Q1 2025 Mercantile Bank Corp Earnings Call
Good morning, and welcome to the Mercantile Bank Corporation 2025 first quarter earnings results Conference call.
Operator: Good morning and welcome to the Mercantile Bank Corporation 2025 First Quarter Earnings Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
Operator: After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.
After today's presentation there'll be an opportunity to ask questions. Please.
Please note this event is being recorded.
Nichole Kladder: I would now like to turn the conference over to Nichole Kladder, Chief Marketing Officer of Mercantile Bank. Please go ahead. and thank you for joining us.
Speaker Change: I would now like to turn the conference over to Nicole Clatter, Chief Marketing Officer of Mercantile Bank. Please go ahead.
Nicole Clatter: Hello, and thank you for joining US today, we will cover the company's financial results for the first quarter of 2025.
Nichole Kladder: Today we will cover the company's financial results for the first quarter of 2025.
Nichole Kladder: The team members joining me this morning include Ray Reitsma, President and Chief Executive Officer, as well as Chuck Christmas, Executive Vice President and Chief Financial Officer. Our agenda will begin with prepared remarks by both Ray and Chuck, and we'll include references to our presentation covering this quarter's results. You can access a copy of the presentation, as well as the press release sent earlier today, by visiting MercBank.com.
Speaker Change: The team members joining me. This morning include Ray Reitsma, President and Chief Executive Officer, as well as Chuck Christmas Executive Vice President and Chief Financial Officer.
Speaker Change: Our agenda will begin with prepared remarks by both rail and truck and will include references to our presentation covering this quarter's result.
Speaker Change: You can access a copy of the presentation as well as the press release said earlier today by visiting <unk> Dot com.
Nichole Kladder: After our prepared remarks, we will then open the call to your questions.
Speaker Change: After our prepared remarks, we will then open the call to your questions.
Nichole Kladder: Before we begin, it is my responsibility to inform you that this call may involve certain forward-looking statements, such as projections of revenue, earnings, and capital structure, as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from any forward-looking statements made today due to factors described in the company's latest Securities and Exchange Commission filings. The company assumes no obligation to update any forward-looking statements made during the call.
Speaker Change: Before we begin it is my responsibility to inform you that this call may involve certain forward looking statements such as projections of revenue earnings and capital structure as well as statements on the plans and objectives of the company's business.
Speaker Change: The companys actual results could differ materially from any forward looking statements made today due to factors described in the company's latest Securities and Exchange Commission filings.
Speaker Change: The company assumes no obligation to update any forward looking statements made during the call. Let's begin right. Thank you Nicole My comments will focus on the changes that have been made to the funding side of our balance sheet and the resulting impact on the income statement as well as our loan growth excellent asset quality and growing core non interest.
Operator: Let's begin.
Ray Reitsma: Ray? Thank you, Nichole. My comments will focus on the changes that have been made to the funding side of our balance sheet and the resulting impact on the income statement, as well as our loan growth, excellent asset quality, and growing core non-interest Taken together, these performance traits have allowed us to compile attractive compounded annual growth rates for the benefit of our shareholders. From year end 2021 to year end 2023, commercial and mortgage loan growth was strong and while deposit growth was solid, it did not keep pace with loan growth. The outflow of deposits from the banking system post COVID contributed to this trend.
Income.
Speaker Change: Taken together these performance traits have allowed us to compile attractive compounded annual growth rates for the benefit of our shareholders.
Speaker Change: From year end 2021 to year end 2023, commercial and mortgage loan growth was strong and while deposit growth was solid and did not keep pace with loan growth. The outflow of deposits from the banking system post Covid contributed to this trend as a result, the bank's loan to deposit ratio increased to 110% at year end.
Ray Reitsma: As a result, the bank's loan to deposit ratio increased to 110% at year end 2023. In 2024, we focused on reducing this ratio with the goal to strengthen our on balance sheet liquidity and overall financial profile and succeeded in reducing the loan to deposit ratio to 98% by year end. As described in previous calls, we undertook a three-pronged approach to building our deposit base with the objective of reducing the loan-to-deposit ratio into the mid-90% range over time. To reiterate, first, we broadened our focus on business deposits, second, we dedicated resources to the governmental and public unit realm, third, we restructured the retail customer focus away from activity and toward balance.
Speaker Change: 2023 and.
Speaker Change: 'twenty 'twenty four we focused on reducing this ratio with the goal to strengthen our on balance sheet liquidity and overall financial profile and succeeded in reducing the loan to deposit ratio to 98% by year end.
Speaker Change: As described in previous calls we undertook a three pronged approach to building our deposit base with the objective of reducing the loan to deposit ratio into the mid 90% range over time.
Speaker Change: To reiterate first we've broadened our focus on business deposits second we dedicated resources to the governmental and public unit realm third we restructured the retail customer focus away from activity and toward balances.
Ray Reitsma: These efforts led to increases in business deposits of 24% and personal deposits of 9% for the 12-month period ended March 31, 2025. Despite a longstanding seasonal pattern of reduced first quarter deposits, our secular growth trend overcame the typical seasonal pattern and allowed us to report a loan to deposit ratio of 99% at the end of the first quarter of 2025 compared to 108% at the end of the first quarter of 2024. Commercial loan growth during the first three months of 2020, or I'm sorry, yes, during the first three months of 2025 was $44 million, or an annualized rate of nearly 5%.
Speaker Change: These efforts led to increases in business deposits of 24% and personal deposits up 9% for the 12 month period ended March 31 2025.
Speaker Change: Despite a longstanding seasonal pattern of reduced first quarter deposits are secular growth trend overcame the typical seasonal pattern and allowed us to report our loan to deposit ratio of 99% at the end of the first quarter of 2025 compared to 108% at the end of the first quarter 'twenty 'twenty four.
Commercial loan growth during the first three months of 'twenty 'twenty or I'm, sorry, yes. During the first three months of 2025 was $44 million or an annualized rate of nearly 5%.
Ray Reitsma: Customer reductions and loan balances from excess cash flow or sales of assets of $55 million during the first quarter of 2025 impacted our commercial loan totals. The Commercial Loan Pipeline stands at $234 million, and commitments to fund commercial construction loans total $210 million, which has decreased from prior quarter ends. While commitments to fund have decreased, discussions and progress are at an all-time high. Given the uncertainty in the environment, the pace at which these may turn into accepted commitments to fund is unknown. Taking these factors into account, we expect commercial loan growth in the immediate future to reduce slightly from the pace of the recent past.
Customer reductions in loan balances from excess cash flow or sales of assets of $55 million. During the first quarter of 2025 impacted our commercial loan totals.
Speaker Change: Our commercial loan pipeline stands at $234 million and commitments to fund commercial construction loans totaled $210 million, which has decreased from prior quarter end.
Speaker Change: While commitments to fund have decreased discussions in progress are at an all time high given.
Speaker Change: Given the uncertainty in the environment the pace at which these may turn into accepting commitments to fund is unknown, taking these factors into account, we expect commercial loan growth in the immediate future to reduce slightly from the pace of the recent past.
Ray Reitsma: Mortgage loans on the balance sheet have grown substantially in the increasing rate environment experienced over the past few years as borrowers have opted for ARMs, which reside on our balance sheet, rather than fixed rate loans, which are sold in the secondary market. We have successfully executed changes within our portfolio mortgage programs, resulting in a greater portion of our mortgage production being sold rather than placed on our balance sheet. The positive outcomes include a 13 percent increase in mortgage banking income during the first quarter of 2025 compared to first quarter of 2024, and a nominal decrease in mortgage loans on our balance sheet during the 12-month period ending March 31, 2025.
Speaker Change: Mortgage loans on the balance sheet have grown substantially in the increasing rate environment experienced over the past few years as borrowers have opted for arms, which reside on our balance sheet, rather than fixed rate loans, which are sold in the secondary market.
Speaker Change: We have success successfully executed changes within our portfolio.
Speaker Change: Mortgage programs, resulting in a greater portion of our mortgage production being sold rather than placed on our balance sheet. The positive outcomes include a 13% increase in mortgage banking income during the first quarter of 2025 compared to first quarter of 'twenty 'twenty, four and a nominal decrease in mortgage loans on our balance sheet during the 12.
Speaker Change: Months period, ending March 31, 2025.
Ray Reitsma: Our mortgage team continues to build market share despite a challenging rate environment, allowing results that diverge from the average in the market. While mortgage banking production is certainly rate dependent, the level of earnings from this activity that can be considered core or somewhat independent of the rate environment is increasing. Asset quality remains very strong as non-performing assets totaled $5.4 million at March 31, 2025, or nine basis points of total assets, consisting primarily of residential real estate and non-real estate commercial loans. There is only $41,000 in commercial real estate representation among the non-performing assets. Past due loans and dollars represent three basis points of total loans, and there is no outstanding ORE.
Speaker Change: Our mortgage team continues to build market share despite a challenging rate environment, allowing results diverged from the average in the market.
Speaker Change: Well mortgage banking production is certainly rate dependent the level of earnings from this activity that can be considered core or somewhat independent of the rate environment is increasing.
Speaker Change: Asset quality remains very strong as nonperforming assets totaled $5 $4 million at March 31, 2025, or nine basis points of total assets, consisting primarily of residential real estate and non real estate commercial loans, there's only $41000 in commercial real estate representation.
Speaker Change: Among the nonperforming assets.
Speaker Change: Past due loans in dollars represent three basis points of total loans and there is no outstanding Ori, we increased the allowance to loans ratio four basis points. During the first three months of 2025, while the level of nonperforming loans to total loans remained constant to reflect the uncertainty inherent in the and economic <unk>.
Ray Reitsma: We increased the allowance-to-loans ratio four basis points during the first three months of 2025, while the level of non-performing loans to total loans remained constant to reflect the uncertainty inherent in the economic environment. 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. That said, our customers continue to report strong results to date, and we expect to see that continue as they report first quarter results.
Speaker Change: Our.
Speaker Change: Our lenders are the first line of observation in defense to recognize areas of emerging risks.
Speaker Change: Our risk rating model is robust with a continued emphasis on current borrower cash flow, providing perhaps sensitivity to any emerging challenges within our borrowers finances.
Speaker Change: That said our customers continue to report strong results to date and we expect to see that continue as they report first quarter results.
Speaker Change: Since the since early in the second quarter of 2025, a great deal of uncertainty has been present in the environment and we expect to see varying impacts on our customers and their financial positions from very modest impact to improvement or decline based on the specifics of their situation. This has been and will continue to be.
Ray Reitsma: Since early in the second quarter of 2025, a great deal of uncertainty has been present in the environment, and we expect to see varying impacts on our customers and their financial positions, from very modest impact to improvement or decline based on the specifics of their situation. This has been and will continue to be a topic of discussion with borrowers and a focus of our lending team. Total non-interest income grew 12% in the core areas of payroll, treasury, management, and mortgage banking during the first quarter of 2025 compared to the first quarter of 2024. Mortgage banking income grew 13% based upon the strategies outlined earlier and the resulting ability to sell a greater portion of originations on the secondary market.
Speaker Change: A topic of discussion with borrowers and a focus of our lending teams.
Speaker Change: Noninterest income grew 12% in the core areas of payroll Treasury management and mortgage banking during the first quarter of 2025 compared to the first quarter 2020 for mortgage banking income grew 13% based upon the strategies outlined earlier and the resulting ability to sell a greater portion of originations.
Nations on the secondary market service charges on accounts grew 20%, reflecting higher activity levels and customer growth and less earnings credit offset charges based on reduced balances and transaction accounts.
Ray Reitsma: Service charges on accounts grew 20%, reflecting higher activity levels and customer growth and less earnings credit offset charges based on reduced balances in transaction accounts. Payroll services grew 16% as our offerings continue to build traction in the marketplace. Finally, debit and credit card income grew 4 percent. Income from interest rate swaps declined to nominal levels as demand by borrowers for interest rate protection shifted with borrowers' future rate expectations and the timing of closing.
Speaker Change: Payroll services grew 16% as our offerings continue to build traction in the marketplace.
Speaker Change: Finally, debit and credit card income grew 4%.
Speaker Change: Income from interest rate swaps declined to nominal levels as demand by borrowers for interest rate protection shifted with borrowers future rate expectations and the timing of closings.
Speaker Change: Finally, a note about interest rate sensitivity during the first quarter of 2025 immediately after the 100 basis point decrease in rates implemented by the fed during the last four months of 'twenty 'twenty four our net interest margin increased by six basis basis points compared to the fourth quarter of 2024, indicating.
Ray Reitsma: Finally, a note about interest rate sensitivity. During the first quarter of 2025, immediately after the 100 basis point decrease in rates implemented by the Fed during the last four months of 2024, our net interest margin increased by six basis points compared to the fourth quarter of 2024, indicating our ability to manage the cost of funds and utilize our investment portfolio in a way that supports a durable net interest margin.
Speaker Change: Our ability to manage the cost of funds and utilize our investment portfolio in a way that supports a durable and net interest margin.
Ray Reitsma: We are pleased to report that our five-year compounded annual growth rate of 8.4% for tangible book value and 10.4% for earnings per share growth places us in the top two of our proxy peer group.
Chuck: We're pleased to report that our five year compounded annual growth rate of eight 4% for tangible book value and 10, 4% for earnings per share growth places us in the top two of our proxy peer group that concludes my remarks, I will now turn the call over to Chuck.
Ray Reitsma: That concludes my remarks.
Chuck Christmas: I will now turn the call over to Chuck. Thanks, Ray.
Chuck: Thanks, right. This morning, we announced net income of $19 $5 million or $1 21 per diluted share for the first quarter of 2025, compared with net income of $21.6 million or $1.34 per diluted share for the respective prior year period.
Chuck Christmas: This morning we announced net income of $19.5 million, or $1.21 per diluted share, for the first quarter of 2025, compared with net income of $21.6 million, or $1.34 per diluted share, for the respective prior year period. Although net interest income increased, net income was negatively impacted by lower non-interest income, increased non-interest costs, and a higher provision expense. Interest income on loans increased during the first quarter of 2025 compared to the respective prior year period, reflecting strong loan growth that more than offset a lower yield on loans. Average loans totaled $4.63 billion during the first quarter of 2025 compared to $4.3 billion during the first quarter of 2024.
Speaker Change: Although net interest income increased net income was negatively impacted by lower noninterest income increased noninterest costs and a higher provision expense.
Speaker Change: Interest income on loans increased during the first quarter of 2025 compared to the respective prior year period, reflecting strong loan growth that more than offset a lower yield on loans average loans totaled $4.63 billion during the first quarter of 2025.
Speaker Change: Compared to $4 $3 billion during the first quarter of 2024.
Chuck Christmas: Our yield on loans during the first quarter of 2025 was 34 basis points lower than the first quarter of 2024, largely reflecting the aggregate 100 basis point decline in the federal funds rate during the last four months of 2024. Interest income on securities increased during the first quarter of 2025 compared to the respective prior year period, reflecting growth in the securities portfolio and the reinvestment of lower yielding investment. in a higher interest rate environment. Interest income on interest earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, also increased during the first quarter of 2025 compared to the respective prior year period, reflecting a higher average balance that more than offset a lower yield.
Speaker Change: Our yield on loans during the first quarter of 2025 was 34 basis points lower than the first quarter of 2024, largely reflecting the aggregate 100 basis point decline in the federal funds rate during the last four months of 2024.
Speaker Change: Interest income on securities increased during the first quarter of 2025 compared to the respective prior year period.
Speaker Change: Reflecting growth in the securities portfolio, and the reinvestment of lower yielding investments.
Speaker Change: In a higher interest rate environment.
Speaker Change: Interest income on interest, earning deposits a vast majority of which is comprised of funds on deposit with the federal Reserve Bank of Chicago.
Speaker Change: So increased during the first quarter of 2025 compared to the respective prior year period, reflecting a higher average balance that more than offset a lower yield.
Speaker Change: In total interest income was $3 $6 million higher during the first quarter of 2025 compared to the first quarter of 2024.
Chuck Christmas: In total, interest income was $3.6 million higher during the first quarter of 2024. We recorded increased interest expense on deposits during the first quarter of 2025 compared to the respective priority period. primarily reflecting growth in money market and time deposit products. Average deposits totaled $4.59 billion during the first quarter of 2025 compared to $3.97 billion during the first quarter of 2024. The cost of deposits was down two basis points during the first quarter of 2025 compared to the first quarter of 2024. Interest expense on Federal Home Loan Bank of Indianapolis advances declined during the first quarter of 2025 compared to the respective prior year period, reflecting a lower average balance that more than offset a higher average cost.
Speaker Change: We recorded increased interest expense on deposits during the first quarter of 2025 compared to the respective prior year period.
Speaker Change: Primarily reflecting growth in money market and time deposit products.
Speaker Change: Average deposits totaled $4.59 billion during the first quarter of 2025 compared to $3 97 billion during the first quarter of 2020 for.
Speaker Change: The cost of deposits was down two basis points during the first quarter of 2025 compared to the first quarter of 2024.
Speaker Change: Interest expense on federal home loan bank of Indianapolis advances declined during the first quarter of 2025 compared to the respective prior year period, reflecting a lower average balance that more than offset a higher average cost.
Chuck Christmas: Interest expense on other borrowed funds declined during the first quarter of 2025 compared to the respective prior year period, largely reflecting lower rates on our trust-referred securities due to the lower interest rate environment. In total, interest expense was $2.4 million higher during the first quarter of 2025 compared to the first quarter of 2024. Net interest income increased $1.2 million in the first quarter of 2025 compared to the respective prior period. Impacting our net interest margin was our strategic initiative to lower the loaner deposit ratio, which generally entails deposit growth exceeding loan growth and using the additional monies to purchase security.
Speaker Change: Interest expense on other borrowed funds declined during the first quarter of 2025 compared to the respective prior year period, largely reflecting lower rates on our trust preferred securities due to the lower interest rate environment and total interest expense was $2 $4 million higher during the first quarter of 2025 compared to the first.
Speaker Change: Of 2024.
Speaker Change: Net interest income increased $1 $2 million during the first quarter of 2025 compared to the respective prior year period <unk>.
Speaker Change: And our net interest margin was our strategic initiative to lower the loan to deposit ratio, which generally entails deposit growth exceeding loan growth and using the additional monies to purchase securities. A large portion of deposit growth was in the higher costing money market and time deposit products, while our purchased securities provide.
Chuck Christmas: A large portion of deposit growth was in the higher costing money market and time deposit products, while the purchase securities provide for a lower yield than loan products. Our net interest margin declined 27 basis points during the first quarter of 2025 compared to the respective prior period. Our yield line earning assets declined 32 basis points during that time period, largely reflecting the aggregate 100 basis point decline in the federal funds rate during the last four months of 2024, while our cost of funds declined five basis points, primarily reflecting lower rates paid on money market and time deposits, which more than offset an increased mix of higher costing money market and time deposits.
Speaker Change: For a lower yield the loan products.
Speaker Change: Our net interest margin declined 27 basis points during the first quarter of 2025 compared to the respective prior period.
Speaker Change: Our yield on earning assets declined 32 basis points during that time period, largely reflecting the aggregate 100 basis point decline in the federal funds rate during the last four months of 2024, while our cost of funds declined five basis points, primarily reflecting lower rates paid on money market and time deposits, which more than offset an increase.
Speaker Change: Mix of higher costing money market and time deposits.
Speaker Change: While average loans increased $330 million or 7% from the first quarter of 2024 to the first quarter of 2025 average deposits grew $622 million or over 15%. During the same time period, providing for a net surplus of funds tow.
Chuck Christmas: Well, average loans increased $330 million or 7% from the first quarter of 2024 to the first quarter of 2025. Average deposits grew $622 million or over 15% during the same time period, providing for a net surplus of funds totaling about $290 million. We use that net surplus of funds to grow our average securities portfolio by $151 million and reduce our average Federal Home Loan Bank of Indianapolis advance portfolio by $84 million. A majority of the remainder of the net surplus of funds is on deposit with the Federal Reserve Bank of Chicago. As Ray noted in his opening remarks, our first quarter 2025 net interest margin was six basis points higher than it was during the fourth quarter of 2024, coming on the heels of the aggregate 100 basis point reduction of the federal funds rate in the last four months of 2024.
Speaker Change: And about $290 million.
Speaker Change: We use that in that surplus funds to grow our average securities portfolio by $151 million and reduce our average federal home loan bank of Indianapolis advanced portfolio by $84 million a majority of the remainder of the net surplus of funds on deposit with the Federal Reserve Bank of Chicago.
Speaker Change: As Ray noted in his opening remarks, our first quarter of 2025 net interest margin was six basis points higher than it was during the fourth quarter of 2020 for coming on the heels of the aggregate 100 basis point reduction in the federal funds rate in the last four months of 2024, we remain committed to managing our balance sheet in a manner.
Chuck Christmas: We remain committed to managing our balance sheet in a manner that minimizes the impact of changing interest rate environments on our net interest margin. We recorded a provision expense of $2.1 million during the first quarter of 2025, which primarily reflects an increased allocation necessitated by changes to the economic forecast. Specifically, we used a blend of the base and adverse economic scenarios compared to only using the base economic forecast as is our standard practice. The change in methodology reflects the enhanced current level of economic uncertainty. The recording of net loan recoveries and sustained strength and loan quality metrics largely mitigated additional reserves associated with loan growth.
Speaker Change: That minimizes the impact of changing interest rate environment on our net interest margin.
Speaker Change: We recorded a provision expense of $2 $1 million during the first quarter of 2025, which primarily reflects an increased allocation necessitated by changes to the economic forecasts, specifically, we used a blend of the base and adverse economic scenarios compared to only using the basic economics.
Speaker Change: Cash as is our standard practice the change in methodology reflects the enhanced current level of economic uncertainty.
Speaker Change: The recording of net loan recoveries and sustained strength in loan quality metrics largely mitigated additional reserves associated with loan growth.
Speaker Change: Noninterest expenses were $1 $2 million higher than the first quarter of 2025 compared to the respective prior year time period, the increase largely reflects higher salary and benefit costs, including annual merit pay increases and market adjustments.
Chuck Christmas: Nine interest expenses were $1.2 million higher than the first quarter of 2025 compared to the respective prior year time period. The increase largely reflects higher salary and benefit costs, including annual merit pay increases and market adjustments. Higher data processing costs also comprise a notable portion of the increased non-interest expense level, primarily reflecting higher transaction volumes and software support costs, along with the introduction of new cash management products and services. Contributions to the Mercantile Bank Foundation totaled $0.7 million during the first quarter of 2024, compared to a nominal level during the first quarter of 2025. We remain in a strong and well-capitalized regulatory capital position.
Speaker Change: Higher data processing costs also comprised a notable portion of the increased noninterest expense level, primarily reflecting higher transaction volumes and software support costs, along with the introduction of new cash management products and services.
Speaker Change: Contributions to the Mercantile Bank Foundation totaled zero point $7 million during the first quarter of 2024 compared to a nominal level during the first quarter of 2025.
Speaker Change: We remain in a strong and well capitalized regulatory capital position, our bank's total risk based ratio total risk based capital ratio was 14.0% at the end of the first quarter of 2025 about $217 million above the minimum thresholds be categorized as well capitalized we did not repeat.
Chuck Christmas: Our bank's total risk-based capital ratio was 14.0% at the end of the first quarter of 2025, about $217 million above the minimum threshold to be categorized as well-capitalized. We did not repurchase shares during the first quarter of 2025. We have $6.8 million available in our current repurchase plan. On slide 22 of the presentation, we share our latest assumptions on the interest rate environment and key performance metrics for the remainder of 2025, with the caveat that market conditions remain volatile, making forecasting difficult. This forecast is predicated on no changes in the federal funds rate during the remainder of 2025.
Speaker Change: <unk> shares during the first quarter of 2025, we have $6 $8 million available in our current repurchase plan.
Speaker Change: On slide 22 of the presentation, we share our latest assumptions on the interest rate environment and key performance metrics for the remainder of 2025 with the caveat that market conditions remain volatile making forecasting difficult.
Speaker Change: This forecast is predicated on no changes in the federal funds rate during the remainder of 2025 we.
Chuck Christmas: We project loan growth in a range of 3% to 5%, and we are forecasting our net interest margin to be in a range of 3.45% to 3.55%. Expected quarterly results for non-interest income and non-interest expense as well as our federal income tax rate are also provided for your reference.
Speaker Change: We project loan growth in a range of 3% to 5%.
Speaker Change: And we are forecasting around that net interest margin to be in a range of 3.45% to 355%.
Speaker Change: Expected quarterly results for noninterest income and noninterest expense as well as our federal income tax rate are also provided for your reference.
Chuck Christmas: In closing, we are very pleased with our operating results and financial condition during the first quarter of 2025 and believe we remain well positioned to continue to successfully navigate through the myriad of challenges faced by all financial institutions and our customers.
Speaker Change: In closing we are very pleased with our operating results and financial condition during the first quarter of 2025.
Speaker Change: I believe we remain well positioned to continue to successfully navigate through the myriad of challenges faced by all financial institutions and our customers that concludes my prepared remarks, I'll now turn the call back over to Ray.
Chuck Christmas: That concludes my prepared remarks.
Ray Reitsma: I'll now turn the call back over to Ray.
Ray Reitsma: Thank you, Chuck.
Speaker Change: Thank you Chuck that concludes our prepared remarks from management, we will now move to the question and answer portion of the call.
Operator: That concludes our prepared remarks from management, and we will now move to the question and answer portion of the call. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then 2.
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
Speaker Change: To withdraw your question. Please press Star then two.
Operator: At this time, we will pause momentarily to assemble our roster.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Our first question is from Brendan Nosal with Hockey Group. Please go ahead.
Brendan Nosal: Our first question is from Brendan Nosal with Hovde Group. Please go ahead. Hey, good morning, Rancho. I hope you guys are doing well. Morning. I'm just starting off here on the outlook for loan growth. You know, it looks like you guys tempered the loan growth outlook at least a little bit. You know, I guess looking at other banks so far this quarter, you know, some have done so, some haven't, just given kind of the myriad uncertainty in the outlook. So I'm just kind of curious, you know, with what you folks have done for the outlook, are you just being conservative given the potential drag from tariffs at this point?
Brendan Nosal: Hey, good morning range I Hope you guys are doing well.
Speaker Change: Good morning, Alright.
Speaker Change: Maybe just starting off here on the outlook for loan growth.
Speaker Change: You guys tempered the loan growth outlook at least a little bit.
Speaker Change: Looking at other banks, so far this quarter you know some of them done so somehow.
Just given kind of the the Mira and uncertainty in the outlook. So I was kind of curious you know with what you folks have done through the outlook or are you just being conservative given the potential drag from tariffs at this point or are you seeing an actual slowdown in commercial loan demand so far.
Ray Reitsma: Or are you seeing an actual slowdown in commercial loan demand so far? Thanks. So, um... Our approach to that was driven by the fact that our commercial pipeline has two components. One is committed and accepted, committed to by the bank and accepted by the borrower moving to closing. The other is discussions that are underway moving toward that end. And the proportion of the pipeline has moved with the uncertainty in the environment more towards discussion and gone lighter on the committed and accepted piece. Now, the overall pipeline is as big as it's ever been, but the uncertainty has just put more of it in the discussion category as opposed to moving to closed category.
Speaker Change: Yes.
Speaker Change: So.
Speaker Change: Our approach that was driven by the fact that our commercial pipeline has two components. One is committed and accepted I'm committed to by the bank and accepted by the borrower and we're moving to closing the other is discussions that are underway moving toward that end.
Speaker Change: And the proportion of the pipeline has moved with the uncertainty in the environment more towards discussion and gone lighter and the committed and accepted piece now the overall pipeline is as big as it's ever been.
Speaker Change: But the uncertainty is just put more of it in the discussion category as opposed to moving to close category.
Brendan Nosal: So with the estimation that the environment will remain somewhat uncertain in the near future, we decided to temper our expectations for loan growth in the numbers that we provide. Yeah, that makes complete sense. Okay, thank you.
Speaker Change: So with the estimation that the environment will remain somewhat uncertain in the near future, we decided to temper our expectations for loan growth in the numbers that we provide.
Speaker Change: Yeah that makes complete sense.
Speaker Change: Okay. Thank you.
Brendan Nosal: Maybe one more for me turning to capital. You know, your capital ratios continue to build nicely. Just curious for your updated thoughts on deployment, particularly if loan growth is a bit more muted this year, given the environment, and how you think about sharing purchase, just given where shares are trading right now. Thanks.
Speaker Change: Maybe one more for me turning to capital.
Speaker Change: Your capital ratios continue to build nicely I'm just curious for your updated thoughts on deploying a particularly if loan growth is a bit more muted. This year given the environment and how you think about share repurchase just given where shares are trading right now thanks.
Chuck Christmas: Yeah, Brad, it's Chuck. You know, as I always say, the buyback is always on the stovetop and maybe in the back of the stove, but not the front. But it's something that we work with, you know, regularly with the board.
Chuck: Yes, Brian it's Chuck as you know is that.
Speaker Change: I always say the buyback is always on the stove top and maybe in the back of the store, but not the front.
But it's something that we work with I O regularly with the board.
Chuck Christmas: You know, clearly, you know, the stock prices of everybody went down quite a bit here over the last few weeks, which, you know, makes the question of do we do buybacks a little more interesting than when our stock is performing well. You know, we look at ourselves as a growth company. And, you know, if there is some reduction in loan growth over the next few quarters, or whatever that time may be, as Ray mentioned, we still have a very strong pipeline. And we want to make sure that we've got sufficient capital to manage that growth, that loan growth specifically.
Speaker Change: You know clearly you know the stock prices of everybody went down quite a bit here over the last few weeks, which makes the question of do we do buybacks a little more interesting than when our stock is performing well, we look at ourselves as a growth company.
Speaker Change: And you know if there is some reduction in loan growth over the next few quarters or whatever that time may be.
Speaker Change: As Ray mentioned, we still have a very strong pipeline and we want to make sure that we've got sufficient capital to manage that as that grows that loan growth specifically.
Chuck Christmas: And then also, at the same time, we're growing our loan, reducing our loan or deposit ratio, which makes asset growth even further. So at the end of the day, we want to make sure, darn sure, that we have sufficient capital to manage the growth plans of the company.
Speaker Change: And then also at the same time, we're growing our loan we.
Speaker Change: Reducing our loan to deposit ratio, which makes us that girl with even even further so at the end of the day, we want to make sure darn sure that we have sufficient capital to manage the growth plans of the company notwithstanding all of the discussions in different forecasts are out there.
Chuck Christmas: You know, notwithstanding all the discussions and different forecasts that are out there, you know, some more dire than others, if there is an overall slowdown in the economic environment, we want to make sure that we've got, you know, the capital support to get us through those time periods as well. So we have the plan, we have dollars in the plan, it's something that we regularly look at. To date, we haven't obviously pulled the trigger. But it is something that we look at.
Speaker Change: Some more dire than others.
Speaker Change: If there is an overall slowdown in the economic environment, we wanted to make sure that we've got a you know the capital support to get us through those time periods as well so.
Speaker Change: We have the plan that we have dollars and the plan is something that we regularly look at but to date, we haven't obviously pulled the trigger but it is something that Oh, we look at but on an overall basis specific to your question and ray kind of already addressed it.
Chuck Christmas: But on an overall basis, specifically to your question, and Ray kind of already addressed it, we think the slowdown in loan growth is relatively short term, don't know how to define that short term. But again, you know, making sure that we have the capital to support great loan growth opportunities that we have and want to take advantage of is job.
Speaker Change: We think the slowdown in loan growth is relatively short term don't know how to define that short term.
Speaker Change: But again, you know, making sure that we have the capital to support great loan growth opportunities that we have and want to take advantage of is job one.
Brendan Nosal: Thank you for the thoughts Chuck I appreciate it.
Brendan Nosal: Thank you for the thoughts, Chuck. Appreciate it.
Daniel Tamayo: The next question is from Daniel Tamayo with Raymond James. Please go ahead.
Daniel Tamayo: The next question is from Daniel Tamayo with Raymond James, please go ahead. Thank you. Good morning, guys.
Daniel Tamayo: Thank you good morning, guys.
Daniel Tamayo: Bye. Maybe starting on the margin, so you take the margin guidance up from last quarter, looks like just to mostly reflect the better than expected first quarter margin. You know, first just want to make sure, just clarify what you're assuming in terms of rate cuts in that margin guidance, Chuck. And then, you know, I guess we can dig in a little bit after that. Yeah, sure. So I thought it best to put some guidance out there, assuming that there's not going to be any rate cuts. Clearly, the bond market, for one, thinks there are going to be some rate cuts, and we're not necessarily disagreeing with that.
Daniel Tamayo: Okay.
Daniel Tamayo: Maybe starting on the margin so you take the margin guidance up.
Daniel Tamayo: From last quarter, it looks like just a mostly reflect the better than expected first quarter margin.
Daniel Tamayo: You know first just.
Daniel Tamayo: Want to make sure just clarify what you're you're assuming in terms of rate cuts in that margin guidance, Chuck and then.
Daniel Tamayo: Yeah, I guess, we can dig in a little bit after that.
Daniel Tamayo: Yeah sure. So I thought it best to put some guidance out there assuming that there's not going to be any rate cuts clearly the bond market for one thinks are all going to be some rate cuts and we're not necessarily disagreeing with that.
Chuck Christmas: What we have to work with is a lot of folks such as Raymond James and everybody else has their own forecast. And so what I thought I would do, what we would do is kind of start with a base case and say, if there are no rate cuts, this is what we look at our margin, the range of our margin being in for the remainder of this year. And then we also, and it's in our deck on slide 10, we also provide the results of our net interest income simulation, which, you know, investors and analysts can look at and use in determining what they think that our, how our company will, would operate under those different interest rate scenarios.
Daniel Tamayo: What we have to work with US a lot of folks such as Raymond James and everybody else has their own forecast and so what I thought I would do but we would do is kind of start with a base case and say, yes. There are no rate cuts. This is what we look at our margin the range of our margin being in for the remainder of this year and then we also and it's in our deck on slide 10, we are.
Daniel Tamayo: So provide the results of our net interest income simulation.
Speaker Change: Which you know investors.
Daniel Tamayo: And analysts can look at and use in determining what they think that our how our company well.
Daniel Tamayo: Would hum operate under those different interest rate scenarios, I would say that and I would think any bank does the same thing and we're running our stimulations were relatively conservative with our assumptions and as you know there's a tremendous amount of assumptions that go into stimulations.
Chuck Christmas: I would say that, and I would think any bank does the same thing, and when we're running our simulations, we're relatively conservative with our assumptions. And as you know, there's a tremendous amount of assumptions that go into simulations. But I think on an overall basis, it shows a realistic position of what may or may happen in those different interest rate environments. But because, again, because there was such a big unknown, we just provided the guidance without that. I think what you see with the... with our margin actually improving in the first quarter, as both Ray and I touched on in our scripts, is the fact that we have built a balance sheet, which is definitely short-term, but we do that on purpose.
Daniel Tamayo: I think on an overall basis. It shows a realistic position of what may or may happen and those different interest rate environments, but because again because there was such a big unknown. We just provided the guidance without that I think what you see with the.
Speaker Change: With our margin actually improved in the first quarter as both Ray and I touched on a nurse in our scripts.
Speaker Change: Is the fact that you know we have built a balance sheet, which is definitely a short term, but we do that on purpose. What we have seen over the last you know 510 15 years as an incredibly volatile interest rate environment and what we wanted to do is run our company with the idea that we don't care I'm being somewhat flip it here, but we don't care.
Chuck Christmas: What we have seen over the last five, 10, 15 years is an incredibly volatile interest rate environment. And what we wanna do is run our company with the idea that we don't care, I'm being somewhat flippant here, but we don't care what rates do, that our net interest margin will behave appropriately under all those different rate environments. That's what I think everybody should be striving to do, and we've been working hard to get that to happen. Clearly a lot of moving parts, and we can't be perfect on that. But we want to make sure that we're managing and concentrating on the core of what we do and that's build our balance sheet and maintain asset quality, grow fee income, and make sure that we're an efficiently run organization.
Speaker Change: What rates do that our net.
Speaker Change: Interest margin will behave appropriately under all of those different rate environments.
Speaker Change: That's what I think everybody should be striving to do and we've been working hard to get that to happen clearly a lot of moving parts and we can't be perfect on that.
Speaker Change: But we want to make sure that we're that we're managing and concentrated on the core of what we do and that's build our balance sheet and.
Speaker Change: Maintain asset quality drove fee income and make sure that we're an efficiently run.
Speaker Change: Organization. So that's our overall goal and what we've seen at least for the first 100 basis points does that yeah. While we did have assets reprice, lower obviously driven by the loan portfolio and what we have on the deposit with the fed is we have a lot of deposits that we were able to reduce basis point for basis point as well clearly on the money market.
Chuck Christmas: So that's our overall goal. And what we've seen, at least for the first 100 basis points, is that, yeah, while we did have assets repriced lower, obviously driven by the loan portfolio and what we have on the deposit with the Fed, is we have a lot of deposits that we were able to reduce basis point for basis point as well. Clearly on the money market side, we were able to do on the CD side, obviously there's some lag on CD repricing, got to wait for the CDs to mature, but a vast majority of our CDs mature in less than a year.
Speaker Change: Side, we are able to do on the CD side. Obviously, there is some lag on CD repricing you got to wait for the Cds to mature.
Speaker Change: But a vast majority of our Cds mature and in less than a year. So.
Chuck Christmas: And then we have also, both on fixed rate loans and fixed rate investments, we have those maturing on a pretty regular basis. And we're able to redeploy those funds at much higher rates than what they're coming off at. So put that all in there and we're able to actually improve our margins somewhat coming off that 100 basis point relative to rapid decline from the Fed. And that's also at the same time that, of course, we've been moving our loan to deposit ratio down, which, as I mentioned, and as we all know, has a negative impact on margins as well, just by the nature of what we're doing there.
Speaker Change: And then we have also both on fixed rate loans in fixed rate investments, we have those maturing on a pretty regular basis, and we're able to redeploy those those funds at much higher rates than what they were coming off at so put that all in there and we were able to actually.
Speaker Change: Prove our margin somewhat coming off that 100 basis point relatively rapid decline from the fed and that's also at the same time.
Speaker Change: Of course, we've been moving our loan to deposit ratio down, which as I mentioned and as we all know it has a negative impact on margins as well just by the nature of what we're doing there so.
Chuck Christmas: So that's kind of what we're thinking about and certainly happy to entertain any other specific questions you might have, Danny.
Speaker Change: So that's kind of what we're thinking about and certainly happy to entertain any other specific questions you might have Danny.
Speaker Change: That's helpful. Chuck a yeah, I guess, maybe on the on the CD side first the.
Chuck Christmas: That's helpful, Chuck. Yeah, I guess maybe on the CD side first, if you have any kind of detail on the repricing, you mentioned that's still happening here, but just curious kind of where those are repricing from and to and kind of the cadence that you're going to see over the next 12 months on the CD side. Yeah, I think if you look at our total CDs, I would say probably a good 90% of them are maturing in the next 12 months or so, relatively equally each month. There's no, there's no, we don't do any CD specials or anything like there.
Speaker Change: If you have any any kind of detail on on the repricing you mentioned, that's still happening here, but just curious kind of where where those are our repricing from end to end and kind of the cadence that youre going to see over the next 12 months Oh, Yeah, I'd say, if you look at our total Cds I would say probably a good 90% of them are maturing in the next.
Speaker Change: 12 months or so.
Speaker Change: Relatively equally each month theres not theres no. We don't do any CD specials or anything that they're so theres really quote unquote no lumpiness in our maturity schedule and I would say on average, they're probably based on todays rates and we haven't adjusted our rates for all of the uncertainty out there are they're coming down probably an average of about 75 basis points.
Chuck Christmas: So there's really quote unquote, no lumpiness in our maturity schedule. And I would say, on average, they're probably based on today's rates, and we haven't adjusted our rates for all the uncertainty out there. They're coming down probably an average of about 75 based on that.
Speaker Change: Okay.
Chuck Christmas: Okay. And that's relatively even over the next year in terms of stuff that's renewing or maturing kind of back half of the year and into next year. You're still going to see that same 75 basis points? Yeah, I would say it's pretty even. I would say it's pretty even, maybe a little bit more dollars in the first six months, in the back half of six months. But I think if we call it even throughout the next 12 months, that's a fairly fair statement.
Speaker Change: And that's and that's relatively even over the over the next year in terms of interim stuff. That's renewing are maturing.
Speaker Change: Kind of back half of the year and into next year is it still you're still going to see that same 75 basis points or let's say, it's pretty even I would say, it's pretty even maybe a little bit more dollars in the first six months in the back half of six months, but I think we call. It even throughout the next 12 months, that's a fairly a fair statement.
Speaker Change: Okay.
Chuck Christmas: Okay, and then on the loan side. So you had average loans at 631, it looks like, in the first quarter. Where were the new loan yields that you were putting on, kind of? I think we're probably somewhere, probably around 7% or so. You know, almost all the loans we put on are at floating rate. You know, as I would say, you know, prime minus 50 to prime, somewhere in there, if you want to use it on a prime basis. And we have about 150 to 200 million dollars a year. In loans that are earning some, commercial loans that are earning somewhere in the 4.5% range.
Speaker Change: And then on the loan side.
Speaker Change: So you you had average loans at 631, it looks like in the first quarter, where.
Speaker Change: Where were the are the new loan yields that you were putting on kind of I think what we're seeing play somewhere of it's probably around 7% or so you know almost all the loans, we put on are at floating rate.
Speaker Change: So I would say you know prime minus 50 to prime.
Speaker Change: Somewhere in there if you want to use it on a prime basis, and we have about $150 million to $200 million a year and loans that are earning some commercial loans that are earning somewhere in the 445% range. Those are the ones that I referenced that are maturing and getting obviously a refinance in today's rate environment.
Chuck Christmas: Those are the ones that I referenced that are maturing and getting, obviously, refinanced in today's rate environment. And then the investment portfolio on top of that, probably this year, I think we got $40 million left, earning about 75 basis points. And then going forward, we have probably around $80 million a year maturing, and I would say in the next couple of years, that's probably like one and a quarter to one and a half percent. That's maturing, and we're getting about four, four and a quarter now. and our current investment strategy.
Speaker Change: Yeah.
Speaker Change: Got it and then they eventually.
Speaker Change: And then the investment portfolio on top of that probably this year I think we got $40 million left earning about 75 basis points and then excuse me. That's yeah, and then going forward, we have probably around $80 million a year maturing and I would say in the next couple of years, that's probably like one in a quarter.
Speaker Change: One and a half per cent.
Speaker Change: That's maturing and we're getting about four four and a quarter now.
Speaker Change: Our current investment strategies.
Speaker Change: Okay, Great and I guess the last just follow up is.
Chuck Christmas: Okay, great. And I guess the last just follow-up is... competition on the loan yields. Did you see spreads tighten at all through the quarter into the first quarter? Are you seeing that happen or has that been relatively stable? One of the things that we measure is the spread that we get in each of our risk rating categories and those have been stable.
Speaker Change:
Speaker Change: Competition on the loan yields did you see spreads tighten at all through the quarter into the first quarter are you seeing that happen or has that been relatively stable.
Speaker Change: Well one of the things that we measure is the spread that we get in each of our risk rating categories and those have been stable.
Speaker Change: Okay terrific alright, well, thanks for taking my questions guys.
Chuck Christmas: Terrific.
Chuck Christmas: All right.
Operator: Well, thanks for taking my questions, guys.
Operator: Be well.
Speaker Change: Okay.
Damon Delmonte: The next question is from Damon DelMonte with KBW. Please go ahead. Hey, good morning, guys. Thanks for taking my questions here. Just to kind of close the loop here on the margin outlook. Chuck, should we kind of expect a similar level of securities purchases in the coming quarters like we've seen over the last three or four quarters? Yes. I mean, obviously, it's predicated on continued local deposit growth, which we think will continue to be strong. But we're looking at, you know, if you put the dollars amount, we're expecting our loan growth in terms of dollars and our securities growth in terms of dollars to be relatively Got it.
Speaker Change: The next question is from Damon Delmonte with K B W. Please go ahead.
Damon Delmonte: Hey, good morning, guys. Thanks for taking my questions here just to kind of close the loop here on the the the the margin outlook Chuck should we kind of expect a similar level of securities purchases in the coming quarters like we've seen over the last three or four quarters.
Damon Delmonte: Yes, Yeah, I mean, obviously, that's predicated on continued local deposit growth, which we think will continue to be strong.
Damon Delmonte: But we're looking at you know if you put the dollars amount, we're expecting our loan growth in terms of dollars and our securities growth or in terms of dollars to be relatively similar.
Damon Delmonte: Got it okay, great that's helpful.
Damon Delmonte: Okay, great. That's helpful.
Chuck Christmas: And then on the expense guide, you know, it's good that we have a full expense number for the upcoming quarters, but as we kind of dig through some of those line items, you know, can we expect an increase in salary and benefits? It seemed like this quarter was down from the fourth quarter. Do you kind of have like merit increases and things like that kicking in here in the second quarter? Yeah. Well, yeah, merit increases took it took into account at the end of February. So there's a little bit more ramp up, you know, to get a full quarter of that.
Damon Delmonte: And then on the expense guide you know the.
Speaker Change: It's good that we have Oh, and all full expense number for the upcoming quarters, but as we kind of dig through some of those line items. You know can we expect an increase in salary and benefits. It seemed like this quarter was down from from the fourth quarter do you kind of have like merit increases and things like that kicking in here in the second quarter.
Speaker Change: Well, Yeah Merit increases took a took into account at the end of February.
Speaker Change: So theres a little bit more ramp up you know to get a full quarter of that but in regards to the fourth quarter. One of the things that we had in the fourth quarter as we came through a very strong 2024, and we did have an increase in our bonus accruals, which obviously, we believe is a good thing.
Chuck Christmas: But in regards to the fourth quarter, one of the things that we had in the fourth quarter is we came through a very strong 2024. We did have an increase in our bonus accruals, which obviously we believe is a good thing, but it's predicated on our continued strength throughout 2024, which actually got stronger. We felt better about it as we were coming through and hitting more and more on our metrics. which has a sliding scale to it. So, I would say in regards to 2024 salary and benefits, there was some, I won't call it one time, but there was some increased bonus accruals in there.
Speaker Change: But it is predicated on our continued strength throughout 2024, which actually got stronger we felt better about it as we were coming through and hitting more and more on our metrics.
Speaker Change: Which has had which has a sliding scale to it so I would say in regards to 2020 for salary and benefits. There was some I'll call. It one time, but there was some increased our bonus accruals in there.
Damon Delmonte: Got it, okay, great.
Speaker Change: Got it okay, great and then just one more.
Chuck Christmas: And then just one more, you know, obviously credit trends are very strong, low NPAs, minimal charge-offs, had some recoveries this quarter, I believe. You know, you built the reserve four basis points, kind of as you factor in, you know, slower loan growth, but yet maybe a little bit of growing concern on the economic uncertainty. You know, how do we think about the reserve level from this quarter going forward? Do we look for a little bit more reserve build over the coming quarters, or do you feel like you addressed it enough here in this quarter? Yeah, I think it was really hard to answer it specifically, Damon.
Speaker Change: Obviously credit trends are very strong low N. P. A's are minimal charge offs had some recoveries. This quarter I believe you know you built the reserve for basis points kind of as you factor in you know slower loan growth, but yeah, maybe a little bit of growing concern on the economic uncertainty you know how do we think about the reserve level from this.
Speaker Change: Quarter going forward, we look for a little bit more reserve build over the coming quarters or do you feel like you addressed it enough here in this quarter.
Speaker Change: Yeah, I mean, I don't know.
Damon Delmonte: I think it was really hard to answer it specifically Damon obviously, there's so much uncertainty out there I think that we as a management team have always been working hard quite frankly too.
Chuck Christmas: Obviously, there's so much uncertainty out there. I think that we as a management team have always been working hard, quite frankly, to battle the accounting rules and the infamous CISO, which we have to talk about every quarter. It's a duration-based model, and we are a short-term commercial banker. And because of that, it's hard to get meaningful reserve coverage ratios, and that is what it is. That's who we are, and that's the model we have to work with. Then you add on top of that is a company that has very strong asset quality, especially since coming out of the Great Recession.
Damon Delmonte: To battle, the accounting rules and the infamous seesaw, which we have to talk about every quarter is it's a duration based model and we are a short term commercial banker.
Damon Delmonte: And because of that it's hard to get you know meaningful reserve coverage ratios and then you add in and that is what it is that's who we are and that's the model we have to work with and then you add on top of that as a company that has very strong asset quality, especially since coming out of the great recession. So when you look at historical numbers, which are.
Chuck Christmas: So when you look at historical numbers, which obviously are applied as part of our model, we're actually in a net recovery position. So we continue to fight the fight. We did see, like I said, we get different economic forecasts. Our policy is to use a base as long as that base passes the smell test and looks like the base forecast from other providers. But in this environment, when there is so much uncertainty, it's going to take a quarter or two to figure this all out. We thought it prudent to go ahead and blend that base case with a more adverse case and just use the average of the two.
Damon Delmonte: Is the are applied as part of our model you know we're actually in a net recovery position. So we continue to fight. The fight we did see like I said, we get different economic forecasts. Our policy is to use a base as long as that base passes the smell test and it looks like the base forecast from other.
Damon Delmonte: Providers.
Damon Delmonte: And this in this environment. When there is so much uncertainty you know, it's going to take a quarter or two to figure. This all out we thought it prudent to go ahead and blend that base case with a more adverse case and just use the average of the two and that was just under a 2 million dollar impact. So a large percentage you can see our provision for the quarter was.
Chuck Christmas: And that was just under a $2 million impact. So a large, as you can see, our provision for the quarter was $2.1 million. So I would say at least 90% of that provision expense was because of us going forward and blending those two economic forecasts together, which we think is the absolute prudent thing to do. So who knows what economic forecasts look like? Obviously, we get them from an independent source, and they'll put their heads together in late June. They'll issue their updates, and we'll run that through our model. So that's always a pretty big unknown.
Damon Delmonte: <unk> 1 million so.
Damon Delmonte: I would say at least 90% of that provision expense was because of us going forward and blending those two economic forecast together, which we think is the absolute prudent thing to do so.
Damon Delmonte: Who knows what economic forecast looked like obviously, we get them from an independent source and they'll put their heads together in late June they'll issue their updates and we'll run that through our model. So that's always a pretty big unknown.
Chuck Christmas: But we definitely wanted to make sure that we weren't fooling ourselves, that we're entering into a period of high uncertainty. And we wanted to make sure that we were on the right side of that calculation, and we'll just take it how it comes from this point forward. Got it.
Damon Delmonte: But we definitely wanted to make sure that we werent fooling ourselves that we're entering into a period of high uncertainty and we wanted to make sure that we were on the right side of that calculation and we'll just take it how it comes you know from this point forward.
Speaker Change: Got it okay. That's all very helpful. That's all I had thank you.
Operator: Okay, that's all very helpful. That's all that I had. Thank you. You're welcome, Nathan. Again, if you have a question, please press star then 1.
Damon Delmonte: You're welcome to you.
Speaker Change: Again, if you have a question. Please press Star then one the next question is from Nathan race from Piper Sandler. Please go ahead.
Nathan Race: The next question is from Nathan Race from Piper Sandler. Please go ahead. Hi. Good morning, everyone.
Speaker Change: Hi, Good morning, everyone. This is out of them for all on for Nate race and thank you for taking my questions.
Adam Kroll: This is Adam Kroll, on for Nate Race, and thank you for taking my questions. I guess to start on the lower loan growth guidance over the near term and if loan demand was to materially soften, is there any expense levers that you could pull to kind of help mitigate that lower loan growth? I don't think, you know, we try to operate as efficient as we can. I would think, you know, not with, if the asset quality stays unchanged and we see a meaningful reduction in loan growth, clearly the provision expense would be impacted by that.
Speaker Change: I guess to start on the lower loan growth guidance over the near term and if loan demand was to materially often is there any expense levers you could pull to kind of help mitigate that lower loan growth.
Speaker Change: I don't think we try to operate as efficient as we can I would think.
Speaker Change: Not with.
Speaker Change: The asset quality stays unchanged and we see a meaningful reduction in loan growth clearly the provision expense would be impacted by that.
Adam Kroll: But, you know, the way that we try to, you know, run our bank and structure our bank is for the long term. So, well, obviously, we need to make sure that we're fortified for any, you know, bumps in the road like we have now. Who knows how big that bump is going to be? But, you know, we're not looking at just the next, what happens the next three months or six months when we're trying to structure our employee base, when we're looking at new products and services, for example, maybe new markets to go into. You know, we're looking at this with, you know, with binoculars looking way out into the future.
Speaker Change: But you know the way that we try to run our bank construction of our bankers for the long term so well, obviously, we need to make sure that we're four to five for any.
Speaker Change: Bumps in the road like we have now and who knows how big that bump is going to be but you know we're not looking at just the next what happens the next three months or six months when we're trying to structure our employee base. When we're looking at new products and services. For example, maybe new markets to go into you know we're looking at this with you know with banana.
Speaker Change: Booth binoculars looking way out into the future so.
Chuck Christmas: So, you know, maybe if it was dire enough, we could maybe, you know, slow down some new projects and stuff like that. But we think long term, these projects are what we need. So we would have to take that on a case by case basis. But, you know, we want to make sure that we continue to build this company, bring on the people, train the people for our success in the long term. Got it. No, I appreciate the color. And then switching to fees, does your fee income guide for the rest of the year include some normalization higher in swap fees or should we assume a similar level to 1Q?
Speaker Change: You know maybe maybe if it was dire enough, we could maybe slowdown some new projects and stuff like that but we think long term. These projects are what we need.
Speaker Change: So we would have to take that on a case by case basis, but.
Speaker Change: No we wanted to make sure that we continue to build this company bring on the people train the people for our success in the long term.
Speaker Change: Got it I appreciate the color and then switching to fees does your fee income guide for the rest of the year include some normalization fire and swap fees or should we assume a similar level to <unk>.
Chuck Christmas: No, 1Q was, I would call that an anomaly, you know, the nature of that is, you know, we have to get term loan growth, generally speaking. I mean, existing loans, we do swaps with them from time to time. But generally speaking, the driver of swap income is new term loan fundings. And we've already talked about it with the uncertainty. And most of our loan net loan growth in the first quarter was actually line draws. But I will say that so far here, we're three weeks into this quarter. And this quarter is looking very normal, like, so I think we know that's going to get lumpy from quarter to quarter.
Speaker Change: No <unk> was I would call that an anomaly.
Speaker Change: You know the nature of that is we have to get term loan growth generally speaking I mean, the existing loans, we do swaps with them from time to time.
Speaker Change: But generally speaking the driver of swap income is new term loan fundings.
Speaker Change: And we've already talked about it with the uncertainty in most of our loan net loan growth in the first quarter was actually line draws.
Speaker Change: But I will say that.
Speaker Change: So far here, we're three weeks into this quarter and this quarter is looking very normal like so I think that we know that's going to get lumpy from quarter to quarter.
Ray Reitsma: And, and so we would expect it to be more normalized going forward. And that is included in the guidance. Got it. That's super helpful. One last question from me is I thought mortgage origination volumes held in pretty well in 1Q. I was just curious if you guys are expecting that typical seasonal uptick in mortgage during 2Q or with the macro uncertainty and rate volatility that maybe the uptick in 2Q isn't as strong as in prior years? Yeah, that's possible that that could happen. I mean, up until March 31st, we had an increase in the seasonal pattern.
Speaker Change: And and so we would expect it to be more normalized going forward and that is included in the guidance.
Speaker Change: Got it that's super helpful.
Speaker Change: One last question for me is I thought mortgage origination volumes held in pretty well in <unk>. I was just curious if you guys are expecting a typical seasonal uptick in mortgage during two Q or with the macro uncertainty and rate volatility that maybe the uptick into Q isn't.
Speaker Change: As strong as in prior years.
Yeah, that's possible that that could happen I mean up until.
Speaker Change: March 31st we had.
Speaker Change: An increase in the seasonal pattern there is definitely a seasonal pattern here in Michigan and mortgages you tend to shop for your home when the weather is a little bit more conducive to that so.
Ray Reitsma: There's definitely a seasonal pattern here in Michigan in mortgages. You tend to shop for your home when the weather is a little bit more conducive to that. So right up until the end of the quarter, that that pattern was increasing nicely. And then. In the intervening time between the end of the quarter and today, that pattern has probably failed to continue to build as much as we'd like it to. In the last few days, it seems like it's picked up a bit, but this is the time of year where it would start to manifest. and I think the uncertainty has kind of kept it at bay a little bit.
Speaker Change: Right up until the end of the quarter that that pattern was increasing nicely and then.
Speaker Change: In the intervening time between the end of the quarter and today that pattern has probably failed to continue to build as much as we'd like it to in the last few days. It seems like it's picked up a bit but this is the time of year, where it would start to manifest.
Speaker Change: And I think the uncertainty has kind of kept it at bay a little bit.
Speaker Change: I don't really expect that to continue through the entire season, but major things like purchasing or refinancing our home and there's a lot more purchases than refis going on right now.
Adam Kroll: I don't really expect that to continue through the entire season, but major things like purchasing or refinancing a home, and there's a lot more purchases than refi is going on right now. Uncertainty is kind of the enemy of that process, so some stability would certainly help that to continue to grow. Got it. That's it for me. Thank you for taking the question. Thank you.
Speaker Change: [noise].
Speaker Change: And to use kind of the enemy of that process. So some stability would certainly help that to continue to grow.
Got it that's it for me. Thank you for taking my questions.
Speaker Change: Thank you.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Ray Reitsma for any closing remarks.
Ray Reitsma: This concludes our question and answer session.
Operator: I would like to turn the conference back over to Ray Reitsma for any closing remarks. I'd like to thank you for your participation in today's call and for your interest in Mercantile Bank, and that concludes today's call. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Ray Reitsma: I'd like to thank you for your participation in today's call and for your interest in Mercantile Bank and that concludes today's call.
Ray Reitsma: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Ray Reitsma:
Ray Reitsma: Yeah.
Ray Reitsma:
Ray Reitsma: Okay.
Ray Reitsma: [music].
Ray Reitsma: Yeah.
Ray Reitsma: [music].
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Ray Reitsma: Yeah.
Ray Reitsma: Yeah.
Ray Reitsma: Yeah.
Ray Reitsma: [music].