MERCANTILE BANK CORP Q1 FY2025 earnings call

• Funding: Loan-to-deposit ratio reduced from 110% at year-end 2023 to 99% at the end of Q1 2025. Business deposits increased 24% and personal deposits increased 9% over twelve months ended March 31, 2025.
• Loan growth: Commercial loan growth slowed due to uncertainty in the environment, with the pipeline having more in discussion than committed and accepted. Mortgage loans grew as borrowers opted for ARMs, but more mortgage production is now sold rather than held on the balance sheet.
• Asset quality: Very strong, with non-performing assets low and allowance to loans ratio increased 4 basis points in Q1 2025.
• Non-interest income: Core areas like payroll, treasury, and mortgage banking saw growth, with mortgage banking income up 13%.
• Interest rate sensitivity: Net interest margin increased 6 basis points in Q1 2025 compared to Q4 2024 after the Fed's rate cut.

Commercial loans: Grew $44 million in the first quarter of 2025, an annualized rate of nearly 5%. The commercial loan pipeline stands at $234 million, and commitments to fund commercial construction loans totaled $210 million. Mortgage loans: Mortgage banking income increased 13% in Q1 2025 compared to Q1 2024, and mortgage loans on the balance sheet decreased over the twelve-month period ending March 31, 2025. Asset quality: Non-performing assets totaled $5.4 million (nine basis points of total assets) at March 31, 2025, with past due loans representing three basis points of total loans. Non-interest income: Grew 12% in core areas like payroll, treasury management, and mortgage banking, with mortgage banking income up 13%.

• Loan growth: Projected to be in the range of 3% to 5% for 2025.
• Net interest margin: Expected to be in the range of 3.45% to 3.55% for the remainder of 2025, assuming no rate cuts. Also provided net interest income simulations for different interest rate scenarios.
• Capital deployment: Share repurchase considered but dependent on capital needs and loan growth; focus on having sufficient capital for loan growth and managing interest rate environments.
• Securities purchases: Expected to be similar to recent quarters if local deposit growth continues.

• Economic uncertainty: Impact on customers' financial positions and uncertainty in commercial loan pipeline converting to commitments.
• Interest rate volatility: Potential impact on net interest margin and loan growth.
• Regulatory changes: Possible impact on balance sheet and income statement.

Q: Brendan Nosal from Hovde Group asked about the loan growth outlook and capital deployment.

A: Raymond Reitsma explained that loan growth was tempered due to pipeline uncertainty with more in discussion than committed and accepted, and Charles Christmas discussed capital deployment considerations with share repurchase being a regular consideration but dependent on capital needs.

Q: Daniel Tamayo from Raymond James inquired about margin guidance and loan yields.

A: Charles Christmas discussed margin guidance assuming no rate cuts and provided net interest income simulations, while Raymond Reitsma noted loan yield spreads in risk rating categories were stable.

Q: Damon DelMonte from KBW asked about securities purchases and expense guidance.

A: Charles Christmas stated securities purchases would be similar if local deposit growth continues, and discussed expense guidance including merit increases kicking in with full quarter impact.

Q: Adam Crowell from Piper Sandler asked about fee income and mortgage origination volumes.

A: Charles Christmas noted fee income expected to normalize, and Raymond Reitsma discussed mortgage origination seasonal patterns affected by economic uncertainty