Q3 2023 Mercantile Bank Corp Earnings Call
Speaker 1: Good morning and welcome to the Merck and Tile Bank Corporation, third quarter 2023 earnings results conference call. All participants will be in
Good morning, and welcome to the Mercantile Bank Corporation third quarter 2023 earnings results Conference call.
All participants will be in a listen only mode.
Speaker 1: Should you need a system? Please signal a conference specialist by pressing the star key followed by zero.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
Speaker 1: After today's presentation, there will be an opportunity to ask questions.
After todays presentation, there will be an opportunity to ask questions.
Speaker 1: To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star then two. Please note this event is...
To ask a question you May press Star then one on a touchtone phone.
Withdraw your question. Please press Star then two.
Please note this event is being recorded.
Speaker 1: I would now like to turn a conference over to Zach Mukaywa, Lambert Investigation. Please go ahead.
I would now like to turn the conference over to Zac move Ky Lambert Investor Relations. Please go ahead.
Speaker 2: Good morning everyone and thank you for joining Mark and Tabanco Pressions conference call and webcast to discuss the company's financial results for the site quarter.
Good morning, everyone and thank you for joining Mark and thought about compression conference call and webcast to discuss the company's not sure Bob.
Speaker 2: Joining me today, a member of the Mark and Tails Management team, including Bob Kraminski, President and Chief Executive Officer, Chuck Christmas, Executive Vice President and Chief Financial Officer, and Ray Rice-Mart, Chief Operating Officer and President of the Bank. We'll begin the call with the management prepared remarks and presentation to review the court's results, then often they call to question.
Joining me today, and then by the market tells management team, including Bob Kaminski, President and Chief.
Hey, So Chuck Christmas Executive Vice President and Chief Financial Officer, and Brian Wright Smart chip.
Absolutely Brian .
Well begin the call with management's prepared remarks, and as I touched him to review the quarters results now I'll turn the call to questions.
Speaker 2: Before turning the call over to management, it is my responsibility to inform you that this call may involve certain board looking assessments, such as projections of revenue, earnings and capital structure, as well as testments from the clients and objectives of the company's business.
Before turning the call over to the 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 testing is funding plans and objectives of the Companys business.
Speaker 2: The company's actual results could be from material from any form looking statements made today, due to the factors that tried with the company's letter securities and exchange commission's filing.
Company's actual results could differ materially from any forward looking person. It's Matt today, you have to the box of describing the company.
That's correct.
Exchange Commission filings.
Speaker 2: The company assumes no obligation to update any forward look in statements, may be during the call.
Company assumes no obligation to update any forward looking statements made during the call.
Speaker 2: If anyone does not already have a copy of the South Quarad 2023 pressure, this presentation that you should buy my can tell today, you can access it at the company's website at www.machband.com. At this time, our life to time we call over to my can tell of present and ship it to the curry boss, Bob Kaminski. Bob.
If anyone does not already have a copy of the third quarter plenty of any pressure.
That does sound like you shouldn't be.
Today, you can access outside of the company's website at Www <unk> com.
At this time I would like to time to call over to the market.
President and Chief Bulks woke up Minsky Bob.
Speaker 3: Thank you, Zach. And thanks to all of you for joining us on the conference call today. This morning, Merkantal released its earnings report for the third quarter. And as one can see, our company carried the momentum of the outstanding work done as we passed the midpoint of the year into the second half of 2023.
Thank you Zack and thanks to all of you for joining us on the conference call. Today. This morning Mercantile released its earnings report for the third quarter and as one can see our company carried the momentum of the outstanding work done as we pass the midpoint of the year into the second half of 2023.
Speaker 3: During the third quarter, Merkantau produced earnings of $1.30 per share and revenues of 58.2 million.
During the third quarter mercantile produced earnings of $1 30 per share on revenues of $58 2 million.
Speaker 3: For the year to date 2023, our company has produced earnings of $3.89 per share on revenues of $168.7 million. This morning we also announced the cash dividend of $0.34 per share payable on December 13, 2023.
The year to date 2023, our company has produced earnings of $3 89 per share on revenues of $168 $7 million. This morning, We also announced the cash dividend of 34 cents per share payable on December 13th 2023.
Speaker 3: Headline in the quarter was exceedingly solid performance in several metrics, most notably continued strength and net interest margin, reflecting in appropriately structured balance sheets. Additionally, mercantile exhibited ongoing success in the performance of his loan book as reflected in the asset quality numbers. Well-managed expense control has demonstrated in its efficiency ratio consistently robust levels of capital and continues success in core local deposit growth.
Headline in the quarter was exceedingly solid performance in several metrics.
Italy continued strength in net interest margin, reflecting an appropriately structured balance sheet. Additionally, mercantile exhibited ongoing success in the performance of this loan book is reflected in the asset quality numbers.
Well manage the expense control has demonstrated its efficiency ratio consistently robust levels of capital and continued success in core local deposit growth.
Ray and Chuck will provide more details on our financial our financial performance shortly.
Speaker 3: Randy Schach will provide more details on our financial performance shortly.
Speaker 3: Strong performance we have demonstrated is only possible through the great work of the Mercontel team. As we approach the 26th anniversary of our company's founding, the impetus that drove the formation of Mercontel still holds true today.
The strong performance, we have demonstrated is only possible through the great work of the mercantile team as we approach the 26th anniversary of our company's founding the impetus that drove the formation of mercantile still holds true today.
Speaker 3: Our team consists of an entrepreneurial group of bankers who care deeply about our customers and communities with the focus on assisting clients in reaching their financial goals and making our communities better places for all of us to live and work.
Our team consists of an entrepreneurial group of bankers, who care deeply about our customers and communities with a focus on assisting clients in reaching their financial goals and making our communities better places for all of us to live and work.
Speaker 3: At the centerpiece of our existence is the desire to forge deep, meaningful, mutually beneficial, and lasting relationships with our customers.
At the centerpiece of our existence as the desire to forge deep meaningful mutually beneficial and lasting relationships with our customers. It.
Speaker 3: It is through these relationships that we are able to add value, oftentimes as a trusted advisor, and help craft a suite of financial solutions to meet their needs.
It is through these relationships, we are able to add value oftentimes as a trusted advisor and help craft a suite of financial solutions to meet their needs.
We remain pleased with the solid fundamentals, which also reflects the quality of the client base with whom we engage.
Speaker 3: We remain pleased with the storage fundamentals, which also reflect the quality of the client base with who we engage.
Speaker 3: While we continue to enjoy numerous opportunities for growth and expansion, we believe the current environment calls more than ever for a disciplined approach to growth, and selectively partaking in opportunities which accommodate our relationship banking philosophy.
Well, we continue to enjoy numerous opportunities for growth and expansion. We believe the current environment. It caused more than ever we're a disciplined approach to growth and selectively partaking in opportunities, which accommodate our relationship banking philosophy.
Speaker 3: The Michigan economy continues to operate in steady fashion during the third quarter, with unemployment rates, employment and economic activity continuing similarly to what we have seen in previous quarters in 2023.
The Michigan economy continues to operate and steady fashion during the third quarter with unemployment rates employment and economic activity continuing similarly to what we have seen in previous quarters in 2023.
Speaker 3: Potential headwinds caused from the actions by the FOMC raising rates to lower inflation.
Potential headwinds caused from the actions by the F O M C raising rates to lower inflation lag.
Speaker 3: Labor issues in the auto industry continue dysfunction by the federal government and new violence in the Middle East continue to create uncertainty however.
Labor issues in the auto industry continued dysfunction by the federal government and new violence in the Middle East continue to create uncertainty however.
Speaker 3: Finally, Merkantow announced my plans to retire on June 1, 2024, and that my colleague Ray Rice-Mobo will succeed me as President and CEO at that time. So I still have another seven months at the helm of our company. The process has already begun, so the seamless transition will take place for our customers, employees, and shareholders.
Finally, mercantile announced my plans to retire on June one 2024 and that my colleague Ray Reitsma will succeed me as president and CEO at that time, So I still have another seven months at the helm of our company. The process has already begun so the seamless transition will take place.
For our customers employees and shareholders.
Speaker 3: Those are my prepared remarks. I'm not past the microphone over to Ray, then to Chuck.
Those are my prepared remarks, a lot pass the microphone over to Ray then to Chuck.
Speaker 4: Thank you, Bob. My comments will focus upon commercial loan growth, net interest margin in income, asset quality, not interest income, and core deposit growth.
Thank you Bob My comments will focus upon commercial loan growth net interest margin and income asset quality noninterest income and core deposit growth.
Speaker 4: Commercial loan growth was out of this quarter, increasing $30 million or 4% annualized, despite $73 million in reductions, primarily due to borrows application of excess cash flow to debt balance.
Commercial loan growth was solid this quarter, increasing $30 million or 4% annualized despite $73 million in reductions primarily due to borrowers application of excess cash flow to debt balances.
Speaker 4: Commercial growth in the third quarter occurred primarily within the non-owner occupied commercial real estate portfolio, although commercial and industrial and owner occupied CRE loans represent 50% percent of the commercial portfolio.
Commercial growth in the third quarter occurred primarily within the non owner occupied commercial real estate portfolio, although commercial and industrial and owner occupied CRE loans, representing 57% of the commercial portfolio.
Speaker 4: The commercial pipeline remains near record levels at $667 million, consisting of $379 million, committed under construction loan facilities, and $288 million under other commercial loan commitments.
The commercial pipeline remains near record levels at $667 million, consisting of $379 million committed and under construction loan facilities and $288 million under other commercial loan commitments.
Speaker 4: residential mortgages grew 22 million dollars and the construction commitment related to this asset type remains stable at 54 million dollars.
Residential mortgages grew $22 million and the construction commitments related to this asset type remained stable at $54 million.
Net interest income benefited from the growth described above as well as from an increase in earning asset yields from 561% in the prior quarter to $5 seven 8% in the current quarter.
Speaker 4: Net interest income benefited from the growth described above, as well as from an increase in earning asset yield from 5.61% in the prior quarter to 5.78% in the current quarter.
Speaker 4: The commercial portfolio is well positioned for any change in the interest rate environment. At 65% of the portfolio consists of floating rate obligations compared to 50% 6.4 ago. Accomplished through discipline to application of our SWAT program coupled with a fixed rate deposit portfolio that correlates in size and duration to our fixed rate loan portfolio.
Commercial the commercial portfolio is well positioned for any change in the interest rate environment, a 65% of the portfolio consists of floating rate obligations compared to 50% six quarters ago accomplished through disciplined application of our swap program, coupled with our fixed rate deposit portfolio that correlates.
The size and duration to our fixed rate loan portfolio.
Speaker 4: S.E.Q.A.R.E. remains very strong as non-performing assets told $5.9 million, or 11 basis points of total assets at the end of the current quarter compared to $2.8 million, or 4 basis points of total assets at the end of the prior length quarter.
Asset quality remains very strong as nonperforming assets totaled $5 9 million or 11 basis points of total assets at the end of the current quarter compared to $2 $8 million or four basis points of total assets at the end of the prior linked quarter.
Speaker 4: The majority of this increase is attributable to a single CNI credit placed into not a cruel stat.
The majority of this increase is attributable to a single C&I credit placed into non accrual status.
Speaker 4: Pest dues are very low at four basis points of total loans. We remain vigilant in our underwriting standards and monitor any, sorry, and monitoring to identify any deterioration within our portfolio. Our lenders are the first line of observation and defense to recognize areas of emerging risk. Our risk rating model is robust with a continued emphasis on current borrower cash flow providing prompt sensitivity to any emerging challenges within a borrower's poorer its surroundings.
Past dues are very low at four basis points of total loans, we remain vigilant in our underwriting standards and monitor any or sorry in monitoring to identify any deterioration within our portfolio.
<unk> are the first line of observation in defense to recognize areas of emerging risk a risk rating model is robust with a continued emphasis on current borrower cash flow, providing prompt sensitivity to any emerging challenges within our borrowers finances that said our customers continue to report strong results today and have not.
Speaker 4: That said, our customers continue to report strong results today and have not begun to experience the impacts of potential recessionary environment in any systematic fashion.
<unk> begun to experience the impacts of potential recessionary environment in any systematic fashion.
Total noninterest income grew 27% compared to the third quarter of 2022 service charges on accounts declined by 13% due to the negative impact of increased interest rates, which increases the earnings credit on accounts offsetting this decrease were increases in the remaining nine.
Speaker 4: group 27% compared to the third quarter of 2022. Service charges on accounts declined by 13%, due to the negative impact of increased interest rates, which increases the earnings credit on account.
Interest income categories. Despite a reduction of 34% in the total amount of mortgage loans originated total total sellable mortgage loans increased 16% and mortgage banking income increased by 58%.
Speaker 4: This reflects efforts to reduce the portfolio mortgage loans and increase saleable loans to decrease the related funding burden and interest rate risk on the balance sheet. Positive performances were achieved in credit and debit card income, which grew 7% compared to the prior year period.
This reflects efforts to reduce the portfolio mortgage loans and increased salable loans to decrease the related funding burden and interest rate risk on the balance sheet.
Positive performances were achieved in credit and debit card income, which grew 7% compared to the prior year period.
Speaker 4: It interest rates swap income, which grew 65% compared to the prior year period. Payroll income, which grew 11% compared to the prior year period. And bully income, which grew 77% compared to the prior year period. Not an interest income also included $391,000 in gains on the sale of ORE.
Interest rate swap income, which grew 65% compared to the prior year period payroll income, which grew 11% compared to the prior year period, and bully income, which grew 77% compared to the prior year period noninterest income also included $391000 in gains on the sale of ore.
Speaker 4: The positive balances have been very steady in our retail portfolio over the last nine months as depicted on slide 19 of the investor presentation.
Deposit balances have been very steady in our retail portfolio over the last nine months as depicted on slide 19 of the Investor presentation.
Speaker 4: Business deposits typically follow a seasonal pattern where commercial deposits contract in the first quarter as clients pay bonuses, partnership distributions, and taxes, and then build during the remainder of the year. This pattern occurred again in 2023 as business deposits decreased by $124 million in the first quarter, followed by a $150 million increase in the second quarter, and a $135 million increase in the third quarter.
Business deposits typically follow a seasonal pattern, where commercial deposits contract in the first quarter as clients pay bonuses partnership distributions and taxes and then build during the remainder of the year. This pattern occurred again in 2023 as business deposits decreased by $124 million in the first quarter.
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Unknown Executive: Good morning, and welcome to the Mercantile Bank Corporation, third quarter 2023 earnings results conference call. All participants will be in a listen only mode. Should you need a system, please signal a conference specialist by pressing the star key followed by zero.
Speaker 4: There were no incremental FHLB advances or additions to broker deposits to fund the commercial and work-on growth described earlier in my remarks.
There were no incremental F H L b advances or additions to broker deposits to fund the commercial and mortgage loan growth described earlier in my remarks, we continue to pursue a number of strategic initiatives around deposit generating opportunities that exist within portions of our customer base in the markets that we serve.
Speaker 4: We continue to pursue a number of strategic initiatives around deposit generating opportunities that exist within portions of our customer base in the markets that we serve.
Unknown Executive: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star than one on a touchtone phone. So let's draw your question, please press star than two. Please note, this event is being recorded.
Speaker 4: Finally, I'm pleased they have the opportunity to serve Mercontile CEO on Bob's retirement next year. We enjoy a great team, a strong customer base, and I'm bullish on the fourth future of our organization. That concludes my comments, and I will not turn the call over to the show.
Finally, I am pleased to have the opportunity to serve mercantile CEO . Upon bobs retirement next year, we enjoy a great team a strong customer base and I'm bullish on the future of our organization that concludes my comments and I will now turn the call over to sharp.
Zack Mukewa: I would now like to show the conference over to Zack Mukewa, Lambert Industrial 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 third quarter. Joining me today are members of Mercantile Management Team, including both Kaminski, President and Chief Executive Officer, Chuck Christmas, Executive Vice President and Chief Financial Officer, and Ray Rice, Chief Operating Officer and President of the Bank.
Speaker 5: Thanks, Ray. Good morning to everybody. As noted on slide six, this morning we announced net income of $20.9 million or $1.30 per diluted share for the third quarter of 2023, compared with net income of $16.0 million, or $1.01 per diluted share for the respective prior year period.
Thanks, Ryan good morning to everybody as noted on slide six this morning, we announced net income of $29 million or $1 30 per diluted share for the third quarter of 2023, compared with net income of $16.01 million or $1.01 per diluted share for the respective prior.
Year period net income during the first nine months of 2023 totaled $62 2 million or $3 89 per diluted share compared to $39 $3 million or $2 48 per diluted share during the first nine months of 2020 to the.
Speaker 5: That income during the first nine months of 2023 totaled $62.2 million or $3.89 per deluded share compared to $39.3 million or $2.48 per deluded share during the first nine months of 2002.
Zack Mukewa: We'll begin the call with the management prepared remarks and presentation to review the chorus results, then often they call to questions. Before turning the call over to management, it is my responsibility to inform you that this call may involve certain board looking assessments, such as projections of revenue, earnings and capital structure, as well as assessments from the clients and objectives of the company's business. The company's actual results could be from materials from any four looking assessments made today, due to the factors described in the company's letter securities and exchange commission's filings. The company assumes now obligation to update any four looking assessments made during the call.
Speaker 5: The improved operating results were in large part driven by a higher net interest income stemming from an improving net interest margin and ongoing loan growth and continued strength in loan quality metrics providing for limited provision expense.
The improved operating results were in large part driven by a higher net interest income stemming from an improving net interest margin and ongoing loan growth and continued strength in loan quality metrics, providing for limited provision expense.
Speaker 5: Turning to slide 7, interest income on loans increased during the third quarter and first nine months of 2023 compared to the prior year periods, reflecting the increase in interest rate environment and solid growth in commercial and residential mortgage loans.
Turning to slide seven interest income on loans increased during the third quarter and first nine months of 2023 compared to the prior year periods, reflecting the increase in interest rate environment and solid growth in commercial and residential mortgage loans, our third quarter 2023, net interest margin was 42 basis points.
Unknown Executive: If anyone does not already have a copy of the third quarter 2023 press release and presentation that you should pay Mercantile today, you can access it at the company's website at www.machband.com.
Speaker 5: Our third quarter 2023 net interest margin was 42 basis points higher than the third quarter of 2022 and our net interest margin for the first nine months of 2023 was 110 basis points higher than the respective prior year period.
Higher than the third quarter of 2022, and our net interest margin for the first nine months of 2023 was 110 basis points higher than the respective prior year period.
Robert Kaminski: At this time, our life to time we call over to Mercantile's president and Chief Executive Officer, both Kaminski, both. Thank you, Zach. Thanks to all of you for joining us on the conference call today. This morning, Mercantile released its earnings report for the third quarter, and as one can see, our company carried the momentum of the outstanding work done as we passed the midpoint of the year into the second half of 2023.
Speaker 5: The improved net interest margins primarily reflect the combined impact of an aggregate 525 basis point increase in the federal funds rate since March of 2022 and approximate two thirds of our commercial loans have any floating rate.
The improved net interest margins, primarily reflects the combined impact of an aggregate 525 basis point increase in the federal funds rate since March of 2022, and approximately two thirds of our commercial loans have any floating rate.
Robert Kaminski: During the third quarter, Mercantile produced earnings of $1.30 per share and revenues of 58.2 million. For the year to date 2023, our company has produced earnings of $3.89 per share on revenues of $168.7 million. This morning, we also announced the cash dividend of $0.34 per share payable on December 13, 2023. Headline in the quarter was exceedingly solid performance in several metrics, most notably continued strength and net interest margin, reflecting an appropriately structured balance sheet.
Speaker 5: Interesting command securities also increased during the 2023 periods compared to the prior year periods. Reflecting growth in the security portfolio and the higher interest rate environment.
Interest income on Securities also increased during the 2023 periods compared to the prior year period, reflecting growth in the securities portfolio and the higher interest rate environment.
Speaker 5: Interesting income on other earning assets, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago also increased during the 2023 periods compared to the prior year periods. The 2023 results were positively impacted by an increased rate paid by the Federal Reserve Bank of Chicago, which more than offset lower average balances compared to the 2022 period.
Interest income on other earning assets a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago also increased during the 2023 periods compared to the prior year periods. The 2023 results were positively impacted by an increased rate paid by the federal Reserve Bank of Chicago.
Which more than offset lower average balances compared to the 2022 periods.
Speaker 5: In total, interest income was $23.0 million and $74.0 million higher during the third quarter and first nine months of 2023, respectively, when compared to the prior year period.
Robert Kaminski: Additionally, Mercantile exhibited ongoing success in the performance of his loan book as reflected in the asset quality numbers. Well-managed expense control is demonstrated in its efficiency ratio, consistently robust levels of capital, and continues success in core local deposit growth.
In total interest income was $23.0 million and 74.0 a million dollars higher during the third quarter and first nine months of 2023, respectively, when compared to the prior year periods.
Speaker 5: We recorded increased interest expense on deposits and our sweep account product during the third quarter and the first nine months of 2023 compared to the prior year periods, reflecting the increasing interest rate environment, transfers of deposits from no- or low-cost deposit products to higher-costing deposit products, and enhanced competition for deposits.
We recorded increased interest expense on deposits and our sweep account product during the third quarter and the first nine months of 2023 compared to the prior year periods, reflecting the increase in interest rate environment transfers of deposits from no or low cost deposit products to higher costing deposit products and.
Robert Kaminski: Rand Shock will provide more details on our financial performance surely. The strong performance we have demonstrated is only possible through the great work of the Mercantile team.
Robert Kaminski: As we approach the 26th anniversary of our company's founding, the impetus that drove the formation of Mercantile still holds true today. Our team consists of an entrepreneurial group of bankers who care deeply about our customers and communities with the focus on assisting clients and reaching their financial goals and making our communities better places for all of us to live and work. At the centerpiece of our existence is the desire to forge deep, meaningful, mutually beneficial, and lasting relationships with our customers.
Enhanced competition for deposits.
Speaker 5: Interest expense on Federal Home Loan Bank of Indianapolis advances also increased during the 2023 periods compared to the prior year periods, reflecting growth in the advance portfolio and the higher interest rate environment.
Interest expense on federal home loan bank of Indianapolis advances also increased during the 2023 periods compared to the prior year periods, reflecting growth in the advanced portfolio and the higher interest rate environment.
Speaker 5: Interest expense on other power funds increased during the 2023 periods compared to the prior year periods reflecting the higher cost of our trust-preferred security.
Interest expense on other borrowed funds increased during the 2023 periods compared to the prior year periods, reflecting the higher cost of our trust preferred securities.
Speaker 5: In total, interest expense was $16.4 million and $36.7 million higher during the third quarter and first nine months of 2023, respectively, when compared to the prior year period.
And total interest expense was $16 $4 million and $36 $7 million higher during the third quarter and first nine months of 2023, respectively, when compared to the prior year periods net interest income increased $6 $6 million and $37 3 million.
Robert Kaminski: It is through these relationships that we are able to add value, oftentimes as a trusted advisor, and help craft a suite of financial solutions to meet their needs. We remain pleased with the solid fundamentals, which also reflect the quality of the client base with whom we engage. While we continue to enjoy numerous opportunities for growth and expansion, we believe the current environment calls more than ever for a disciplined approach to growth and selectively partaking in opportunities which accommodate our relationship banking philosophy. The Michigan economy continues to operate in steady fashion during the third quarter, with unemployment rates, employment, and economic activity continuing similarly to what we have seen in previous quarters in 2023.
Speaker 5: Net interest income increased $6.6 million, and $37.3 million during the third quarter and first nine months of 2023, respectively, compared to the prior year period.
During the third quarter and first nine months of 2023, respectively compared to the prior year periods.
Speaker 5: We recorded a provision expense of $3.3 million, and $5.9 million during the third quarter, and first nine months of 2023, respectively.
We recorded a provision expense of $3 $3 million and $5 $9 million during the third quarter and first nine months of 2023, respectively.
Speaker 5: The third quarter provision expents primarily reflects the establishment of a $1.2 million specific reserve on a commercial loan relationship that was placed in the non-accrual status during the quarter and the allocation of $1.7 million to a qualitative factor assessment considering local economic conditions, particularly the potential impacts of the ongoing UAW strike.
The third quarter provision expense, primarily reflects the establishment of a $1 2 million specific reserve on a commercial loan relationship that was placed into non accrual status during the quarter.
And the allocation of $1 $7 million to a qualitative factor assessment, considering local economic conditions, particularly the potential impacts of the ongoing UAW strike.
Robert Kaminski: Potential headwinds cause from the actions by the FOMC raising rates to lower inflation, labor issues in the auto industry, continue dysfunction by the federal government, and new violence in the Middle East continue to create uncertainty, however.
Speaker 5: updated economic forecasts throughout 2023 have had a nominal impact on the reserve calculation.
Updated economic forecast throughout 2023 have had a nominal impact on the reserve calculation.
Robert Kaminski: Finally, Merkontail announced my plans to retire on June 1, 2024, and that my colleague Ray Riceman will succeed me as president and CEO at that time. So I still have another seven months at the helm of our company. The process has already begun, so the seamless transition will take place for our customers, employees, and shareholders.
Speaker 5: We recorded increased overhead cost during the third quarter of the first nine months of 2023 compared to the prior year period.
We recorded increased overhead cost or the third quarter and first nine months of 2023 compared to the prior year periods.
Speaker 5: Overhead costs increased $2.1 million during the third quarter of 2023, compared to the third quarter of 2022, and we're at $5.9 million during the first nine months of 2023, we'll compare to the same time period in 2022. The increased overhead costs primarily resulted from larger compensation and benefit costs.
Overhead costs increased $2 $1 million during the third quarter of 2023 compared to the third quarter of 2022 and were up $5 $9 million in the first nine months of 2023, when compared to the same time period in 2022, the increased overhead costs, primarily resulted from larger comps.
Robert Kaminski: Those are my prepared remarks.
Raymond Reitsma: I'm not past the microphone over to Ray, then to Chuck. Thank you, Bob. My comments will focus upon commercial loan growth, net interest margin in income, asset quality, net interest income, and core deposit growth. Commercial loan growth was out of this quarter, increasing $30 million, or 4% annualized, despite $73 million in reductions primarily due to borrows application of excess cash flow to debt balances. Commercial growth in the third quarter occurred primarily within the non-owner occupied commercial real estate portfolio, although commercial and industrial and owner occupied CRE loans represent 50% percent of the commercial portfolio.
<unk> and benefit cost increased FDIC insurance assessments, reflecting the industry wide adjustments effective January one of this year and higher swap collateral holding costs.
Speaker 5: Increased FGIC insurance assessments reflecting the industry wide adjustments effective January 1 of this year and higher swap collateral holding.
Speaker 5: Continuing on slide eight, our net interest margin was 3.98% during the first quarter of 2023, about 42 basis points from the third quarter of 2022, and was 4.10% during the first 9 months of 2023, up 110 basis points from the first 9 months of 2022.
Continuing on slide eight our net interest margin was 398% during the first quarter of 2023 up 42 basis points from the third quarter of 2022 and was 410% during the first nine months of 2023 up 110 basis points from the first nine months of 2000.
'twenty two.
Speaker 5: The improved net interest margin is primarily a reflection of an increase yield on earning assets. In large part reflecting the increase in interest rate environment over the past 12 months, which has more than offset the increased cost of funds.
The improved net interest margin is primarily a reflection of an increased yield on earning assets in large part, reflecting the increase in interest rate environment over the past 12 months, which is more than offset the increased cost of funds.
Raymond Reitsma: The commercial pipeline remains near record levels at $667 million, consisting of $379 million, committed under construction loan facilities, and $288 million under other commercial loan commitments. Residential mortgages grew $22 million, and the construction commitment related to this asset type remains stable at $54 million. Net interest income benefited from the growth described above as well as from an increase in earning asset yields from 5.61% in the prior quarter to 5.78% in the current quarter. The commercial portfolio is well positioned for any change in the interest rate environment as 65% of the portfolio consists of floating rate obligations compared to 50% six quarters ago.
Speaker 5: Our yield on earning assets equals 5.78% during the third quarter of 2023, an increase of 17 basis points from the second quarter of 2023, and up 174 basis points compared to the third quarter of 2022.
Our yield on earning assets equaled $5 seven 8% during the third quarter of 2023, an increase of 17 basis points from the second quarter of 2023 and up a 174 basis points compared to the third quarter of 2022.
Speaker 5: Our loan yield has increased 181 basis points over the past 12 months, primarily reflecting the combination of the increase in interest rate environment, and approximately 2 thirds of our commercial loans having a floating rate.
Our loan yield has increased 100 181 basis points over the past 12 months, primarily reflected the combination of the increase in interest rate environment and approximately two thirds of our commercial loans, having floating rates.
Speaker 5: Our average commercial loan rate has increased 178 basis points over the past 12 months, a significant increase on a loan portfolio that averaged approximately $3.1 billion during that time period.
Our average commercial loan rates has increased 170 basis point 178 basis points over the past 12 months, a significant increase in our loan portfolio that averaged approximately $3 $1 billion during that time period.
Raymond Reitsma: Accomplished through discipline to application of our SWOT program coupled with a fixed rate deposit portfolio that correlates in size and duration to our fixed rate loan portfolio. Asset quality remains very strong is now performing assets total 5.9 million dollars or 11 basis points of total assets at the end of the current quarter compared to 2.8 million dollars or 4 basis points of total assets at the end of the prior length quarter.
Speaker 5: Our cost of funds equaled 1.80% during the third quarter of 2023, an increase of 24 basis points from the second quarter of 2023, and up 132 basis points compared to the third quarter of 2022.
Our cost of funds equaled, 180% during the third quarter of 2023, an increase of 24 basis points from the second quarter of 2023, and up 132 basis points compared to the third quarter of 2022.
Speaker 5: The 24 basis point increase in our cost of funds during the third quarter of 2023 compared to the second quarter of 2023 reflects a reduction from a 49 basis point increase during the second quarter of 2023 compared to the first quarter of 2023 and a 42 basis point increase during the first quarter of 2023 compared to the fourth quarter of 2022.
The 24 basis point increase in our cost of funds during the third quarter of 2023 compared to the second quarter of 2023 reflects a reduction from a 49 basis point increase during the second quarter of 2023 compared to the first quarter of 'twenty, three and a 42 basis point increase during the first.
Raymond Reitsma: The majority of this increase is attributable to a single CNI credit placed into not a cruel status. Pest dues are very low at 4 basis points of total loans. We remain vigilant in our underwriting standards and monitoring to identify any deterioration within our portfolio. Our lenders are the first line of observation and defense to recognize areas of emerging risk. Our risk rating model is robust with a continued emphasis on current borrower cash flow providing prompt sensitivity to any emerging challenges within a borrower's finances.
Quarter of 23 compared to the fourth quarter of 2022.
Turning to slide 14, we have provided repricing data on our loan portfolio about two thirds of our commercial loans have a floating rate.
Speaker 5: Turning to slide 14, we have provided repricing data on our loan portfolio.
Speaker 5: About two-thirds of our commercial loans have a floating rate, while about 81% of our fixed-rate commercial loans mature within five years. Our retail loans are largely comprised of 5-1, 7-1, and 10-1 adjustable rate mortgage loans, with most subject to adjustment within the next seven years.
81% of our fixed rate commercial loans mature within five years, our retail loans are largely comprised of 5171 and 10, one adjustable rate mortgage loans with most subject to adjustment within the next seven years.
Raymond Reitsma: That said our customers continue to report strong results today and have not begun to experience the impacts of potential recessionary environment in any systematic fashion. Total amount of interest income grew 27% compared to the third quarter of 2022 service charges on accounts declined by 13% due to the negative impact of increased interest rates which increases the earnings credit on accounts. Offsetting this decrease were increases in the remaining non interest income categories despite a reduction of 34% in the total amount of mortgage loans originated.
Speaker 5: In aggregate, approximately 84% of our loans are subject to repricing within the next five years.
In aggregate approximately 84% of our loans are subject to repricing within the next five years.
We have also included a couple of slides in our presentation depict information on our investment portfolio, which are slide number 15, and 16, there were only nominal changes to our investment portfolio. During the third quarter of 2023, largely limited to ordinary purchases immaturity as a municipal bonds all of our investments may ring.
Speaker 5: We've also included a couple of slides in our presentation to pick the information on our investment portfolio, which are slide numbers 15 and 6.
Speaker 5: There were only nominal changes to our investment portfolio during the third quarter of 2023, largely limited to ordinary purchases and maturities of municipal bonds.
Speaker 5: All of our investments, Marine, remain categorized as available per sale.
We remain categorized as available for sale.
Raymond Reitsma: Total saleable mortgage loans increased 16% and mortgage banking income increased by 58%. This reflects efforts to reduce the portfolio mortgage loans and increase saleable loans to decrease the related funding burden and interest rate risk on the balance sheet. Positive performances were achieved in credit and debit card income which grew 7% compared to the prior period. Interest rate swap income which grew 65% compared to the prior period payroll income which grew 11% compared to the prior period and bully income which grew 77% compared to the prior period.
Speaker 5: As of September 30, 2023, about 65% of our investment portfolio was comprised of U.S. government agency bonds, with approximately 30% 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.
As of September 32023, about 65% of our investment portfolio was comprised of U S. Government agency bonds with approximately 30% 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 more.
Speaker 5: Mortgage-backed securities, all of which are guaranteed by a U.S. government agency, comprise only about 5% of our investment portfolio.
Mortgage backed securities all of which are guaranteed by U S. A U S government agency comprise only about 5% of our investment portfolio.
Speaker 5: The maternity of U.S. government agency bonds and municipal bond segments are generally structured on a laddered base.
The maturities of U S government agency bonds and municipal bonds segments are generally structured on a ladder basis.
Speaker 5: A significant majority of U.S. government agency bonds mature within the next seven years, with over three-fourths of the municipal bonds maturing over the next 10 years.
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 10 years.
Raymond Reitsma: Not an interest income also included $391,000 in gains on the sale of ORE. Deposit balances have been very steady in our retail portfolio over the last nine months as depicted on slide 19 of the investor presentations. Business deposits typically follow a seasonal pattern where commercial deposits contract in the first quarter as clients pay bonuses, partnership distributions and taxes and then build during the remainder of the year. This pattern occurred again in 2023 as business deposits decreased by $124 million in the first quarter followed by a $150 million increase in the second quarter and a $135 million increase in the third quarter. There were no incremental FHLB advances or additions to broker deposits to fund the commercial and more strong growth described earlier in my remarks.
Speaker 5: The net unrealized lost total of $93 million as of September 30, 2023.
The net unrealized loss totaled $93 million as of September 32023.
Speaker 5: This significant increase in the net unrealized loss over the past two years reflects the increasing interest rate environment since that time that the Fed started raising interest rates. It is important to note that the same increasing interest rate environment has had a substantial impact on our net interest margin, leading to significant growth in net interest income and net income.
This significant increase in the net unrealized loss over the past two years reflects the increasing interest rate environment since that time that the fed started raising interest rates. 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 cigna.
Growth in net interest income and net income.
Speaker 5: On slides 18, 19, and 20, we provide data on our deposit.
On slides 18, 19, and 20, we provide data on our deposit base.
Speaker 5: You will note that we include sweep accounts in our deposit tables and calculations as those accounts reflect money from entities, primarily municipalities, that elect to place their funds in a sweep account that is fully secured by U.S. government and agency bonds.
Note that we include a include sweep accounts in our deposit tables and calculations as those accounts reflect monies from entities, primarily municipalities that he'd like to place their funds in a sweep account that is fully secured by U S government and agency bonds.
Raymond Reitsma: We continue to pursue a number of strategic initiatives around deposit generating opportunities that exist within portions of our customer base in the markets that we serve.
Speaker 5: Even with the seasonal decline we experience during the first quarter of each year, and I'm going transfers to money market accounts, nine interest bearing check-in accounts comprise a significant 32% of total deposit and sweep accounts as a September 30, 2023.
Even with the seasonal decline we experienced during the first quarter of each year and ongoing transfers to money market accounts non interest bearing checking accounts comprised a significant 32% of total deposit sweep accounts as of September 32023.
Raymond Reitsma: Finally, I'm pleased to have the opportunity to serve Mercantile as CEO on Bob's retirement next year. We enjoy a great team, a strong customer base, and I'm bullish on the fourth future of our organization.
Speaker 5: A large portion of these funds are associated with commercial lending relationships, especially commercial and industrial companies.
Large portion of these funds are associated with commercial lending relationships, especially commercial and industrial companies.
Charles Christmas: That concludes my comments and I will not turn the call over to strike. Thanks, Ray.
Charles Christmas: Good morning to everybody. As noted on slide 6, this morning we announced net income of $20.9 million or $1.30 per deluded share for the third quarter of 2023 compared with net income of $16.0 million or $1.01 per deluded share for the respective prior year period. Net income during the first nine months of 2023 totaled $62.2 million or $3.89 per deluded share compared to $39.3 million or $2.48 per deluded share during the first nine months of 2022.
Speaker 5: The level of uninsured deposits, totally in about 51% as of September 30, 2023, has remained relatively steady over many years. On slide 19, we provide information on depositors with balances of $5 million or more. As of September 30, 2023, we had 75 relationships which aggregated $1.2 billion.
The level of uninsured deposits totaling about 51% as of September 32023 has remained relatively steady over many years on slide 19, we provide information on depositors with balances of $5 million or more.
As of September 32023, we had 75 relationships, which aggregated $1 $2 billion about 81% of the relationships and approximately 83% of the total deposits were with businesses and are individuals with the remaining comprised of municipal entities.
Speaker 5: about 81% of the relationships and approximately 83% of the total deposits were with businesses and our individuals with the remaining comprised of municipal entities.
Speaker 5: When compared to five years ago, we had 36 relationships.
When compared to five years ago, we had 36.
Charles Christmas: The improved operator results were in large part driven by a higher net interest income stemming from an improving net interest margin in ongoing loan growth and continued strength and loan quality metrics providing for limited provision expense. Turning to slide 7, interest income on loans increased during the third quarter and first nine months of 2023 compared to the prior year periods reflecting the increase in interest rate environment and salad growth in commercial and residential mortgage loans.
Our relationships.
Speaker 5: with the deposit balances over $5 million. Of those 36 relationships, 27 continue to have balances over $5 million and have drawn those deposit balances by over $200 million in aggregate.
With the deposit balances over $5 million of those 36 relationships twenty-seven continue to have balances over $5 million and have grown those deposit balances by over $200 million in aggregate.
Speaker 5: As a commercial bank, a majority of our deposits are comprised of commercial accounts. On slide number 20, we depict our deposit balances as September 30, 2023 and year-end 2022.
As a commercial bank a majority of our deposits are comprised of commercial accounts on slide number 20, we depict our deposit balances as of September 32023, and year end 2022.
Charles Christmas: Our third quarter 2023 net interest margin was 42 basis point higher than the third quarter of 2022 and our net interest margin for the first nine months of 2023 was 110 basis point higher than the respective prior year period. The improved net interest margins primarily reflect the combined impact of an aggregate 525 basis point increase in the federal funds rate since March of 2022 and approximately two thirds of our commercial loans have any floating rate.
Speaker 5: including broker deposit CDs, business deposit accounts were up $49 million during the first nine months of 2023, which includes a decline of $124 million during the first quarter that primarily reflected business customer seasonal payments. Obtaxes, bonuses, and partnership this first.
Excluding broker deposit Cds business deposit accounts were up $49 million. During the first nine months of 'twenty 2023, which includes a decline of $124 million. During the first quarter that primarily reflected business customer seasonal payments of taxes bonuses and partnership disbursements.
Speaker 5: I do get personal deposit totals have increased $27 million during the first nine months of 2023, a majority of which occurred during the third quarter.
Aggregate personal deposit totals have increased $27 million during the first nine months of 2023, a majority of which occurred during the third quarter.
Charles Christmas: Interest income on securities also increased during the 2023 periods compared to the prior year periods reflecting growth in the securities portfolio and the higher interest rate environment. Interest in income on other earning assets a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago also increased during the 2023 periods compared to the prior year periods. The 2023 results were positively impacted by an increased rate paid by the Federal Reserve Bank of Chicago which more than offset lower average balances compared to the 2022 periods.
Speaker 5: During the first nine months of 2023, we have experienced transfers of funds from no and low cost checking and savings deposits to higher pay and money market and time deposits, a trend we expect to continue.
During the first nine months of 2023, we have experienced transfers of funds from no and low cost checking and savings deposits to higher paying money market and time deposits a trend we expect to continue.
Speaker 5: On slide 21, we depict our primary sources of liquidity as of September 30, 2023. We do periodically use our unsecured federal funds line of credit with a major course by the bank. However, we have not utilized this line since late April 2023. Our deposit balance of the Federal Reserve Bank of Chicago equaled $189 million as of September 30, 2023.
On slide 21, we depict our primary sources of liquidity as of September 32023, we do periodically use our unsecured federal fed funds line of credit with a major correspondent bank. However, we have not utilized this line since late April 2023 or.
Our deposit balances at the Federal Reserve Bank of Chicago equaled $189 million as of September 32023.
Charles Christmas: In total interest income was 23.0 million dollars and 74.0 million dollars higher during the third quarter first nine months of 2023 respectively compared to the prior year periods. We recorded increased interest expense on deposits and our sweep account product during the third quarter and the first nine months of 2023 compared to the prior year periods reflecting the increasing interest rate environment transfers of deposits from no or low cost deposit products to higher costing deposit products and enhance competition for deposits.
Speaker 5: To offset the impact of loan fundings and net deposit withdrawals during the first half of the year, and to assist in the rebuilding of our on-balance sheet liquidity position, we obtained $111 million in broker deposits, and $90 million in federal home loan bank of Indianapolis advances during a second quarter of 2023, combined with $70 million in federal home loan bank of Indianapolis advances during the first quarter of 2023.
To offset the impact of loan fundings and net deposit withdrawals during the first half of the year and to assist in the rebuilding of our on balance sheet liquidity position, we obtained $111 million in broker deposits and $90 million in federal home loan bank of Indianapolis advances during the second quarter of 2023.
Combined with $70 million in federal home loan bank of Indianapolis advances during the first quarter of 2023, we did not obtain any new broker deposits or federal home loan bank of Indianapolis advances during the third quarter of 2023.
Speaker 5: We did not obtain any new broker deposits or federal home loan bank of any napless advances during the third quarter of 2023.
Charles Christmas: Los Angeles. Interest expense on Federal Home of Bank of Indianapolis advances also increased during the 2023 periods compared to the prior year periods, reflecting growth in the advance portfolio and the higher interest rate environment. Interest expense on other power funds increased during the 2023 periods compared to the prior year periods, reflecting the higher cost of our trust-preferred securities. In total, Interest expense was $16.4 million and $36.7 million higher during the third quarter and first nine months of 2023, respectively, what compared to the prior year periods.
Speaker 5: Our level of wholesale funds as a percentage of total funds was 13% as of September 30, 2023, unchanged from June 30, 2023, and up from 7% at year end 22.
Our hosts our level of wholesale funds as a percentage of total funds was 13% as of September 32023 unchanged from June 30 of 2023 and up from 7% at year end 'twenty two.
We remain in a strong and well capitalized regulatory capital position, our bank's total risk based capital ratio was 13, 9% as of September 32023.
Speaker 5: We remain in a strong, well-capitalized, regulatory capital position. Our bank's total risk-based capital ratio was 13.9% as of September 30, 2023, about $189 million above the minimum threshold to be categorized as well-capitalized.
$189 million above the minimum threshold to be categorized as well capitalized we did not repurchase shares during the first nine months of 2023, we have $6 $8 million available in our current repurchase plan.
Speaker 5: We did not refer to shares during the first nine months of 2023. We have $6.8 million available in our current repurchased plan.
Charles Christmas: Net interest income increased $6.6 million and $37.3 million during the third quarter and first nine months of 2023, respectively, compared to the prior year periods. We recorded a provision expense of $3.3 million and $5.9 million during the third quarter and first nine months of 2023, respectively. The third quarter provision expense primarily reflects the establishment of a $1.2 million specific reserve on a commercial loan relationship that was placed in the non-accrual status during the quarter and the allocation of $1.7 million to a qualitative factor assessment considering local economic conditions, particularly the potential impacts of the ongoing UAW strike.
Speaker 5: Well, net unrealized gains and losses in our investment portfolio are excluded from regulatory capital calculation.
While net unrealized gains and losses in our investment portfolio are excluded from regulatory capital calculations on slide 17, we depict our tier one leverage and total risk based capital ratios assuming the calculations did include that adjustment.
Speaker 5: On slide 17, we depict our Tier 1 leverage and total wrist-based capillaries, assuming the calculations did include that adjust.
Speaker 5: While our regulatory capillary ratios were negatively impacted by the pro forma calculations, our capital position remains strong.
While our regulatory capital ratios were negatively impacted by the pro forma calculations, our capital position remains strong as of September 32023, our tier let with tier one leverage capital ratio declined from 12.0% down to 10, 8% and our total risk based capital ratio declines from <unk>.
Speaker 5: As of September 30, 2023, our Tier 1 leverage capillar ratio declines from 12.0%, down to 10.8%, and our total risk-based capillar ratio declines from 13.9% down to 12.4%. Our excess capital has measured by the total risk-based capillar ratio is also negatively impacted. However, it told us a strong $115 million over the minimum regulatory minimum of the uh...
<unk>, 9% down to 12, 4%, our excess capital as measured by the total risk based capital ratio was also negatively impacted however in total is a strong $115 million over the minimum regulatory minimum.
Charles Christmas: Updated economic forecasts throughout 2023 have had a nominal impact on the reserve calculation. We recorded increased overhead costs during the third quarter and first nine months of 2023, compared to the prior year periods. Overhead costs increased $2.1 million during the third quarter of 2023, compared to the third quarter of 2022 and were at $5.9 million during the first nine months of 2023, compared to the same time period in 2022. The increased overhead costs primarily resulted from larger compensation and benefit costs, increased FGIC insurance assessments reflecting the industry wide adjustments effective January 1 of this year and higher swap collateral holding costs.
To be categorized as well capitalized.
Speaker 5: On slide 22, we share our latest assumptions on the interest rate environment and key performance metrics for the fourth quarter of 2023, with the caveat that market conditions remain volatile, making forecasting difficult. This forecast is predicated on the federal funds rates, stay in unchanged for the remainder of 2023.
On slide 22, we shared our latest assumptions on the interest rate environment and key performance metrics for the fourth quarter of 2023 with a caveat that market conditions remain volatile, making forecasting difficult. This forecast is predicated on the federal funds rate stay and unchanged for the remainder of 2023.
Speaker 5: We are projecting total loan growth in a range of 5% to 6%. While we have experienced solid commercial loan funding throughout 2023 thus far, and our commercial loan pipeline remains very strong, we continue to experience a high level of payoffs and pay down.
We are projecting total loan growth in the range of 5% to 6%, while we have experienced solid commercial loan fundings throughout 2023, thus far and our commercial loan pipeline remains very strong we continued to experience a high level of payoffs and pay downs.
Speaker 5: We are forecasting our net interest margin to decline five to 15 basis points during the fourth quarter of 2023. From the 3.98 percent we recorded during the third quarter of 2000.
We are forecasting our net interest margin to decline, 5% to 15 basis points during the fourth quarter of 2023 from the $3, 98%. We recorded during the third quarter of 2023.
Charles Christmas: Continuing on slide 8, our net interest margin was 3.98 percent during the first quarter of 2023, up 42 basis points from the third quarter of 2022 and was 4.10 percent during the first nine months of 2023, up 110 basis points from the first nine months of 2022. The improved net interest margin is primarily a reflection of an increased yield on earning assets in large part reflecting the increase in interest rate environment over the past 12 months, which has more than offset the increased cost of funds.
Speaker 5: In closing, we remain very pleased with our operating results in financial conditions through the first nine months of 2023, and believe we remain well positioned to continue to successfully navigate through the myriad of challenges faced by all financial institutions. Those are my prepared remarks.
In closing we remain very pleased with our operating results and financial conditions through the first nine months of 2023 and believe we remain well positioned to continue to successfully navigate through the myriad of challenges faced by all financial institutions.
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 up for the question and answer session.
Speaker 3: Thank you, Chuck. That concludes management's prepared comments, and we will now open the call-up for the question and answer session.
Charles Christmas: Our yield on earning assets equals 5.78 percent during the third quarter of 2023, an increase of 17 basis points from the second quarter of 2023 and up 174 basis points compared to the third quarter of 2022. Our loan yield has increased to 181 basis points over the past 12 months, primarily reflecting the combination of the increase in interest rate environment and approximately two thirds of our commercial loans having a low-dead rate.
We will now begin the question and answer session.
Speaker 1: To ask a question, you may press star and one on your touchtone phone.
I'll ask a question you May press Star then one on your Touchtone phone.
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If you are using a speakerphone please pick up your handset before pressing the key.
Speaker 1: If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time we will pause momentarily.
Is it any time your question has 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.
Charles Christmas: Race. Our average commercial loan rate has increased 170 basis points over the past 12 months, a significant increase in a loan portfolio that averaged approximately $3.1 billion during that time period. Our cost of funds equaled 1.80% during the third quarter of 2023, an increase of 24 basis points from the second quarter of 2023 and up 132 basis points compared to the third quarter of 2022. The 24 basis point increase in our cost of funds during the third quarter of 2023 compared to the second quarter of 2023 reflects a reduction from a 49 basis point increase during the second quarter of 2023 compared to the first quarter of 2023 and a 42 basis point increase during the first quarter of 2023 compared to the fourth quarter of 2022.
The first question today comes from Daniel Tamayo with Raymond James. Please go ahead.
Speaker 1: The first question today comes from Daniel Conello with Raymond James. So you go ahead.
Speaker 4: Hey, good morning, guys.
Hey, good morning, guys.
Oh boy.
Speaker 4: Congratulations to Bob on your retirement and to Ray for your promotion, so that's terrific.
Yeah, congratulations to Bob on your retirement and into Ralph you're right on your promotion so that's terrific.
Speaker 4: But I guess just starting on the on the margin.
But I guess just starting on the on the margin.
Yeah.
Just curious.
Speaker 4: As we think about, we've got your fourth quarter guidance here, but as we think about going forward beyond the fourth quarter perhaps, assuming we stay at this interest rate levels here, and maybe we've seen most of the increase in asset yields now, how you're thinking about
As we think about we've got your your fourth quarter guidance here, but you know.
As we think about going forward beyond the fourth quarter, perhaps assuming we stay at this interest rate levels here and and maybe we've seen most.
Most of the increase in our asset yields now how youre thinking about.
Speaker 4: you know, where the NIM may bottom eventually, I know we've had this discussion before, but what are your current thoughts there? And then perhaps a trajectory as we move to 2024.
You know where the NIM may bottom eventually I know we've had this discussion before but what are your current thoughts there and then perhaps a trajectory as we move through 2024.
Charles Christmas: Certain news slide 14, we have provided repricing data on our loan portfolio. About two-thirds of our commercial loans have a floating rate, while about 81% of our fixed rate commercial loans mature within five years. Our retail loans are largely comprised of 5.1, 7.1 and 10.1 adjustable rate mortgage loans with most subject to adjustment within the next seven years. In aggregate, approximately 84% of our loans are subject to repricing within the next five years.
And you know.
Speaker 4: And, you know, sorry to continue on here, but your deposit cost have been very low so far. So I'm just curious what that bakes in in terms of, maybe a terminal deposit paid as.
Sorry to continue on here, but your deposit costs have been very low so far so I'm just curious what what that bakes in in terms of maybe.
Maybe a terminal deposit beta as well thanks guys.
Speaker 5: Yeah, this is Chuck. We're just in the initial stages of Billionaire our 2024 budget. So my comments will be relatively general. But given the backdrop of the federal funds rate staying unchanged throughout next year, which is what will likely, as we see here today, is what will likely budget.
Yeah, Dan This is Chuck [noise], we're just in the initial stages of building out our 2020 for budget. So my comments will be relatively general.
But given the backdrop of the federal funds rate stayed unchanged throughout next year, which is what will likely as we sit here today was what will likely budget.
Charles Christmas: We have also included a couple of slides in our presentation to pick the information on our investment portfolio, which are slide numbers 15 and 16. There were only nominal changes to our investment portfolio during the third quarter of 2023, largely limited to ordinary purchases and maturities of municipal bonds. All of our investments remain categorized as available per sale. As of September 32, 2023, about 65% of our investment portfolio was comprised of U.S, government agency bonds, with approximately 30%, 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.
Speaker 5: I think we'll see a steady but lower decline in our margins, kind of the decline that we've seen over the last couple quarters and taking into account my guidance. I would say probably in the mid single digits decline on a corley basis. Clearly we have some deposits that are going to continue to reprise.
I think we'll see a steady but lower decline in our margin.
Kind of the decline that we've seen over the last couple of quarters and taken into account my guidance I.
I would say probably in the mid single digits decline on a quarterly basis.
Clearly we have some deposits that are going to continue to reprice.
Speaker 5: and some FHLB advances that are maturing as well. However, a lot of those FHLB advances are actually match funded against fixed rate loans that are also scheduled to reprice next year as well. And we also have some investment securities that are maturing that are at very, very low rates that either will be reinvested at much higher rates in the investment portfolio.
And some <unk> advances that are maturing as well however, a lot of those <unk> advances are actually match funded against fixed rate loans that are also scheduled to reprice next year as well and then we also have some investment securities that are maturing that are at very very low rates that either will be reinvested at.
Charles Christmas: Mortgage back securities, all of which are guaranteed by U.S, government agency, comprised only about 5% of our investment portfolio. The maturities of U.S, government agency bonds and municipal bond segments are generally structured on a ladder basis. A significant majority of U.S, government agency bonds mature within the next seven years, with over 3.4% of the municipal bonds maturing over the next 10 years. The net unrealized loss total of $93 million as of September 30, 2023.
Much higher rates in the investment portfolio or and or some of that money will go into loan portfolio, which obviously will provide us even higher rate so without putting all the the the excel spreadsheets together and letting them do their thing I would expect a decline on a quarterly basis is probably in the mid single digits.
Speaker 3: And or some of that money will go into the loan portfolio which obviously will provide us even higher rates so
Speaker 5: Without putting all the Excel spreadsheets together and letting them do their thing, I would expect the decline on a corley basis, probably in the mid single digit.
Speaker 4: And did that assume any particular cumulative deposit data where you guys end up?
And it did that assume any any particular.
Cumulative deposit beta where you guys end up.
Charles Christmas: The significant increase in the net unrealized loss over the past two years reflects the increasing interest rate environment since that time that the Fed started raising interest rates. 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.
No I wouldn't have that off the top of my head Danny but on an overall basis don't really expect that to go too much higher.
Speaker 5: No, I wouldn't have that off the top of my head, Danny, but on an overall basis, don't really expect it to go too much higher.
Okay.
Speaker 4: And then just to follow up on credit, yeah, obviously that's still very strong story for you guys, but if you could just provide a little more detail on the commercial loan that really drove the increase in MPAs, that'd be great.
And then just a follow up on on credit you, obviously that that's still very strong story for you guys, but if you could just provide a little more detail on the the commercial loan that really drove the increase in M. P. H that'd be great.
Charles Christmas: On slide 1819 and 20, we provide data on our deposit base. You will note that we include suite accounts in our deposit tables and calculations as those accounts reflect monies from entities, primarily municipalities, that elect to place their funds in a suite account that is fully secured by U.S, government agency bonds. Even with the seasonal decline we experience during the first quarter of each year, and I'm going transfers to money market accounts, nine interest bearing checking accounts comprise a significant 32% of total deposit and sweep accounts as a September 30, 2023.
Yeah.
Speaker 6: Yeah, Danny, this is Ray. So that single credit was one that.
Yes, Danny this is ray so that single credit was one.
Speaker 6: It was under some pressure from a margin standpoint in the particular industry that it serves. Management made some...
It was under some pressure from a margin standpoint in a particular industry that it serves a management made some.
Speaker 6: In hindsight, poor decisions about how to manage their business.
In hindsight poor decisions about how to manage their business and the owner support it for a while with cash injections made the decision not to continue to do that and shut the doors and so.
Speaker 6: and the owner supported it for a while with cash injections made the decision not to continue to do that and shut the doors. And...
Speaker 6: As we compare that particular company to others that we serve in the same industry, we've tentatively drawn the conclusion that it was a company specific rather than an industry specific delays that struck this particular company. And we've begun collection efforts and expected get full resolution to this within a quarter or two.
As we compare that particular company to others that we serve in the same industry. We've tentatively drawn the conclusion that it was company specific rather than an industry specific a malaise that struck this particular company and Hum we've begun.
Charles Christmas: A large portion of these funds are associated with commercial lending relationships, especially commercial and industrial companies. The level of uninsured deposits, totally in about 51% as a September 30, 2023, has remained relatively steady over many years. On slide 19 we provide information on deposits with balances of $5 million or more. As a September 30, 2023, we had 75 relationships which aggregated $1.2 billion. About 81% of the relationships and approximately 83% of the total deposits were with businesses and individuals with the remaining comprised of meaningful entities.
Election efforts and.
Expected.
Get full resolution to this within a quarter or two.
Okay.
No.
Speaker 6: broad industry that you could give us as an indication of where that would be from? Given its status as the only one, I'd prefer not to.
Broad industry that you could give us an indication of where that would be from a.
Given its status as the only one I prefer not to.
Charles Christmas: With compared to five years ago, we had 36 relationships with the deposit balances over $5 million. Of those 36 relationships, 27 continue to have balances over $5 million and have drawn those deposit balances by over $200 million in aggregate. As a commercial bank a majority of our deposits are comprised of commercial accounts. On slide number 20, we depict our deposit balances as a September 30, 2023, and year end, 2022. Excluding broker deposit CDs, business deposit accounts were up $49 million during the first nine months of 2023, which includes a decline of $124 million during the first quarter, that primarily reflected business customer seasonal payments of taxes, bonuses, and partnership disbursements.
Speaker 4: Okay, I understand. All right, I appreciate the color. Thanks, guys. Thank you.
Okay understood Alright, I appreciate the color thanks, guys.
Thanks, David.
The next question comes from Eric.
Speaker 1: The next question comes from Eric Lick with Hoppe Group. Please go ahead.
Please go ahead.
Good morning, everyone.
Alright.
Speaker 7: One just wanted to appreciate slide 14 and kind of the breakdown of the loan repricing and I'm I'm curious about the
One just wanted to say I appreciate the slide 14 in kind of the breakdown of the loan repricing and I'm curious about the.
Speaker 7: pie chart in the bottom right hand corner and specifically the 28% of loans expected to repriciate in the one to five years, you know, certainly a larger majority of your portfolio has had seen the
Hum chart in the bottom right hand corner and specifically there.
28% of loans expected to three pricing in the one to five years, you know certainly a large majority of your portfolio had kind of seem to be.
Speaker 7: you know, right on our loans go up over the past year and a half or so, but for that segment that hasn't seen it yet, you know, could be some fairly large increases. I'm wondering how you guys, you know, think about that if you're proactively talking to some of these borrowers so that there's not a, you know, kind of a big shock when these rates are just higher as they kind of reprise or come do for renewals. I'm curious about that. The thoughts on that segment.
You know right on our loans go up over the past year, and a half or so but what for that segment that haven't seen it yet it could be some fairly large increases I'm wondering how you guys think about that if you're proactively talking to some of these borrowers. So that there's not a you know kind of a big shock. When these rates are just higher as they kind of repriced or come due for renewal.
Charles Christmas: Aggregate personal deposit totals have increased $27 million during the first nine months of 2023, a majority of which occurred during the third quarter. During the first nine months of 2023, we have experienced transfers of funds from NO and low cost checking and savings deposits to higher pay and money market and time deposits, a trend we expect to continue.
So I'm curious about the thoughts on that segment.
Yeah. This is ray we have engaged in proactive discussions with our borrowers as the rates have followed the path that they have them.
Speaker 6: Yeah, this is Ray. We have engaged in proactive discussions with our borrowers as the rates have followed the path that they have.
Speaker 6: and provided opportunities to them to, you know, blend and extend or, you know, reprice early. And if that was important to their particular situation, many of them have taken advantage of that. So that is an activity that we've undertaken fairly regularly in the last couple of years.
And provided opportunities to them to a blend.
Blend and extend or reprice early and if that was important to their particular situation.
Charles Christmas: On slide 21, we depict our primary sources of liquidity as of September 30, 2023. We do periodically use our unsecured federal funds line of credit with a major course by the bank. However, we have not utilized this line since late April 2023. Our deposit balance at the Federal Reserve Bank of Chicago, equaled $189 million as of September 30, 2023. To offset the impact of loan fundings and net deposit withdrawals during the first half of the year, and to assist in the rebuilding of our on balance sheet liquidity position, we obtained $111 million in broker deposits and $90 million in federal home loan bank of Indianapolis advances during the second quarter of 2023, combined with $70 million in federal home loan bank of Indianapolis advances during the first quarter of 2023.
Many of them have taken advantage of that so that is an activity that we've undertaken fairly regularly in the last couple of years.
Thanks, I appreciate the color there and then it sounds like you're fairly comfortable that theres not going to be any surprises or any loans that have no difficulty one once those rates do move higher and reset.
Speaker 7: Thanks. I appreciate the color then. And it sounds like you're fairly comfortable then that there's not going to be any surprises or any loans that have, you know, difficulty once those rates do move higher and reset.
Speaker 6: We're not aware of any at the current time, but things as the environment is very dynamic and things change as possible. So any is a strong word, but certainly not massive ways of that by any stretch of the imagination.
We're not aware of any at the current time, but.
Things.
The environment is very dynamic and things change as possible. So any is a strong word, but certainly not massive waves of that by any stretch the imagination.
Speaker 3: And Eric, what it really points to is that we are continually engaged with our clients.
And Eric what it really points to is that we we're continually engaged with our clients and understand their.
Speaker 3: and uh... understand uh... uh... their business structure and and and uh... their cash flows and and so uh... it won't be the first conversation that we have with the about raising raising rates because uh... uh... we're concerned uh... that uh... that they address their uh... their situation and make sure they plan for uh... in the upcoming uh... cash flow
Their business structure, and our cash flows in and so it won't be the first conversation that we've had with them about raising raising rates because.
Charles Christmas: We did not obtain any new broker deposits or federal home loan bank of Indianapolis advances during the third quarter of 2023. Our level of wholesale funds, as a percentage of total funds, was 13% as of September 30, 2023, unchanged from June 30, 2023, and up from 7% at year end 22. We remain in a strong, well-capitalized regulatory capital position. Our bank's total risk-based capital ratio was 13.9% as of September 30, 2023, about $189 million above the minimum threshold to be categorized as well-capitalized.
We're concerned.
That that they address their their situation and make sure they plan for them and the upcoming casual drains as a result of increased loan pricing. So continue to engagement. We stay ahead of those situations that may potentially be some challenges some presents some challenges and that's how we do business.
Speaker 3: drained as a result of increased loan prices. So, continue engagement. We stay ahead of those situations that may potentially present some challenges in how we do business.
Yeah.
Got it I appreciate that the follow up and I agree that constant dialogue is definitely important I'm moving to the securities portfolio.
Speaker 7: I appreciate that the fall-up and I agree constant dialogue is definitely important. Moving to the securities portfolio, I made some commentary just about the unrealized loss position at this point. And, of course, maybe a truck, if you could remind me of what the duration is on a total portfolio, and then have you guys given any thoughts to restructuring a portion of the portfolio at this point, and if not, you know, what might cause you to change your mind and reconsider.
Made some commentary just about the unrealized loss position at this point and I'm curious first maybe Chuck if you could remind me what the duration is on the total portfolio and then have you guys given any thoughts to no restructuring a portion of the portfolio at this point and if not you know what might cause you to change your mind and then reconsider.
Charles Christmas: We did not refer to shares during the first nine months of 2023. We have $6.8 million available in our current repurchased plan. While net unrealized gains and losses in our investment portfolio are excluded from regulatory capital calculations, on slide 17, we depict our tier one leverage and total risk-based capital ratios assuming the calculations did include that adjustment. While our regulatory capital ratios were negatively impacted by the performance calculations, our capital position remains strong.
Hey, Eric.
Speaker 5: Excuse me, the duration is right around five years.
[noise] excuse me the durations right around five years.
Speaker 5: The investment portfolio is a relatively small part of our balance sheet, it's currently about 13%. It's actually a little bit above our policy guidelines of 10 to 12%.
The investment portfolio is a relatively small part of our balance sheet is currently about 13%.
You're a little bit above our policy guidelines of 10% to 12%.
Speaker 5: We haven't given, I mean, we definitely have thought about doing some restructuring, but on an overall basis, we don't think that that's the right thing to do at the current time. You know, like I provided the adjusted cap or ratios, we feel, you know, still feel good with our, with our regulatory cap will even take it into the unrealized laws.
We haven't given I mean, we definitely have thought about doing some restructuring.
Charles Christmas: As of September 30, 2023, our tier one leverage capital ratio declines from 12.0%, down to 10.8%, and our total risk-based capital ratio declines from 13.9%, down to 12.4%. Our excess capital as measured by the total risk-based capital ratio is also negatively impacted. However, it totaled a strong $115 million over the minimum regulatory minimum to be categorized as well-capitalized.
But on an overall basis, we don't think that that's the right thing to do at the current time.
Hum.
I provided the adjusted capital ratios, we feel still feel good with our with our regulatory capital even taken into the unrealized loss.
Speaker 5: As I mentioned, we have always managed the portfolio on a laddered basis.
As I mentioned, the we mandate we have always managed the portfolio on a ladder basis and we are just now starting to get into the time period. When we were you know we took some of the excess liquidity during the Covid period.
Speaker 5: And we are just now starting to get into the time period of when we, we, you know, we took some of the excess liquidity during the COVID period to invest in some investment securities. And this is the first quarter where we really start getting into a good volume of maturities.
To invest in some investment securities.
Charles Christmas: On slide 22, we share our latest assumptions on the interest rate environment and key performance metrics for the fourth quarter of 2023, with a caveat that market conditions remain volatile, making forecasting difficult. This forecast is predicated on the federal funds rates stay in unchanged for the remainder of 2023. We are projecting total loan growth in a range of 5% to 6%, while we have experienced solid commercial loan funding throughout 2023 thus far, and our commercial loan pipeline remains very strong, we continue to experience a high level of payoffs and paydowns. We are forecasting our net interest margin to decline five to 15 basis points during the fourth quarter of 2023. From the 3.98%, we recorded during the third quarter of 2023.
And this is the first quarter will be really start getting into a good volume of maturities.
Speaker 5: So we'll see some, you know, some really good repricing opportunities, as I mentioned, starting this quarter going forward for the next several years.
So we will see some you know some really good repricing opportunities as I mentioned, starting this quarter going forward for the next several years and when we kind of blend that blend that cash flow band knows repricing opportunities into the rest of our balance sheet, we feel comfortable with where that's accurately but you know certainly.
Speaker 5: And when we kind of blend that cash flow, bend those repricing opportunities into the rest of our balance sheet.
Speaker 5: We feel comfortable with where that's at currently. But certainly, like all things, we on a regular basis look at our balance sheet and make determinations whether any type of restructuring, whether it's the securities portfolio or any other segment of the balance sheet is needed or warranted.
Like all things, we we on a regular basis look at our balance sheet and make determinations, whether any type of restructuring whether it's the securities portfolio or any other segment of the balance sheet is needed or warranted.
Got it and then just.
Speaker 7: And then just moving on to non-interest income, obviously had some nice growth in the interest rate swap income, credit debit card income and payroll servicing. And I know you call the attention to some successful marketing of products and services to help drive those.
Moving on to noninterest income up if they had some nice growth in our interest rate swap income credit and debit card income and payroll services and I.
Charles Christmas: In closing, we remain very pleased with our offer and results in financial conditions through the first nine months of 2023, and believe we remain well positioned to continue to successfully navigate through the myriad of challenges faced by all financial institutions.
I know you called attention to some successful marketing of our products and services to help draw.
Drive those and based on your projections for the fourth quarter. It seems like those should be those weren't just kind of a one quarter bump there should be pretty sustainable going forward and you know kind of in any additional thoughts you can provide there.
Speaker 7: based on your projections for the fourth quarter, it seems like those should be, those weren't just kind of a one quarter bump, those should be pretty sustainable going forward and kind of any additional thoughts you could provide there.
Charles Christmas: Those are my prepared remarks, I'll now turn to call back over to Bob. Thank you, Chuck.
Unknown Executive: That concludes management's prepared comments, and we will now open the call up for the question and answer session. We will now begin with question and answer session. To ask a question, you may press star than one on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star than two.
Speaker 5: Yeah, I think you're spot on, Eric. I think you know, when you look at the fee income categories that you mentioned,
Yes, I think youre spot on Erik I think you know when you look at the fee income categories that you mentioned.
Speaker 5: Those are very important products and services that we can provide to our commercial borrowers.
Those are very important products and services that we can provide to our commercial borrowers.
Speaker 5: So as we continue to market those to existing borrowers.
So as we continue to market those to existing borrowers certainly when we bring new commercial loan relationships into the bank, our marketing those products and services as well.
Speaker 5: Certainly, when we bring new commercial loan relationships into the bank, we're marketing those products and services as well.
Speaker 5: So, yeah, we would expect as the commercial loan segment, especially the C&I segment continues to grow, we would expect growth in those fee increases.
So yeah, we would expect as the as the commercial loan segment, especially the C&I segment continues to grow we would expect growth in those fee income categories.
Unknown Executive: At this time, we will pause momentarily to assemble our roster.
Speaker 5: Swaps are definitely a very important part of managing our balance sheet.
Daniel Conello: The first question today comes from Daniel Conello with Raymond Jane. Please go ahead. Hey, good morning, guys.
Swaps are definitely a very important part of managing our balance sheet.
Speaker 3: You know, we continue to, you know, our basic guideline, if somebody wants a fixed-rate commercial real estate loan over, say, $2.5 million, is they're going to get a floating rate, and if they want to fix it, they can do a swap, and then, obviously, we back out of that by doing, simultaneously doing the opposite swap with the correspondent.
We continue to are our basic guideline if somebody wants a fixed rate commercial real estate loan over say $2 $5 million as theyre going to get a floating rate and if they want to fix that they can do a swap and then obviously we back out of that by doing simultaneously doing the opposite swap with a correspondent.
Charles Christmas: Congratulations to Bob on your retirement and to Ray on your promotion, so that's terrific. But I guess just starting on the margin, just curious as we think about we've got your fourth quarter guidance here. But as we think about going forward beyond the fourth quarter, perhaps, assuming we stay at this interest rate levels here, and maybe we've seen most of the increase in asset yields now, how you're thinking about where the NIM may bottom eventually.
Speaker 5: because we want the adjustable rate, obviously.
Hum.
No just because we want the adjustable rate obviously.
Speaker 5: Um, you know, those can, you know, on a quarter by quarter basis, there'll be some lumpiness, if you will, just because of the activity that takes place in any one quarter. However, from our policy standpoint, this is a product that we that we will continue to have in place and we'll continue to use.
Those kids.
By quarter basis, there'll be some lumpiness if you will.
Just because of the activity that takes place in any one quarter. However from a policy standpoint. This is a product that we that we will continue to have in place and will continue to use gaining income, which obviously is good but the most important part of that product is managing the interest rate risk position of our balance sheet and we think that that's very.
Speaker 5: Gaining income, which obviously is good, but the most important part of that product is managing the interest rate risk position of our balance sheet, and we think that that's very important. So we would certainly expect swap fees to continue, just want to put it out there that that can be lumpy on a quarter-to-quarter basis, depending on the activity in any one quarter.
Important so we would certainly expect swap fees to continue just want to put it out there that that can be lumpy on a quarter to quarter basis, depending on the activity in any one quarter.
Charles Christmas: I know we've had this discussion before, but what are your current thoughts there, and then perhaps a trajectory as we move to 2024. And you know, sorry to continue on here, but your deposit cost has been very low so far. So I'm just curious what that bakes in in terms of maybe a terminal deposit rate as well. Thanks, guys.
Speaker 7: Understood. Thanks, Chuck. And last one for me, maybe for Bob or Ray, just curious about your thoughts on the UAW strikes, just given the importance of auto manufacturing in the state of Michigan. And correct me if I'm wrong, I don't think you have any direct exposure to any of the major auto manufacturers, but maybe some secondary or tertiary exposure to suppliers or even on the consumer side, some employees that may be participating in the strikes and what impact that could have and how you think about the impact there.
Understood. Thanks, and last one for me maybe for Barbara Ray just curious about your thoughts on the UAW strikes just given the importance of auto manufacturing and in the state of Michigan and correct me if I'm wrong I don't think you have any direct exposure to any of the major auto manufacturers, but maybe some secondary or tertiary exposure to suppliers or.
Charles Christmas: Yeah, this is Chuck. We're just in the initial stages of Billy Knight, our 2024 budget. So my comments will be relatively general. But given the backdrop of the federal funds rate staying unchanged throughout next year, which is what will likely, as we see here today, is what will likely budget. I think we'll see a steady, but lower decline in our margins, kind of the decline that we've seen over the last couple quarters, and taken into account my guidance.
Or even on the consumer side, yeah. Its not from employees that you know may be participating in the strikes and you know what impact that that can happen. How do you think about the impact there.
Yeah. This is ray you're correct, we don't have any direct exposure.
Speaker 6: And this is Ray, you're correct, we don't have any direct exposure.
Speaker 6: The tertiary and secondary impacts that you referenced are still pretty minimal in our portfolio at this point. The employee bases that have been impacted are primarily in the southeast side of the state, where we don't have heavy retail business. So we haven't felt much impact there. Some of our customers that provide
The.
The tertiary and secondary impacts that you referenced are so pretty minimal in our portfolio. At this point are the employee bases that have been impacted.
Charles Christmas: I would say probably in the mid single digits decline on a quarterly basis. Clearly, we have some deposits that are going to continue to reprice, and some FHLB advances that are maturing as well. However, a lot of those FHLB advances are actually match-funded against fixed rate loans that are also scheduled to reprice next year as well. And we also have some investment securities that are maturing that are at very, very low rates that either will be reinvested at much higher rates in the investment portfolio and or some of that money will go into loan portfolio, which obviously will provide us even higher rates.
Are primarily in the southeast side of the state where we don't have.
In our heavy our.
Retail business. So we haven't felt much impact there.
Some of our customers that provide.
Speaker 6: you know, piece parts as opposed to tools and dyes, their volumes are starting to contract to some level. But again, it's not terribly broad-based. So it's a situation where they can.
Piece parts as opposed to tools and dies are there volumes are starting to contract some level, but again its not terribly broad base. So it's a situation where they can.
Charles Christmas: So without putting all the Excel spreadsheets together and letting them do their thing, I would expect the decline on a quarterly basis, probably in the mid single digits. And did that assume any particular cumulative deposit data where you guys end up? No, I wouldn't have that off the top of my head, Danny, but on an overall basis, don't really expect it to go too much higher. Okay.
Speaker 6: Uh, you know, tread water, if you'll permit the expression for this period of time until resolution, but there hasn't been a lot of damage to individual or corporate balance sheets to this point, obviously, the duration of the strike and the breath.
You know tread water or if you'll permit the expression for this period of time until resolution, but there hasn't been a lot of damage to individual or corporate balance sheets to this point, obviously, the duration of the strike and the breadth and depth of it will determine what ultimately that looks like but so far.
Speaker 6: depth of it will determine what ultimately that looks like, but so far so good.
So good it seems like some of the feedback that we're getting from our clients. At this point is that these platforms and these things that are being worked on from their perspective.
Speaker 3: It seems like some of the feedback that we're getting from our clients at this point is that these platforms and these things that are being worked on from their perspective will happen. It's just that the timing will be different than originally planned in a lot of cases, and it'll be pushing it back a little bit. But hopefully, as well, I think they get this resolved sooner than later, but we'll see.
Raymond Reitsma: And then just to follow up on on credit, obviously that's still a very strong story for you guys, but if you could just provide a little more detail on the commercial loan that really drove the increase in MPAs, that'd be great. Yeah, Danny, this is Ray. So that single credit was one that was under some pressure from a margin standpoint in the particular industry that it serves. Management made some In hindsight, poor decisions about how to manage their business and the owner supported it for a while with cash injections made the decision not to continue to do that and shut the doors and so as we compare that particular company to others that we serve in the same industry.
It will happen, it's just that the timing will be different than originally planned and a lot of cases, and it'll be pushing pushing it back a little bit, but hopefully as well think they get this resolved sooner than later, but we'll see.
That's very helpful. Thanks for taking my questions today.
Thanks, Michael.
As a reminder, if he would like to ask a question. Please press Star then one can be joined into the question queue.
Speaker 1: As a reminder, if you would like to ask a question, please press star then 1 to be joined into the question queue.
Speaker 1: Your next question comes from Damon Delmonte with KBW. Please go ahead.
Your next question comes from Damon Delmonte with K B W.
Go ahead.
Speaker 7: Hey, good morning, guys. First off, congrats, Bob, on the retirement announcement and Ray on the promotion. Both very well-deserved. So just wanted to circle back on kind of a broader margin picture question. Chuck, just given the high percentage of floating rate commercial loans, if the Fed does start to cut rates in the back half of 24, have you guys given any thought of trying to maybe put on some hedges to protect on the downside for risk there?
Hey, Good morning, guys first off congrats Bob on the the retirement announcement and Ray on the promotion, both well very well deserved.
I just wanted to sure I just wanted to circle back on on kind of a broader margin.
Picture question Chuck.
Chuck you know just given the high percentage of floating rate commercial loans, you know if the fed does start to cut rates in the back half of 'twenty for you guys given any thought of trying to maybe put on some hedges to protect on the downside for risk there.
Daniel Conello: We've tentatively drawn the conclusion that it was a company specific rather than an industry specific malaise that struck this particular company and we've begun collection efforts and expected get full resolution to this within a quarter or two. Okay, there's no broad industry that you could give us is the indication of where that would be from given its best is the only one I prefer now to. Okay, I understand. All right, I appreciate the color. Thanks, guys. Thank you.
Speaker 5: But we're always thinking about both sides. The interest rate spectrum, and certainly, it's likely over time, especially that rates will be going down before they go up much more, maybe another increase here soon. But likely they will be going down. So we're always managing our balance sheet to the degree that we can...
Well, we're always thinking about both sides of the interest rate spectrum and certainly.
It's likely over overtime, especially that rates will be going down before they go up much more you know maybe another increase here soon but are you now likely they will be going down. So we're always managing our balance sheet to the degree that we can.
Speaker 5: You know, make any change in interest rates to make that, you know.
You know.
Make any change in interest rates to make that you know.
Speaker 5: you know, minimize the negative impactors could be negative impacts. So, you know, clearly, I think where you're going is we got the benefit of rates going up because of the structure of our balance sheet. What happens if rates go down? Clearly, there's a question there of magnitude. Rates going up 525 basis points, obviously very substantial. Don't see, you know, a decline of any of that degree on the horizon. Obviously, it could happen.
Minimize the negative impact or is it could be negative impacts. So clearly I think where you're going is we got the benefit of rates going up because of the structure of our balance sheet. What happens if rates go down clearly there's a question there a magnitude.
Erik Zwick: The next question comes from Erik Zwick with Hoppy. Please go ahead.
Erik Zwick: Good morning, everyone. One just wanted to appreciate slide 14 and kind of the breakdown of the loan repricing and I'm curious about the. High chart in the bottom right hand corner and specifically the 28% of loans expected to repricand in the one to five years certainly a larger majority of your portfolio has had seen the. You know, rate on our loans go up over the past year and a half or so, but but for that segment that hasn't seen it yet, you know, could be some fairly large increases I'm wondering how you guys, you know, think about that if you're proactively talking to some of these borrowers so that there's not a, you know, kind of a big shock when these rate rate to just higher as they kind of repriced or come do for renewals. I'm curious about that itself in that segment.
Rates going up 525 basis points, obviously very substantial.
Don't see a decline of any of that degree on the horizon, obviously it could happen.
Speaker 5: But we think that in general, as rates go down, assuming at some point they will, we feel pretty good about our position. We would see some negative impact to our net interest margin if you look at our simulations, but there are definitely some things that we can do, and obviously would react if we did see an interest rates go down.
But we think that in general in general as rates go down assuming at some point they will we feel pretty good about our position we would see some negative impact to our net interest margin. If you look at our stimulations, but there are definitely some things that we can do and obviously would react if we did start seeing interest rates go down.
Speaker 5: As far as hedges, you know, we look at those from time to time for sure. The one thing that we see with hedges is that they're incredibly pricey because of the volatility in the market. So with that volatility priced into the cost of hedging products, it's very, very expensive to do.
As far as hedges, we look at those from time to time for sure.
The one thing that we see with hedges is out there and they are incredibly pricey because of the volatility in the market. So what that volatility are priced into the cost of hedging products, it's very very expensive to do.
Raymond Reitsma: Yeah, this is Ray. We have engaged in proactive discussions with our borrowers as the rates have filed the paths that they have and. Provided opportunities to them to, you know, blend and extend or reprice early and if that was important to their particular situation, many of them have taken advantage of that. So that is an activity that we've undertaken fairly regularly in the last couple of years. Thanks appreciate the color of them and it sounds like you're fairly comfortable then that there's not going to be any surprises or any loan that have, you know, difficulty once, once with rates to move fire and reset.
Speaker 5: and you'll give in where we are with the structure of our balance sheet, our expectations and rates.
And you know given where we are with the structure of our balance sheet, our expectations on rates and the impact at a lower rate environment would have we have so far felt comfortable not putting hedges on our balance sheet, but clearly continue to manage the balance sheet with the idea and the expectation that at some point rates will go down.
Speaker 5: and the impact that a lower rate environment would have. We have so far felt comfortable not putting hedges on our balance sheet, but clearly continue to manage the balance sheet with the idea and the expectation that at some point rates will go down.
Got it Okay. That's helpful. Thank you and then with respect to the kind of the outlook for provision I mean credit continues to be extremely strong.
Speaker 7: Got it. Okay. That's helpful. Thank you. And then with respect to kind of the outlook for provision, I mean, credit continues to be extremely strong. You know, it sounds like this quarter's uptick in NPLs is clearly a one-off for you guys. You know, if we kind of look at the specific reserve that went into that credit and we kind of back that out of the provision level, is that a reasonable run rate to expect kind of over the upcoming quarter?
You know it sounds like this with this quarter's uptick in Npls is clearly a one off for you guys.
Look at the specific reserve that went into that credit and we kind of back that out of the the provision level is that a reasonable run rate run rate to expect kind of over the upcoming quarters.
Raymond Reitsma: We're not aware of any at the current time, but you know things as the environment is very dynamic and things change as possible. So any is a strong word, but certainly not massive ways of that by any stretch of the imagination. And Eric, what it really points to is that we are continually engaged with our clients and understand their business structure and their cash flows. And so it won't be the first conversation that we have with them about raising rates because we're concerned that they address their situation and make sure they plan for any upcoming cash flow drains as a result of increased loan price.
Speaker 8: Yeah, I think, you know, given, you know, we think our growth going forward will be similar to what it has been in the recent past. Obviously, like you said, the assumption of no further large specific reserves that, yeah, I think that would be a good run rate going forward. All things being equal. Okay. Great. And then just lastly, you know, any update thoughts on capital management with regards to the buyback, you know, capital levels remain strong and you still have.
Yes, I think.
Given.
We think our growth going forward will be similar to what it has been in the recent past.
Obviously like you said the assumption of no further large specific reserves that yes, I think that would be a good run rate going forward all things being equal okay. Great and then just lastly on you know any updated thoughts on capital management with regards to the buyback you know capital levels remained strong and you still have six six inch.
Raymond Reitsma: And so continuing engagement, we stay ahead of those situations that may potentially be some challenges, present some challenges and it's how we do business. I appreciate that the fall-up and I agree constant dialogue is definitely important.
Speaker 8: 6 and change, 6.8 million left on the current buyback and kind of given where shares are trading now, what are your thoughts on getting back in to the buyback?
$6 8 million left on the current buyback and kind of given where shares are trading now what are your thoughts on I'm on getting back in to the buyback game.
Speaker 3: Damian, that's certainly something that we have at our disposal. We've engaged in it not been until last year and a half certainly, but it's something that's out there, especially at the stock price where it currently is sitting at. But we continue to evaluate that question in terms of our overall capital management and what we need for growth and lots of other potential uses of the capital. So something that we'll certainly consider. Hopefully the stock price will continue to
David Yeah that that's certainly something that we have at our disposal. We've engaged in it are not than last year and a half certainly, but it's something that's out there, especially at the stock price where it currently is sitting at but we continue to evaluate that question in terms of our overall capital management and what we need.
Charles Christmas: Moving to the securities portfolio, it made some commentary just about the unrealized loss position at this point, and I'm curious, first maybe Chuck, if you could remind me of what the duration is on a total portfolio, and then have you guys given any thoughts to, you know, restructuring a portion of the portfolio at this point, and if not, you know, what might cause you to change your mind and reconsider? Yeah, the duration, excuse me, the duration's right around five years. You know, we've all, you know, the investment portfolio is a relatively small part of our balance sheet is currently about 13%, it's actually a little bit above our policy guidelines of 10 to 12%.
For growth in lots of other potential uses of the capital. So it's something that we'll certainly consider hopefully the stock price will continue to.
Speaker 3: to go in the right direction so it will be a move point, but it's certainly a tool in our toolbox.
Do I go in the right direction, so it'll be a moot point, but it's certainly a tool in our toolbox.
Speaker 8: Okay, great. Oh, that's all that I had. Thank you very much. Thank you, David.
Okay, Great. That's all that I had thank you very much thanks, David.
This concludes our question and answer session I would like to turn the conference back over to Bob Kaminski for any closing remarks.
Speaker 1: Please conclude our question and answer session. I would like to turn the conference back over to Bob Cummins, deep running, closing remarks.
Speaker 3: Yeah, thanks, Betsy, and thank you all for your interest in our company. We look forward to speaking with you next at the end of the fourth quarter in January . This call is now ended. Thank you.
Yeah, Thanks, Betsy and thank you all for your interest in our company. We look forward to speaking with you next at the end of the fourth quarter in January . This call has now ended thank you.
Charles Christmas: We haven't given, I mean, we definitely have thought about doing some restructuring, but on an overall basis, we don't think that that's the right thing to do at the current time. You know, like I provided the adjusted capital ratios, we feel, you know, still feel good with our, with our regulatory capital, even taken into the unrealized loss. As I mentioned, we have always managed to portfolio on a latter basis, and we are just now starting to get into the time period of when we, you know, we took some of the access liquidity during the COVID period to invest in some investment securities, and this is the first quarter will be really started getting into a good volume of maturities.
Speaker 1: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Charles Christmas: So we'll see some, you know, some really good repricing opportunities, as I mentioned, starting this quarter going forward for the next several years. And when we kind of blend that, blend that cash flow, bend those repricing opportunities into the rest of our balance sheet, we feel comfortable with, with where that's currently.
Charles Christmas: But, you know, certainly, like all things, you know, we, on a regular basis, look at our balance sheet and make determinations, whether any type of restructuring, whether the securities portfolio or any other segment of the balance sheet is needed or warranted. Got it.
Charles Christmas: And then just moving on to non-interest income, obviously, had some nice growth in the interest rate swap income, credit debit card income, and payroll servicing. And I can know you call the attention to some successful marketing of products and services to help drive those. And based on your projections, for the fourth quarter, it seems like those should be, those weren't just kind of a one quarter bump, those should be pretty sustainable going forward.
Charles Christmas: And, you know, kind of any additional thought you could provide there. Yeah, I think you're spot on, Eric. I think, you know, when you look at the fee income categories that you mentioned, you know, those are very important products and services that we can provide to our commercial borrowers. So, as we continue to market those to existing borrowers, certainly when we bring new commercial loan relationships into the bank, we're marketing those products and services as well.
Charles Christmas: So, yeah, we would expect as the commercial loan segment, especially the CNI segment, continues to grow, we would expect growth in those fee income categories. Swaps are, you know, definitely a very important part of managing our balance sheet. You know, we continue to, you know, our basic guideline if somebody wants a fixed rate commercial real estate loan over, say, two and a half million dollars is they're going to get a floating rate and if they want to fix it, they can do a swap and then obviously we back out of that by doing simultaneously, doing the opposite swap with a correspondent to man, you know, because we want the adjustable rate obviously.
Charles Christmas: You know, those can, you know, kind of quarter by quarter basis, there'll be some lumpiness, if you will, just because of the activity that takes place in any one quarter. However, from our policy standpoint, this is that product that we will continue to have in place and will continue to use gaining income, which obviously is good, but the most important part of that product is managing the interest rate risk position of our balance sheet and we think that that's very important. So, we would certainly expect swap fees to continue. Just want to put it out there that that can be lumpy on a quarter to quarter basis, depending on the activity in any one quarter. Thanks, Chuck.
Raymond Reitsma: And last one for me, maybe for Boba Rae, just curious about your thoughts on the UAW strikes just given the importance of auto manufacturing in the state of Michigan. And correct me for a long, I don't think you have any direct exposure to any of the major auto manufacturers, but maybe some secondary or tertiary exposure to suppliers or even on the consumer side, some employees that may be participating in the strikes and what impact that can have on how you think about it.
Raymond Reitsma: [inaudible] You know, make any change in interest rates to make that, you know, you know, minimize the negative impactors could be negative impacts. So, you know, clear that I think where you're going is we got the benefit of rates going up because of the structure of our balance you what happens if rates go down. The rise and obviously it could happen. But we think that, you know, in general, in general as rates go down, assuming at some point they will, we feel pretty good about our position.
Raymond Reitsma: We would see some negative impact or net interest margin if you look at our simulations, but there are definitely some things that we can do and obviously would react if we did see an interest rates go down. As far as hedges, you know, we look at those from time to time for sure. The one thing that we see with hedges is that they're incredibly pricey because of the volatility in the market.
Raymond Reitsma: So with that volatility priced into the cost of hedging products, it's very, very expensive to do. And, you know, given where we are with the structure of our balance sheet, our expectations on rates and the impact at a lower rate environment would have. We have so far felt comfortable not putting hedges on our balance sheet, but clearly continue to manage the balance sheet with the idea and the expectation at some point rates will go down. Got it. Okay, that's helpful. Thank you.
Daniel Conello: And then with respect to the kind of the outlook for provision, I mean, credit continues to be extremely strong. You know, it sounds like this this quarters uptick and NPLs is clearly a one off for you guys. You know, if we kind of look at the specific reserve that went into that credit and we kind of backed out out of the provision level, is that a reasonable run rate run rate to expect kind of over the upcoming quarters?
Daniel Conello: Yeah, I think, you know, given, you know, we think our growth going forward will be similar to what it has been in the recent past. Obviously, like you said, the assumption of no further large specific reserves that, yeah, I think that would be a good run rate going forward. All things being equal. Okay, great.
Daniel Conello: And then just lastly, you know, any update thoughts on capital management with regards to the buyback, you know capital levels remain strong and you still have six and change 6.8 million left on the current buyback and kind of given where shares are trading out. What are your thoughts on getting back in to the buyback game? Yeah, but that's certainly something that we have at our disposal. We've engaged in it, not been last year and a half certainly, but it's something that's out there, especially at the stock price where it currently is sitting at.
Daniel Conello: But we continue to evaluate that question in terms of our overall capital management and what we need for growth and lots of other potential uses of the capital. So, something that will certainly consider hopefully the stock price will continue to go in the right direction so it will be a move point, but it's certainly a tool in our two box. Okay, great. That's all that I had. Thank you very much.
Unknown Executive: This concludes our question and answer session.
Robert Kaminski: I would like to turn the conference back over to Bob. Come in, be ready, close your remarks. Yes, thanks Betsy, and thank you all for your interest in our company.
Robert Kaminski: We look forward to speaking with you next at the end of the fourth quarter in January.
Unknown Executive: This call is now ended. Thank you.
Unknown Executive: The conference is now concluded.
Unknown Executive: Thank you for attending today's presentation.
Unknown Executive: You may now disconnect.