Q1 2022 Mercantile Bank Corp Earnings Call
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Good morning, and welcome to the Mercantile Bank Corporation first quarter 2021 earnings results Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by June .
After todays presentation, there will be an opportunity to ask questions.
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Please note this event is being recorded.
I would now like to turn the conference over to Kate Croft Lambert Investor Relations. Please go ahead.
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 2022. Joining me today are members of mercantile as management team, including Bob Kaminski, President and Chief Executive Officer, Chuck Christmas Executive Vice President and Chief Financial Officer.
Chief operating officer, and President of the Bank, we will begin the call with management's prepared remarks and presentation, Turkey. The quarters results and then open the call up to questions.
Fortunately the call over to management responsibility to inform you that this call may involve certain forward looking statements.
As projections of revenue earnings and capital structure as well as statements on the plans and acceptance of the company's business.
The company's actual results could differ materially from any forward looking statements.
Due to the factors described in 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 first quarter 2022 press release and presentation deck issued by mercantile today, you can access it at the company's web site Www Dot must think dot com at this time I would like to turn the call over to Mark and Paul Coghlan, Chief Executive Officer, Bob Kaminski.
Thank you Kate and good morning, everyone on the call. This morning, we will provide you with detailed information on the company's performance in the first quarter as well as updates on the current operating environment. We were pleased to begin the year with a solid first quarter performance highlighted by an operating profit prudent expense management.
Continued growth in core commercial loans contributed to a higher net interest income and pristine asset quality.
The dedicated efforts of our team in tandem with strong with a strong foundation. We have built are the keys to our continued success.
In the first quarter.
We reported net income of $11 $5 million or <unk> 73 per share total assets were $5. One 8 billion with loans growing two to 3.5 dollars 6 billion at March 31st.
Our performance was once they once again headlined by growth in commercial in the commercial loan portfolio.
New loan opportunities continue to be cultivated and all of our markets, including our requests from borrowers with smaller credit need which is a characteristic characteristic of our rural markets. In addition to a larger more complex low needs, which are typical in our metro markets.
These opportunities are possible because of the superb work up our lending staff and gain familiarity with the business as a prospective clients understanding their opportunities challenges and needs and then adding value to the relationship is as strong as a trusted advisor.
Ray will provide more details on the loan portfolio metrics in his comments.
While our mortgage banking income is down year over year from 2021, well low interest rates allowed for significant refinance volume our keen focus on purchase business and the addition of a commission based real estate lenders are providing benefit to us during this time of rising interest rates.
Mortgage production has migrated to loans retained in the portfolio and construction loans as many customers are opting to build new houses since the availability of existing homes has limited.
Despite the reduction in mortgage banking income we are confident in our ability to continue to be a top performer in this area during 2022.
We made a number of strategic lender hires throughout our footprint during 2021 together with new offices in Pitofsky, serving a very attractive Lake, Michigan second home region as well as the economically vibrant Cincinnati market. We believe our team is well positioned to be the bank of choice for new and existing customers.
Our team was successful in generating Gulf growth and several free fee income categories. During the first quarter compared to the same period in 2021.
Including service charges credit and debit cards interest rate swaps and payroll services.
This growth is the result of ongoing strategic initiatives to understand our customers' needs and ensure that customers are aware of the full suite of mercantile products that can help that can help to fulfill those needs.
Ray and Chuck will provide more specific details following my comments.
We continue to make appropriate investments to recruit and retain high performing talent that has been and will remain the key to growing the number and depth of mercantile customer relationships.
This includes our exceptional branch and customer service staff Accordingly in February we ever made it implemented a dollar per hour wage increase for all Nonexempt employees at the same time office optimization, plus the shift to a remote work options for certain employees should allow us to reduce our <unk>.
<unk> costs, which will help offset the increases to our salaries and benefits. We aim to strike the right balance between investing smartly in our team and technology, while managing expenses to enhance our profitability.
Regarding the Michigan, Michigan economy, while the overall state wide unemployment rate is 4.4% down from six 3% a year ago in the Metro markets, which contains the most significant concentrations of assets in mercantile and business opportunities. The unemployment rate is below four person.
Sent.
With this low unemployment rate many companies face challenges in attracting new employees and the construction in the construction industry. For example, many firms are having a difficult time identifying skilled workers and this is slowing productivity.
With a tight supply of housing inventory, many new homeowners and consumers desire to upgrade their dwellings are turning to new construction.
With current housing market conditions and supply chain challenges construction productivity creates yet another issue capital expenditures continue to trend upward as companies look to implement technological upgrades to their equipment and plant expansions.
Our clients have adroitly managed through the challenges over the past two years since the onset of the COVID-19 pandemic. We expect they will continue to do so in 2022.
But we remain closely engaged with them of course to assess the effects of rising cost included including anticipated increased borrowing costs.
Finally, I want to compliment the mercantile team for their spectacular performance to start 2022.
Their tireless work to ensure that mercantile is our relationship based approach, which is the hallmark and the foundation of our culture is reflected in our daily engagement with our customers and potential customers.
Those are my prepared remarks, I'll now turn the call over to Ray.
Thanks, Bob Today, My comments will center around three topics in evidence in our quarterly results for 2022.
Strong commercial loan growth strategic diversity of sustainable noninterest income and pristine asset quality.
For the first quarter, we are reporting core commercial loan growth of $82 million or 11% annualized. This growth was achieved despite payoffs related to asset or business sales of $46 million. It has been possible due to the efforts of our commercial team and their focus on relationship building in the business community Bank value.
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Our backlog remains consistent with prior periods as we fund this impressive level of growth availability under construction commitments that we expect to fund over the next 12 to 18 months totaled $184 million.
Second liens strategic diversity and sustainable noninterest income for.
For the first quarter, we're reporting noninterest income of $9 $3 million compared to $13 $5 million in the comparable period last year, a reduction of $4 $2 million mortgage banking income decreased by $5 $5 million to $3 $3 million. This reduction occurred due to a <unk>.
60% decrease in refinancing originations, which masked a 24% increase in purchase originations, indicating that our mortgage production team continues to successfully pivot to the purchase market.
Our other diverse noninterest income categories reported total increases of $1.3 million led by 107% increase in interest rate swap income a 23% increase in service charges on accounts, a 15% increase in payroll services and a 12% increase in credit and debit card.
Income.
Each of these income streams are sustainable as the interest rate environment fluctuates.
Finally, the bank continues to experience pristine asset quality with zero Ori and three basis points of nonperforming assets at the end of the first quarter of 2022 compared to zero point $4 million of Ori and seven basis points with nonperforming assets at the end of the comparable prior year period.
This level of asset quality supports an allowance to loans ratio.
Of 0.99% as of March 31, 2022, and a provision for credit loss expense of zero point $1 million during the first quarter compared to zero point $3 million in the comparable period last year that concludes my comments I will now turn the call over to Chuck.
Thanks, Ray and good morning to everybody.
As noted on slide 24. This morning, we announced net income of $11.5 million or 73 cents per diluted share for the first quarter of 2022 compared to $14 $2 million or <unk> 87 per diluted share for the respective prior year period.
Ongoing strong core commercial loan growth continued strength in asset quality metrics and increases in several key fee income revenue streams in large part mitigated a significant decline in mortgage banking revenue as industry wide originations come off of 2020, and 2021 record levels driven by low.
Mortgage loan rates and resulted in refinance activity.
Turning to slide 25 interest income on loans during the first quarter of 2022 increased zero point $3 million from the year ago first quarter.
Growth in core commercial loans and residential mortgage loans offset lower P. P. P net loan fee income accretion.
Interest income on securities in the first quarter of 2022 increased zero point $6 million from the first quarter of 2021.
In large part reflecting growth in the securities portfolio over the past 12 months to meet internal policy guidelines and deploy a portion of the excess liquid funds position.
Interest income on other earning assets a vast majority of which is comprised of funds on deposit with the federal Reserve Bank of Chicago increased zero point $2 million during the first quarter of 2022 compared to the year ago first quarter.
Primarily reflect an increase balances.
In total interest income for the most recent quarter increased $1.1 billion from the first quarter of 2021.
Interest expense on deposits during the first quarter of 2022 decreased zero point $9 million from the year ago first quarter as lower deposit rates more than offset increased interest bearing deposit balances.
Interest expense on other borrowed money in the first quarter of 2022 increased zero point $8 million from the first quarter of 2021 in large part, reflecting the issuance of $75 million in subordinated notes in December of 2021, and a $15 million follow on issuance in mid January .
In total interest expense for the most recent quarter declines zero point $3 million from the first quarter of 2021.
Net interest income increased $1.4 million during the first quarter of 2022 compared to the first quarter of 2021.
We recorded a credit loss provision expense of zero point $1 million for the first quarter of 2022 compared to the provision expense of zero point $3 million during the prior year first quarter.
Net loan recoveries and continued strong loan quality metrics and large part mitigated additional reserves associated with the loan growth.
We adopted ceased all effective January one 2022 with a one time reduction of zero point $4 million to the reserve balance recorded on that date.
Continuing on slide 27 overhead costs during the first quarter of 2022 increased zero point $6 million from the year ago first quarter.
Salary and benefit costs were up zero point $4 million in large part, reflecting merit pay increases market adjustments and promotions over the past 12 months.
Continuing on slide 28, our net interest margin was two 5%, 2.57% during the first quarter of 2022 down 17 basis points from the fourth quarter of 2021 and average during all of 2021.
Compared to the year ago first quarter, the yield on earning assets decreased 27 basis points, primarily reflecting a decline in loan yields associated with lower P. P. P net fee accretion.
As noted on slide 23.
Net fee income accretion totaled zero point $8 million during the first quarter of 2022 compared to $2 $8 million during the first quarter of 2021.
A vast majority of the remaining unrecognized net P. P. P. C income of zero point $2 million is expected to be recorded during the second quarter.
The cost of funds declined seven basis points for the most recent quarter compared to the year ago quarter. The cost of deposits decreased 12 basis points, which more than offset an increase in the cost of borrowed money associated with the issuance of the subordinated notes.
Our net interest margin continues to be negatively impacted by a significant volume of excess on balance sheet liquidity, you've picked up by low yielding deposits with the federal reserve bank of Chicago.
Excess funds are a product of increased local deposits, which are primarily a product with federal government stimulus program.
Programs as well as lower business to consumer investing and spending.
Overnight deposits averaged $784 million during the first quarter of 2022 compared to $592 million during the first quarter of 2021 and $671 million during all of 2021.
Actually higher than our typical average balance up around $75 million.
The excess liquidity lowered our net interest margin during the first quarter of 2022, and all of 2021 by about 40 to 45 basis points.
Well, we expect the level of excess overnight deposits to decline in light of continued loan growth in wholesale fund maturities, we expect the level of overnight deposits to stay elevated well into the foreseeable future.
Given the asset sensitive nature of our balance sheet any further increases in short term interest rates would have a positive impact on our net interest margin and net interest income.
We remain in a strong well capitalized regulatory capital position the tier one leverage capital ratio continues to be impacted by excess liquidity. Although there is no similar impact on the risk based capital ratios as deposits maintained at the Federal Reserve Bank of Chicago are assigned a zero percent risk weighting.
Both our tier one leverage capital ratio and the total risk based capital ratio have also been impacted by strong core commercial loan growth over the past several quarters.
Our total risk based capital ratio and all of our banks regulatory capital ratios were augmented this past December and January with an aggregate 90 million dollar issuance of subordinated notes, which are mass majority of the funds were downstream to the bank as a capital injection.
As of March 31st are our total risk based capital ratio was 14, 1% compared to 12, 5% as of September 32021.
Our bank's total risk based capital ratio was $157 million above the minimum threshold to be categorized as well capitalized at the end of the first quarter.
We did not repurchase shares during the first quarter of 2022, given the recent stock price and prospects for additional solid loan growth, we do not plan to purchase additional shares at least in the near term, we have $6 $8 million available in our current repurchase plan.
On slide 32, we shared our latest assumptions on the interest rate environment and key performance metrics for the remainder of 2022 with the caveat that market conditions remain volatile, making forecasting difficult at best.
As you can see we are currently expecting fee income overhead cost in our tax rates remain relatively consistent for the remainder of the year.
We are projecting the F O M C. The increase the federal funds rate at each of the next four meetings, including a 50 basis point increase in early may.
Based on this rate projection along with the reduction of excess liquidity, we are forecasting our net interest margin to improve in each of the next three quarters.
For information regarding our floating rate loans and repricing opportunities. Please refer to slide 18.
Yeah.
In closing we are pleased with our operating results and financial condition. As we begin 2022 campaign and believe we remain well positioned to continue to successfully navigate through the myriad of challenges faced by all of US. Those are my prepared remarks, I'll now turn the call back over to Bob.
Thank you Chuck that concludes that concludes management's prepared comments and we'll now open the call to the question and answer period.
Thank you we will now.
Begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Yeah.
And the first question will come from Brendan Nosal with Piper Sandler. Please go ahead.
Hey, good morning folks how are you doing.
We've got a better tomorrow.
And maybe just to start off on kind of the NII.
Outlook you provided on slide 32, I do get that part of the NIM expansion that you're you're forecasting is one a function of rates moving higher and to a function of some liquidity rolling off the balance sheet I'm sure that I can do the math myself, but just kind of curious how much of that margin improvement do you think is there.
It really a function of rates moving higher.
I think you know most of the expected increase is from the rates, but we are expecting a reduction in some of that excess liquidity, although as I mentioned, we still think it's going to be relatively elevated even by the end of this year I think if you look on page 32, with the average earning assets.
We expect loan growth to be somewhat similar for the remainder of this year as to what it was in the first quarter.
But you can see that average earning assets are trending downward at least for the next couple of quarters before it flattens out and of course, what that is is really a net of the loan growth.
Less the expected run off of some of our excess liquidity.
Yes that does.
Okay. Good.
One more for me just on the expense outlook. Some costs. Obviously, so you know quite a bit from the first quarter as top accruals reset which was certainly nice to see so I guess, just you know going forward in your outlook you can provide for expenses is it safe to assume that that includes accruals for you know what what is appearing to be a good.
NII outlook given rate increases.
Yes, Yep that takes into account what we think the rates are gonna do you know for the rest of this year and and the associated impact on our overhead costs for the remainder of the year.
Alright wonderful thank you for taking the questions.
Thank you.
And the next question will come from Daniel Tamayo with Raymond James. Please go ahead.
Good morning, guys.
And maybe just a.
Maybe just starting on the on the loan growth. You know you just talked about that are you know that that guidance kind of remaining similar to what we saw in the first quarter, which is great first quarter had a little more one to four family growth than I was expecting can you just talk about what what the type of of mix of growth here.
And going forward and if if there was anything unusual in the first quarter.
Yeah, I think in regards to the residential mortgage area. We continue to kind of go along with what we had structured for the last several years and that is to sell a vast majority of our fixed rate loans, but then the book or arms, which are primarily 5171 arms, we are looking into potentially.
Some investors are for the arm products as we go forward as we have seen the arm product become a little more popular with our client base quite frankly, we'd like to see a little bit less on balance sheet growth.
With our residential mortgage loan portfolio, but clearly we want to make sure that our mortgage operation stays very strong and that we're providing the products that are that our customers are asking for so it's kind of it's kind of more of a balance there.
But definitely the trend is there for additional growth and we're looking for ways to maybe mitigate that.
To supplement that point with the fact that construction mortgages.
Have become more popular roughly twice as high as the previous quarter and that as the impact of staying on the balance sheet during the construction period and reducing the amount of loans that are sold while we wait for those to complete construction.
Yeah.
Okay, Great and then switching gears here to to the fee income and and you know I. Appreciate you guys, putting a guidance on on that last slide that's very helpful. Within the fee income.
You know, obviously mortgage banking took a big hit in the quarter.
And you talked about the refi versus purchase dynamics, a little bit was there.
Can you give what the gain on sale rate was in the quarter and what the change was from you know from last year, the fourth quarter and if there was any MSR change in that number as well.
I think on the gain rate, we're going to probably have to get back to you Dan. We're looking at each other I don't think either of us have that.
As far as the M. S ours, we haven't seen a huge impact we do lower of cost or market. So theres no fair value adjusting going on there.
You know, we certainly continue to see some acceleration.
From some refinance activity clearly, we see a decline in refinance activity.
So accelerated amortization of mortgage servicing rights is slowing down.
And we would expect that to continue to slow down which of course would would be a tailwind for mortgage banking income as we go forward.
But clearly the production and especially the volume of sold.
Versus portfolio is going to be a bigger player on that number.
And then just kind of bigger picture of the you know the the number came in the run rate. If you will I guess came way down in the quarter.
You know you've talked about the focus on growing.
The purchase side you know if you.
Is this the new run rate that youre still expecting that that would come down as as refi volumes decline from that $3 3 million number and.
How are you thinking about where where you might end up in a normalized environment in terms of volumes at least.
I'll give you a general answer and I'll, let Chuck followed up with the specifics, but it's you know.
Seasonally here in Michigan.
We do expect a pickup in activity.
As we move from the first quarter into the second and the second quarter and the third are.
Seasonally strong for us here and the lovely state of Michigan and its weather driven.
School, driven like it is everywhere else so we would.
<unk> to see some recovery there.
From a seasonal pattern, that's an evidence every year.
I think you also mentioned that another factor into the mix as the the limited supply of homes that are available for sale and as I mentioned in my comments Danny of many customers who would just as soon buy an existing home are frustrated by the lack of availability so they're opting for construct.
And process, which were some of the challenges that we've outlined are it takes a little bit longer to so as rate hit on that number a week, we've seen a significant increase in our construction commitments.
Here in the first quarter and I think as long as the current how housing inventory remains low I think you'll see customers exploring that as a possibility because they they they deserved a new home and they're just nothing available from an existing home standpoint, so they're looking at all options, but a lot of dynamics in the market right now affecting.
Consumers decisions.
I think that if I. This is Chuck again, if I could add to that is when you look at our fee income performance for the first quarter.
Apart from the mortgage banking, we think that the trends that you saw in the first quarter will continue for the rest of the year and and as Ray mentioned, we had solid growth in some of our more ongoing and core fee income, especially on the Treasury management side of things.
The big wildcard as we're talking here in trying to answer your questions as best we can as mortgage banking and there's just so many moving parts.
Two is that you know it becomes somewhat difficult to try to narrow that down.
We're very very pleased with our mortgage operation, you'll clearly us and the industry certainly enjoyed very very strong refinance activity over the last calendar two calendar years.
Other attributes as well as included you know pretty high gain rates are in the marketplace, but with the but with the increase in mortgage rates. The refi area is drying up pretty significantly.
And reliance on purchase it was going to become a bigger and bigger issue and all along as we go out and hire additional commercial mortgage lenders are we make sure that they have the ability to be high performers and kind of a purchase only market that we seem to be entering into so.
Clearly, we're not going to make and I think the I think I think I can speak for the industry, we're not going to make the lofty numbers that we had the last couple of years, but I think as Ray mentioned, we saw really solid growth in the purchase volume that we've gotten and think we're doing a good job and our lenders are doing a really good job of being out on the streets and getting a higher volume than I would.
Say that we believe that we've increased our market penetration.
And is just in a different in a different market.
And one other tidbit I'd throw on there Daniel is that Oh.
All the numbers that we've referenced so far have related to closed volume. If you move a step further and look at the applications are.
They show a continuation of that trend in the applications that we have for purchases.
And our construction or higher by a similar percentage as the clothes volumes. So there are like.
Like 25% over what they were last year at this time.
And similarly, the apps for refinance our or down in that 60% range. So.
If you move from what's closed to what we anticipate closing based on applications and process, yes, the trend will continue.
I think looking at our mortgage production for the first quarter those numbers are pretty much on track with what we were expecting for the first quarter. The main difference is the percentage of loans that were selling the mix of the type of loans that we're generating leaning towards construction. So I think in the end it will all wash out and and end up as we.
Projected just there are variables variables along the way that are certainly affecting our west fall into that mortgage production income mortgage banking income in any one quarter.
That's awesome.
Okay.
Okay.
Yeah.
Loan growth.
That's all.
Youre welcome.
Thank you and the next question will be from Damon Delmonte with K B W. Please go ahead.
Hey, good morning, guys How's everybody doing today.
David how are you doing.
Great. Thanks.
So first question just wanted to talk a little bit about loan growth.
You know you guys sound pretty optimistic on the commercial side of things you know do you think that kind of keeping the commercial growth rate at that.
You know high single low double digit range is doable for the remainder of the year do you think it kind of comes back to the more of the the.
The mid to upper single digit range.
I would say that based on all the information we have right now we'd expect to continue along the pace that we demonstrated in the first quarter.
As we look at our backlogs opportunities in all the surrounding information it appears that the immediate future looks a lot like the past.
Yeah, I would add.
Knowing that we have and of course, we had some in the first quarter is the pay offs.
And so when we look at our pipelines and all the trends, we definitely see a lot of momentum there and believe we'll hit on that but it's just a matter of the payoffs that come in as borrowers sell their projects or the underlying assets. That's that's the unknown I'm trying to factor in our commercial loan growth.
Got it and is there any particular region of your footprint in our area of your footprint that is showing better opportunity than others.
I, particularly no Grand Rapids is always a strong market for us we're very well represented here by our commercial loan team and you know a long history of participating in that market, but.
They're all fairly robust.
Yeah.
Got it okay alright.
Alright, that's great and then on the on the credit side.
Finally adopted T. So either one one in 'twenty 'twenty. Two you know you had a modest adjustment to your reserve level. Chuck can you help us to think a little bit about you know what the.
Outlook would be for provision expense, especially with the strong outlook for loan growth like should we start to see a more normalized level of provisioning.
[laughter].
Normal.
Can you talk about people this morning.
But oh.
You know you know clearly you know the loan growth necessitates additional reserves and while we don't like making provisions we certainly want to make sure. We keep our reserve adequate which is reflective of that loan growth and of course, we all we were very proud of our very very strong credit metrics, which if you look at just those it makes it difficult to increase reserve of any.
Notable size, which means that your you know your heavily relying on your qualitative measurements and those factors.
So really I think while the growth is certainly going to be there or we think it's going to be there and that's going to result in some reserve.
Increases like it did the first quarter, it's kind of more of a it to answer your question in a very long winded way of it's more about what happens with those qualitative factors.
You know the big one of course, which is pretty much out of our control is the economic forecast is we use a third party and look the market.
For that.
You know when you look at expected GDP growth unemployment rates those types of things over the next couple of years.
Feel pretty strong and pretty frothy, which doesn't add a lot to your reserve calculation as a matter of fact as of the end of the year and also as the end of March is actually a small negative to our reserve calculation on the economic factor. So yeah, we would expect that probably as we move along that you know quarter over quarter, maybe the.
The economic forecast isn't as strong and maybe we will see the need to add to our reserves.
As we move along I would say that's just not mercantile I would say that you know that impacts any bank that's adopted Cecil but I would also say we've got other factors in here, we have quite a bit of money.
In our reserve associated with Covid not.
Not just the disease itself, but you know all the impacts that it has supply chains and all those things that we know about.
You know, there's quite a bit of money in the reserve for that factor you know hopefully over time, we can start peeling some of that away.
Definitely look forward to that and then of course, we'll just keep an eye on all of the other normal regulatory factors that we have so I can't give you a solid answer I think that right now with what we saw in the first quarter seems to be you know what I would expect and then at least in the next couple of quarters, but that makes the assumption that there's no significant change in economic forecasting.
I will add that just pure commercial loan growth and of itself does not contribute a whole lot to the reserves under seasonal because of the duration of those commercial loans is on the short side compared to longer term residential mortgage loans. So just by growing the commercial portfolio absent the other factors that Chuck talked.
With qualitative and asset quality the growth of south does not require the additional of a whole lot of reserves as much as as much as you might think based on the incurred loss model, which we just came off of yeah. It's it's you know and that's one of the reasons why we delayed so as long as we could because we know it to be a duration based model where obviously.
We're a commercial bank with a duration of barely over two years and so when you look at it when we book a dollar of mortgage loans and a dollar of commercial loans. The mortgage long. It takes twice as much reserve is what the commercial loan does we don't agree with that that's the way that the framework works. So we have to we have to deal with that.
But then therefore you have a lot more reliance on environmental factors on the commercial side to support some higher reserve dollars.
Got it okay, that's great color and very helpful. And then just one final question on expenses I apologize. If this was said either in response to a question or in your prepared remarks, but you know the guidance is obviously a step up from where we were this quarter did you say that sat or would you say that salary and benefits and like data processing of the two.
Main drivers of the step up going forward versus this past quarter.
Yeah. That's correct I think you know I think Bob mentioned in his opening remarks, we did a a pay raise for all of our hourly people.
Towards the end of the first quarter. So there's the ongoing costs associated with that but so yeah as always when you look at the makeup of our overhead is salaries and benefits and as data processing costs that are the big numbers and changes and those are going to be the primary drivers of any changes.
In our in our overhead costs.
Yeah. Okay. That's all that I had thank you very much guys I appreciate it.
Right.
And the next question will be from Bryce Rowe from Humpty Group. Please go ahead.
Thanks, Good morning, guys, how are Ya man alright.
Wanted to I appreciate all the kind of the detail in the.
Discussion around round Cecil I understand it's a it's it's a moving moving target so to sneak them in.
One question on the margin and the.
The margin outlook that was provided there in the in the deck.
What what level of deposit beta are you are you kind of assuming with these with these rate hikes and are you thinking about you know each subsequent re Cai rake hike any any differently from a deposit beta perspective.
Yeah, Brian that's a great question because of all the things that we talked about mortgage banking some others at difficult to forecast. The deposits. There are just there you know you obviously, all the banks, including mercantile has seen significant deposit growth over the last couple of years. We don't think it's all going to stay we think a fair amount of it is going to stay but.
When the money starts actually let you know when the balances start leaving there started to be invested starting to be spent or whatnot that of course has a play into the margin calculation in excess funding and and all that type of thing you know so we have to have some expectations for that and I would say so far we've seen very little in the way of deposit withdrawals as a matter of fact.
We generally have we have some seasonality here at this bank, where we generally lose about $100 million and primarily checking account balances in January as our customers pay bonuses and taxes and stuff like that that did happen this year its seasonal for us.
But if you exclude the one withdraw from the large depositor that made.
Largest part of the end of last year, we actually saw net deposit growth here in the first quarter. So in a quarter that was in that we generally see a reduction in deposits.
We actually saw more growth. So we loved deposits, we know at some point in time down the road, we're gonna want more deposits, but we clearly have many now but what we don't see there's a lot of money changing banks you know the rates are still quite low.
And theres really not much of an incentive from a rate perspective for people to start moving money from bank to bank Theres, just not a lot of competition out there for deposits given a vast majority of the banks out there have plenty of excess deposits on hand, I bring that up because that certainly impacts deposit rates.
As we know you know deposit rates are impacted primarily by two things. One is the overall interest rate environment, which obviously is increasing and additional increases are expected, but it also the demand for the deposits has a big play as well and so what we have seen at least so far and we only have one increase increased so far of course.
Is that deposit rates in our markets change very little at least after the first fed increase you know rates are you know I'm were surmise in here, but rates are very very low and I think a lot of depositors have are somewhat indifferent.
Because of those low rates. However, we think that is going to change as it's in the it's in the market. It's in the news that the fed is getting more aggressive with rates, obviously folks see what's going on with mortgage rates they'll probably become more attentive to whats being paid on deposits and perhaps that will put some pressure on us having as a market as an industry.
They have to have to raise deposit rates as we move forward.
But to the degree that theyre going to that Theyre going to move going forward is kind of really anybody's guess.
In my in the.
On the assumptions that I provided in our forecasts ideas and thoughts that I provided a we kind of use more of our historical betas.
Which are probably more aggressive you know clearly we wanted to be somewhat conservative and putting out or expectations.
So they're relatively aggressive because we're using historical numbers.
I use those consistently throughout the rest of the year, but I think it's probably more likely that the betas will be relatively low and slow at the beginning and we'll probably speed up.
As we move on and we get more increases from the fed. So that's kind of our thoughts is that will probably eventually come out at an average of betas.
But and so we budgeted or forecasted at up average level, but it will probably be a little less at the beginning and a little more beta at the end.
That's perfect. Thanks Chuck.
Welcome.
Once again, if you have a question. Please press Star then one.
The next question will be from John <unk> from Janney. Please go ahead.
Good morning, everybody I'm shocked.
Chuck a question for you on the Securities portfolio, just given your outlook for average, earning assets should we sort of assume securities are flat to down going forward given the outlook for loan growth.
Yeah, I think I have a little bit of an increase in that portfolio, Jon but I don't think it's it's nothing material. So.
So what you see in the average earning assets as the security staying relatively stable the growth in loans as we've talked about and then the net is the reduction in excess funding.
Okay. Okay.
One more question in.
Hopefully you didn't already answer to this I'm.
Just didn't in the prepared remarks, I think you talked about the payoffs in the quarter do you said a third of the payoffs said, we're experiencing some financial difficulties could you maybe just give some more details on those difficulties.
They were performance difficulties are largely related to the industry. There we're in relative to the pandemic environment.
And I believe one was hospitality one was an entertainment venue, obviously impacted by the environment and so their performance during that particular time was depressed.
Yes.
Okay and Ray do you see more exposure. There are you know as it relates to those industries and stuff that would give you pause.
Not at this point, we feel pretty good about our remaining portfolio. Our watch list is at a.
The low point historically.
And.
Most of those types.
Types of credits have performed quite well avoid.
Okay fair enough. Thank you guys.
Okay got it thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Bob Kaminski for any closing remarks.
Well. Thank you very much for interest in our company. We look forward to speaking with you next at the end of the second quarter. This call is concluded.
Thank you Sir the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Yeah.
Yeah.
Yeah.
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