MERCANTILE BANK CORP Q3 FY2024 earnings call

• Loan-to-Deposit Ratio: Reduced to 102% as of September 30, 2024, from 110% at year-end 2023. Implemented a three-pronged approach to build deposits: focusing on business deposits, growing in the governmental/public realm, and enhancing retail customer focus. - Asset Quality: Very strong, with nonperforming assets totaling $9.9 million (17 basis points of total assets), no commercial real estate in nonperforming assets. - Interest Metrics: Interest income on loans, securities, and interest-earning deposits increased. Interest expense on deposits and sweep accounts rose due to higher interest rates. Net interest income declined, and the net interest margin decreased 46 basis points in the third quarter of 2024.

Commercial Loans: Grew $233 million in the first three quarters of 2024, a 9% annualized rate. Current pipeline stands at $236 million. Mortgage Loans: Balance sheet mortgage loans saw a nominal increase of $7 million year-to-date. Mortgage banking income increased 49% in the first nine months of 2024 compared to 2023. Deposits: Local deposits increased approximately $600 million in the first three quarters of 2024, a 21% annualized growth rate, with $339 million growth in the third quarter alone. Non-Interest Income: Totaled a 27% increase in the first nine months of 2024 compared to 2023, with mortgage banking up 49%, service charges on accounts up 46%, payroll services up 20%, credit/debit card income up 3% (adjusted), and interest rate swaps down 8%.

• Projected loan growth in the range of 4%-6% for 2024. - Forecasted net interest margin to be in the range of 3.35%-3.45% for the fourth quarter of 2024. - Anticipates additional NIM compression after the fourth quarter due to strategic efforts to lower the loan-to-deposit ratio, with margin expected to stabilize with a gradual Federal Reserve rate cut cycle in 2025.

• Potential impact of an economic recession on borrowers. - Volatility in deposit balances, particularly with noninterest-bearing accounts. - Sensitivity of the net interest margin to changes in interest rates and deposit costs.

Q: Brendan Nosal asks about the drivers of deposit growth, especially noninterest-bearing balances.

A: Raymond Reitsma states it's driven by new client acquisition and deposit opportunities, with a focus on business banking deposits. Chuck Christmas adds that noninterest-bearing deposit growth is due to seasonal factors like businesses building balances for bonuses and taxes.

Q: Daniel Tamayo inquires about deposit costs and NIM compression.

A: Chuck Christmas discusses deposit rates, noting money market and CD rates were affected by Fed rate cuts, and explains that additional NIM compression is expected due to strategic loan-to-deposit ratio reduction, with margin stabilization expected with gradual Fed cuts in 2025.

Q: Nathan Race asks about money market deposit pricing and stock buybacks.

A: Chuck Christmas mentions the bank aims to be competitive on deposit pricing, with money market rates tied to the Fed funds rate, and states the bank is comfortable with its capital position and may consider stock buybacks if valuation is favorable.

Q: Damon DelMonte asks about securities vs wholesale borrowings and mortgage banking outlook.

A: Charles Christmas says the bank is growing securities portfolio and reducing wholesale borrowings, and Raymond Reitsma notes mortgage banking activity was stronger than seasonal expectations due to improved rates.

Q: Brendan Nosal follows up on excess deposit growth and wholesale borrowings.

A: Charles Christmas explains the bank is reducing wholesale funding, with Federal Home Loan Bank advances used to match fund fixed rate loans, and surplus funds are placed in securities.