Mercantile Bank Corp (MBWM) 2014 Q1 法說會逐字稿

Good day, and welcome to the Mercantile Bank Corporation's first-quarter 2014 earnings results conference call. (Operator Instructions) Please note this event is being recorded. I would like to turn the conference over to Mr. Robert Burton with Lambert Edwards investor relations. Please go ahead, sir.

Thank you, Ed. Good morning, everyone, and thank you for joining Mercantile Bank Corporation's conference call and webcast to discuss the Company's financial results for the first quarter of 2014. I am Bob Burton with Lambert Edwards, Mercantile's investor relations firm. And joining me are members of their management team, including Michael Price, Chairman, President, and Chief Executive Officer; Robert Kaminski, Executive Vice President and Chief Operating Officer; and Chuck Christmas, Senior Vice President and Chief Financial Officer.

We will begin the call with management's prepared remarks and then open the call up to questions. However, before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings, and capital structure, as well as statements on the plans and objectives of the Company's business. The Company's actual results could differ materially from any forward-looking statements made today due to the important factors described in the Company's latest Securities and Exchange Commission filings. The Company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the press release issued by Mercantile today, you can access it at the Company's website at www.mercbank.com.

At this time, I would like to turn the call over to Mercantile's CEO, Mike Price. Mike?

Good morning, everyone, and thank you for joining us to discuss our first-quarter 2014 results for Mercantile Bank Corporation. On the call today are CFO Chuck Christmas, who will provide details on our financial results; followed by Chief Operating Officer Bob Kaminski with his comments regarding asset quality and other operational successes for the quarter.

Before going on, however, I'd like to update you on the progress regarding the pending merger with Firstbank Corporation. We continue to work with the appropriate regulatory agencies to obtain final approval.

At the same time, our integration teams have made tremendous progress, and we are excited to bring this transformational project closer to fruition.

With regard to this quarter, it is worth noting that these results include approximately $300,000 in one-time after-tax, merger-related costs.

Hopefully, you've all had a chance to review our quarterly performance, which was highlighted by solid profitability despite some net interest margin contraction in the aforementioned merger expense -- related expenses, improved asset quality, and continued success in new loan originations. The continued improvement in the quality of our loan portfolio is particularly satisfying.

Our near-term delinquent loans at quarter end are at zero. In the quarter, we recorded a $1.9 million negative provision reflecting continued recoveries, reversals of specific reserves, and reductions in nonperforming and other [stress] lending relationships. We will strive to remain flexible and opportunistic as we pursue disciplined growth for long-term performance.

As we await regulatory action on the pending merger due to timing uncertainties, Mercantile's Board of Directors has decided to delay the consideration of its quarterly dividend until a little later in the second quarter.

As we look ahead, we are confident in the direction of economic recovery for both West and Central Michigan. The consummation of the merger will ensure that Mercantile remains well-positioned to continue as the market leader in 2014. We will continue to do this while remaining focused on building our franchise and helping the communities that we serve to prosper.

At this time, I'll turn it over to Chuck.

Thanks, Mike. Good morning, everybody. This morning, we announced net income of $3.6 million, or $0.41 per diluted share, for the first quarter of 2014, compared to net income of $4.4 million, or $0.50 per diluted share, during the first quarter of 2013.

As Mike mentioned, the results for the first quarter of 2014 include after-tax, merger-related costs of about $0.3 million. This compares to a negligible amount during the first quarter of last year. We expect to expense further merger-related costs during the next two quarters, although the exact amounts and timing are not currently known.

The quality of our loan portfolio continues to improve, which, when combined with recoveries of prior loan charge-offs and the elimination or reduction of specific reserves on problem loans, have provided for negative provisions to the loan-loss reserve.

In addition, problem asset administration costs have substantially declined.

Nonperforming assets have declined $109 million, or over 92%, since their peak level at March 31, 2010, and are currently at their lowest dollar volume since year-end 2006.

Our improved earnings performance and financial condition reflect many initiatives we have implemented over the past five years to improve our financial condition and earnings performance in the near term and to establish an improved foundation for longer-term performance as well.

We continue to believe we are very well positioned to succeed as a strong community bank and to take advantage of lending and market opportunities.

First-quarter highlights include a net interest margin that remains well above our historical levels. Our net interest margin was 26 basis points lower during the first quarter of 2014 than it was during the first quarter of 2013, in large part reflecting a lower yield on commercial loans and a higher level of low-yielding federal funds sold.

The decrease yield on commercial loans was primarily due to newly originated and renewed loans being generally expended at rates that were lower than the average rate on the existing loan portfolio, in large part reflecting the ongoing low-interest-rate environment and competitive marketplace. A reduction in commercial loan prepayment fees was also a contributing factor.

Excess on balance sheet liquidity had a negative impact of about 15 basis points on our first-quarter net interest margin. When comparing our first-quarter net interest margin to that of the third and fourth quarters of 2013, I remind you that we recorded the collection of unaccrued interest on several larger nonaccrual commercial loan relationships that were paid off and the collection of prepayment fees associated with several larger-performing commercial loan relationships, resulting in elevated net interest margins during those two previous quarters.

Our net interest income during the first quarter of 2014 was $11.1 million, down $0.4 million, or 3.4%, from the first quarter of 2013, primarily reflecting the decline in the net interest margin which was partially mitigated by a $27.5 million increase in average total loans.

We remain dedicated to maintaining a solid net interest margin that improves our historical average over the long term even as we employ certain longer-term strategies that have a negative impact on our shorter-term net interest income.

A majority of the strategies involve strengthening our interest rate risk position, which will be beneficial when short-term interest rates begin to rise.

The ongoing improvement in the quality of our loan portfolio, combined with recoveries or prior loan charge-offs and the elimination of reduction of specific reserves, have produced a positive impact on our loan-loss reserve calculations and allowed us to make a negative provision of $1.9 million through loan-loss reserve during the first quarter of 2014. We have recorded negative provisions in each of the past five quarters and seven of the past eight quarters.

Gross loan charge-offs totaled $0.6 million during the first quarter of 2014, which were offset by slightly higher recoveries during the period. We have recorded a net loan recovery during the past four quarters and during five of the last six quarters.

Our loan-loss reserve was $21 million as of March 31, 2014, or 1.96% of total loans. Despite the significant improved condition of our loan portfolio and reduction of the loan-loss reserve in terms of dollars and as a percentage of total loans, our loan-loss reserve coverage ratio remains substantially higher than historical averages.

Local deposit and sweep accounts were up $6 million, or almost 1%, during the first quarter and are up $416 million since the end of 2008. We have experienced significant growth in our business checking accounts during the past couple of years, primarily reflecting new business checking accounts that were opened as part of new commercial loan relationships established during that period.

We have been able to reduce our level of wholesale funds by $1.18 billion since the end of 2008. As a percentage of total funds, wholesale funds have declined from 71% at the end of 2008 to 19% at March 31, 2014.

Problem asset administration resolution costs were slightly negative during the first quarter of 2014. Gains on sale of foreclosed properties, which are netted against problem asset costs, totaled $0.3 million during the quarter. This expense line item has been dramatically and positively affected by a lower volume of problem assets, gains on the sale of foreclosed properties, and lower instances of valuation write-downs on foreclosed properties.

We remain a well-capitalized banking organization. At the end of the first quarter, our bank's total risk-based capital ratio was 16% and in dollars was $74 million higher than the 10% minimum required to be categorized as well-capitalized.

Those are my prepared remarks, and I'll now turn the call over to Bob.

Thanks, Chuck, and good morning, everyone. During the first quarter, Mercantile enjoyed continued successes in client acquisition and asset quality. End-of-period loans showed an increase of $14 million from December 31. Supporting that progress, Mercantile lenders funded $45.9 million in new term loans to new and existing customers during the quarter. Line-of-credit balance was also increased during the quarter by $14.8 million. Mercantile entered into new commitments with clients on various new construction projects that will be funded over the next several quarters.

While the landscape remains very competitive, the Mercantile team continues to gain new business based on the development of client relationships. This manifests itself through responsiveness to customer requests, understanding clients' businesses, and identifying and fulfilling the customers' needs.

Our loan pipeline continues to be very healthy. And as commitments are funded, they are being replaced in the backlog by new opportunities.

Asset quality continued its steady improvement. Nonperforming assets were reduced by 9% during the quarter, as lending personnel remain diligently at work to bring to a resolution some problem assets originating back to the recession.

For the fourth consecutive quarter, Mercantile recorded a net recovery position for loan losses. This is illustrative of the continued work to realize proceeds on previous loan charge-offs.

At March 31, the allowance for loan losses was at 1.96% of total loans. We are pleased to report that loan delinquencies from 30 to 89 days past due were zero at March 31.

Finally, with regard to asset quality, the watchlist total once again declined and is at its lowest total since 2007.

Operationally, commercial customers continue to be transitioned to our new online banking service. Our treasury management products and our payroll service continue to be attractive, relationship-enhancing features for customers and prospects.

Regarding activity related to the merger with Firstbank, integration committees from both organizations continued their work together to ensure a smooth transition of banking operations with the eventual merger.

Those are my prepared comments. I'll be happy to answer questions during the Q&A, and I'll now turn it back over to Mike.

Thanks, Bob. And also thanks to you, Chuck. At this time, operator, we would like to open the queue up for questions.

(Operator Instructions) John Rodis, FIG Partners.

Mike, I guess maybe a question for you just sort of on loan pricing. Can you just talk about what you are seeing in the markets today as it relates to new loan originations?

Yes, it continues, John, to be very, very competitive. There's a lot of activity out there, and it's an ongoing balancing act to make sure that you get the pricing that you need and you want to maintain margin integrity and discipline. Yet, to be competitive in a very, very, very competitive marketplace.

We talked about on a few of the prior conference calls, we have gone back to what we do best and why we started this bank in the first place 16.5 years ago. And that is to really focus on relationships and the value that those relationships bring that not all of our competitors, quite honestly, can bring. And that's been very satisfying.

The new loans that we have booked have been all relationship based. And we had to let some deals go because the pricing just will not fit our discipline on the paradigms there. We did have some reduction in our margins during the quarter, and it probably is much to excess liquidity as far as anything else that we have on the balance sheet.

But yes, the long answer to your short question, John, it's pretty darn competitive out there.

And is some of the excess liquidity just sort of positioning the Company for the merger and so forth, too?

No, John, this is Chuck. The excess liquidity has nothing to do with the merger. It has to do with the fact that we've got really, really strong deposit growth, as I mentioned.

We tend to end the year with some pretty high deposits. Usually during the last six months, we start seeing our businesses start increasing their deposit accounts as they plan for generally first-quarter bonus and tax payments.

And we've seen that, and, of course, we've also got some nice net loan growth coming too. So far this month, we have been selling about $80 million -- $75 million to $80 million in fed funds, compared to almost $110 million during the fourth quarter of last year. And we would expect further reductions in fed funds, especially if we can get more solid net loan growth as we go forward into the quarter and into future quarters.

There's no doubt that both Mercantile and the Firstbank organization have excess liquidity on their balance sheet, and certainly we're taking a look at that. Obviously we'd love to take all of that excess liquidity and just put it in the loan portfolio, so that's what we'll endeavor to do first. But we are also looking at putting the companies together and how we're going to structure our deposit base in different types and the different rates and try and put all that together, and making sure that we're offering the right products at the right prices given the different regions and different needs of the Company.

Okay, it makes sense. I guess one other question on the loan growth is can you -- and maybe this is a question for you, Bob. But since you did see net growth this quarter, do you sort of expect it —- do you think we have turned the corner where we'll continue to see net growth going forward? And I guess what I'm getting at is sort of the level of paydowns going forward.

There's no doubt the level of paydowns has slowed from what we're seeing in prior years, and that is encouraging. But the ones that have gone away are ones that generally we didn't totally mind going away. They were solidly performing assets in many regards but ones that, either through a pricing situation or from a risk-reward situation, competitors took them and we were okay with that.

As far as the pipeline, as I mentioned, the pipeline is remaining quite healthy. Although, as we see with loan fundings, sometimes the timing is everything. And what we saw this quarter was a good solid fund to the loans from start to the finish of the quarter, and it was gratifying to see. Although, with our heavily focused commercial lending footprint, those timings can be quite challenging to predict and when a loan will fund versus when commitments are received. It's a moving target.

But we are quite confident that we have a lot of nice things in the pipeline. As I mentioned, those commercial construction projects that we booked will start to increase over the course and ramp up over the remainder of this year and provide some good steady growth from a loan funding standpoint that will help offset just normal monthly runoff.

Yes, John, and this is Chuck. If I'll just add some numbers to it because that's what I'm supposed to do. As of March 31, and kind of going back to what Bob was talking about with the construction development projects that are already on the books, they've already closed in earlier quarters and are obviously in the construction phase. We've got about $55 million at the end of the first quarter in availability on those construction development loans. Again, that had already closed prior to quarter end. So we would expect most of that money to go out over the next to potentially three quarters depending on the project.

Okay, okay. And then maybe just one more question, Mike, for you I guess -- just the decision to sort of delay the dividend. Could you maybe just elaborate on that? And does that impact at all the special $2 dividends or the thought process of paying debt, I guess?

No, it has nothing to do with the $2 dividend at all, John. Good question. But as far as our normal quarterly dividend, we just want to remain flexible in anticipation of receiving approval for the merger of the holding companies and making sure that we sync up the dividends in a correct way.

Okay, fair enough. Thanks, guys.

Thank you, John.

Michael [Pertro], KBW.

I thought I could maybe ask one more on the margin. Just kind of putting all the pieces together, you said that loan pricing is still competitive. You have the excess liquidity which you expect to deploy.

Is it fair -- is there -- I'm sorry if I missed this, but is there any more interest recoveries or anything in this 342-basis-point margin, or do you guys expect it to kind of be a low point? Or can we see some additional compression in the next couple of quarters, at least until the closing of the Firstbank deal?

Yes, Mike, this is Chuck. I'm glad to elaborate further on that. That 342, what we're trying to do with the math -- and obviously there are moving parts and will continue to be moving parts. What we are trying to say is if we had our liquidity where we had wanted it to be, which by way of example would be a fed funds average -- sold average balance of closer to $50 million instead of the almost $110 million. If you just kind of back that $110 million down to about $50 million, that's where that 15 basis points is coming from. And I'm not saying we'll be right at $50 million for the second quarter and beyond, but that's what we're endeavoring to do. And, again, as I mentioned earlier in answering John's question, we're about $75 million to $80 million so far this quarter and expect that to go down a little bit further.

So kind of backing that off, we would expect that 342 to be closer to 350, 355 if we can back off some of that excess liquidity and then, obviously, all of the different moving parts from there.

Okay. So, I remember last quarter you guys had spoke about a 350 to 360 target core margin. You guys are still -- that's still the case?

Yes, I would say may be 350 to 355 as we have yet another quarter of some of the competitiveness that's out there and then looking at the pipeline.

One thing about the pipeline, to further echo Bob's comments, those are some really, really strong credits which obviously from a risk reward standpoint will, on average, get a very strong loan rate. Will we more than make up for that is obviously on the administration and certainly the provision expense standpoint. So we would rather have maybe a slightly lower margin going forward if it's a result of getting some very strong credits into the Company that not only grow our balance sheet but also take minimal time in regards to administration and minimal impact to our provision expense.

Okay. Thank you. That was very helpful. And then just in terms of the securities book, and feel free to correct me if I'm wrong, I remember when you guys announced the deal initially that the FBMI deal is going to, at least as a percentage of your earning assets, increase your securities book. How are you guys thinking about the size of the securities book, at least relative to once the deal closes, in terms of where you guys are comfortable from the liquidity standpoint and just from an overall earning asset mix standpoint?

Yes, I think the Mercantile -- legacy Mercantile has generally kept the investment portfolio around 11%, 10% to 11%. And what we would like to do, and I don't anticipate any outright sales -- but what we're hoping to do when we combine the companies is to use the cash flow coming off of the combined portfolio -- that being any calls in the portfolio, certainly any mortgage back paydowns that we get on a monthly basis -- we can hopefully fund the loan pipeline that we've talked about so far this morning.

I think what we've talked about so far is an investment portfolio in that 12% to 13% range as we go forward as a percent of total assets. But, again, we're not looking at just immediately selling a bunch of securities to get down to that level because when we do combine the companies, the percentage would be higher than that percentage going forward.

Okay, all right. Thanks, guys. Appreciate it.

(Operator Instructions) Stephen Geyen, D.A. Davidson.

Just a couple -- I guess mostly focused on the commercial real estate, the pipeline, C&I. What are you seeing out there across your footprint? Line utilization, I think you mentioned that it is maybe ticking up a bit. Where are you seeing the growth?

The growth is taking place in a variety of areas. We certainly have seen some nice credits that have come our way with respect to commercial real estate and good solid deals, obviously, and some projects that we talked about on the construction side.

We do have some very nice C&I credits in the pipeline and ones that we are engaging with customers -- potential customers at this point. And the ever-watchful eye to keep that balance on the C&I side and good balance with the CRE because that's what we feel is the appropriate thing for us to do.

But we've been very gratified to see that we've got some good looks on both the CRE and the C&I side, especially in the first quarter of this year.

How would you characterize the relationships? Are they potential new relationships, or are they the original customers that are re-upping or looking at expanding?

There's been a little bit of both. We've seen several new projects and with existing customers that have come our way and some things that are fired up with customers that had been with us a while. But we also have been pleased to see some new prospects, new relationships that have chosen to come to Mercantile and ones that we are calling on that we're hopeful and confident that we'll be able to lend that relationship in many of those cases as well to keep the mix going between new and existing customers.

And maybe just a thought on where you are seeing the growth in commercial real estate. (multiple speakers) business segments?

You know, it's been a mix. We've seen some growth in the core downtown Grand Rapids area in terms of office, in terms of some retail. We've seen some other retail and some of the other markets in the Grand Rapids area. And we've seen some industrial commercial real estate. So it's been a mixture of the various types of commercial real estate, and that's what we're after as well.

Okay. And I guess just one final question. Anything particular you can help us on as far as like the size of potential customers, the type of credits that you're going after? Are you seeing a little bit more activity in the larger commercial relationship? I guess, speaking specifically regarding C&I, or is it kind of across-the-board small and kind of mid-cap?

We've been pleased to see that we've seen some smaller but also some larger commercial industrial relationships that we've called on and had some good successes with. And especially with the combination of the companies with the merger of the Firstbank and the size of the credit that we can entertain has been very attractive to potential clients that we are seen [off] in the market. And they look at our capacity and see it as one that we're more than capable of handling with those larger types of credits. And that has been a special focus of our commercial relationship officers as they've gone out there, especially the last six months.

Okay. Thanks for your time.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Mike Price for any closing remarks.

Thank you, Ed. Mercantile's momentum is increasing, and our team is motivated and dedicated to continue to build on our success. As I stated earlier, our long-standing relationships and proven excellence at community banking are really coming to serve us well as we continue on the path of achieving efficient, profitable growth.

Thank you to all of you for joining us this morning and for your interest in our Company. We look forward to talking with you again.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.