Mercantile Bank Corporation (MBWM) Earnings Call Transcript & Summary

Good morning. It's May 27, 2021, and welcome to Mercantile Bank Corporation's Annual Meeting of Shareholders. I'm Bob Kaminski, Mercantile's President and Chief Executive Officer, 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. Thank you very much to those who are participating in our virtual meeting today, and please note that this meeting is being recorded. I would like to call the formal portion of this meeting to order. I'd like to call your attention to the rules of conduct set forth for this meeting. They are available on the company's website and can be found by navigating to Investor Relations, overview and then governance documents. Shareholder ability to comment or ask questions is available only via the virtual meeting platform Q&A section. Shareholders attending on the telephone may view, follow along with the meeting presentation material separately as they are also posted on the company's website under the Filings, Documents section or under Presentations. The Board of Directors has appointed Amy Kam and Bob Worthington to act as inspectors for this meeting. I would like to ask Mr. Worthington to also serve as the secretary of the meeting. Mr. Worthington is Senior Vice President, Chief Operating Officer of Mercantile Bank Corporation and Mercantile Bank. Ms. Kam is our Vice President and Executive Administrator. If you need a copy of the annual report or proxy statement, the links to those documents are also provided online on the Investor Relations page of our website. I would like to now introduce our directors who are present on the webcast: David M. Cassard, Michael S. Davenport, Michelle L. Eldridge, Jeff A. Gardner, Robert B. Kaminski, Michael H. Price, and David B. Ramaker. We would also like to acknowledge Ed Clark, company and Bank Director, who retired in March; and Doyle Hayes of the Bank Board retiring as of today's meeting. Both Mr. Clark and Mr. Hayes have been long-standing directors, and we thank them for their many years of service and dedication to our company. 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. Next, I would like to introduce our Bank President, Ray Reitsma; and our CFO, Chuck Christmas, who will join me later for our question-and-answer session at the end of the meeting. Finally, our directors, David Cassard and Michael Davenport are serving as proxies for shareholders who voted by proxy. The Board of Directors set the close of business on March 31, 2021 as the record date for this meeting. A list of the shareholders is available for inspection upon request. If any shareholder would like to view this list, please put your name and e-mail address in the Q&A section, and inspector Amy Kam will send you a link to view the file for a limited time this morning. Only the meeting panelists are able to see the entries in the Q&A section. I have been advised by the inspectors that 12,434,825 of the 16,219,138 shares that are entitled to vote are present by proxy. Since the majority of the shares are represented, a quorum is present and the 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 our website under the Investor Relations section. The minutes of the 2020 Annual Meeting of Shareholders have been made available to you on our website by navigating to Investor Relations, selecting overview, then governance documents. I would accept the motion approving the minutes. I would also suggest that one of the proxies make the motion.

My name is David Cassard. I move that the minutes of the 2020 annual meeting of Mercantile shareholders be approved as presented to this meeting.

Is there a second for the motion?

My name is Michael Davenport. 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 the 2020 annual meeting are approved as presented to this meeting. Mr. Cassard and Mr. Davenport as proxies were among the persons casting for the motion -- voting for the motion. The first item of business is the election of 7 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 7 nominees proposed by our Board of Directors. These nominees are: David M. Cassard, Michael S. Davenport, Michelle L. Eldridge, Jeff A. Gardner, Robert B. Kaminski, Michael H. Price and David B. Ramaker. In accordance with the bylaws of the company, stockholders are required to provide advanced notice of their intent to nominate candidates for directors. No such notice was received. Therefore, I declare nominations closed. I would accept the motion regarding the election of the directors. I would suggest that one of the proxies make this motion.

I move that the following resolution be adopted: Resolve that David M. Cassard, Michael S. Davenport, Michelle L. Eldridge, Jeff A. Gardner, Robert B. Kaminski, Jr., Michael H. Price and David B. Ramaker, are hereby elected as directors of Mercantile Bank Corporation to serve 1 year term expiring at the annual meeting in the year 2022 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 ratification of BDO USA, LLP as our independent registered public accounting firm for 2021. I would accept a 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: Resolve that the appointment of BDO USA, LLP as Mercantile Bank's Corporation's independent registered public accounting firm for 2021 is ratified.

Is there a second from motion?

I second the motion.

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

Resolve 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 second the motion.

The proxies have submitted their proxy votes to the inspectors of the motion -- on the motions. It is 9:08 a.m. While the inspectors are finalizing the results, we will make a brief presentation. After we have concluded the formal business of the meeting, you'll have an opportunity to ask questions. First, we have our forward-looking statements section, and I'll read that to you now. This presentation contains statements or information that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as anticipate, intend, plan, goal, seek, believe, project, estimate, expect, strategy, future, likely, may, should, will and similar references to future periods. Any such statements are based on current expectations that involve a number of risks and uncertainties. Actual results may differ materially from the results expressed in forward-looking statements. Factors that may cause such a difference may include changes in interest rates and interest rate relationships, demand for products and services, the degree of competition by traditional and nontraditional financial services companies, changes in banking regulation or actions by bank regulators, changes in tax laws, changes in prices, levels and assessments, the impact of technological advances, potential cybersecurity attacks, information security breaches and other criminal activities, litigation liabilities, governmental and regulatory policy changes, the outcomes of contingencies, trends in customer behavior as well as their ability to repay loans, changes in local real estate values, changes in the method of determining LIBOR or the replacement of LIBOR with an alternative reference rate, changes in national local economies, including the significant disruption to financial markets and other economic activity caused by the outbreak or the continuance of the COVID-19 pandemic, our participation in the Paycheck Protection Program administered by the small business administration, and other factors, including the risks disclosed from time to time and filings made by Mercantile in the Securities and Exchange Commission. Mercantile undertakes no obligation to update or clarify forward-looking statements whether as a result of new information, future events or otherwise. Investors are cautioned not to place undue reliance on any forward-looking statements contained herein. That's definitely the hardest thing I had to do so far today. Now for the presentation. As I mentioned, we have a brief presentation today, and this looks very similar to a lot of our quarterly updates that we've had over the last year, and we'll have some information that expands a little bit upon that. But I want to start out with a map of the footprint of Mercantile. And why this is significant is that over the last year, despite the onset and continuation of the pandemic, Mercantile has been busy with potential -- with new markets and the addition of new markets in our footprint. As you can see, since our last meeting in 2020 or the annual meeting in 2020, we've added a mortgage loan office in Cincinnati, Ohio. We've added a mortgage production office in Petoskey, Michigan. And a mortgage office in Midland. And those are continuation of our philosophy that we employ at the bank to look for high-performing employees, high-performing teams, and build our presence around those individuals, because they are the ones that deliver our markets -- our products and services to the markets that we're in, and we found some great opportunities to open offices in those markets based on some outstanding new employees. Financial highlights. We're not going to dig deep into this because we've already talked a lot about this at our March quarter end conference call. But to summarize 2020 and Q1 2021, I have a list of some of the highlights here: robust earnings and capital position, excellent mortgage banking income, outstanding asset quality metrics, strong net core commercial loan growth, continuation of strong pipelines both on the commercial side and the mortgage side, strong participation in the aforementioned PPP program, significant local deposit growth and the ongoing treasury management opportunities that we focused on for several years now. Here's a brief time line, and many of you have seen this before, of our COVID-19 activities and time line. And we go through with the early onset of the pandemic last year continuing on through April. Our team has done a tremendous job of continuing to work despite the challenges that we've encountered with the pandemic, that everyone has encountered with the pandemic. And despite that, working remotely, we've been able to put forth some great numbers. And really, the most impressive thing is to continue the quality that is Mercantile Bank, and that is our trademark. And also to enjoy some tremendous organic growth during these difficult times. And that's all attributable to our team. Strategic initiatives. Again, this is a slide that some of you may be familiar with. We focused on a number of pillars that we group our strategic plan into at this time. And those pillars are leveraging investments, big focus on digital delivery, continued focus on people and culture. And then, of course, risk and process. And you see the factors in each of those categories that make up those strategic pillars and also talk about some of the new markets that we've been in. As many of you know, since Mercantile Bank opened the doors back in the late '90s, we've had a strong focus on digital delivery. And in those days, it wasn't called digital delivery, but we knew what the future of banking was going to look like. And so we focused on making the investments over the years to make sure our technology was strong and on the leading edge of the ability to offer the kinds of products and services that our clients need. And of course, many -- much focus this past year on our employees and our customers and our communities to the people and culture side. Talking about the people and culture, we've broken this up into 3 categories that has really had our focus this past year. Of course, diversity, equity and inclusion, we developed numerous programs that have served us very well over the past year that have helped our employees and all of our constituents try to comprehend and process some of the challenges that this country has faced going back to last May. And I think through this, our employees are fully engaged, and our team has put together some great strategies to help us understand each all -- each other much better. Corporate social responsibility, we put out our first corporate social responsibility statement earlier this year, talks about some of the many things we're doing to continue to build a sustainable Mercantile Bank Corporation, and that dovetails then to the environmental, social and governance that we're always looking at best practices to make sure the things that we're doing are ones that are serving our shareholders well and also being good stewards of our resources. And great participants in the communities that we serve. Now I'll turn it over to Chuck Christmas for a brief run-through of a couple of our last slides.

Thanks, Bob, and good morning to everyone. Our participation in the Payment Protection Program, or PPP, is summarized on Slide 16. PPP round #1 loans were extended during the second quarter and early portion of the third quarter in 2020, while PPP round #2 loans were primarily extended in the first quarter and into the second quarter of 2021. We extended almost 2,200 loans totaling $553 million in round #1, and over 1,200 loans aggregating $208 million in round #2. We are currently in the forgiveness phase of round #1. Almost 1,800 loans or about 82% of round #1 loans have been forgiven, totaling $332 million. The $332 million represents about 60% of the total dollars extended. The difference between the 82% of the total number of loans forgiven, but 60% of the total dollar amount forgiven, reflects relatively slow experience in loans over $2 million being forgiven and paid off by the SBA. Since the slide was developed on May 20, we have experienced an uptick in forgiveness activity for loans over $2 million and are hopeful the trend continues. We have no further applications in process for round #2 loans and expect initial forgiveness application activity to begin soon. This slide also reflects fee income associated with PPP loans. As a reminder, in addition to earning 1% rate on PPP loans, banks were also paid origination fees by the SBA based on the size of the loan. While the collection of said fees were received soon after the loans were funded, per accounting rules, the fees are recognized as interest income over the contractual life of the loan using the level yield method. However, once a PPP loan is forgiven and paid off by the SBA, any remaining unrecognized fee income for that loan is immediately recorded. A sizable portion of the PPP fee income recognized during the fourth quarter of 2020 and the first quarter of 2021 reflects the acceleration of fee income recognition due to forgiveness activity. As of March 31, we had $1.4 million in round #1 PPP fee income remaining to recognize as fee income and $6.8 million from round #2. We expect a large portion of both dollar amounts to be recorded as interest income by the end of 2021. However, forgiveness activity will play a significant role in the timing. Continuing on Slide 17, I'd like to make a few comments on future earnings expectations. Given the unique and changing environment, it remains difficult to project earnings performance however, we have listed for you the primary factors that may impact primary earnings components for the remainder of this year. Net interest income will largely be impacted by changes in interest income. Our preferred increase in interest income is through commercial loan growth. As we reported last month, commercial loan growth, net of PPP activity, equated to 15% annualized during the first quarter of 2021. Our pipelines remain strong, and we are optimistic for additional commercial loan growth in future periods. As discussed on the previous slide, fee income recognition associated with PPP forgiveness activity will impact interest income this year as well. Asset quality metrics remain very strong, and we currently believe that nonaccrual levels will remain low for the remainder of 2021. A significant level of excess liquidity, primarily reflecting a very high-volume of loans on deposit with the Federal Reserve Bank of Chicago, in large part resulting from substantial deposit growth over the past 14 months, is expected to remain for the foreseeable future. Although the impact on net interest income is a small positive of about 5 basis points, the impact to our net interest margin is significant at about 30 to 35 basis points. Provision expense for the remainder of 2021 will be primarily impacted by 3 items. The expected core commercial loan growth will result in some need to increase the reserve balance. Commercial loan grades are a principal driver of our reserve balance calculation. So any grade changes may have an impact on the level of provision expense, either positive or negative. A large portion of our current reserve balance is predicated on our assessment of economic conditions and the environment regarding the coronavirus pandemic. Updates to our assessment of these 2 qualitative factors at the end of each quarter may have a sizable impact on our loan loss reserve calculations, and therefore, provision expense. Fee income for the remainder of 2021 will primarily be impacted by these 3 items. Mortgage production volumes are largely predicated on mortgage interest rates in the housing market items that are out of our control. However, we are very pleased with our results over the last few years and believe our team of mortgage lenders and supporting staff are well positioned to be strong participants in our markets. We continue to build out our credit card-related programs and believe we'll continue to report solid growth in future periods. However, current income is dependent on underlying volume of card and payables processing activity so the economic environment does play a meaningful role in our income from this function. We are also pleased with the growth in our treasury management function over the past several years and have various strategic initiatives in place to support additional growth in future periods. While we develop initiatives to enhance revenue, we devote similar efforts in managing our overhead costs. A large part of this effort is ensuring that we are operating in an efficient manner, providing products and services in a high-quality professional and timely manner within a structure that properly supports activity volumes. We regularly review our operating structures and processes to ensure appropriate cost to benefit relationships and institute changes when opportunities for improvement are identified. Overall, we believe we are well positioned to take advantage of future opportunities while maintaining flexibility to operate in what seems like ever-changing operating environments. Thank you.

Thank you, Chuck. Before we announce the results, if you have any questions for either our legal counsel or our public accounting firm, please enter your question in the Q&A section on your screen. The votes have been counted. Regarding the election of directors, the inspectors report that more than 93% of the shares represented at the meeting have voted for each nominee. Accordingly, David M. Cassard, Michael S. Davenport, Michelle L. Eldridge, Jeff A. Gardner, Robert B. Kaminski, Michael H. Price and David B. Ramaker have been elected directors of Mercantile to serve 1-year terms. The 1-year terms will expire at our annual meeting in the year 2022 or upon the election and qualification of their successors. Regarding the motion to ratify BDO USA, LLP as our accountants for 2021, the inspectors report that a majority of the shares voted were for the ratification. The preliminary tally shows 12,397,409 shares voted for ratification, 29,526 shares voted against ratification and 7,889 shares abstained from voting. Based on the vote, the appointment of BDO USA, LLP has been ratified. Regarding the advisory vote of our executives' compensation, the inspectors report that a majority of the shares voted were for approval. The preliminary tally shows 9,087,909 shares voted for approving compensation, 256,801 shares voted against approval, and 64,163 shares abstained from voting. Accordingly, the compensation of our executives has been approved on an advisory basis. The inspectors will furnish the secretary with a 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 where you may -- when you may ask questions of our officers. Do we have any questions for our accountants or counsel?

We will give it just a few more seconds here, but we have no questions at this point.

All right. No questions for them. If there is no further business to come before the meeting, I would accept a motion for adjournment. Will one of the proxies make the motion?

I move that the meeting be adjourned.

I second the motion.

You have heard the motion to adjourn. All that favor, say aye.

Aye.

The motion is carried. The meeting is adjourned. There will now be a brief question-and-answer period with Ray, Chuck and myself. You may submit your questions by using the Q&A section on your screen. Please note that we will adhere to the rules of conduct in answering your questions. We will pause for a second or 2 to let us assemble any questions that may come in.

We do have a couple of questions it looks like here. I'll read the first question. It appears that you have been able to mitigate quite a bit of the negative impact of the pandemic. What would you say has been the greatest contributor to that success? I'll take that question. And that's an easy one for me, even though the process itself has been far from easy. I attribute really the work that we've done throughout the pandemic and the many different facets and aspects of it attributable to our team. Our team has been outstanding through every month that has gone by, every phase of the pandemic through the closures, the working remotely. A huge project in the pandemic was the PPP program. And as you saw from our numbers, we have been able to assist so many businesses in our marketplace with the much-needed funds to help them get through business closures and loss of revenues during the pandemic. That has been through the tremendous, tireless work of our team throughout the entire process. And the process continues right now. We just closed the second round of PPP, which we -- we had another great round of new loans funded to customers who are still needing some assistance and that would get in the forgiveness phase on both rounds 1 and 2, and that's a process that will continue throughout much of this year. So again, the throughout all the challenges that we've all faced, business and personal, our team has worked on behalf of our customers and in our communities to make sure that we were doing the things we needed to do to provide assistance, and that's with a good financial institution and what a good community bank does. We got another question here. And this question is, after the current refinancing activity runs its course, what do you see as the primary sustainer for mortgage income? I think I'll toss that one over to our Bank President, Ray Reitsma

Thanks, Bob. I think the best answer to that would be our connectivity to the purchase market. And that market remains very strong and appears to have more legs in the refinance market, which depends entirely or at least heavily on the interest rate environment. Our connectivity of the purchase market has been a point of focus over a fairly long period of time, as has been the addition of quality calling professionals and sales professionals to our mortgage team. And those 2 factors together will serve us well as we move forward whatever the environment is.

Thank you, Ray. It looks like we've got like one last question, is kind of a dovetail to the first question. Did PPP provide appropriate assistance to business customers to bridge the gaps in revenue caused by mandated closures due to COVID-19? I think PPP was a really good program. It was put forth in record time by the government, and it was -- well it was far from perfect, and it was kind of built on the fly, if you will, when it was rolled out last April and into the spring months of 2020. It was a really solid program. I think it was envisioned to provide the bridges and the revenue gaps for businesses throughout the country, to make sure that they can withstand whatever challenges the pandemic put forth. And I think throughout the course of 2020 and into '21 with the second round of PPP, it continues to do that. And like I said, the program has been clunky at times. They're far from perfect. But I think in terms of the speed with which it was put out by the government and implemented and carried forth by the banks throughout the country, it's been a really solid program and one that helped bridge those gaps for so many customers, so many businesses who were in need because they lost all the revenue, in some cases, because they were shut down for months at a time. So again, it was a great program. And I think Mercantile was very pleased to be able to participate to the level that we did. I think there are no further questions, so we'll declare the question-and-answer period concluded. At this point, we want to thank you all for joining us today, and thank you for your interest in our company. And I appreciate the chance to speak with you this morning. Have a good day, everyone.