Mercantile Bank Corporation Q1 2023 Earnings Call
Speaker 2: followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then on your touchtone phone.
Speaker 2: To withdraw from the question queue, please press star then 2.
Speaker 2: Please note this event is being recorded. I would like to turn the conversation to Zach Mokewa, Lambert Investor Relations. Please go ahead.
Speaker 3: Good morning, everyone, and thank you for joining Matt and Tal's Bank Operations Conference call and we're up to discuss the company's financial results for the first quarter. Joining me today are members of Matt and Tal's management team, including Bob Kaminski, President and Chief Executive Officer,
Speaker 3: Chuck Christmas, Executive Vice President and Chief Financial Officer, and Ray Reissner, Chief Operating Officer and President of the Bank.
Speaker 3: We'll begin the call with management's prepared remarks and presentation to review the quota's results, then often they call to questions.
Speaker 3: Before turning the call over to management, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings, and capital structure, as well as statements on the plans and objectives of the company's business. When you are lucky, you remain informed.
Speaker 3: The company's actual results could differ materially from any four outlook statements met today due to factors described in the company's letter of securities and exchange commissions failing.
Speaker 3: The company assumes no obligation to update any forward-looking statements made during the call.
Speaker 3: If anyone does not already have a copy of the first quarter 2023 press release and presentation that is issued by Martin's House Day, you can access it at the company's website at www.smashbanks.com
Speaker 3: At this time, I'd like to turn the call over to Mark and Terrence's president and Chief Executive Officer, Bob Karminski.
Speaker 4: Thank you, Zach, and thanks to all of you for joining us on the conference call today.
Speaker 4: Mercantile released its March 31st financial results this morning, which reported a strong quarter and a great start to 2023. Importantly, this information demonstrates continued strength and stability of Mercantile Bank Corporation and its subsidiary Mercantile Bank.
Speaker 4: As we have witnessed during the latter part of the first quarter, events have happened in our industry that have caused concerns about the health of the banking system in this country.
Speaker 4: Today we will share with you our quarterly results and other detailed information that illustrates the solid foundation on which mercantile is based and the continuation of the strong fundamentals that have been a consistent trait of mercantile irrespective of the economic environment and other external factors.
Speaker 4: During the call this morning, we will provide you with details on our deposit base from the first quarter, which will illustrate the attractive diversification of our funding base.
Speaker 4: We will discuss our strong capital levels, solid liquidity, loan portfolio composition and stratification and asset quality as well as efficient overhead management.
Speaker 4: Ray and Chuck will have complete details on these items in their comments.
Speaker 4: For the first quarter, Mercantile posted earnings of $1.31 per share on revenues of $55.3 million compared to $0.73 per share on revenues of $40.2 million for the same period in 2022.
Speaker 4: This morning we also announced the cash dividend of 33 cents per share payable on June 14, 2023, the same dividend that was paid during the first quarter. Our team has been able to adeptly manage net interest margins.
Speaker 4: As a result of the composition of our asset base, net interest income continued to show nice growth compared to the respective prior year period.
Speaker 4: Deposit costs continue to perform favorably compared to expectations.
Speaker 4: Well, those costs have risen during the first three months of 2023.
Speaker 4: The pace of the increase has been slower than has been anticipated.
Speaker 4: This has continued to benefit net interest margins, allowing Mercantile to maintain this profitability measurement at a higher level than we would consider normalized.
Overhead expenses remain well managed.
Net loan growth was lighter than expectations during the first quarter as the timing of some advances was pushed back due to normal closing scheduling situations.
Some borrowers are also taking additional time before embarking on projects to reassess and ensure that the economics are still appropriate given the levels of inflation and higher borrowing costs.
Loan pipelines remain at solid levels, however, and many credits whose funding has been pushed back will fund early in the second quarter. Asset quality continues to be extremely strong, however, with normal levels of past dues and non-performing loans, and only $661,000 in other real estate, with the vast majority being a former bank branch.
low levels of exposure in the retail and office types. Our lending teams remain heavily engaged with our clients, which is the hallmark of a relationship-based community banking approach.
On an overall basis, our clients continue to manage through macro and industry specific challenges that emerge, and remain confident in their business's ability to perform successfully in the near term and the long term.
Ray will have more color on the loan portfolio shortly.
The Michigan economy continues to perform in steady fashion, with overall unemployment remaining unchanged as of February 28th at 4.3% compared to year-end 2022.
Non-farm employment is up 2.1% at February 28 from the prior 12-month period, including manufacturing jobs up 2.6%, trade, transportation and utilities up 0.8%, and manufacturing jobs
Education and health services up 2.5%.
and leisure and hospitality up 5.3%.
The Mercantile team of bankers continues to represent our company as a dependable and trusted partner for our clients and communities.
The successes that we enjoy would not be possible without the incredible work and dedication of our team members.
Time and time again, despite the challenges that emerge, Mercantile has stepped up to provide financial advice, guidance, and solutions to clients and potential clients.
Relationship banking manifests itself in many different forms to different constituents.
Our business partners know that the relationship with Mercantile is based upon our culture of excellence. We hope you enjoyed this presentation.
Those foundational principles allow customers to rely upon us regardless of the economic conditions and other external forces that will affect them in our communities.
It is relationships that are established on trust and develop with years of experience that provide the basis for successful performance by our company, which benefits all of our stake holders data coin.
Those are my prepared comments. Ray will now take the microphone next followed by Chuck.
Thanks Bob, my comments will center upon the dynamics in our commercial loan, mortgage loan and deposit portfolios as well as the components of non-interest income.
Core commercial loan growth was relatively flat for the quarter as we posted growth of $8 million. This modest level of growth was impacted by $41 million in paydowns from excess cash flow or cash reserves and $19 million from asset sales.
Our commercial backlog has grown sequentially over the last four year ends to an all-time high at December 31, 2022. And as of March 31, 2023, the backlog remains at similar levels to that reported at year end.
The pipeline for commercial construction commitments that we expect to fund over the next 12 to 18 months totals $285 million compared to $197 million last quarter, reflecting the bank's support of the need for light industrial and multifamily projects in the markets we serve.
The portfolio has been well positioned for the rising rate environment as 64% of the portfolio is comprised of floating rate loans compared to 50% one year ago, accomplished largely through our SWOT program. Asset quality remains strong with nominal levels of past due loans and non-performing loans to total loans of 20 basis points.
unchanged from the prior quarter. While we are proud of our strong asset quality metrics, we remain vigilant in our underwriting standards and monitoring efforts to identify any sign of deterioration in our loan portfolio. Our lenders are the first line of defense to recognize areas of emerging risk.
Our risk rating model is robust with an emphasis on current borrower cash flow in our rating model providing sensitivity to any challenges emerging within a borrower's finances.
All that said, our customers continue to report strong results to date and have not begun to experience the impacts of a potential recessionary environment.
We continue to monitor concentration limits within our non-owner occupied commercial real estate loan portfolio including office buildings which presently comprise 6% of total loans, multifamily at 6% of total loans and retail at 4% of total loans. The mortgage business continues to be impacted by the raising rate environment.
seasonality and a lack of available housing inventory in the markets we serve.
Higher rates have led to more demand for arms and the lack of inventory has led to more construction activity. We hold each of these types of loans on our balance sheet and as a result residential mortgages have increased 52% over the prior year.
Compared to a gain on sales event and immediate recognition of revenue, a portfolio loan takes about 24 months to generate an equal amount of income.
We continue to pursue share in the purchase market with originations in the first quarter and we are decreasing 44% compared to the first quarter last year due to the increase in rate since that time.
Availability under residential construction loans is $58 million this quarter compared to $72 million last quarter. Refinance activity is 23% of last year's comparable quarter.
Non-interest income for the first quarter is down 25% compared to the respective year ago quarter. The primary contributor to the overall reduction was the previously described decrease in mortgage banking income is 63% along with a 31% decrease in service charges on accounts.
which resulted from higher earnings credit rates and a 23% decrease in swap income. In sum, the decline in these categories more than offset increases in credit and debit card income of 9.5% and in payroll services income of 17%.
During the quarter, deposits decreased by $115 million, or 3%.
This decrease was in evidence primarily in non-interest bearing accounts.
An analysis of accounts which displayed a material balance decrease
revealed that the vast majority were attributable to normal business activity.
The remainder, consisting of eight relationships totaling $26 million or less than 1% of total deposits, was attributable to customers who reacted to the headlines surrounding the banking industry and moved deposits to another bank or a non-bank investment.
We have developed a number of strategic initiatives around deposit opportunities that exist within portions of our customer base and the markets that we serve.
That concludes my comments. I will now turn the call over to Jeff. Thanks, Ray. Good morning to everybody. As noted on slide 10, this morning we announced net income of 21 million dollars or one dollar and 31 cents per diluted share for the first quarter of 2023 compared with net income of 11.5 million dollars or 73 cents per due to the current rate of $11.5 million.
expense.
Turning to slide 11, interest income on loans increased significantly during the first quarter of 2023 compared to the prior year period, reflecting the increase in interest rate environment and strong growth in core commercial and residential mortgage loans. Our first quarter of 2023 loan yield...
was 203 basis points higher than the first quarter of 2022, reflecting the combined impact of an aggregate 475 basis point increase in the federal funds rate since March of 2022, and approximately two thirds of our commercial loans have a floating rate.
Interest income on securities also increased during the first quarter of 2023 compared to the prior year period, primarily reflecting growth in the investment portfolio and the higher interest rate environment.
Interest income on interest earning assets, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, was relatively unchanged during the first quarter of 2023 compared to the prior year period.
While the rate paid by the FRB of Chicago has increased substantially, our average balance was considerably lower.
In total, interest income was $24.6 million higher during the first quarter of 2023 when compared to the prior year period.
We recorded increased interest expense on deposits and our sweep accounts during the first quarter of 2023 compared to the prior year period, reflecting the increase in interest rate environment and enhanced competition for deposits.
Interest expense on other borrowed money increased during the first quarter of 2023 compared to the prior year period, reflecting the higher cost of our trust-referred securities. Interest expense on FHLB advances declined slightly, reflecting the net impact of a lower average balance outstanding.
but higher average rate. In total, interest expense was $7.1 million higher than the first quarter of 2023 when compared to the prior year period.
Net interest income increased $17.5 million during the first quarter of 2023 compared to the prior year period.
We recorded a credit loss provision expense of $0.6 million during the first quarter of 2003 compared to $0.1 million in the prior year period.
Provision expense in both periods mainly reflected reserve allocations necessitated by loan growth.
with the recording of net loan recoveries and ongoing strong loan quality metrics, in large part mitigating additional reserves associated with the loan growth.
We did not adjust any qualitative reserve factors during the first quarter of 2023 and the impact of the updated economic forecast was less than $0.1 million. On slide 13, overhead costs increased $2.9 million during the first quarter of 2023.
compared to the prior year period. Salary and benefit expenses were $1.2 million higher during the first quarter of 2023 compared to the prior year period.
Bonus accruals totaled $1.4 million during the first quarter of 2023. No bonus accruals were recorded during the first quarter of 2022.
Lower mortgage lender commissions mitigated the impact of annual merit increases.
Other overhead costs increased $1.4 million during the first quarter of 2023 compared to the prior year period.
Included in this dollar amount is a $0.4 million write down on a former branch facility that is under agreement to be sold.
FDIC insurance expense increased $0.3 million due to the industry-wide assessment increase that became effective at the beginning of 2023, while the interest costs of SWOP cash collateral and the credit reserve on SWOPs increased an aggregate $0.5 million.
Continuing on slide 14, our net interest margin was 4.28% during the first quarter of 2023, up 171 basis points compared to the prior year period. The improved net interest margin is primarily a reflection of increased yield on earning assets.
in large part reflecting the increase in interest rate environment over the past 12 months.
Our yield on loans has increased 203 basis points since the first quarter of 2022, reflecting the combination of the increase in interest rate environment and approximately two-thirds of our commercial loans having floating rates.
Our average commercial loan rate has increased 284 basis points over the past 12 months, a significant increase on a portfolio that averaged $3.1 billion during that time period.
After increasing only about three basis points per quarter over the first three quarters of 2022, our cost of funds has increased 17 basis points during the fourth quarter of 2022, and another 42 basis points during the first quarter of 2023.
Despite the increase in interest rate environment, our deposit rates and those of our competitors were not meaningfully raised during the first nine months of 2022, which we believe reflected a relatively low level of competition for deposits given the excess liquidity positions of most financial institutions during that time.
However, as interest rates continue to rise and excess liquidity positions decline, deposit rates are now increasing and we believe deposit rate betas will ultimately return to historical levels.
We added a couple of slides to our presentation depicting information on our investment portfolio, which are slides numbers 20 and 21.
All of our investments are categorized as available for sale. As of March 31, 2023, about 64% of our investment portfolio was comprised of U.S. government agency bonds. The U.S. government agency bonds are categorized as available for sale.
with approximately 31% comprised of municipal bonds, all of which were issued by municipal entities within the state of Michigan and a high percentage within our market areas.
Mortgage-backed securities, all of which are guaranteed by a U.S. government agency, comprise only 5% of the investment portfolio.
The maturities of the U.S. government agency and municipal bond segments are generally structured on a laddered basis.
A significant majority of the U.S. government agency bonds mature within the next seven years with over three-fourths of the municipal bonds maturing over the next ten years.
On slide 18, we depict the unrealized gain and loss of the investment portfolio from the first quarter of 2021 to the first quarter of 2023.
The net unrealized loss started to increase meaningfully during the first quarter of 2022.
To date, the net unrealized loss peaked at $92 million at September 30, 2022 and has since declined to $71 million as of March 31, 2023.
The significant increase in the net unrealized loss reflects the increase in interest rate environment. It is important to note that the same increase in interest rate environment has had a substantial impact on our net interest margin leading to significant growth in net interest income and net income.
Turning to slide 19, we have provided repricing data on our loan portfolio.
Nearly two-thirds of our commercial loans have a floating rate, while about 87% of our fixed rate commercial loans mature within five years.
Our retail loans are largely comprised of 7-1 and 10-1 adjustable rate mortgage loans, with most subject to adjustment within the next 7 years.
In aggregate, approximately 83% of our total loans are subject to repricing within the next five years. On slides 23, 24, and 25, we provide data on our deposit base.
You will note that we include sweep accounts in our deposit tables and calculations as those accounts reflect monies from entities.
primarily municipalities, they elect to place their funds in a sweep account product that is fully secured by US government agency bonds.
Even with the seasonal decline we experience during the first quarter of each year, non-interest-bearing checking accounts comprise a significant 36% of total deposits and sweep accounts.
A large portion of these funds are associated with commercial lending relationships, especially commercial and industrial companies.
The level of uninsured deposits, which totaled 48% as of March 31, 2023, has remained relatively stable over many years.
On slide 24, we provide information on depositors with balances of $5 million or more.
As of March 31, 2023, we had 69 relationships which aggregated $1.1 billion.
Almost 80% of the relationships and approximately 85% of the deposits were with businesses and are individuals with remaining comprised of municipal entities.
Of those 69 relationships, 30 of them have had balances exceeding $5 million for at least five years.
2025, we depict our deposit balances as of March 31, 2023, and year-end 2022. Business deposits were down $124 million in the first quarter, primarily reflecting business customers' seasonal payments of taxes and bonuses and partnership disbursements.
Aggregate personal deposit totals increase slightly during the first quarter.
On slide number 26, we depict our primary sources of liquidity as of March 31, 2023.
We do periodically use our unsecured federal funds line of credit with the major corresponding bank as we did March 31, 2023 at $17 million.
The FHLB of Indianapolis has been our only source of wholesale funds since June of 2022 when our last remaining broker deposit matured. We obtained advances from the Federal Home Loan Bank of Indianapolis as needed to manage loan and deposit flows.
It is also our primary vehicle to manage interest rate risks associated with fixed rate commercial loans and the residential mortgage portfolio as we generally obtain fixed rate bullet advances with tenures of four to seven years.
We remain in a strong and well-capitalized regulatory capital position. As of March 31, 2023, our bank's total risk-based capital ratio...
was 13.8% and was $175 million above the regulatory minimum threshold to be categorized as well capitalized.
We did not refer to shares during the first quarter of 2023. We have $6.8 million available in our current repurchase plan.
While net unrealized gains and losses in our investment portfolio are excluded from regulatory capital calculations, on slide number 22 we depict our Tier 1 leverage and total risk-based capital ratios assuming the calculations did include that adjustment.
While our regulatory capital ratios were negatively impacted by the pro forma calculations, our capital position remains strong. As of March 31, 2023, our Tier 1 leverage capital ratio declines from 12.2% down to 11.1%.
And our total risk-based capital ratio declines from 13.8% down to 12.7%. Our excess capital as measured by the total risk-based capital ratio is also negatively impacted. However, it totals a strong $125 million over the minimum regulatory...
to be categorized as well capitalized. On slide 27, we share our latest assumptions on the interest rate environment and key performance metrics for the remainder of 2023 with the caveat that market conditions remain volatile, making forecasting difficult.
The forecast is predicated on no changes to the federal funds rate during the remainder of 2023, and no significant recessionary pressures on asset quality and provision expense.
We are projecting total loan growth in the range of 6-8%, with commercial loan growth of around 5%. While our commercial loan pipeline remains strong, we experienced a high level of payoffs and paydowns in 2022, especially in the latter part of the year, which continued into the first quarter of this year.
We are forecasting our net interest margin to decline as 2023 progresses as we experience increases in our cost of funds from competitive pressures and growth in interest bearing liabilities to fund loan growth.
while our earning asset yield remains relatively stable. In closing, we are very pleased with our first quarter 2023 operating results 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. Now that concludes management's prepared comments, and we'll now open the call to the Q&A session. We will now begin the question and answer session.
Thank you, please press Start and 2. At this time, we will pause momentarily to assemble our roster.
Our first question will come from Brendan Nolzel with Piper Sandler. You may now go ahead.
Hey, good morning guys. Congrats on the nice quarter.
quarter. All right, thank you.
Just to start off here on the margin, I think the NIMH held it a lot better this quarter than I would have thought. But it looks like you kind of tempered the outlook by about 15 basis points over the next couple of quarters despite the higher starting point. If you just kind of walk us through the major moving pieces and the new guidance as you see it and how you ended up at a lower go-forward level despite the strong first quarter.
So if you were looking at us on a monthly basis, our margin for the back half of the corridor, especially March, would have been much closer to what we had budgeted for the entire quarter. I think as far as some additional degradation in our margin...
for the guidance I'm giving today versus what we did in January is a reflection primarily of the deposit rate pressures that we're seeing out there. And that's especially true on CD products as well as our money market accounts. I think one of the things that the banking industry is facing with this deposit pricing.
also non-bank products that are also out there, especially on a short-term basis given the inverted yield curve, that are placing pressure on deposit rates as well.
Thanks for the color check. Maybe moving on to deposits itself. Some pressure on the overall balance over the past couple of quarters, but clearly still well above pre-COVID levels. Yeah, I know that it's tough to pinpoint, but do you have any sense of how much more overall runoff you're expecting over the balance of year?
and then kind of the remixing as well out of non-interest bearing, and then just how that plays into the overall equation of funding versus loan growth.
Great question, a lot of points there. I think our expectation is that deposits in general remain relatively stable for the remainder of this year. We do expect some increases. We get that seasonality in January of every year. So we saw that money leave, but obviously those funds have to be built up.
throughout the year as you know those same customers and depositors expect to make similar withdrawals in January of next year. So I think on an overall basis we would expect our core deposits especially the non-interest bearing area to increase gradually steadily over time.
I think it's very difficult to try to figure out what's going on with core deposits other than that. As I mentioned in my comments, our personal deposits were unchanged. We saw the withdrawals, as Ray touched on more specifically in his comments, were on the business side. We saw the withdrawals, as Ray touched on more specifically in his comments, were on the business side.
You know, we are definitely seeing some deposits go back into your higher yielding money market accounts as well as time deposits. I think that that's just kind of a reverse of what we saw in 2020 and 2021 when rates got so low. You know, we are seeing some deposits go back into your higher yielding money market accounts as well as time deposits.
I think those monies were originally in CD products, they just went into savings or another deposit product and got parked there. But now with CD rates increasing as they have, we're starting to see those funds migrate back to the time deposit product, which of course is going to cost us more money. And that's what's factored into that margin calculation, is the fact that we expect continued migration.
uh, from lower yielding non-maturing deposits into the higher yielding CDs. And then of course we have existing CDs, you know, that have been open over the last couple of years are maturing into the higher rate environment as well. That's really the big driver of the cost of funds going forward.
yielding non-maturing deposits into the higher yielding CDs. And then of course we have existing CDs that have been open over the last couple of years are maturing into the higher rate environment as well. That's really the big driver of the cost of funds going forward. Got it. Thank you for your questions.
You're welcome. Thank you. Our next question will come from Daniel Tamayo with Raymond James. You may now go ahead. Hey, good morning, everybody. First of all, thank you for all the disclosures. I know that was, sure, a ton of work to put together, but that's very helpful for all of us.
I guess first on just following up on deposit costs, you talked about the margin being lower in March. I was wondering if you could put a little bit more of a finer point on kind of what that was at the end of the period or in March and specifically in terms of deposit costs, what you were seeing towards the end of the quarter.
Yeah, let me grab that for you really quick.
Yeah, let me grab that for you really quick.
So what we saw in deposit costs, our cost of all of our deposits were about $104 for March. And at our total cost, if you look at it as a percent of...
average assets it was about 1.15 percent.
So it's just kind of more of a, you know, what we're expecting for the rest of this year is just a continuation of those types of calculations. Okay, and did you have an overall margin in March or? Oh, I'm sorry. Yeah, it was 4.17%.
Okay, so it's still pretty high.
The I Guess just just following up on that the the mix shift that you talked about being baked into your your guidance
I think you said you're expecting non-interest bearing and core deposits to grow over time but
Fair to assume that you're expecting that mix shift to take place as well over the rest of the year. I'm just curious how much you think that 38% of non-interest bearing changes over the coming year, or what you're baking in.
Yeah, I think we're expecting that percentage of non-interest bearing to stay relatively stable if not increase a little bit because as I mentioned, we've got to have these companies build those balances back up in anticipation of the tax and bonus and partnership disbursements that they would expect to make in January . So my expectation on an overall basis is that non-interest bearing should be at the top
which is driving an increase in cost of funds. You know, the CDs that are re-pricing are, you know, generally speaking below 1% and they're going into products that are in the upper threes and low fours. So there's a lot of, you know, re-pricing going on just with CD products. And then as I mentioned, seeing some migration from savings accounts and...
those types of deposits into the CD products as well, which is also a significant repricing. I think what we try to do as we typically do is try to be pretty conservative on our expectation of non-maturing deposits and when we build our balance sheets, you know from a projection standpoint, try to do that with some of our higher costing funds whether that's time deposits, borrowings.
some high yielding money market account products. Clearly we're out there as hard as we can day in and day out trying to grow all of our deposits, but certainly from a projection standpoint want to be conservative. Okay, great. And then lastly on the loan side, just curious.
where the new loan yields were coming in kind of towards the end of the quarter. You mentioned that those would expect those to continue to go up given the variable nature, but I'm just curious where those settle relative to what's on the portfolio now and then kind of a bigger picture question around.
With deposits stable, loan deposit ratio 110% and 6-8% loan growth in the forecast.
How high do you expect that value to get? It seems already somewhat elevated, so just curious how you're thinking about that ratio. Yeah, and as I mentioned in my comments, we always throw sweep accounts into that because those really truly are deposit accounts in our minds.
But it's still a little bit over 100%, so not trying to change your question. I think if you look at us historically, especially in excluding the last couple of years with the pandemic and all those impacts on our balance sheet, our loan or deposit ratio or however you want to calculate that has always been the highest at the end of the first quarter.
because of that seasonality withdrawals that we see. You know, we're a commercial bank and a lot of our deposits are commercial. And so that seasonality we see with our commercial customers is very noticeable within our balance sheet. So, I think we would, you know, we don't expect that ratio to go any higher. You know, it's not our intent to play games with that ratio, so to speak. You know, as I mentioned in my comments, you know, we're not using broker deposits right now and haven't for almost a year.
the FHLB advances. The rates that we get from the Federal Home Bank of Indianapolis are considerably lower than the rates we're going to get on broker deposits of a similar tenure. And the biggest reason for that is in the brokered market, at least up until most recently, there's not been a lot of supply of three and five year money out there.
as everybody had decided to keep short in a low interest rate environment. So it makes sense for quite a few reasons and certainly on an overall basis for us to use the FHLB using broker deposits as we had done throughout Mercantile's history up until last year. But on an overall basis, my expectation is that loan to deposit ratio will be a little bit higher.
will not go up any higher and hopefully, you know, we'll get some nice wins with all the different initiatives that Ray briefly mentioned in his comments and we can see that ratio decline. But having said all that, you know, our company has almost always been somewhere around, you know, 95, 100% loan to deposit ratio, maybe 105%, especially at the end of the first quarter.
On an overall basis, it's a position that we're comfortable managing. We've got a lot of experience with it. As Bob mentioned in his opening remarks, we are a relationship-driven company. We don't get very many surprises. We're not transactional or try not to be transactional. Those are where the surprises come within the balance sheet when you're in that type of business.
So, given all that, I think we're pretty comfortable with where we're at. But clearly, growing deposits is a big challenge. It's always really been a big challenge because we've been so successful at growing our loan balances. Deposit growth has always been a challenge for this company and we really don't see that any different now than we had in the past.
Certainly, the activities that took place in March and throughout at least the early part of April got everybody's attention and we spent even more time, especially with our larger depositors, giving them comfort and the strength of our company and making sure that they understood that our bank, and like virtually every other bank, was nothing like Silicon.
And, as Ray mentioned, very limited withdrawals that we saw out of our bank from that episode. So it's a big challenge. We're going to continue to grow our deposits as best we can. But we're going to manage the balance sheet, which makes the most sense on a long-term basis as we manage interest rate risk along with our liquidity positions.
Thank you for all that, Collar. Sorry if I missed it. Did you have the new loan yields at the end of the quarter? You know, basically what we do on the fixed rate basis, you know, we have a very, you know…
strategic loan pricing model that we use and you know basically you know on fixed rate we're going to do it a spread over cost of funds. I think you know looking at the five-year and we use the FHLB of Indianapolis advance rates.
So, I think the current rate is right around 4%, I think. So you would add 250 to 300 basis points to that and that would be, I think, a standard rate that we would do on a five-year balloon or on some equipment financing over five to seven years. If you have questions about ourButtons, the e-mail that she...
So I think the current rate is right around 4%, I think. So you would add 250 to 300 basis points to that. And that would be, I think, a standard rate that we would do on a five-year balloon or on some equipment financing over five to seven years. Terrific. Thanks for all the power that's there for me.
You're welcome, Nenny. Our next question will come from Eric Zwick with Hovde Group. You may now go ahead. Good morning everyone. I wanted to start maybe a question for either Bob or Ray just given the pipeline for destruction at this point and I guess conventional wisdom might suggest that
confidence to extend new credit at this point and additionally your confidence that they will move to completion and move to the permanent market at some point.
This is Ray. There's really two elements in that. There's a light industrial construction element and then there's the multi-family. On the light industrial side, the buildings that are being constructed have tenants and the space is required. It's in very high demand here in West Michigan. For more information, visit www.fema.gov
So we feel very good about that sector. Moving to the multifamily side, the recent evidence has been pretty strong that the inventory shortage continues to exist in terms of housing from
studies that have been done for the city of Grand Rapids to information that we're hearing from realtors about how intense the competition is for Homes when they go up for sale all those things support anecdotally the need for more housing units and in the form of multi-family so
I would offer that, you know, yesterday we took 14 apps in the bank for mortgages. 12 of those had no address associated with them, so they were pre-qualifications. And that would speak to the shortage of inventory. Occupancy rates are extremely high in the existing inventory.
So all those factors together make us comfortable along with sponsors of these projects that are very strong and experienced and have the ability through their existing portfolio to accurately ascertain the conditions in the market. Yeah, this is Bob and I would certainly underscore what Ray just said.
going into the portfolio, what's coming out and looking at those diversification levels of our real estate and as Ray said, partnering with experienced developers who've got many years in working on the projects that they're engaged with at the current time and it's something that we've...
We've historically had a very close watch item, continue to do so today, especially with what some people are predicting in the form of recession coming up. So we feel really good about our entire portfolio and certainly the CRE captures a lot of our attention on an ongoing basis. But we feel really good about what's comprising that.
that bucket of loans at the current time. That's great, Thanks guys. Next one, I guess for Chuck maybe, just looking at what the future is, the Fed funds kind of futures curve and the...
yield curve is suggesting that we're getting towards the end of the rate hiking cycle and potentially see a normalization maybe starting at the end of 23 or into 24 with rates coming back down. With the balance sheet still being constructed with their relatively kind of asset sensitive positioning, how do you think about that longer term if rates were to start to come back down and would you potentially
look to utilize any hedges or anything to protect the downside or limit the negative impacts there.
Yeah, I don't think we have any specific programs on our balance sheet with derivatives. Specifically speaking to your question there, I think what we try to do on an overall basis is shorten the duration of our balance sheet as much as we possibly can. One of the things that when you look at any graph out there, you know, even over mercantile's existence.
which isn't that long. And what we see is just a tremendous amount of volatility and interest rates for a myriad of reasons. You know, a couple of you probably would have ever put into any type of analysis. And so I think the best defense is to make sure our balance sheet is as short as it can.
So if there is any, you know, tiny mismatches within our balance sheet, it's only relatively short lived. And that, you know, if we do see a rate environment decline, yeah, it's going to impact our floating rate commercial loans, but we also, you know, are looking at the liability side to make sure that we're matching up the duration and re-pricing opportunities on those liabilities as best we can.
But on an overall basis, trying to match up the duration, re-pricing opportunities of our assets with our liabilities, and on an overall basis, in addition to that, is trying to just shorten the duration of our entire balance sheet. Got it. Thank you. And there's one last one for me. I think you mentioned about 6.8 million shares available.
under your repurchase authorization. Just curious about your appetite for potentially buying back from shares in 23 relative to other uses of capital at this point. Yes, so we have the $6.8 million in our current plan. We didn't buy back any shares last year and as I mentioned and as you just repeated, we don't do anything this year. I think given what took place in March, you know, capital is incredibly important. Hi everybody this is MrP complied.
And we've made the decision at least to date that we'll maintain our capital position as best we can and not engage in any repurchase activity. We come out of our blackout period on Friday of this week and clearly, admittedly when we look at our stock price and our valuations, it's definitely very tempting to get into the market and start buying back our stock. We have certainly been active in buying back our stock over time in previous periods, although I would say it's...
It's never been incredibly active. We're not trying to be out there to purchase back a significant, an overly significant number of shares. I think we want to be out there, be opportunistic, and also support our current shareholders by trying to support the price as best we can. At the end of the day, we look at that as a finance transaction.
It does that better the company on an overall basis. So I think right now we're reticent to engage in any buybacks, but obviously that's up for reevaluation at any time going forward and we certainly have the plan available to us if we want to endeavor back into buying some shares back. Thanks so much for taking my questions today. You're welcome, Victor.
Again, if you have a question, please press star, then 1. Our next question will come from Damon Del Monte with KBW. You may now go ahead. Hey, good morning, guys. Thanks for taking my questions and thanks for all the disclosures in the slides today. I guess just with respect to the outlook for loan growth, I think you guys are saying 6 to 8% over the remaining quarters of this year.
And Ray, you may have said this in your prepared remarks, but could you just kind of go over the kind of the split between the commercial side and the retail side for that expected growth? Yeah, we have the retail side growing about 180 million I think for the year.
and a similar amount for the commercial side. So they're fairly balanced in the growth. Right now, as I mentioned, arms are more popular than fixed rates, so those are finding their way onto our balance sheet as opposed to being sold. If the inverted yield curve is correct, we'll have an opportunity to refinance many of those things that you can do.
15 and 30 year obligations and maybe reduce the weight of those on our balance sheet at some point in the future. Obviously that's dependent on rates, so time will tell. But for the near term I'd say a fairly equal representation between the two.
Okay, thanks. And then with respect to the outlook for expenses, any internal discussions about ways to maybe kind of shave some expenses out of that overall expense structure?
I think that's something that we endeavor to do every day. I wouldn't think that there's any type of stuff or anything within our overhead structure. We're very dutifully trying to become as an efficient bank as we possibly can, rationalize our branch system, making sure we're employing technology, whatever we can, whether that's what we're trying to do, and I'm not going to let those conflicts contract and Premise
customers interact with our company, whether it's automated, the new automated teller machines, or online banking, or anything like that. We're always endeavoring to become more efficient in how we deliver our products and services to our customers.
It makes it more efficient and more cost effective for us. I think, I'm not sure what else to say except we're doing as best we can and I think if you look at our overhead costs on an overall basis, especially from say an occupancy equipment in some of those areas, I think we're doing a really good job and we're going to continue to do.
to do that. You know, the SWAP program obviously, just because of where rates were and cash collateral and interest rates going up, you know, there's some additional costs there. The FDIC didn't do us any favors by raising our assessment 58% just for opening our doors.
And of course inflation had a big impact on our salary and benefits as well. So I don't think there is anything we can say, hey let's cut that out. I think on an overall basis we continue to look for ways to run more efficiently and utilize our resources as best we can.
This is Bob, I'll add to that by saying we certainly look at efficiencies all the time and that's where you've seen, for instance, the branch breakdown because we're able to shed a particular branch and we've done that numerous times over the last couple of years. I will also say, however, that...
We're committed to attracting and retaining the best employees we can because they're really who allow us to do the things that we can do from a customer standpoint. And also continue that forward investment in technology, as Chuck mentioned, the digital frame, the use of data, the ability to automate processes are something that we continue to look at.
And for that we need to make the investment in technology, which we always have been committed to. That's an important part of who we are. So we never defer investments in technology or expenses because we do not want to get behind and we have not and we never will.
Got it. That's helpful. Thank you. And then I guess just lastly, credit continues to be extremely strong for you guys. Chuck, could you kind of help frame out expectations for the provision, kind of balancing off loan growth and potentially a softer economic backdrop as we go through the remainder of 2023?
That's a really loaded question. There's a reason why I didn't put provision expense on page 27. I think clearly our loan portfolio is going to react to that of our market. I think we do a really good job of selecting our borrowers, customers we want to do business with, structuring them properly that's mutually beneficial. So I think my humble opinion, I think the guy here would agree is that.
Our asset quality has generally been stronger than that of the industry and we would think that would continue to be the case regardless of what the economic environment is out there. I think certainly the economic environment is going to be the big determinant there. Two ways it is going to impact the provision, one is specifically on our portfolio. If there is a bunch of downgrades that we have to do, clearly that is going to require a higher reserve through provision expense. And then of course with our friend CISO, we have got that economic...
But the similarity is what's driving these forecasts is the unemployment rate. You know, we've seen a degradation in GDP forecasts over the last few years, and we really haven't seen an overly significant impact to the reserve calculation as a result of that. What we have seen is a relatively steady or just slightly over time increasing unemployment rate.
As I mentioned, the impact in the first quarter from the updated economic forecast was literally less than $100,000 at a loan portfolio.
close to $4 billion, so pretty nominal there. So I would say it's the economic forecast, especially in regards to those unemployment expectations and obviously the impact to our specific customers and as we have to go in there and change any loan grades. We still have all of our qualitative factors as well. We didn't make any changes. Next Accounting
As I mentioned in the first quarter, I think most of those kind of represent the overall environment that we have. So I think that those would kind of move in similar fashion to the overall upgrades, downgrades within our portfolio as well as the economic forecast that we put into the model. Okay. And just from like a reserving level, I mean if things remain...
given the risk that's in the portfolio. But again, I think the coverage ratio is just an outcome of what we have to do granularly to the items that we just talked about. So yeah, certainly if there's downgrades, certainly if we see a degradation in the forecast, we're going to have to add provision expense and that would cause an increase in the coverage ratio.
But given where we're at now in a very, very strong loan portfolio and an overly good, I would call, economic forecast, you know, with continued, I think the forecast that we see out there is an unemployment rate that I think overall is now 3.5. We see that growing to 4.5 in most of the forecast over the next couple years.
But I would say that 4.5% is still a really strong unemployment number. So again, we'll just see how the economies react to what the Fed is doing, what they may do in the future, obviously any other.
that we see in the financial markets. Um, you know, I don't, I guess I would say I don't see that coverage ratio going any lower, uh, given where we're at right now in regards to the economic forecast and the overall condition of our loan portfolio. Uh, but clearly if there's stresses within the economy and, or.
Our loan portfolio, I think you would expect, and I would certainly expect to see that coverage ratio have to increase. Got it. Okay. All right. No more questions on credit. Everything else that I had has been asked and answered. So that's all I had. Thank you very much. You're welcome, David. Thank you. This concludes our question.
I would like to turn the conference back over to Bob Kaminski for any closing remarks.
Thank you very much for your interest in Mercantile Bank Corporation. We look forward to speaking with you next after the end of the second quarter in July . This call has now ended. Thank you.