Release Date: April 22, 2025
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Mercantile Bank Corp (MBWM, Financial) successfully reduced its loan to deposit ratio from 110% at year-end 2023 to 99% by the end of the first quarter of 2025.
- Business deposits increased by 24% and personal deposits by 9% over the 12-month period ending March 31, 2025.
- Asset quality remains strong with nonperforming assets totaling only $5.4 million, or nine basis points of total assets.
- Total non-interest income grew by 12% in core areas such as payroll, treasury management, and mortgage banking during the first quarter of 2025 compared to the first quarter of 2024.
- The bank's net interest margin increased by 6 basis points in the first quarter of 2025 compared to the fourth quarter of 2024, despite a 100 basis point decrease in rates by the Fed.
Negative Points
- Net income for the first quarter of 2025 was $19.5 million, down from $21.6 million in the same period of the previous year.
- The loan growth outlook has been tempered due to uncertainty in the environment, with expectations for a slight reduction in commercial loan growth.
- Net interest margin declined by 27 basis points during the first quarter of 2025 compared to the prior year period.
- Interest expense increased by $2.4 million during the first quarter of 2025 compared to the first quarter of 2024.
- Provision expense increased to $2.1 million during the first quarter of 2025, reflecting changes to economic forecasts and increased uncertainty.
Q & A Highlights
Q: Can you elaborate on the tempered loan growth outlook and whether it's due to conservatism or an actual slowdown in demand?
A: Our approach is driven by the composition of our commercial pipeline, which has shifted more towards discussions rather than committed and accepted loans due to environmental uncertainty. While the overall pipeline is robust, the uncertainty has led us to temper our expectations for loan growth.
Q: With capital ratios building nicely, what are your thoughts on capital deployment, particularly share repurchases, given the current stock pricing?
A: We view ourselves as a growth company and prioritize having sufficient capital to support asset growth and reduce the loan-to-deposit ratio. While share repurchases are considered, our focus remains on maintaining capital for growth opportunities and navigating potential economic slowdowns.
Q: Can you clarify the assumptions behind the margin guidance, particularly regarding interest rate cuts?
A: Our guidance assumes no rate cuts, although the bond market suggests otherwise. We provide a base case scenario for our margin, and our net interest income simulation results are available for different interest rate scenarios. Our strategy is to maintain a balance sheet that performs well across various rate environments.
Q: What is the expected impact on the repricing of CDs over the next 12 months?
A: Approximately 90% of our CDs will mature in the next 12 months, with a relatively even distribution. They are expected to reprice down by about 75 basis points based on current rates.
Q: How do you view the reserve level given the economic uncertainty and slower loan growth?
A: We have adjusted our reserve methodology to blend base and adverse economic scenarios, reflecting the current uncertainty. This prudent approach led to a $2 million impact on our provision expense, and we will continue to adapt based on future economic forecasts.
Q: Are there any expense levers you could pull if loan demand softens significantly?
A: We operate efficiently and focus on long-term growth. While we could slow down new projects if necessary, our strategy is to continue building the company and preparing for future success.
Q: Does your fee income guidance include normalization in swap fees?
A: The first quarter's swap fee level was an anomaly. We expect more normalized levels going forward, which is included in our guidance.
Q: Are you expecting a typical seasonal uptick in mortgage origination during the second quarter?
A: While there is usually a seasonal increase, current uncertainty may dampen this trend. However, we do not expect this to persist throughout the entire season, and stability could help the market recover.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
