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Mercantile Bank (MBWM) - 2021 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported net income of $18.1 million or $1.12 per diluted share for Q2 2021, compared to $8.7 million or $0.54 per diluted share for Q2 2020, and year-to-date net income totaled $32.3 million or $2 per diluted share, up from $19.4 million or $1.19 per diluted share in the same period last year [37][10][11] - Interest income on loans declined due to FOMC rate cuts and a low interest rate environment, with total interest income down $1.4 million year-over-year for Q2 2021 [38][39] - Net interest income increased by $0.3 million in Q2 2021 compared to Q2 2020, but was down $0.5 million year-to-date [41] - The company recorded a negative provision expense of $3.1 million in Q2 2021, compared to a provision expense of $7.6 million in Q2 2020 [42][43] Business Line Data and Key Metrics Changes - Core commercial loan growth year-to-date was $135 million, with an annualized growth rate of 11% and a quarterly growth rate of 8% [22][23] - Mortgage banking income was $7.7 million, with purchase activity representing 61% of originations in Q2 2021, a significant increase from 21% in the same quarter last year [31][32] - Noninterest income for Q2 2021 was $14.6 million, up 33% from the prior year, driven by mortgage banking and other fee income sources [30] Market Data and Key Metrics Changes - Total local deposits increased by $276 million or 8% during the first six months of 2021, and are up $1.1 billion or 42% since year-end 2019 [52] - The company expects elevated levels of overnight deposits to continue, impacting net interest margin negatively [53] Company Strategy and Development Direction - The company remains focused on acquiring new customers and servicing existing ones, leveraging strategic initiatives to increase market share [13][14] - Digital delivery and technology investments are prioritized to meet evolving client needs and enhance operational efficiency [18][19] - The company plans to continue its stock buyback program, having repurchased about 229,000 shares for $7.3 million in Q2 2021 [56][57] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about future performance due to the reopening of the Michigan economy and improvements in economic conditions [7][10] - The company is closely monitoring COVID-19 developments while prioritizing health and safety [9] - Management indicated that while they expect some modest erosion in net interest margin, they are confident in the overall trajectory of the business [74][75] Other Important Information - The company plans to adopt the CECL model on January 1, 2022, with a projected reserve balance under CECL methodology expected to be about $6.6 million lower than the current incurred loss methodology [44][90] - Overhead costs increased by $3.0 million in Q2 2021 compared to the prior year, primarily due to salary and benefit costs [47][48] Q&A Session Summary Question: What drove the strong commercial loan growth this quarter? - Management attributed the growth to the pandemic and the PPP program, which allowed them to support both existing and new clients effectively [64][65] Question: What is the outlook for the margin? - Management expects modest erosion in the core margin over the next couple of quarters, projecting a margin closer to 2.65% to 2.70% for the remainder of the year [74][75] Question: What are the expectations for loan loss provisions going forward? - Management anticipates net loan growth will require some level of reserves, but they expect any reserve release to be larger than what would be needed for new credits [78][85] Question: Can you quantify the pipeline relative to prior periods? - The commercial pipeline remains strong and similar to the first two quarters, while the mortgage pipeline has recovered to equal prior levels [97] Question: How will the remaining repurchase authorization be utilized? - Management views the repurchase authorization as opportunistic, driven by stock price levels [99][102] Question: What are the expectations for PPP loan forgiveness? - Management noted that forgiveness applications are inconsistent, but they expect a significant portion of remaining loans to be forgiven by the end of the year [132][134]