Release Date: July 16, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Mercantile Bank Corp (MBWM, Financial) reported a 14% annualized growth rate in local deposits for the first half of 2024, with a $260 million increase.
- Commercial loan growth was strong, with a 7% annualized increase in the first half of 2024, totaling $118 million.
- Asset quality remains robust, with non-performing assets totaling only $9.1 million, or 16 basis points of total assets.
- Net interest income grew by 40% during the first half of 2024 compared to the same period in 2023.
- The bank's total risk-based capital ratio was 13.9% at the end of the second quarter, indicating a strong capital position.
Negative Points
- The loan-to-deposit ratio remains elevated at 107% as of June 30, 2024, despite efforts to reduce it.
- Net income for the second quarter of 2024 was $18.8 million, down from $20.4 million in the same period in 2023.
- Increased provisions for credit losses and higher non-interest expenses negatively impacted net income.
- The net interest margin declined by 42 basis points during the second quarter of 2024 compared to the same period in 2023.
- Interest expense on deposits and borrowed funds increased significantly, reflecting the higher interest rate environment.
Q & A Highlights
Q: Maybe just starting off on deposit competition and what you folks are seeing there, I mean, it's still like the mix shift out of non-interest-bearing has slowed pretty materially and the pace of increase in deposit pricing has as well. And so just kind of curious where the competitive environment stands and how much further bleed in funding costs you might see as the year progresses?
A: Yeah, Brendan, it's a good question. This is Chuck. I would agree with your comment that transfers from the no or low costing deposit products has definitely slowed from certainly from where it was in the back half of last year and the beginning of this year. We still see some of that, but certainly not as what we had before. One of the things that we haven't seen that we typically do it kind of goes back to in January of each year, we lose quite a bit of non-interest bearing deposits as our commercial customers, pay bonuses, taxes, and partnership distributions. And then we generally see that ramp back up and kind of go through the same cycle again. We're not seeing the growth in non-interest bearing accounts that we typically would. But what we are seeing is those businesses growing their money market and in some cases time deposits. So I think with the rates being higher than obviously what they have been over the last few years, I think our commercial customers are being more savvy and pay more attention to cash management. And so that's increased. So our margin or net interest income is impacted by them putting money into those higher money-market accounts versus the non-interest bearing accounts. I would say that interest deposit rates in our markets have remained relatively stable for the last few months, which obviously is a good thing. I think you know, we're still feeling that the rates are relatively high in total, but we're not seeing them increase anymore.
Q: Just on that goal to get the loan to deposit ratio into the [mid-90s] over time. I know that there's a lot of factors environmentally that can kind of help or hurt that. But just kind of curious on how you think about a timeframe to get towards that target.
A: Because of the way you opened your question, we don't think about it with a timeframe. You're correct, there are so many variables and our goal in general is to continue to grow the loan portfolio at a pace that our markets and customers demand of us and outgrow that with deposits at the same time. And to do that without going above market for deposit rates, so those are the factors that will determine how quickly we can bring it down. And for the first six months of the year, we've been able to grow our loan book at about 7%, deposit book at about twice that at 14%. And so that's an indication of what the last six months environment yielded. We don't expect that to change materially. But as we've seen financial markets, things do change and they will. So we'll have to adjust as that happens.
Q: Just digging into credit a little bit. It's obviously been a strength for you guys and remains so. But just curious if you're able to give us any information on the commercial relationship that drove the increase in reserves in the quarter.
A: Well, it was an outlier. It was a non-real estate related. Our C&I business did basically ran into management issues and that caused the credit issue. Doesn't look like it relates to anything systemic in the marketplace, the economy, or our portfolio.
Q: And was taken in terms of reserves on that loan, where does that stand in terms of loan due -- I'm sorry, in terms of coverage?
A: We reserved it aggressively and fully, so wouldn't expect to have further reserve related to that credit.
Q: The provision and net charge-offs, I mean, is there anything different that we should think about in terms of forecasting that loss provision number going forward or outside of the unusual number in the second quarter, do you still feel like that's relatively stable?
A: Yeah, Daniel, this is Chuck. I think we generally don't give guidance on provision. All the firms have their own different thoughts on the economy. And certainly, we can see especially as a commercial lender with some sizable credits. Occasionally, we do have some one-offs, which hopefully will go the other way as we continue our collection efforts, namely on the two credits that I mentioned in my prepared remarks. So I would say if you look at a combination of the first and second quarter, kind of average them out is in general what our expectations would be as we sit here today.
Q: Just going back to Chuck's comments previously, in terms of the deposit and pricing environment being relatively stable of late. Just curious kind of how that trend in the margin unfolded over the course of second quarter. Was it relatively stable or kind of steady compression each month between April and June?
A: Yeah, I would say it was on a downward trend throughout the quarter. I think what we're seeing is that our deposits are repricing a little bit faster than what our assets are repricing as we kind of get to that equilibrium, say, as we've gone through the timing of events that I mentioned. But I think that we're getting we're getting close to the point here. And you can see that in my guidance as we're getting close to a point of equilibrium, the CDs repricing today, while they're repricing, they're not repricing to the magnitude that they were certainly 12 months ago, even six months ago. And then again, we continue to have the repricing on the asset side as well. So we think on an overall basis, it looks like the Fed's going to start lowering rates on a measured basis. We feel good about our balance sheet and that environment. So taking all that together, we think when we get here into the third and fourth quarter, is that our margin will be relatively stable at the levels that we projected.
Q: Can you remind us just in terms of what amount of non-maturity deposits can you reprice or kind of are commensurate with each cut?
A: Yeah, I think you kind of touched on something that it's going to be very interesting. I think, when we're all looking at trying to forecast our net interest margins as they come, the deposit betas are, of course, the biggest objective number that we put into our models, we put into our forecast. But I think now that we'll get -- they'll become very interesting if the Fed does, in fact, start lowering interest rates. As we see how the competition reacts clearly, you've heard from our comments today, the loan-to-deposit ratio strategy is very important to us. So that's going to come into the mix as well. I think we've definitely seen some increases in time deposits. But the biggest level of increases by far are the money market rates. Those are the ones that have been priced most aggressively, not just by us, but in
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
