpful. And then one more from me and I'll step back.
It looks like outside of all the PPP noise loan growth was quite strong this quarter at which makes for two pretty healthy quarters in a row and wishes just not something that many community banks are seeing these days so.
And definitely <unk> strong trends there.
Help us understand kind of where the commercial growth is coming from what your commercial customer sentiment is today and how are you guys thinking about loan growth for the remainder of the year.
Yes. This is ray I'd be happy to tackle that one.
The funding that we see and the very near future that we can point to with some specificity.
As similar to what you pointed out and the last couple of quarters and.
Much of that comes from new relationships. This environment that we've all been through has really differentiated our approach as a bank.
And.
And that differentiation and their approach has led to more and more opportunities to pick up relationships that we had been calling into for a number of years and.
And so that has provided a nice bit of momentum.
And also.
The economy is fairly decent ear and west, Michigan and the trend toward.
The shortage of labor has led to greater investments in equipment than we've seen in the past. So that's been somewhat of a trend fueling our balance sheet and.
And of late we've seen increased usage and <unk>.
Your line of credit facilities, and that and a big major way, but and.
A subtle way that's been big enough to increase the overall trends and our balance sheet.
Got it that's very helpful. Thank you for taking my questions.
You bet.
Our next question will come from Damon Delmonte with K B W. Please go ahead.
Hey, good morning, guys hope everybody's doing well today.
First question just wanted to circle back on that and the margin Chuck. So the reported was $2 77, and I think you said there was 37 basis points of a drag from the liquidity what was the impact from PPP.
I don't have that and in basis points, but we did record about $2 $8 million.
And PPP fee income and of course, we have the 1% on top of that.
Our average balance was $433 million during the first quarter. So sorry, I can't give you a specific number but I can give you the components of that calculation.
That's fine and I could I can back into it from there that's fine okay.
Okay and then.
I guess just with regards to the outlook for loan growth are you seeing any benefit from the market disruption that may be going out and from the.
The Tcf deal that was announced with that with each bank.
Or is that not really started yet.
No that's definitely been and opportunity for us and.
And there is disruption from that announcement.
And are you seeing that and the way of new lending relationships or possibly hiring commercial bankers.
Both of those are opportunities.
The obtaining of relationships comes a little bit faster than the people, but there are definitely both opportunities.
Okay great.
And then I guess just on the fee income side.
And I think Ray your commentary was pretty positive for mortgage banking that things continue to to try.
And well pipelines are strong housing market remains healthy.
He had a much stronger quarter and the first quarter and we had we were expecting and it seems to be better than what.
And the broader.
And next May have been forecasting for the year, how has your outlook changed for the remainder of the year do you think you could.
Kind of outperform the broader mortgage index.
Yes, I think that is possible.
Think we're well positioned relative to both.
Arms of the market the refi and the purchase.
We've seen some shifting.
The purchase market is being more active as the rates have begun to tick up a little bit and.
We have put focus on that particular portion of the market the purchase market over a number of years and.
Took the refinancing activity as the rates offered it but the real work is to get a bigger and bigger share of the purchase market and given that we are focused on that for some period of time I think that's where we're distancing ourselves from those around us.
Got it okay.
All that I had I appreciate the color guys. Thanks.
Thanks, David.
Our next question will come from David Long with Raymond James. Please go ahead.
Good morning, everyone.
Alright.
Morning.
Looking at the backdrop.
Obviously, the economic outlook continues to improve can you can you talk a little bit about some of your risky areas, especially with the state of Michigan now going back to at least to some type of modified and shutdowns here.
Thinking specifically about your hotel portfolio and the restaurant portfolios and how they are performing here.
And this is Bob I'll start off and then hand, it off to the other guys for their commentary amplification.
While the caseload and Michigan has certainly has surged the.
And the state government and Michigan has not implemented new restrictive measures as they had done during a great portion of 2020, and that's a complicated star and Theres a lot going on there behind the scenes, but but I think this day.
And government is.
Content with the pace of vaccinations and looking to address the rising cases that way, while continuing to emphasize the restrictive measures that are still on the books and still being recommended.
<unk>.
Measures aren't mandates and I think because of it I think.
Many segments and the economy are doing very well the industries that you mentioned, the hospitality and entertainment and that's certainly.
And that certainly continues to be challenged and the state of Michigan.
But there are some signs of life there in terms of the activities that people are able to do within the current.
And.
Environment given the the.
The guidelines and the and the restrictions that continue to remain in place so.
And it's kind of a unusual situation and that while the cases are very high and I think we're getting national attention for.
For the the way that the cases have increased.
And that is certainly the case.
As you saw during a large part of the 20th of 2020, those cases had dropped quite substantially down to one of the strongest performances in the country and the dynamics of why the cases or increase and is open for debate.
I think overall the economy continues to do pretty darn well given all of those complicating factors and it is a pretty complicated.
Situations.
Got it okay and I appreciate that color. Thank you and then separately and looking at.
The first round and now the second round of the PPP.
Yeah, Thanks for giving us the amount of fees that are still left but as far as timing and forgiveness.
What are you expecting with the remaining Ron one forgiveness and then what about your expectations for timing and round two and how that plays out.
This is Chuck I'll take a first swing at that.
The forgiveness activity has been quite frustrating.
For us and myself trying to put numbers together.
For the borrowers as well.
And especially over the last four to six weeks the level of forgiveness.
Payments transactions, how are we want a terminal from the SBA have been incredibly slow.
There are many days I would say probably two days out of the week that we don't get any.
And the payments and the days that we do and we're getting like four or five.
So it's it's been painfully slow.
Not really sure what's going on.
There's lots of work and you know lots of guesses out there.
As to what's going on and certainly its a tremendous amount of volume that the SBA has too.
To go through.
We're kind of hoping that coming out of spring break it would speed up but based on what we've seen late last week and so far well leased yesterday.
Nothing has really changed there from an overall numbers perspective, the slowest part.
And the slowest segment.
Continues to be those over $2 million again, those are the ones, who get extra scrutiny I guess, if you want to call it that and Theres lots of additional questions and additional information that has to be provided.
We did 50 of those loans and only five so far have been forgiven. So we still have 45 out there a vast majority of those 45 have had completed applications for quite some time.
One of the guidelines that was from the original program was that within 90 days of receive any full application.
And the SBA was supposed to make a determination.
And my understanding is all banks have very quite a few loans that are willing and well in excess of the 90 days.
So with regards to round one is just kind of a drip drip drip.
And regards to getting those payments through.
A large percentage of the dollar amount again is wrapped up and those loans that are over $2 million.
And regards to PPP round number two we're still making loans under that program, but.
Maybe doing one to three loans a day.
And we were very active very busy at the end of January and I would say at least half of February.
And and making those loans, but it's been relatively slow sense and.
Like I said, it's very slow now.
And regards to forgiveness not a lot of.
Guidance out there in regards to that but assuming we go through the same process or a similar process that we deal with around one.
Perhaps during the third quarter later on and the third quarter and we.
Might start seeing some forgiveness activity come through and my expectation would be that the fourth quarter is probably going to be the.
And the busiest quarter and regards to forgiveness activity.
And around two loans.
Excellent I appreciate the color I know you don't have a lot of guidance, there and round two and and then lastly with the.
And the PPP program overall.
And how have you guys been able to leverage that to bring and prospects and have you been able to add new clients from the PPP bolt around one and now were thrown too.
Yes. This is ray we certainly have been able to leverage debt and that's.
And kind of boils down to.
Speed and responsiveness within the process.
Strong communication is.
<unk>.
Parameters of the program evolves shall we say and.
Those types of things demonstrate what our relationship with us looks like.
And there has been some frustration with.
Some of our competitors around those points.
And since we've had dialogues with these prospects for.
A lengthy period of time, a number of years. This has been a great platform to kind of prove.
What we say about how we do business is actually how we do business and.
That's been a nice contributor to the growth some of the growth that you've seen and our numbers over the past few quarters.
Excellent thanks for taking my questions.
Thanks, David.
Our next question will come from Bryce Rowe with hub Day group. Please go ahead.
Thanks, Good morning.
Just a few questions here.
One Chuck I wanted to ask kind of again around the day.
And the X plus the excess liquidity, we've seen you all filled up the bond portfolio methodically over the last several quarters and was.
Was curious if you thought that could continue as we move throughout 2021.
Yes that is good observation is something we have been doing and we continue to do so.
And then buying the same type of bonds and we always have we're just buying more of them.
We've kind of lead with U S government agency bonds generally callable bonds.
Usually have.
State and maturities of three to 10 years, and just building out a ladder.
As part of that portfolio, just not wanting to go too long.
But knowing that of course the longer you go a little bit better rate you get.
<unk> also been adding to the municipal bond portfolio.
Tax exempt as well as taxable we continue to stay within the state of Michigan and generally within our markets.
And there is usually enough product out there that we can.
Build the portfolio and help with the excess liquidity.
But also do our part in assisting our communities as well with their financing needs.
We tend to.
The same.
Same idea with the maturity as we ladder those out so.
And we have been buying some mortgage backs, primarily our CRA qualified.
Net debt, we can pick up from time to time.
It's nice to help our CRA efforts, but its also nice with the rate environment that theyre, not so pricey and.
Instead of pay and Youll 105 107.
And it had been over quite a few years the prices are down to 101 or so so that helps.
And the prepayment risks there.
I think what you have been seeing I think youll continue to see at least for the next couple of quarters.
Okay. That's helpful. Thanks Chuck.
And then kind of wanted to follow up on the on the mortgage question.
Obviously, you had good volume come and coming in here and certainly appreciate the focus on purchase versus refinance market.
Was curious if you could kind of.
Breakout.
The newer markets that you've added and how much how much they might account for some of the volume and then any appetite you might have to to further expand the mortgage offices, whether it would be.
And some of the Michigan markets or even outside of Michigan like like the Cincinnati effort.
Yeah.
Well.
Yes, we certainly will be on the lookout for more talent and.
And where that.
Thats available.
The markets are of interest book of more interest is getting the right people to add to the team we feel like we've been successful and the case of Cincinnati and the new group up and tasks.
That we did add people who fit in with the way, we do business and.
The Cincinnati office has provided very close to what we expected the task E offices, just lifting off but we expect to.
You have to add.
Maybe depending on the environment between 75 and $125 million over a year.
Coming up.
We're in discussions with the teams and a number of markets right now and very early but.
The interest is certainly there are team and the production side is a very good reputation. That's one of the hot points with producers that they arent able to get the volume that they produce through the system that they are and currently so.
That has been and attractive element and.
And as they talk to their colleagues who've moved over here.
Hear good things about our team so.
We expect to continue to add them as the opportunity arises that's extraordinarily difficult to quantify but it's a definite opportunity.
Okay, that's great.
And maybe maybe one or two more from me.
It's interesting to hear that the seasonal commentary relative to the incurred loss model.
And the obviously the discrepancy between.
Those two in terms of the reserve level.
So just curious how you how you might be able to.
I guess tweaked that dynamic or or manage the dynamic is there is there something that you've thought about too.
And it took to align those reserve levels up more and more appropriately more appropriately maybe with a special special COVID-19 bucket or something along those lines just trying to you're trying to understand how yet.
You think about that as you approach seasonal adoption.
Yeah. This is Chuck I'll take that one.
Up until.
December.
Our seasonal calculation and our incurred loss calculation was pretty similar.
What ended up whats happened.
Is that really started in September, but certainly with December and now what we see in March.
Economic forecasts are improving on the seat and which of course is very important and seasonal.
We also have and economic factor.
And so it's an important factor from a number of basis points, we put through it and are incurred and what we have not done on the incurred as we havent change and economic factor yet.
And to put it in a matter of perspective, and it varies a little bit by portfolio, but on average.
And we put 35 right now the way that we have the economic factor rated and which is very low is 35 basis points applies to almost every loan.
On average I think thats a good number to have so.
And when we feel comfortable and I think we're definitely and the right direction.
When we feel more comfortable with the economic situation, which of course is driven by Covid.
We will definitely start improving that rating, which will bring net 35 basis points down.
Over time, and we'll just have to analyze that at the end of each quarter, and and see where we're at and see where the levels and direction and magnitude and how our borrowers are doing and.
Put that into our calculations and our.
And our thought processes.
As I mentioned in my prepared remarks, it was just a little bit premature, especially cookie and what we've already talked about this morning.
Just what's going on in Michigan, with the cases and the surge and.
And all of that the other big part of our incurred calculation is a new factor. So we went to 10 factors and the second quarter of last year, we call. It the COVID-19 factor.
Which is just kind of there's this big unknown, what's going to happen with COVID-19, and obviously it's unprecedented.
At that point and time, we were directionless and quite.
Quite frankly and had didn't have a vaccine or anything like that.
That's a.
Definitely a one time type factor right now that's 20 basis points applied to all loans.
And we would expect over time as our.
And you know hopefully sooner than later Covid gets and a rearview mirror and ultimately over time, we will start dropping that the ratings on that which will improve the ratings on that which would drop the basis points along the way and then at some point.
We will drop that factor altogether.
So it's really those two factors that we haven't changed.
Since the second quarter.
So I think long answer to your question is I think over time, probably the next few quarters based on the current trends and expectations.
Is that as we get closer to the end of this year and the adoption of seasonal when we start modifying those two factors alone.
We would think that the incurred model and the CSO model will be closer just like they were before COVID-19 hit.
That's that's great great detail Chuck I appreciate that maybe one more from me for Bob Bob.
Just curious if there's any any appetite.
And for M&A I know you all haven't been Super Super Acquisitive.
And your history, but.
With with the I guess the environment seemingly heating up from an acquisition perspective, any any opportunities on the horizon and maybe speak to speak to mercantile is appetite.
Brian and I think I would respond to that similar to as we've responded and the past and that we're certainly open to M&A, we have an appetite for M&A.
<unk>.
The Big question for US is a culture of another organization and how that cultural lines up with the mercantile culture. It was touched on by the guys are within the framework of this call. It was related to the mortgage area and are going.
Going into new markets.
Hiring additional lenders as about the culture of the people and how those people fit into the way we do business.
Because that hasnt been it's been a very successful recipe for mercantile and.
And leads to the performance that you see quarter after quarter with solid performance and you're seeing good core loan growth now because the way, we do business and so really the M&A question for us keeps going back to the culture.
<unk>.
Potential.
M&A partners debt.
And our culture is a good match for ours, and then I believe something we've certainly been interested in and if the cultures did not match something we will be less interested in.
Alright, that's great I appreciate I appreciate all the answers and I'll have a good day.
Thanks, Brian.
Again, if you have a question. Please press Star then one our next question will come from John <unk> with Janney. Please go ahead.
Good morning, guys.
And then.
Chuck just a question on expenses you highlighted the 500000, I guess and branch write downs. So excluding the 500000 and this sort of the $24 $6 million is that a pretty good area sort of run rate going forward yeah.
Yes, I think the big caveat would be of course, the mortgage banking.
With the vast majority of our lenders are commission based so we.
And we need to correlate that expense with the volume that's out there.
But aside from that adjustment matching that up with our with the mortgage income excluding those two branch write downs, yes, I think that's a good run rate.
Thank you.
Welcome.
This concludes our question and answer session I would like to turn the conference back over to Bob Kaminski for any closing remarks.
Thank you, Matt and thank you all for your continued interest and our company and hope that you and your families stay healthy and safe and we look forward to speaking with you again at the conclusion of the second quarter. This conference call has now concluded. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.