Mercantile Bank Corporation (MBWM) Earnings Call Transcript & Summary

Good morning, 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 Mercantile Bank. Today's virtual-only meeting is a live webcast. We believe that 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 the meeting is being recorded. I would like to call the formal portion of this meeting to order. First, I'd like to call your attention to the rules of conduct set forth for this meeting. They are available on the screen as well as on the company website under Investor Relations, overview and 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 Company Reports tab. 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 Secretary of the meeting. Mr. Worthington is Senior Vice President, Chief Risk 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 the 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 Kaminski, Michael H. Price, and David B. Ramaker. I would also like to introduce Kevin Muntter of BDO USA LLP, our accounting firm; and Brad Wyatt and Cyndi Moore of Dickinson Wright PLLC, our legal counsel. Mr. Muntter has been given an opportunity to make a statement and he has declined our invitation cited that he has no additional comments. At the end of the meeting, Mr. Muntter, Mr. Wyatt and Ms. Moore will also be available to answer questions. Our directors, Jeff Gardner and David Ramaker are serving as proxies for the shareholders who voted by proxy. The Board of Directors has set the close of business on March 30, 2022, as the record date for this meeting. A list of the shareholders as of the record date is located in the Document section of the meeting portal. It is arranged alphabetically. I have been advised by the inspectors that 12,024,288 of the 15,843,066 shares that are entitled to vote by -- are present by proxy. Since a majority of the shares are represented, a quorum is present, the business of the meeting may proceed. A notice of the meeting was sent to each shareholder. A copy of the notice and proxy statement is also available on our website under the Investor Relations Annual Report section. The minutes of the 2021 Annual Meeting of Shareholders were made available to you in the meeting portal and on our website under Investor Relations. I would accept a motion approving the minutes. I would suggest that one of the proxies make the motion.

My name is David Ramaker. I move that the minutes of the 2021 Annual Meeting of Mercantile shareholders be approved as presented to this meeting.

Is there a second for the motion?

My name is Jeff Gardner. I second the motion.

We will now vote on the motion to approve the minutes. All in favor, say aye.

Aye.

One of the proxies may speak on behalf of the shareholders.

Aye.

The motion is carried. The minutes of the 2021 Annual Meeting are approved as presented to this meeting. Mr. Gardner and Mr. Ramaker as proxies were among the persons 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 2023 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 the nominations closed. I would accept the motion regarding the election of the directors, and I would suggest that one of the proxies make the motion.

I move that the following resolution be adopted. Resolved that David M. Cassard, Michael S. Davenport, Michelle L. Eldridge, Jeff A. Gardner, Robert B. Kaminski, Michael H. Price and David B. Ramaker are hereby elected as Directors of Mercantile Bank Corporation to serve 1-year terms expiring at the annual meeting in the year 2023 for 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 2022. I would accept the motion to ratify BDO USA LLP as our accountants. I would also 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 independent registered public accounting firm for 2022 is ratified.

Is there a second for the 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 accept the motion to approve on an advisory basis, the compensation of our executives. I would also 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 second the motion.

The proxies have submitted their proxy votes to the inspectors on the motions. It is 9:07 a.m. While the inspectors are finalizing the results, we'll make a brief presentation. After we have concluded the formal business of the meeting, we will have an opportunity to ask questions. Chuck and I, as I mentioned, have a brief presentation this morning. And it's -- the timing is such that we're directly in between the end of the first quarter and the end of the second quarter. So there's no new financial information that we have for your review today. So we're going to review very briefly some of the high-level initiatives, and Chuck is going to go over some items on the financial side for the balance of 2022. First, before we begin, we have our forward-looking statements paragraph. It's a long paragraph and it's one that you've seen before. But I would ask that you review and consider this when understanding and listening to the information that we have presented today. Next slide. This is a slide from our quarterly slide deck that we have in our earnings release. And this gives a little summary of the map of Mercantile Bank. You can see all the markets that we're in and some information about the bank and the various locations that we currently have. At the bottom of that slide, you have our top 5 markets. And as you heard us say on many occasions, the greatest concentration of assets is certainly in West Michigan and specifically Kent County. You can see some of the data on the various counties that we are representing at the bottom of that slide. As you know, back in 2020, we opened our office in Cincinnati at the end of that year. And since then, we've also opened offices in Petoskey and in Midland and that adds to a very nice footprint and coverage for the state of Michigan. Some great new opportunities in our new markets as well as some very nice opportunities for new and existing customers in our current markets. The next slide is a high-level summary of our strategic initiatives. This is something that we work on with our team throughout the course of the year. And we summarize just for our employees reviewed on a periodic basis, some high-level pillars just so that they can have at their fingertips, the things that we want them to be aware of as they execute their jobs on a daily basis. Number one, leveraging investments to allow the continued deepening of new and existing relationships. That's really the foundation of Mercantile's culture and how we do business is a relationship banking. Relationship is something that we focus on, and we have focused on since the very early days of Mercantile Bank. It is why we were founded because we believe that is a difference maker for Mercantile Bank. We want to make sure that we understand our customers' needs, and more importantly, follow-up and provide products and services that fulfill those needs. And it all starts with understanding what they're all about, I understand their business for business customers and following up to look at the various products that we offer and maybe look at some new opportunities for new products, depending upon how those needs evolve. And we've seen a lot of that, especially in the couple of years since the beginning of the pandemic. People's needs have changed, and we have pivoted to adapt to those needs. Expand utilization of digital banking services is our second pillar. This is something that is going to be on the radar for the long haul here. Digital is the way banking is going. Because, as you know, fintechs are making a big splash in many facets of our lives, most especially in the financial services industries. And so it's our obligation to develop relationships and we develop relationships with a group of vendors and partners that we think can help us continue to evolve our digital channels to make sure that we're providing the services that our customers need and the efficiency and the responsiveness that they deserve. We're looking at also developing digital on an internal basis to do things more efficiently, to have things involving less paper to enhance communication throughout the enterprise to make sure that we're using all of our technological capabilities to service our customers. Third pillar, people and culture are very important to our ongoing success. We couldn't do the things that we have done throughout our history without our employees. They are a wonderful team of bankers. It takes a special person to be able to fit into the culture of Mercantile Bank because it's all based upon that relationship and that approach to make sure that we approach customer needs with a sense of urgency. And not every person fits that mold, some people that have worked at other financial institutions have a little different approach to customer service. We take a proactive forward-facing customer relationship building approach, and that's reflective in every position in the bank. It applies both internally to internal customers as well as external customers. It all begins with that staff member and that culture. Finally, operational excellence, keeping us strong to make sure that we ensure financial strength and resiliency just to make sure that everything we do is based on an approach that we need to perform in an excellent fashion for our customers and for our shareholders. And if we do that as we have done, I think we'll continue to show successful results to service our markets, be a good community partner and make sure that we're continuing to evolve as our markets change and our customers' needs change. And whatever we do, we intend to do it in an excellent fashion. Last slide that I had before I turn it over to Chuck is something we developed uncertainties remain. And there are a lot of uncertainties right now. And you might suggest that, that's really always the case in life and especially in the banking world. But I listed some of the concerns right now that we've got our eye on with the radar screen. Certainly, the pandemic has thrown us all and challenges over the last couple of years, the pandemic itself, the effects on the economy, the effects on our customers. And we think we've done a very nice job of helping our customers manage through some of the challenges that they've had when it goes back to the early days of the pandemic with PPP and then dealing with forgiveness of [Audio Gap] in that we're going to have to continue to deal with and make sure that our customers are well positioned to maneuver through that as well. Interest rates. Interest rates are rising, and they're going to continue to rise throughout this year. How high will they go? It depends upon the Federal Reserve direction, but our challenge is to make sure that we anticipate the effects on our clients, the effects on the economy to make sure that we develop the strategies that can help us manage through. I think in a basic sense, rise in interest rates will help expand our margins. But certainly, as the Fed tries to thread the needle, the challenge is to make sure we don't do things that are going to accentuate the likelihood of a recession. So it's a balancing act, and we'll do what we can to make sure that all of our constituents are positioned as best we all can. Geopolitical is the last item on my list here. Conflict and turmoil on the international front. Obviously, things happening around the world at the current time are causing effects here at home. Domestic challenges continue lots of challenges on that front. And in a lot of ways, the divided society, we need to make sure that we try to minimize that impact on our company and our customers as best we can. So with that, I'll turn it over to Chuck for a few comments on the first quarter performance and looking forward to the balance of the year. Chuck?

Thanks, Bob, and good morning to everybody. The slide that we have for you to start off my presentation this morning is really taken from our first quarter earnings announcement back in April. And while it was from that particular presentation, it really is a reflection of what we have seen for quite a few years now. Notwithstanding the challenges that we went through with the COVID environment. You can see that we ended the first quarter at about $5.2 billion in assets, which was comprised of about $3.5 billion in loans, which were funded with just under $4 billion in deposits. We continue to have strong growth in our commercial loans as well as our mortgage loans. And here in the first bullet point, we call it core commercial loans, and that's because we are excluding our PPP program. We lent over $700 million in the PPP program and are down to just $3 million currently outstanding. We did grow on an annualized basis by 11% in the first quarter. So a very strong continuation of our loan growth. We do continue to have strong and sustained strength in our commercial loan pipeline. So notwithstanding very strong growth that we've seen over the last couple of years. The lenders are continuing to see opportunities out there and the pipelines remain very robust. We have seen and continue -- and expect to see growth in net interest income over the last few years has been primarily predicated on growing the loan portfolios, but now we are also seeing assistance with the interest rate environment. We are, as they call an asset-sensitive bank, which basically means when rates rise, our net interest income goes up, primarily because of the growth -- or the increases in interest rates and commercial floating rate loans. We continue to see significant increases in key fee income categories. Certainly, like all banks, all anybody involved in the mortgage business, we saw significant reductions in mortgage banking income in the first quarter of this year compared to 2020 and 2021. Although I think we would all agree that the environment in 2020 and 2021 was unprecedented with the level of refinance activity. We certainly have, as an industry, have seen declines in refinance activity, which is impacting mortgage banking income. However, we see our mortgage banking income drop off a lot less than what we see that of the industry on an overall basis. Having said that, we continue to see growth in our core especially commercial related fee income categories, that would be our treasury management area, our credit card programs as well as our payroll services. We continue to see double-digit growth in those items. Lots of opportunities there existing now. And as we continue to grow our commercial loan portfolio, we think we'll have additional opportunities there. So look for double-digit growth in those items in the periods to follow. Our asset quality remains very, very pristine. I think we -- it's very accurate to say we are best-in-class in an incredibly low level of nonperforming assets, a very nominal level of loan charge-offs and our watch list and dollar volume right now is at its lowest percentage in a couple of decades, quite frankly. So great to see that. That is certainly a big part of growing income is to make sure that we have pristine asset quality to minimize provision expense, which obviously is an expense for the company and cost of doing business. Our capital position remains very robust, certainly driven by our strong earnings performance. And again, that strong asset quality is a big player to that. We did augment our capital position in December and January. December last year, January this year with a $90 million sub note issuance, gave virtually all of those proceeds to the bank to augment the bank's capital position and make sure that we have the capital strength to continue to grow the portfolio and take advantage of those opportunities that we continue to see. On the next page, this is also a slide that we included in our presentation last month at the conclusion of the first quarter. And this is our thoughts on the remainder of 2022, and it really underpins what Bob was just talking about with all the different uncertainties. And what we wanted to do was to give our investors, our shareholders an idea as to what we were thinking, at least for the remainder of this year as we continue to feel the tailwinds of some items that are having a good benefit or having a benefit on our company and certainly some of the headwinds that we're feeling or may feel as we go forward. Certainly, from a bank perspective, and as I mentioned, we're an asset-sensitive bank. What happens in the interest rate environment is going to play a key role. Certainly, we're in a period now of increasing interest rates has been a very dramatic increase. I think the first quarter will go down in the record books in the level of interest rate increases, especially in the medium-term and longer-term rates. And now we had the Fed and the short-term rate spectrum keeping up with that. We did see -- these are -- what I have here is what we had put into our assumption base when we're looking at our thoughts for the remainder of 2022. As expected, we did get a 50 basis point increase in the prime rate on May 4. We injected a 25 basis point increase at the next 3 meetings at the Federal Reserve has scheduled, for the June 15 and July 27, the Fed share has come out and said, he expects to see 50 basis points. They released a minute from the May meeting yesterday, and the minutes also reflected the likelihood of a 50 basis point increase in both June as well as July. So certainly more aggressive than what we had put into our numbers and again, be an asset-sensitive bank that will have even a better -- have a positive impact on our projections as we go forward. But as far as those projections using those assumptions as reflected you can see on an overall basis, what we expect that to look like. And you can certainly see the big impact there on our net interest margin. You can see the steady and robust increase in our net interest margin that we expect to record for the remainder of this year. And again, with the higher interest rate increase from the Fed that we used, we would expect even more improved margin as we go forward through the rest of the year, which will lead to improved overall earnings performance. Those are my remarks. I will turn the call back over to Bob.

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 into the Q&A box on your screen now. The votes have been counted regarding the election of directors, the inspectors report that a majority of the shares voted were 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. [Audio Gap] Regarding the motion to ratify BDO USA LLP as our accountants for 2022, the inspectors report that a majority of the shares voted were 4 ratifications. Based on the vote, the appointment of BDO USA LLP has been ratified. Regarding the advisory vote on our executive compensation, the inspectors report that a majority of the shares voted were for approval. 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 when you may have the ability to ask questions of our officers. Do you have any questions for our accountants or a legal counsel? And I see in the queue that we have no questions for our accountants or legal counsel. If there is no further business to come before the meeting, I would accept the motion for adjournment. But 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 those in favor say, Aye.

Aye.

The motion is carried. The meeting is adjourned. There will now be a brief question-and-answer period with our executive officers. 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.

The first question that we've got today is something we talked about briefly earlier on is about the labor situation in our communities in our country right now, given the current labor environment is the bank finding it difficult to fill open positions. And if so, do you see the situation influencing the ability to grow and to provide a high level of service? I'll take that question first, I guess, and then certainly, Chuck and Ray Reits can chime in and amplify. The labor situation is certainly affecting all areas of our economy and our communities. And certainly, Mercantile Bank as well. We have more open positions now than we typically do. It's really put a huge task upon our human resource department to find us candidates as we talked about earlier on. We're very selective and very choosy about the people that join our team. And so it makes that job even more challenging. But they continue to do a very good job. We spent a lot of time recruiting at the college level at going to job fairs and making contacts with prospective employees very earlier on in the process, and we've been very successful at that. We have a very successful internship program that we use to provide opportunities to feed some entry-level positions into the bank. And we continue to make contacts to influence makers in the community and also reach out to our employees for referrals of potential candidates for open positions. So it's not easy, but I think we've done a good job and kept our existing team intact in a very strong way, and we'll continue to work hard to make sure that the people that join our team and the candidates that we talk to are in the same excellent mercantile tradition that we've seen in the past.

As it relates to the angle on our growth, our 2 primary growth opportunities on the revenue streams from commercial banking and mortgage. And the trajectory of that curve is a long one in commercial from hiring credit analysts to train them to become lenders to getting them to the point where they're producing business. given the length of that development process, the current travails in the labor market have been less impactful and so that we've been able to sustain that growth of that labor force and therefore, that business. On the mortgage side, we've had a lot of success in recruiting from disrupted banks and adding producers from that revenue -- for that revenue source. So that has also had less of an impact than you would derive from looking at the labor market in general.

Thanks, Ray. Next question we have is something that we touched a little bit in our presentation, but what's management's view of increasing -- the increase in interest rate environment? And how will it impact the bank's profitability? I'll hand it off to Chuck for his comments on that one.

Yes. As I mentioned before, we're an asset-sensitive bank, which means when rates go up, it benefits our net interest income. Conversion when rates go down, generally, it hurts our -- or reduces our net interest income although we have strategies in place to minimize that impact when interest rates do decline. But given the strong magnitude and quick interest rate increases that we've seen, we would expect that as interest rates go up, that will have a benefit to our net interest income. And we'll see that benefit accrue to the bottom line and improved net income and earnings per share performance.

Thank you, Chuck. It looks like we have one final question in the queue right now. Would you be able to comment on potential commercial and mortgage loan growth? You've been successful in the last couple of years in generating that growth. How do you anticipate that now looking into the balance of '22 in the future. I'll hand it off to Ray for his comments on that one.

Yes. As it relates to commercial loan growth, I think what you've seen in the recent past is a reasonable proxy for what you'll see in the future. The backlogs are similar the unknown factor, of course, and always is payoffs as business to sell assets or the business themselves. But in terms of the backlog, it's very similar, as I mentioned, and inflationary pressures should help the loan portfolio along as we have increased opportunity to finance receivables and inventory, at least increased values of receivables and inventories.

Great. Thank you, Ray. That was a final question. No further questions in the queue. And as there are no further questions, the Q&A session is finished. Thank you for joining us today for the meeting and for your interest and support of our company. Have a good day, everyone.