MERCANTILE BANK CORP Q4 FY2024 earnings call

• Focused on reducing loan-to-deposit ratio by growing deposit base through three-pronged approach: broadening business deposits, growing in governmental/public realm, and retail customer focus based on total balances.
• Local deposits increased $816 million in 2024, funding strong loan growth and reducing wholesale funding sources.
• Commercial loan growth $292 million in FY, mortgage banking income up 62% due to selling more originations on secondary market.
• Asset quality very strong with nonperforming assets at 9 basis points of total assets.
• Noninterest income grew in multiple categories including mortgage banking, service charges, payroll services, and card income.

Commercial loan growth for the fiscal year end was $292 million or 8.5% over the prior year-end and was $59 million for the fourth quarter. Mortgage loans on the balance sheet grew substantially, with mortgage banking income increasing 62% in 2024 compared to 2023. Local deposits increased by $816 million in 2024, a growth rate of more than 20%, with $216 million growth in the fourth quarter alone. Total noninterest income grew 26% in 2024 compared to 2023, with mortgage banking income up 62%, service charges on accounts up 38%, payroll services up 22%, and credit/debit card income up 2% (adjusted).

• Projected no changes in federal funds rate in 2025.
• Forecast loan growth in range of 5% to 7%.
• Expected net interest margin in range of 3.3% to 3.4% in 2025.
• Deposit growth expected to be in low double-digits.

• Interest rate changes could impact net interest margin, as seen in forecast changes with rate cuts.
• Automotive suppliers still under average state of being, though outlook improving.
• Economic conditions could affect loan performance and provisioning.

Q: How would margin outlook change with one to two rate cuts this year?

A: If there are one or two rate cuts in the first half of 2025, margin would be about five basis points lower than projected if rates don't change.

Q: Where are pockets of strength and weakness in loan growth?

A: Weakness in automotive suppliers (still under average), but C&I opportunities, transition/ownership, and real estate markets are strong.

Q: Loan deposit initiative progress and impact on loan growth?

A: Loan-to-deposit ratio down to 98%, goal is mid-90s. Focus on deposit growth without detriment to loan growth, mortgage department shifting to put fewer loans on balance sheet.

Q: Thoughts on securities portfolio size and investment rates?

A: Expect continued growth in securities portfolio, likely to reach 15%-17% range with loan-to-deposit ratio in mid-90s.

Q: Provisioning outlook and credit trends?

A: Provision largely driven by loan growth, economic environment expected stable, low net charge-offs expected.

Q: Tax rate and mortgage banking pipeline?

A: Lower tax rate in Q4 due to year-end true-ups related to low income housing tax credits. Mortgage banking pipeline seasonally strong, reflective of seasonality in fee income.