Mercantile Bank Corporation (MBWM) Earnings Call Transcript & Summary

Hello and welcome to the 2020 Mercantile Bank Corporation Annual Meeting of Shareholders. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to Bob Kaminski, President and Chief Executive Officer of Mercantile Bank Corporation. Mr. Kaminski, you may begin.

Thank you and good morning. I'm Bob Kaminski, Mercantile's President and Chief Executive Officer of the bank. Today's virtual-only meeting is a live webcast. We believe in engaging with our shareholders, and it is our hope that this virtual meeting will maximize the participation of shareholders regardless of their location. This technology enables us to reach a larger audience while maintaining safety. Thank you very much to those who are participating in our virtual meeting online today. I would like to call the formal portion of this meeting to order. First, the rules of conduct. I'd like to call your attention to the rules of conduct set forth for this meeting. These were made available to each shareholder at the bottom of the list of meeting links found along the left side of the screen. The polls are open. And any shareholder who has not yet voted a proxy may do so until closing of the polls via instructions on the virtual meeting platform. Shareholder ability to comment or ask questions is available only via the virtual meeting platform messaging function. Shareholders attending the meeting via telephone may view or follow along with the meeting presentation material separately as they are also posted on the company's website under the company Reports tab. Board of Directors have appointed Amy Kam and Bob Worthington to act as inspectors for this meeting. I would also like to ask Mr. Worthington to serve as secretary of the meeting. Mr. Worthington is the Senior Vice President, Chief Operating Officer of Mercantile Bank Corporation and Mercantile Bank. Ms. Kam is our Vice President and Executive Administrator. If anyone has a proxy to vote at today's meeting that has not yet been submitted or wish to change your vote, you may do so now by clicking on the voting link provided online. If you have already voted and do not wish to change your vote, you do not need to take any further action. If you need a copy of the annual report or proxy statement, the links to those documents are also provided online. I would also like to now introduce our directors who are present on the webcast: David M. Cassard, Edward J. Clark, Michelle L. Eldridge. Eldridge, Jeff A. Gardner, Robert B. Kaminski and Michael H. Price. We would also like to acknowledge Edward Grant and Susan Jones of the bank Board. Mr. Grant was on the Corporate Board, who have been long-standing directors and are both retiring from the Board of Directors of the company and the bank as of this meeting. We thank you for your many years of service and dedication to our company. Our directors, Michelle Eldridge and Edward Clark, are serving as proxies for shareholders who voted by proxy. Next, I'd like to introduce Ray Reitsma and Chuck Christmas. Mr. Reitsma is the Executive Vice President of Mercantile and President of the bank. Mr. Christmas is our Executive Vice President, Chief Financial Officer and Treasurer as well as Executive Vice President and Chief Financial Officer of the bank. I would also like to introduce Kevin Muntter of BDO USA, LLP, our accounting firm; and Brad Wyatt and Cindy Moore of Dickinson Wright PLLC, our legal counsel. Mr. Muntter has been given an opportunity to make a statement if he would like. At the end of the meeting, Mr. Muntter, Mr. Wyatt and Ms. Moore will be available to answer questions. Kevin, do you have any statements?

I have no comment at this time.

Thank you. Board of Directors set the close of business on April 1, 2020, as the record date for this meeting. A list of the shareholders as of the record date is located in the file link section of the meeting portal. It is arranged alphabetically. I have been advised by the inspectors that 13,116,815 of the 16,205,207 shares are entitled -- that are entitled to vote are present by proxy. Since the majority of the shares are represented, a quorum is present. Business of the meeting may proceed. A notice of this meeting was sent to each shareholder. A copy of the notice and proxy statement is also available on the meeting portal and is available on our website under Investor Relations section. The minutes of the 2019 Annual Meeting of Shareholders were made available to you in the meeting portal. I would set the motion approving the minutes. I would also -- I would suggest that one of the proxies make the motion.

My name is Michelle Eldridge. I move that the minutes of the 2019 Annual Meeting of Mercantile Shareholders be approved as presented to this meeting.

Is there a second for the motion?

My name is Ed Clark. I second the motion.

We will now vote on the motion to approve the minutes. All in favor say aye. One of the proxies may speak on behalf of the shareholders.

Aye.

The motion is carried. The minutes of 2019 Annual Meeting are approved as presented to this meeting. Ms. Eldridge and Mr. Clark as proxies were among the persons voting for the motion. The first item of business is the election of 6 directors. Each will serve a 1-year term expiring at the 2021 Annual Meeting or until the election and qualification of their successors. The proxy statement lists 6 nominees proposed by our Board of Directors. These nominees are David M. Cassard, Edward J. Clark, Michelle L. Eldridge, Jeff A. Gardner, Robert B. Kaminski and Michael H. Price. In accordance with the bylaws of the company, stockholders are required to vote advance -- to provide advanced notice of their intent to nominate candidates or directors. No such notice was received. Therefore, I declare the nominations closed. I would accept the motion regarding the election of the directors. I would suggest that one of the proxies make the motion.

I move that the following resolution be adopted. Resolved that David M. Cassard, Edward J. Clark, Michelle L. Eldridge, Jeff A. Gardner, Robert B. Kaminski, Jr. and Michael H. Price are hereby elected as Directors of Mercantile Bank Corporation to serve 1-year terms expiring at the annual meeting in the year 2021 or the election and qualification of their successors.

Is there a second for the motion?

I second the motion.

The second item of business is the approval of the Mercantile Bank Corporation 2020 Stock Incentive Plan. I would accept the motion to approve the Mercantile Bank Corporation 2020 Stock Incentive Plan. I would suggest that one of the proxies makes the motion.

I move that the following resolution be adopted. Resolved that the shareholders approve the Mercantile Bank Corporation's Stock Incentive Plan of 2020 as disclosed in Appendix A contained in the proxy statement.

Is there a second for the motion?

I second the motion.

The third item of business is the ratification of BDO USA, LLP as our independent registered public accounting firm for 2020. I would accept the motion to ratify BDO USA, LLP as our accountants. I would suggest that one of the proxies make the motion.

I move that the following resolution be adopted. Resolved that the appointment of BDO USA, LLP as Mercantile Bank Corporation's registered public accounting for 2020 is ratified.

Is there a second for the motion?

I second the motion.

The fourth and final item of business is the advisory vote to approve the compensation of our executives. I would accept the motion to approve on an advisory basis the compensation of our executives. I would suggest that one of the proxies make the motion.

I move that the following resolution be adopted. Resolved that the shareholders approve on an advisory basis the compensation of Mercantile Bank Corporation's executives as disclosed in the compensation discussion and analysis, the compensation tables and the related disclosures contained in the proxy statement.

Is there a second for the motion? I

I second the motion.

It's 9:10 a.m. The polls remain open for voting on the 4 motions just received. For all 4 of the matters to be voted on today, any shareholder of record who is present and wishes to vote or change their vote may do so right now by clicking on the voting link provided online. If you have already voted -- if you already submitted a proxy with your vote, there is no need to vote again. If you wish to revoke your proxy and vote again, you may follow the electronic voting procedure just described. [Voting]

The proxies have submitted their proxy votes to the inspectors on the motions. It's 9:11 a.m. The online voting will now be closed. While the inspectors are counting the ballots, we'll make a brief presentation. After we have concluded the formal business of the meeting, you'll have an opportunity to ask questions. Today for the presentation, we have just a brief presentation at best. And the presentation will be made by Ray Reitsma and myself. Really, as pretty apparent, the overarching topics that we've all been focused on for the last several months are dealing with the ramifications of the COVID-19 pandemic. So we'll spend some time going through the activities of Mercantile Bank related to that. And we'll also follow up on one of our most impactful strategic initiatives that we've had certainly for this year and the last couple of years, which is the growth of noninterest income for our bank. On the presentation today, we have our forward-looking statements that's listed on Slide 3 for your consideration. Please review that and understand that, that is a part of this presentation today. On Slide 5, we have the map to give all shareholders a current snapshot of where the Mercantile Bank locations are located throughout the state of Michigan. And then settling in on Slide 6. This is a time line of activities that really relate to the pandemic and Mercantile's reaction to the pandemic. Starting on the left side of the page, we started receiving and reviewing reports of problems with the virus back in January. And as the monitoring occurred, it became quite apparent that this was going to be a problem, and our pandemic action plan was activated in the month of February. Throughout this time, the health and safety of our employees and our customers was our paramount concern, and all the actions that we've taken related to the pandemic have kept that at the forefront of our focus. On March 18, our branches were opened by appointment only. And on March 18, we also had the commencement of Mercantile Bank's payment relief assistance programs for commercial and retail loan customers. This is an important part of our focus on the loan side because with the shutdown of the state of Michigan that occurred on March 25, Mercantile Bank became extremely concerned that our clients -- how they were dealing with it and -- dealing with the pandemic. We spent a lot of time working with them beginning at that point. And on March 23, we had 75% to 80% of our employees working remotely from home. This was a tremendous feat by our IT and operations staff, be able to set up employees who are not normally used to working from their homes on a remote basis, happened pretty seamlessly, and the transition was pretty smooth. And from that point onward to the present time, again, we have 75% to 80% of our staff working to service our customers and conduct a lot of activities, both related to the pandemic and otherwise. On March 25, in conjunction with the Governor's stay-at-home order, all the lobbies of our locations were closed. Even though Mercantile Bank is an essential operation as defined by the Governor's Executive Order, Mercantile Bank thought it was best in view of the safety of both our employees and our clients to close our lobbies. On March 27, the CARES Act was signed into law. This set in motion a tremendous number of activities by the bank to work in conjunction with the provisions of the CARES Act, namely the Paycheck Protection Plan, and a significant amount of activities of the staff were emerged in processing and working with our clients to submit those applications throughout the month of April. By May, all PPP applications approved by the SBA -- were approved by the SBA and funded by Mercantile during the month of May. And now at this point, PPP focus is now shifting to the planning and implementation of the forgiveness phase of the CARES Act regarding the PPP program. As you all follow through the news, this legislation continues to change almost daily. Certainly, every week, there are significant number of updates to the regulations that relate to the Act and PPP. We spend a lot of time monitoring this with our accountants and legal counsel and working with our clients to make sure that we are in compliance and that we're doing things to make sure our customers have the maximum assistance that we can provide to them. And as of this time, we're currently planning for the phase-in reopening of regions of the state of Michigan. Again, keeping our customers' and our employees' safety is the focus, the forefront of our efforts. We're taking a slow-as-we-go approach to make sure that those safeties are taking into consideration with all that we do. So at this stage, I'll turn it over to Ray and dig into some of the specifics of the loan portfolio, the Paycheck Protection Plan and those strategic initiatives.

Thank you, Bob. The next slide is entitled Credit Administration and asset quality is clearly the issue today. We remain in close contact with our customers to monitor their financial condition and the ongoing status of their operations. We have spent basically every working day since the Great Recession to build a portfolio that will withstand some stress. And this environment is certainly testing that. And our loan metrics have remained very strong over the past several years. And as a result, we have a position of strength to go into this crisis. Payment relief assistance programs have been initiated on both the federal level and within the bank, and we have some details on that in the following slides, which provide some numeric scope to the payment relief provided to our commercial and retail customers. As you can see, we have about 600 incidents on the commercial side where we have provided a relief of -- on the payment streams of one form or another. And also on the retail side, about $55 million of principal balance impacted by payment relief programs. The next slide details our efforts under the Paycheck Protection Program, which provided liquidity to support our clients that will prop up asset quality as the economy is reactivated. Our commercial team excelled in the execution of this program, and we're very proud of the work that we've done to support our communities throughout -- through this program. The next slide details the fact that we've lots access to branches. Online tools have been much more widely utilized. And as you can see, we've added nearly 50% to the retail online banking activity and about 16% to our business online activity over the prior period a year ago. Another incredibly important element of our noninterest income efforts are the mortgage area. Applications have materially increased, as you can see in this chart. Our survey tells us that the customer satisfaction is very strong among the clients that we serve. Interestingly, purchase-related apps, applications have approximately -- have been approximately equal in May of 2020 to the same period last year, which gives us some confidence that the level of activity will persist as the refinance activity starts to fade away, ensured that our mortgage team has performed well by any and all measures. The following chart depicts how the previously described application activity has turned into loan production. In addition to strong mortgage activity, our income from our Treasury offerings has also contributed nicely to noninterest income as we provide value through offering centers, security and convenience. That concludes my remarks. I'll now turn it back to Bob.

Thanks, Ray. And to conclude the presentation, we just want to assure our shareholders that we continue to work continuously with our clients, to stay plugged into what's going on in their world. Obviously, we have a wide variety of all kinds of different businesses and industries that we serve. And we're trying to assess the impact of the shutdown in the various parts of our state with our clients and to help them provide -- help provide them the tools that can best get them to the other side of the pandemic. So again, I'll be happy to answer questions at the end of the presentation, at end of the meeting, and we'll continue on with the formal business of the meeting at this point. The votes have been counted regarding the election of directors. The inspectors report that 95% of the shares represented at the meeting have voted for each nominee. Accordingly, David M. Cassard, Edward J. Clark, Michelle L. Eldridge, Jeff A. Gardner, Robert B. Kaminski and Michael H. Price have been elected directors of Mercantile to serve 1-year terms. The 1-year terms will expire at the Annual Meeting in the year 2021 or upon the election and qualification of their successors. Regarding the emotion -- regarding the motion to approve the Mercantile Bank Corporation 2020 Stock Incentive Plan, the majority of shares were voted for approval of the plan. The preliminary tally shows 9,275,247 shares voted for ratification, 433,862 shares voted against ratification and 55,018 shares abstained from voting. Based on the vote, the Mercantile Bank Corporation Stock Incentive Plan 2020 is approved. Regarding the motion to ratify BDO USA, LLP as our accountants for 2020, the inspectors report that a majority of the shares voted for ratification. The preliminary tally shows 13,005,604 shares voted or for ratification; 88,109 shares voted against ratification; and 23,102 shares abstained from voting. Based on the vote, the appointment of BDO USA, LLP has been ratified. Regarding the advisory vote on our executive's compensation, the inspectors report that a majority of the shares voted or for approval. The preliminary tally shows 9,574,845 shares voted for approving compensation; 128,941 shares voted against approval; and 40,340 shares abstained from voting. Accordingly, the compensation of our executives has been proved -- has been approved on an advisory basis. The inspectors will furnish the secretary with their written report of the final vote count, and this will be made available online in the next few days. Our accountants and legal counsel are now available to answer questions. After the formal portion of the meeting, there will be a question-and-answer period when you may ask questions of our officers. Does anyone have any questions for our accountants and legal counsel? We have received no questions for our accountants and legal counsel. If there is no further business to come before the meeting, I would accept a motion for adjournment. Would one of the proxies make the motion?

I move this meeting be adjourned.

I second the motion.

You have heard the motion to adjourn. All those in favor say aye. One of the proxies may speak on behalf of the shareholders.

Aye.

The motion is carried. The meeting is adjourned. There will now be a brief question-and-answer period. You may submit questions online by clicking or tapping on the small dialogue icon located in the bar in the upper portion of your screen. Please note that we will adhere to the rules of conduct in answering your questions.

We've got a couple of questions concerning the effects of the COVID pandemic on the credit situation of the bank and loan losses in the quarters to come. This is something, as we mentioned in the presentation, that we have spent a tremendous amount of time on. There's a significant amount of unknown that is obviously in its way through this pandemic and the reaction in the individual states to dealing with the situation as it pertains to their states. Michigan has taken a very aggressive approach. And therefore, most businesses have been shut down for many weeks now and only now are some of these businesses being allowed to reopen, albeit on a limited basis. We have -- we maintained continual contact with our clients to identify and help them identify the concerns as a result of the impact of being shut down. We do have some businesses that are -- have been identified as essential that are doing very well right now. As we've mentioned in the presentation, we positioned ourselves since the end of the Great Recession to have a very strong loan portfolio with very solid clients and position ourselves to be able to withstand the effects of an economic downturn. Certainly, none of us could have envisioned the kind of downturn that we're having right now as a result of the pandemic, and it has been dramatic, no doubt. I think as Ray highlighted in his presentation, results of the government stimulus with the PPP program has been quite impactful on our client base. There have been over -- almost 2,000 loan applications that were approved, injecting funds -- must needed funds into our clients' cash flows. Also, our payment deferral program, which Ray identified as well, is helping to build that bridge to get us to the other side of the effects of the pandemic. So that is my view of some of the activities that we are -- we've been having. I don't know, Ray, at this point, do you have any further comments about what you're seeing in the portfolio and some of the early feedback from our clients?

Well, as you said, Bob, it's early in the process, and time will tell more. However, I would say that our portfolio appears to have been helped in the right areas. The PPP funds and the payment deferrals together have left our portfolio in a very good position from a payment performance standpoint. Our past due list looks extremely similar to the way it looked before the pandemic hit the economy. And that would suggest that the PPP funds have hit home and the remaining companies are surviving adequately with the businesses they're able to do right now.

We had a question on are there any opportunities or innovations as a result of some of the effects that we've seen on the shutdown and the pandemic? Ray, why don't you take that one?

Yes. As one of the slides in my presentation indicated, we've seen a real increase in the use of our online banking channels as our branch offices have been less available. And we've also been able to use methods to close loans electronically, which has been very helpful and efficient. The PPP process increased our number of notes by about 50%. And to be able to close those in a relatively short period of time of about 2 weeks gives a good indication of how much efficiency those tools added to our process. So we'll continue to use those in the future. And we're also seeing a heightened use of many of our treasury products. And those have also added to the convenience and security and timeliness for our clients, and we expect that those will continue into the future as well.

I think that over the last couple of years, Mercantile has deployed video banking machines technology. And the video banking machines I think have done a really good job of helping our clients conduct their banking needs with our call center during the shutdown of our lobbies. And that along with the tool that Ray mentioned on the electronic banking side have done a very nice job in working with our clients to address the normal banking needs over the course of the last several months. And the fact that our employees are working from home remotely, for the most part, just further points to the effectiveness of our staff and their dedication and loyalty to making sure our customers are served the best of their abilities. And so far, it's been going very, very well. There is some questions on our mortgage banking business. And obviously right now the fact that with interest rates at a very low level, our refinance business is continuing to be very strong, of course, with that. So the question is, how do we see the purchase market playing out once the refinance boom is through the system and there are less loans to refinance and when the majority goes back to serving clients that are interested in buying homes? Ray, what are you seeing along those lines?

Well, as I mentioned earlier, the purchase volume in the month of May of this year slightly exceeds what we saw in the purchase volume in May of last year. So that's a sign of cautious optimism that the market for purchases is surviving and indeed thriving to the same level it was last year. Right now our mortgage backlog is approximately double what it was last year at this time. So the difference between the sameness in relative terms of the purchase market and that double backlog is accounted for in the really strong refinance activity. So we've put resources towards handling that activity in an efficient and customer-friendly way. That's been very successful. We've been able to deliver on that. We'll keep pursuing that market as long as it's there and available. But there is a core purchase activity at this time that persists that should carry us in levels that would not be dissimilar to what we saw in 2019.

Thank you. Also, I have a question about our stock buyback program. Could you please provide an update on the stock buyback as well as possible plan going forward? With that, I'll turn it over to Chuck.

Thanks, Bob, and good morning to everybody. As we have mentioned publicly and as virtually every company has done in our country, we suspended -- at least temporarily suspended our buyback activity in the latter part of March. As we entered into this COVID-19 pandemic environment not being able to, with a high level of certainty, forecast our financial performance over at least the next future quarters, we thought it appropriate that we suspend our buyback activity and make sure that we are enhancing our capital to the nth degree. So we did temporarily suspend it. We will continue to work with our Corporate Board as we move forward in respect to our capital levels, our cash dividend program and certainly anything that we may do with our buyback program.

Thank you, Chuck. I'm checking the queue to see if there are any other questions that have been submitted by shareholders today. It looks like there are no further questions. So with that, the question-and-answer session is finished, and we want to thank you for joining us today for the 2020 Mercantile Bank Corporation Annual Meeting. Obviously, the first of its kind being in virtual fashion as a result of the pandemic, but it just points to the technology and the efforts of our staff to be able to put this together for the benefit of our shareholders. And hopefully, you found it informative and helpful. And again, thank you for your support of our company and all that you do for our communities and for Mercantile Bank. Again, this call has concluded. Thank you for participating today.

This concludes the meeting. You may now disconnect.