MBWM - Earnings call transcript Q1 2020 | Mercantile Bank Corporation

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Operator

Good morning, and welcome to the Mercantile Bank Corporation First Quarter 2020 Earnings Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mike Houston, Investor Relations. ahead. go Please

Mike Houston

the President Good of Mercantile Grant. President discuss and you -- thank company's Houston, I'm and and Thank Relations Lambert with Corporation's Officer; Chief firm. morning, conference members joining IR, for fourth the Bank results to quarter Chuck me Mercantile and including call Officer; team for XXXX. financial Mike you, of Christmas, for everyone, first today and the joining Investor management Reitsma, Bob Vice Chief Michigan. Executive Ray Financial Mercantile's are Executive And their Bank, Kaminski, President webcast

will review with the We call management's to then results and open the presentation call the quarter's questions. up prepared begin to remarks

my call projections as that the responsibility to However, plans we capital earnings on before inform the may such objectives as certain and is this forward-looking of statements revenue, as statements structure and of begin today's well it business. involve you company's call,

actual quarter presentation have you during anyone press made If the it at materially company's latest could differ does factors Commission XXXX access and deck in www.mercbank.com. can and first any the not no copy website statements release issued call. to by forward-looking forward-looking of to due today, update filings. from already the Exchange obligation the results statements Securities company company's today assumes a described The made The any Mercantile company's the

Executive turn like Bob time, this over Mercantile's and to I'd call Officer, At to President Kaminski. Bob? the Chief

Bob Kaminski

speaking in few that was morning, how could none when in going we good have April, world imagined forward the short call to to of January you in Mike of told everyone. conclusion a change At with us and just months. you our our look we Thanks,

our the be believe the the our spend to this of provide of we you usual, in as we which significant pandemic. but call of we of will the a items, for in comments will details discussing also morning first wake performance the amount quarter will On time interest COVID-XX

a the life-threatening created COVID-XX crisis has globe. around obviously

and virus that be and the As ended, rapidly action it in became more United February spreading more States had to taken. the apparent was

First and on our response safety presentation. X foremost, of and and the of detailed employees ensure our expeditiously is health customers and worked slide Mercantile to noted the

As over stay-at-home started contact XX. and in face-to-face worked beginning grow, lobbies with limit on March closure pandemic lobbies our concerns our our March full beginning order customers the leading on the eventually Michigan U.S. -- to XX to of Whitmer's Governor to the of with us Mercantile

our for almost their able are to our machines drive-thru continue Customers banking doubled. online Since needs banking logins banking have and retail example, the beginning the of crisis fulfilling with banking. daily facilities, electronic video

over remotely our we any have working slide March home. Regarding X, at generally XX of mentioned employees day from all staff since as on XX%

And be X. on of from gracious slide some the seen feedback our customers can

economy, but times. we goal Recession discussed of weaker provide since of leverage strong financial a Mercantile have with metrics to is has place Great company position also of to the during to allow solid end successful worked ourselves strength. us a As in the years, to in The the opportunities economic be recent that our continuously

our storm clients to certainly everyone caused our them the with challenges as creates in financial extremely the industry, pandemic the crisis. new by While solid work this for services remains we help foundation weather

well estate estate historical loan our classification. C&I presented you including including credit versus as about real up quality by our real concentrations owner-occupied we our some be on call, through the loan industry industry. as portfolio as metrics to the providing issues breakdown of details our to focus leading will with talk crisis, We'll and loan we work by on During areas type this portfolio non-owner-occupied

with clients clients talk activity the provide existing about discuss to payment also efforts our SBA Protection loans our We'll pandemic. to to We also funds program through relative -- our during will relief with the for our payment Plan. Paycheck the

liquidity position new key rules as Mercantile of We'll well capital metrics regarding and the the the the CECL. taking as including is position that of postponement discuss our adoption allow

We interest economy. will FOMC our on crisis non-interest the taken start discuss of by boost at impact by -- the actions the the the net our margin the to

refinances. able with The in generate movement cuts mortgage rates, comprised primarily estate to agents compliance trying been With and challenging orders. volumes is consumers activity real business time, has the the at pipeline new quite executive maintaining making the with creative be real to estate purchase are stay-at-home our banking interest mandate current but record of while

Michigan COVID for cases. has hotspot unfortunately been a

part Detroit a maintains is of the hit and increasing, Southeast The the statistics the has Michigan critical remains its hard County cases with metropolitan in keep levels seen with have along with including of of vast Michigan market early systems the but spread. skyrocketing very presence the state area been April. central of the death state and Kent allowing Mercantile health that large City including where the care majority its areas confirmed to West at pace

state critical in economy state can the have engaged mandate for virus relief home stimulus industries. to Many their employees with caused at has the subside keep cases conjunction citizens with their remain reopened. as exception the of distancing so working waits in to federal local paid be safely those Social to help essential businesses the

economy Michigan the throughout steady generally crisis, XXXX. was this Before

hope is with implemented been subside force, that down energy which real, manufacturing the had and lifting restrictions infections to certainly as are the low ample is consumer in unemployment to continue jump a our but on Some movement economy increase the communities plans start returns areas of everyone's the that is strength. placed for businesses continued to hibernation. was the driving prices tourism virus in industry and that estate year from exhibit have It

needs arise. measures those situations monitor to if prepared the take be continue to We'll closely and additional

strongly of this positioning out eventually through remain environment. we we in ever-changing confident serve to navigate always, customers As and that as continues our our

my comments. to turn are now introductory Those it Ray. I'll over

Ray Reitsma

Thanks, Bob.

portfolio contributing markets to loan of increased that in of the each our first with growth. Our $XX million quarter XXXX

well as commercial resumed in next which solid of development with construction the we time that to a over activity remains pipeline million expect normal of loans, XX $XX semblance commitments construction XX months to and fund during Our should frame.

in non-interest Our quarter remains March fourth of from when continuing of $X.X non-interest asset quality by income, first market the up increased to $X.X to strong $X.X income assets of banking refinance to success strategic was from designed assets recent ongoing largely income million non-recurring million $X.X proven rates We level continue a the quarter. mortgage higher including of XX% initiatives total items during an originators market mortgage a banking stemming loan that year increase in to through quarter million, priority excluding level are mortgage non-performing increased million able. in prior the reflecting This we share income decrease one-tenth share driven improved will related enhance at remains or or recorded totaled hire increased as and purchase of the share X% activities market and of XX. we a

systems card accounts stay-at-home has growth and other and debit recorded through in credit debit were XX. of income as as also fee costs on income, trended in related all delivery discipline April The to Credit we including exercise categories and implemented overhead on continued of charges and of service remains payroll a March in remain efficient our card in downward income are processing focus orders priority. business effect in fees. quarter scheduled to the lines We

demonstrate the opportunity of to the an with virus service high-touch combining value provided COVID-XX onslaught capabilities. The banking community of strong

capability allowed banking contributed of date on work to mentioned March As ability us our home employees from from lobbies have three-quarters electronic forward. Bob to XX an our and that close to our

contributing SBA asset in X,XXX under to plays the as applications the labored Mercantile over Paycheck banks of representing Program, million communities over thousands in the many maintenance of our crisis workers loans, Protection quality out. While $XXX supporting funded and

been communities praising the to our throughout in with Our feedback, professionalism providing have commitment process. consistent us supportive

our can Bob this of on be of as slide customers from gracious Some mentioned. the X presentation feedback found

as for see directly crisis. the slide by can and you SBA programs deferral programs addition X, entities interest-only the on Mercantile COVID-XX federally In allowing total payment payment created programs to programs deferral impacted funded

consumer logged -- and cases proportion at hardship over our Next, XXX have than of approximately million requested than portfolio while less by lending small our implementation. been customer have on cases XX is less customers a X, in service inquiries $XX slide XX and team our

on in April strength slides list slide and world The reflects has due economy. reflecting risk well. past in as the characteristics, strong rating as Our a next seen as date of of process portfolio the pre-crisis March proportions of the of pre-crisis the the to X XX maintained

focus key ratings Maintaining quarters. in the accurate a upcoming risk will remain

construction, of segments for the performance be financial lodging, paying attention movie segments: retail. and credits the living, of commercial assisted None account than particular and hotels automotive the theatres, will individual these condition to restaurants, loans. of and X% following We dealerships, more in

Turning Paycheck to Reserve. employment provides small recent to maintain of Protection XX, pandemic. forgivable program we the the Federal of implemented go eligible to slide the some programs the details Act over CARES will during and for loans by businesses this

the payments the a borrower and the payroll first carry funds forgiven payments may loans in the deferred following monthly XX loans X% are rate utilities months for rent for The be The used and six months. proportions. by for interest if the and specified

within five the of fee provides of of accretion days between accretive loan paid closing. X.X%. income The X% accelerated also with paid and in is resulted These yield X%, the SBA of over or loan an The is interest enhancement off is origination forgiven. effective to which an the life income deferred if

fixed of forgiveness PPP Reserve over advances on to The are you loan To and or advances XX-month the in repaid on payments can These be allow Federal rate borrower term. as from with the are fund points. as advances Slide SBA term these the dollar-for-dollar XX see required received loans the borrow the basis loans us the repays providing which to is XX.

I'll remarks. now That over call turn concludes my to the Chuck.

Chuck Christmas

announced first or million first share this net or $X.XX income of good and with quarter everybody. of net the Starting per for $XX.X diluted share quarter XXXX the of diluted Ray, we $XX.X $X.XX per slide on compared income Thanks XX, million of morning, morning XXXX. for

share. sale a net Proceeds $X.XX prior per from gain facility in of a or on former life million diluted $X.X increased claim a the year by period branch bank-owned income insurance the and

$X.XX first of current impacts these earnings quarter. diluted compared to the X% the per prior transactions, year first increased share quarter approximately the or Excluding during year

FOMC of first Moving income XXXX. of basis quarter XXX XXXX points the XXX with due of beginning those slide basis points loans cuts aggregating declined in the cuts the third interest quarter on the occurring in the to to XX, rate since

down was discount is $X.X quarter the $X.X accelerated income on discount excluded. of million agency from income of the $X.X called down the compared In first during if during million to Interest U.S. quarter million first the accretion securities XXXX quarter or from of Government in accelerated total, accretion XXXX. benefited a first bonds interest XXXX

Interest million is first during first expense excluded. rate compared $X.X the compared first XXXX, in if during quarter of of the declined environment. quarter of income Net $X.X million XXXX all to the first reflecting interest accelerated XXXX declined the categories the interest XXXX quarter to or accretion declining of the quarter when discount

expense CECL Act. Provision first adoption the as to postpone of $XXX,XXX XXXX. CARES We of during first similar quarter the $XXX,XXX totaled the during by elected we XXXX, the to quarter permitted expensed relatively the

is As the of you forecast know, key an CECL component methodology. a economic

shelter-in-place has been environment economy embarking a businesses of and significantly unprecedented similar declarations an whereby reactions individuals. economic are into sizable We by by the impacted and portion

economic government individuals state and Economic offered and options. are has institutions businesses and there individuals consensus. to regularly local governments. have provided forecasts forecast Substantial updated Financial relief no payment been businesses, is stimulus and

modifying necessary of high updating loss uncertainty factors our to calculations degree have to nine quarter and to loan migration reserve surrounding model the as forecasting, elected loss time environmental the the Given incurred at continue each for economic we utilize end. being, them

growth, specific expense First lending of a allocations economic on a an of quarter collected XXXX uncertain provision fully and environment combination reduction reflects loan relationships. change, allocation

to similar fee the Moving slide first XX, recorded income fee of XXXX quarter to during total during the on first XXXX. quarter of was income

XX%. aforementioned branch on income former the and during the if claim gain BOLI quarter are or first increased excluded, However, sale million by fee facility $X.X

income additional several of initiatives, implementation the banking about by activity hiring during reflecting ongoing of and the the XXX%, of part lenders. quarter Mortgage refinance increased the strategic mortgage successful expanded including latter

treasury higher We XX% growth income XX% recorded in management a due large processing charge payroll service to expanded in also an income reflecting client growth and income base. part in

up of $X.X furniture compared XX first expansion. higher million, equipment quarter $X.X the part commissions. our costs million, in Salary XXXX. quarter costs large increases office page main the up and mortgage were overhead On XXXX $X.X and million and benefit a costs completion of Occupancy, increased combined reflecting lender during were of pay of first reflecting to fall the XXXX merit

basis net XX the basis On from The on assets first previously slide government was of earning the the margin XX reflects mentioned U.S. XXXX. our quarter on this of interest of first X.XX% quarter fourth and that down our XX on quarter had first impact interest XXXX, a point discount accretion during points the of margin quarter yield XXXX during accelerated and agency called compared to bonds net unchanged positive year.

the quarter compared and reflecting quarter targeted XXXX, loans reduction in The the down down FOMC's during yield quarter basis XXX compared rate. the point large was when first of in the first XXXX XX XX aforementioned part points basis on points XXXX of funds the aggregate federal basis of to fourth to

funds falling of has on and not declining a the but environment, on the loans. our interest also reflecting of to experienced scale, trend, cost in yield magnitude in rate been primarily The terms degree

impacts net full basis quarter then loan early interest during margin XXXX, interest programs, and and of of the stable reduction the XXX for PPP XXXX. lower as the the the experienced relatively net remainder margin in Excluding impact second we we FOMC's a forecast of March a a quarter of aggregate point rate PPPLF

About originations or only the quarter of our year. XX% the during $XXX compared quarter XX, during XXXX. mortgage refinance the totaled the of million slide of increase quarter On consisted quarter to mortgage volume almost first an XXXX loan the $XX of first to first during XXXX, million compared applications XXX% of first of last XX%

the from the the loan XXXX sold net or mortgage of the the during our XX% market, soon loans than of The after ago. XX% onetime of closed lower our gain on the level a loans up first to closing the to about that's reflecting activity, secondary first year of of mortgage expiration commitment during year, loan. sale Approximately relative on sell rather the will been originations to quarter of quarter decision this mortgage the impact was closer of have date be date,

level The accelerated refinance right higher of did activity mortgage servicing result in a amortization.

remains of above However, March valuation of we XX. estimated cost to servicing mortgage as was market carrying a no the The our use methodology, value at write-down rights lower recorded. well value

a Moving capitalized. ratio well XX.X% leverage million categorized strong strong was on risk-based we being and XXXX. well The and the in to total above capitalized a XX.X% slide XX, well-capitalized XX. -- We capital risk-based over minimum position. remain thresholds Tier ratio capital and regulatory as of remain bank's capital X March was as was capital the $XX total The ratio

COVID-XX elected share shares We about repurchase environment. $XX of available or we to repurchase suspend during at first million the due cost quarter to March Share repurchase average current our about have surrounding the XXXX plan. total activity XXX,XXX a of share $X.X the totaled million uncertainty in per In $XX.XX activity late price. currently

XX non-performing the remains with quality low loans end percent the very basis The slide at on loans of levels and equaled Non-performing the points XX of loan continued strong loan numbers. loans some of only a charge-offs. asset as portfolio quality of Turning quarter. average overall on

three of $XXX,XXX than less to net of of totaled of of period annualized. totaled owned over was about quarter loans prior while The Gross average other recovery equated points total real end. XXXX, loan charge-offs loan during balance less charge-offs The basis quarter first than $XXX,XXX. $XXX,XXX $XXX,XXX estate at loan the resulting recoveries

during residential in loans. these quarter mortgage in purchased part January residential are large loans was XXXX of considerations, non-performing stressed Due discontinued in materiality large originated. accounting totaled On purchase loan $X.X Therefore, as peered specific now reflecting additions first slide and to the reported part, effective X, million assets XX, mortgage XXXX.

we past to slide guidance performance degree on providing uncertainty high to XX. not conference done calls. we earnings Due exists, the be will as Moving currently of that have

key rate; earnings LIBOR to of floating forecast XX-day into our However, should interest regards or offer that index. are of net we company the XX% total able to be factored commercial loans, loans included commercial considerations rate to any XX% income, tied are in of this

based XX-day month, that hold to the rate closing on equal -- then, loans of first And entire the of reprised business each LIBOR We've the end. loans previous the day constant for rate month. month

LIBOR an While credit XX-day historically, XX the rate rate was federal basis elevated XXXX rate. the The funds LIBOR has XX-day federal funds points. to has resulted LIBOR targeted in approximated March rate a premium, XX basis compared a risk of points at XX rate, XX-day

impacted LIBOR million. are be periods. excess LF loan XX-day Interest in PPP PPP income and in loan fees loan fluctuates commercial $XX volume, loans origination in will of million. totaled future the the $XXX of excess to of SBA degree rate, PPP fundings

likely $X will be XX used a loan origination about of aggregate six Direct the to deposit costs that program is in weeks. to next outflows, million. majority It over result the fund PPP LF

loan into SBA of period. XX-month will over fees on loan accreted life level income underwritten origination loans the direct the and PPP origination a yield a method. loans deferred be Net loans costs, for are on interest

PPP off The the which degree are be accretion effectively will paid by and the net deferred accelerated. to are forgiven fee loan loans SBA loans

quarter Accelerated accretion of agency discounted to will government March discount on XXXX. agency XX. aggregated $X.X discount totaled as accelerated. U.S. callable be million $X.X which are the degree accretion Unaccreted bonds during bonds first The of million, called discount

an interest is income the negatively and be loan quality in loans increase finally which impacted. may And degree to margin, experienced asset in non-accrual

For loan reserve requires via build level net growth of some provision expense expense. provision

our provision via building or in which building loans TDR due loan with are necessary. The grading which impaired, via to being status, reserve may downgraded, become may be provision degree to non-accrual expense accordance to be necessary. placed expense paradigm in degree The loans reserve

The required may impact qualitative calculation formally -- quarter the the reserve which each Any will are an end. environmental impact reserve changes provision allocation impact nine have at factors expense. reviewed on may which

For home are changes mortgage in COVID-XX declarations fee The purchase impact, income, measures our made which substantial the to a operations. had banking on by Michigan's market. on degree to predict difficult have Governor are shelter-at-home Michigan's

difficult substantial have Governor the on credit as card and our impact Michigan's in which changes fees had a COVID-XX made dropped. also debit declarations uses operations. card are by are predict, measures card shelter-at-home on The and debit degree to to credit interchange Michigan's

Michigan's impact on had as And fee costs overhead and reimbursements. lastly for reimbursements well ATM employee various have a declarations substantial costs, as shelter-at-home meal overhead mileage as such foreign

The Any degree costs. to COVID-XX increase in to which on measures in changes Michigan's difficult in increase loan costs. made relationships predict are Governor in problem by collection result overhead could various an are

quality while closing, In may stressed performance with strong in that many and periods, asset impact earnings we financial there that Mercantile's entered capital condition and uncertainties position. we the future are note environment

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

Bob Kaminski

and prepared you, Ray. thank now session. We'll call question-and-answer Thank Chuck up now That the to open remarks. you the management's concludes

Question-and-Answer Session

Operator

first Our Instructions] question ahead. with Brendan Piper Nosal Sandler. go comes [Operator Please from

Brendan Nosal

morning How you? are Hey, guys. good

Bob Kaminski

you? Good and morning, Brendan, fine

Brendan Nosal

first you deck, I wanted definitely just level slide helpful. off disclosure Fine, at in to of the thank you offered guys very the

off level on on too, just questions the of So reserve. starting the

talked level delayed states. harder coming of Charge-offs at the hit like benign CECL it NPVs that are one of implementation. get really so I out the pretty guess unemployment just of Michigan, was claims to of even looking you kind seems But I and stable. it's guys

just me level reserve kind up help economy of in seeing we're now. right the that the Michigan the stress relatively square So stable versus

Chuck Christmas

very best massive we economic manage use the know well a parts there calculation. of the to model. the my impact have CECL, comments, we per process the that it all which my as as continue just forecasting within and as we trying the significant to Brendan, the process, it model uncertainty all the are appropriate incurred calculations we to is we given CECL thought when a as mentioned, And prepared to now Yes. moving And reserve remarks, incurred many model. thought course so to comes it know we on

certainly And served think well yes, did end starts the model model, us we consider we I has to is allocation and with that in we like we March quite migration. at it performed and else since XXXX. and the environmental make some factors everybody it reserve do did of have incurred an we're adjustments. the it's But back going used definitely consider nine

be obviously relying on those. will heavily we So very

that frankly, next this going been quite then That the primary was Michigan how is in Southeast But of by you our hit most not going cases we need stated hard in of – see environment look is as And – especially impact next true at with those note Michigan's definitely couple hit. when being presence, the to quarters. the also to And Bob. already areas we have this hard over been Michigan. has borrowers

there's the there. So economy of affect state. does it separation a the entire obviously, But for somewhat

One that of the interesting is of adoption our day upon reserve things a reduction $XXX,XXX. with CECL showed actually our of one calculation

our So least CECL actually speak $XXX,XXX. by reserve adopting at gates increased by to out calculation not day, on so we a the of one

impact to having going going and on that that understand downgrades definitely we're that understanding a that to any of the And necessary. forward, – them we're we and per are in our working we entering the with environment. midst going this my now stressed borrowers, very are doing is So comments, obviously be are there's –

look We've factor paradigm. will management the changes Executive to needed in within allocation factors the and level involving our as its economic current those already circumstances environmental at adjust rating downgraded to the factors. possible loss given continue those

we from think as in that saw portfolio that is of So are – commercial about XX% came over loans. I one where and reserve last our the $XXX,XXX loan reduction thing

exposure what is a lending. do consumer to have mortgage of retail don't area primarily the we that and we So have much

lending a with footprint level looking that reserve. two a years. drives drives by And lower – itself look you it's our our is CECL, at barely duration average that When That duration-based of at over model. commercial by

on the day say reduction. that's a taken one, net been So $XXX,XXX would reduction actually have – when while I

this in doesn't we where more management our that assume loans loans. make that look for on at unfortunately cannot our the commercial just calculations, fallen allocation it's loans rules reserve team than from see part quite did allocations an calculations, CECL, much And you have to mortgage we That resulted If would increase of but the commercial lot actually renewals a of frankly of sense. which $XXX,XXX.

We have in the great relationships that to in with they maturities quarters coming or next have commercial of any future may of many our borrowers we few a periods, couple notwithstanding many expect have up that years.

And then the I we're were think lastly our what primarily through. to to and not was and very I third forecast that dramatic forecast on, party there aspect drove its going economic modeling, change quite We think we changes rely some regularly us the going really it. saw for using were CECL that CECL to

was pick one trying to just the forecasts should being questioned. which use of So we

to One CECL we the of of we that provider as third-party that was forecast. wanted was while know provider, we economic folks since that as range have out consensus controls the sure in other were there's we that many one selecting model that providing are make we there, there building the our was out

consensus, We know that whatsoever. there is absolutely no

So consensus. because our economic forecasts – key make that have sure our or in no in we model, close not i.e. It's we those own one to is of use that consensus. there very is is within that controls

serious some troubled of to dire that start we're So we to in. a were has shortfalls brand-new the using midst believe in have crisis we model very very a that

we want fine. reported make did but lower everybody – very that banks provision in your long-winded have took sure far expense. to it obviously We provisioning have I certainly That's a answer increases to the We expense. not our significant reported know take to so understands So it. question that why

that the know that loan exposures in we calculations. loan, those also consumer could models have retail that very large we that our on impact own most saw at banks saw We of have least that

we're to on. impact I bank, having the to the the this calculations. rating very, to and it's a we're of just rely forward as stress the significant we And to had environmental because paradigm are going again, And say, going going that ones factors, reserve that difficult be them if specific that stimulus we'll do continue very portfolio quality to we exactly in. credit of those being within nine accordingly adding always has our it's asset But move our we've been on put commercial what or downgrade should amount see understand

X,XXX PPP have to that loans, some more of get to We flow of them expenses our for obviously two of biggest clients is they cash and over providing waiting have. which months the up

our We're borrowers, other And flows. options will options cash as protect offering help that their mortgage also borrowers for also payment commercial even them we're well. offering payment deferral

stress but borrowers the on stress consumers degree So, our that commercial variety on significant stress a has and the see and and on entire marketplaces, our stimulus borrowers. our that economy see we of through also amount lessen our tremendous or we to other of programs are going

the seeing by at start portfolio, going few measure to as going going next and all on measure that to entries had is should portfolio have our those loan significant far of quality. is arguing But point if quality those required. the our expense time, the been the during one's the measures, done. to lifted months that reflecting Michigan. what Governor it's the So, make that has impact to aggressive to very And to Southeast is of No our our have her the that on especially in going asset we're be -- duration provision question degree the impact big continue over been we're impact that biggest

Brendan Nosal

of of All especially of you unprecedented for much right. appreciate your Thank CECL environment. in adopting the light so thoughts all of problems there. certainly I an

other If incurred of open credit in comments. could we follow migration I such big of those taken under mean taken, component deferral? should to the be, what up Just loss a methodology kind on old provision expense and it's a are reserves credits and the the even pushed banks have does as guys reserve such building migration that whether forbearance or is down actions further deferrals, you slow a out it's have that that those trajectory are of the

Chuck Christmas

Yes.

I last five, six, think want really had to there's our seven or -- grade loan the rate allocation should five long-winded our one your where stressed losses very have of or many question our would zero a it. bank that has years four things and a in if answer minimal have our bank the loan recognizing lot calculations, my first that through even migration of small but banks, -- you I to over very, and migration was I categories our and very go

or did for or adopted categories was quite a along we deminimis commercial required grade. with loan if as of our we our were to part of segments amount each increase amount of ago factors What reserve allocation carry, of the cost reserve long a significant five you five That time minimum migration. we was will primary in the or actually primary

of look or the allocation small, if So, for CECL, deminimis between you very that decline at the was calculations. commercial model Quite loans that I was And one numbers. model and it deminimis migration factors. really frankly, model these our between CECL incurred but the we numbers our for that did were mentioned the minimum deminimis elimination big allocations those the our of very, in differences not allow put reserve reserve and place CECL these incurred these was

of our not our very, given feel level seven deminimis which was five numbers did last because years, was So obviously loan clean the quality of our lot we of reserve to some our asset appropriate migration. obviously, very a that we the driving it very include portfolio with to over in calculations, comfortable thought,

borrowers. In question your regards continue going to to to work with we're here, our second

need a while are for to credits, we talking a borrowers to lenders determined that. on to to just Our of discussions, it. downgrade if it's those certainly it's going basis. going take out we're But to that do on regular shake Based this our

and equally treated customer -- blanch. to difficult every everyone's impact and be do So to equally way. is case. everyone going to be just is in very a impacted the going impacted It's to that's a carte different what's going very not This or

we it its our commercial in lending at to single is different have why retail balance. an little with own bit reserve merits. on commercial every think relationship drive But if can I lending, on why grading that we maybe That's Especially system. better needs you're system at looking lending, looked impact our rely the be and a we have really have borrowing a grading That's of base. to

Bob Kaminski

Brendan, adoption said I'll just times. this that Bob. CECL what we'll loan times our the it served by to with very during and methodology adoption years plays and the And economic reserve the well what next over Yes. under eventual add he reemphasize has said Chuck is economic how as all us good of that, all earlier couple banks. years see over and to of the challenged out loss

strength. But we Portfolio crisis. very customers great had board. We our our very going feel this the really solid are were into that methodology. feel Customers performing good good are really about They across well.

will economy. and I them very well crisis the down of this of road shutdown a our we us think that through serve comes whatever the and result as as work

going strength that that fortunate in. we had very that's So

here that situation make customer legislators restriction, go the don't as to But showing their reopened on think that and And sure but I where to are curve. that's flatten continue working results continue said all make are economy Michigan. the the with the gets analyze I happening. And that that Chuck sure each the we'll are in from overboard look coming revenues we think their we at Governor and eventually and understanding to

to and the and then high. unemployment our There's proves be allowed result of reopened shut And numbers I that about been that think certain communities And as be down. once back question businesses very see a are the relief that our bring you'll to no customers have to start that. up some in a customers some to pattern sustained will nonessential

lots are drive through parking you When empty. town

So you're emerge businesses from going be the and county to back think reopened will will But have work. serve back I And measures unemployment. state the will us to crisis. The to employees work and well. the

Brendan Nosal

back. the then And I step All right. one Perfect. Thanks comment. last before for

program of far, is $XXX average approved loans PPP fee the the looks million so about on X.X%. So like

here. correct? million up that that expect origination accrete loans So of the whatever being. That's life NII Is have of ends math roughly the just fees sure to make over right I the you into $XX to

Chuck Christmas

that with have net have we'll correct. we debt then $X well. about million to And loans about -- and we and in million the about is as then to That -- those we add fees just costs life defer have that origination over $X of direct

Brendan Nosal

Got it. Thank you

Operator

will with John Janney. next go Our Please from Rodis come question ahead.

John Rodis

Good morning guys.

Chuck Christmas

Good morning.

John Rodis

Actually moving curious my loans. get losses over just few and and you I portfolio and the on loan question all years? of But sort thoughts Chuck, the just stress answered was But obviously But a any lot and uncertainty parts cumulative asked on the next stuff. the on average fee of PPP guys when stuff. the

Chuck Christmas

formal and models loan a We year. No. That's pretty run set we that stress through we stressed -- XXXX, will actually CCAR vendor back we several we've of early our the a testing felt different portfolio hired went had that a Fed out the And environment to test in DFAST using -- you our if -- formal do had good. the for John.

back. The It come when didn't us surprise didn't surprise us. results they

the much Given loan that go cost use we without it hasn't through changed to we that's and process same current of makeup to proxy portfolio its if and of those a inputs, that will think We having kind in the its portfolio. redoing the you and apply that. sufficient our characteristics,

provision two; annualization case expense. beyond the an we base an Certainly see of we increase definitely three above think both and what portfolio the ongoing expect, the might first in scenarios the we well one And proxy a the expensed as see would in our again good of growth. of and obviously, characteristics the quarter. and And because similar during we you that's notwithstanding

unprecedented in time. We're

happen. to going of that. I hard to won't it the so going per a a this Hopefully out this it's repeat environment put is the there are depth of saying be relatively scenario to So to short-lived, comments, Bob's is of -- relatively what's be going

impact. spot I crisis to this going long think on to is how he's

and products to frankly and going quite bank again And great our we're it's but back a trying couple commercial different answer a in not commercial repeat borrowers to it question, to are the another time. have Quite credit happen that line quarters of best that some essential are larger performing very during myself this of And a they're borrowers now our goes our having impact of all two because way. they in. interestingly our of of right to list credits produce watch just of we because business are

day because reasons we all the go to we as could quantitative I makeup wanted didn't CECL can So the the numbers of all of it possibly our at we you with give numbers be portfolio. and as long one long. to And want throw day we up methodologies why this is and can logical loan given

likely and scenarios stressed are environment. that can individuals a suffer. it's see do dues going and There's increase We're and it's an and charge-offs. is guess of in going which degree we the But going but to Companies no matter. long, to to non-accrual day doubt around past not just sit all and some anybody's

be environment or too any future not This today on be April going impact to predict FASB is to unprecedented is too our other to. going was told understanding bank. it what the What going it was really going told We're unlike able have losses. bank tell was CECL of to what to any on XX us us to dynamic, just

John Rodis

No.

what to the forward. tell You're normal hard new right. It's is going

you So think without just confirm. said margin the I just Chuck, said guidance gears, that I you to specific -- switching want

sort second second to expected of year. down the then the said stable in quarter of You half in be the it you and

down And to to the I say then confirm are in the it right quarter think way roughly though quarter second was down So, about discount -- margin from first core you the accretion? is backing the of out in the just think. sort the X.XX% when

second that So, quarter? the down in level from

Chuck Christmas

Yes.

what That's would were March. early had happened a given quarter of cuts think expect relaying we X.XX% the X.XX% reduction around and comments that I core in that rate was the we the my -- fact that second yes, further you're exactly FOMC right. in

a So, get we'd quarter full of that.

a beginning that, different our prime-based March. loans loans floating into we hit rate having said lot the is which lots half of floors and our can of of at scenarios, go their Now, of again,

Fed the that basis points So, the loan by odd every points XXX not XXX some went by. -- down reduced and basis

just course, We so already of of parts. because all the then, markets But LIBOR see moving didn't that my And lots this are really want have out XX moving the of that give down specific I which comments basis would some expected with month, on that points. there again of there, solidification to I there. coming the XX-day LIBOR was parts guidance

second core the once changes out reduction I to program again of core loans. to any the quarter definitely on then year notwithstanding to major a But expect going of the would But margin our yes, that there's basis we a indices rest the the say of in be support would be compared in I our steady PPP for get relatively of our any first.

John Rodis

Okay. Makes sense.

and you be Thank safe. guys. Okay

Chuck Christmas

you. Thank

Operator

Our question with Please next comes KBW. ahead. from DelMonte Damon go

Damon DelMonte

Hey today? good it guys. going How morning is

Chuck Christmas

Hi Damon.

Damon DelMonte

for question quick So, Ray.

rate you saw was was much of quarter? what And line in attributable utilization? quarter utilization to line last this loan increased the that how quarter C&I, On growth to this

Chuck Christmas

half growth, the loans basically Yes, bit, it back for a on just math I half sale residential the loan sure side. growth make to mortgage little about held Damon, net of to other it loan Of up just was right. that that Chuck. we kind then commercial our of is this was got portfolio want

the We of credit. saw wasn't I some of we've but lines of of don't out a anything out end change commercial anything of -- March, lots increases the in the bank it mean of wasn't towards We're line ordinary. level I and balances ordinary. got

we day $XX $XX a So, million $X on average. on million million see line fluctuating our balances

end utilization wasn't first of typically be to that the in I it daily we basis. our ordinary an would XX%. And quarter, gradual while of we basis, continues increases the a say saw line to what the anything see And overall out some towards on around

that are the balances stress borrowing fact supported And I also by our line would just formulas.

so And borrow to the and credit they're come of borrowing in do lines more and to need so we're customers happy as long formula. our within than may off while so, their have

under borrow the can And a lines. the maximum certainly be they existing current that their on because have they amount may that seeing negative in any slowdown impact environment may business of

again not to there. on of But have in again, basis, spike utilization. but not parts any So, line seen lots major moving overall have an sorry say it we -- we

situation. course, certainly has Of PPP loan their flow cash funding $XXX in to million helped

Damon DelMonte

it. Got

just circle to kind on back the then PPP. of And Okay.

spread that have may said this, obviously, missed expenses that. the in Does loan? the over million life $XX is may -- with on million is of that You have have out all comment. a the said originated in may and I but in that associated $X fees, loan you or this I when missed come

Chuck Christmas

Yes, days of we five are supposed get the within with emphasis on funding. to supposed fee

Although what much basically applications our team borrowers and work we through give the last weeks -- to three done so were thought to to with over loans. they've I X,XXX in these over for credit got now us we the and we're funding putting

fundings morning to of this our million. I or think night up $XXX last as we're

we through have them. the borrowers to through there more more we're hopeful almost definitely there like other we're get would million we $XXX and money Not amount, think and to that assistance got I out refunds but it would wave certainly are largest the we initial like the customers that that put are we've program because or So, that that Congress into waiting.

our finding What on what we to we're the the into get we're Federal trying in the getting PPP program this finding as find liquidity program. everyone's out fees getting is figure finding -- trying we're And found to Reserve's -- that we now fly. --

it and anyone. not is all criticism a new at This one is trying everyone's a figure brand this So, to out of step time.

through process. And got so origination the we

fund borrowers Now, with we fees degree that we getting to and working on have type because the Treasury what the they what funded to them. approved. when banks that are that. they what provide reporting don't we're on have Because have we we've fees know asked asked don't of know for what definitely our the They origination actually know them for and they with based these

to a we that that the will them there's us mechanism initiate paying So, that reporting finding to now need we're provide then them fees.

that or with they're to them providing funding that I it on next on getting on that caught catch-up assumes those that there's So, five information within and would of some definitely said to we're so going all coming be we're within think that funds but pay that that. in. up Having week supposed day the days that

Bob Kaminski

our did Damon, just congratulations give you Mercantile is PPP our for at a something with through here continuing through able team to work and to this for that process every second Bob. wanted this you these that the had system said. in it. follow-up pause thank different to to and one by I applications the of We team's all to approved from Chuck and want strong they being make I on day work in bank entered processed hands regardless areas we've the all their with on deck, got of get the sure what people job, regular SBA. helping process into

And I and process to a them give of that that a through some as We're wanted very express But new as challenging I the really And tremendous smoothly. deserve the going the we that heard team smooth it. did to they seconds our couple heard I the this want for enough. feedback as have of where said, of say other gone they Chuck could process financial customers for it of at to to hadn't work some we work they making just for a reflect things we deck some all times to to include from the some thank all And is through were process. institutions of appreciation comments take just our in it on because that trying Mercantile the props everyone. clients that can't

Damon DelMonte

is important banking community to another why the system. are banks this our of as Well data Great. so to success point Okay.

your So congrats team. to

more one follow-up Just quick one more -- on quick question that.

$XX when majority fees do these we first second the have of like in in million we them hit about Chuck, the think model the of much So the quarter? kind here in quarter? in Or of coming

Chuck Christmas

be through we've -- -- again. question to we $XXX,XXX obviously Yes. been never I Damon going is, mean know this don't the expect that's

going pay utilities. rent after to borrowers our salary borrowings of and mortgage their majority soon the payments expect ask their payments for through forgiveness We to

end actually get if will. will milestone, May we happens, that to when when that So towards June, you would and would that they the expect that standpoint be into that of to

through third So It really and we will is will the quarter the the event. of be forgiveness, some we through borrowers expect that for forgiveness a rest road. the financing would lot off of definitely working will a tail some I X% later it our But down believe on year. that of ask and think that of like

ourselves and most majority to quarter expect doing analysis We opinion majority the but once a the they're of we and the at of think third is two are my look in months my that But forgiveness, little don't cash a to internal and ask in know. through fund going to the hard -- gotten that fourth for We quarter. going know flows, through okay how of they've to in it's rest just the react.

Damon DelMonte

it. Got

Okay. had. Thank that all you I and safe That's stay out there.

Chuck Christmas

you, Thank Damon.

Operator

question Nosal Our will [Operator come go next Brendan with Instructions] from Piper Sandler. Please ahead.

Brendan Nosal

Hey, guys.

are XX, follow-up impacted of lay it for kind Just you of chunk one concerned slide industries. commercial the pandemic which over this of these out a few seeing sectors the have as to balances. months? of kind decent loan the guys today? you these me. most of of next most the And plays Which On COVID out up And obviously, adds stress all total

Ray Reitsma

revenue. key say no effectively focused They're we're one would This that closed that completely theaters movie have is and area I are Ray. on.

reduced an and only cases be to in will area of complete that drive-thru others. So restaurants closure are And focus. some a

lodging hotels, impacted for the business move And leisure. significantly and So to travel that'll be around by inability and hotels are another.

three areas. say key I'd So three are those

Chuck Christmas

over financial clients said, some in about they many you made and very in are bank had Brendan risk though weather to part very of very our to though stress strong what we as crisis the that earlier right our partner than tested will we borrowers. borrowers solid we feel other ability into as this probably going processes, our so years could certainly Ray most look the we of commented are storm as now. points more dark I condition were That earlier, the with concentration And communities. said mitigation good businesses

think why and economy than in I the are the curve virus, balance also our strike more that. harming we're hard a working good people between we accomplish very exceedingly have to, flattening making but that's sure reducing to to state And the that not

at whole we're will because the this thing of the and consequences portfolio we all that risk So monitor and have the from some but the wanted to it's economic some an that the we this But are have to there probably out those biggest commercial a areas impact - immediate surprises act, things for are unintended so continue our portfolio. entire closures industries balancing longer standpoint, on we'll far. industry see some we some put but looking there the that goes are

Brendan Nosal

makes definitely helpful all Last one for and it's that Yeah, detail. sense me.

you would to – And inquiries payments inquiries early again the Is retail due? inquiries, Just as expect new looks timing end to then down. payment that April down? kind came why looking came the of that like around to just April? end March at of we that assistance increase of Is peaked due were what get when

Chuck Christmas

laid They want – some payments think are the off I is partially would income either as that are in way say, that the relief inquiries goes I case situation. keep or this way, longer you'll or have that to on go would were certainly answer of will I people – relief I challenged long program? the they Brendan customers I making options in my those the think laid and off the as lot what can. pay their answer to early on a in so they need payment think I more the And hey, at partaking start And opportunities. a

are the a depends of duration moving lot So, again, as said A upon crisis. we the of crisis depth this and lot the parts. of of there it

performance and we've challenged so more the longer it our clients goes But pleased the more will been the certainly certainly be partake these in And very with also relief of so far. programs. on they'll

Brendan Nosal

it. guys. Got Thanks All Stay Yeah. right. healthy.

Chuck Christmas

Thank you.

Operator

any conference like CEO to session. our I the closing over question-and-answer concludes for to back Bob Kaminski, turn would remarks. and President This

Bob Kaminski

interest thank participating This call. in We the our much you Grant. and you, families in you hope for all and the call your stay Thank and company concludes healthy safe. your Yeah. And very today.

Operator

has The Thank conference you presentation. now attending for concluded. today's

You disconnect. may now

Mercantile Bank (MBWM) 21 Apr 202020 Q1 Earnings call transcript