00:03 Good morning and welcome to the Mercantile Bank Corporation Fourth Quarter 2021 Earning Results Conference call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. 00:37 I would now like to turn the conference over to Kate Croft, Lambert Investor Relations. Please go ahead.

00:42 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 fourth quarter of 2021. 00:52 Joining me today are members of Mercantile's management team including Bob Kaminski, President and Chief Executive Officer; Chuck Christmas, Executive Vice President and Chief Financial Officer; and Ray Reitsma, Chief Operating Officer and President of the bank. 01:05 We will begin the call with management's prepared remarks and presentation to review the quarter's results, then open the call up for questions. Before turning the call over to management, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenues, earnings and capital structure as well as statements on the plans and objectives of the company's business. 01:28 The company's actual results could differ materially from any forward-looking statements made today due to the 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 fourth quarter 2021 press release and presentation deck issued by Mercantile today, you can access it at the company's website www.mercbank.com. 01:54 At this time, I would like to turn the call over to Mercantile's President and Chief Executive Officer, Bob Kaminski.

01:59 Thank you, Kate. Good morning, everyone and thank you all for joining our call today. Our company's strong fourth quarter rounded out, it was an excellent year highlighted by steady operating performance, continued organic loan growth and very sound asset quality metrics. 02:17 Our results in 2021 were based on the solid foundation that we have built and driven by our relentless focus on serving our clients and communities at the highest level. We accomplished this by adding value as a trusted advisor to our customers. 02:33 The Mercantile team is devoted to delivering exceptional service to our customers, building new relationships, and deepening the penetration of our markets. Our fourth quarter and full year 2021 performance reflects the continued success of that approach. 02:48 We earned fourth quarter net income of $12.3 million, or $0.74 per share, for the full year 2021 net income totaled $59 million, a 33.7% increase over 2020, earnings per share were $3.69 an increase of more than 36.2% from the prior year. 03:12 Excluding the year-end initial funding and formation of The Mercantile Bank Foundation, as a new vehicle for charitable giving and community investments, EPS would have grown to $0.94 per share in the fourth quarter and $3.89 for the full year 2021. 03:31 We also announced today the declaration of a cash dividend of $0.31 per share for the first quarter of 2022. Chuck will provide you detailed comments on our full year 2021 and the fourth quarter performance including more color on revenue, expenses, and capital position. 03:50 We believe a key differentiator for Mercantile is our level of sustained organic loan growth. Total loans of $3.45 billion are up 8% year-over-year as we continue to build out our new and existing markets by adding talented in market lenders to…

07:58 Thanks, Bob. Today -- my comments will center around three topics in evidence in the 2021 year end results. Strong core commercial loan growth, strategic growth and sustainable non-interest income, and stability and operational efficiency. 08:15 First, core commercial loan growth. For the fourth quarter, we are reporting core commercial loan growth of $184 million representing a 27% annualized growth rate. Full year core commercial loan growth is $482 million representing an increase of 20%. This growth has been possible due to the efforts of our commercial team and the focus on relationship building and the business community bank value proposition. 08:43 The pandemic and the PPP program gave us an opportunity to prove in action what we have marketed in concept, namely that Mercantile has the capability and technology to serve them along with timely local decision making and exceptional service. We paused our stock (ph) repurchase program in recognition of the fact that this strong level of growth requires robust capital support. Our backlog remains consistent with prior periods as we funded this impressive level of core growth. 09:15 Secondly, strategic growth and sustainable non-interest income. During 2021, we reported non-interest income of $55.2 million, net of gain on a branch sale compared to $45.2 million last year, an increase of 22% and $10 million. How do we make the case that this is sustainable performance, swap income accounted for $6 million of the growth and the swap program allows us to meet customer demand for fixed rates without taking on the balance sheet risk of a conventional fixed rate, which is very important to margin sustainability in the present environment. 09:54 Our term debt funding has been nearly 50% fixed over a long period of time and we do not expect the mix to change meaningfully.…

12:17 Thanks, Ray. As noted on slide 25, this morning, we announced net income of $11.6 million or $0.74 per diluted share for the fourth quarter of 2021 compared to $14.1 million, or $0.87 per diluted share for the respective prior year period. Net income for the full year 2021 totaled $59 million or $3.69 per diluted share compared to $44.1 million or $2.71 per diluted share for 2020. 12:53 Costs related to the initial funding and formation of The Mercantile Bank Foundation decreased net income during the fourth quarter of 2021 and full year 2021 by approximately $3.2 million, or $0.20 per diluted share. Excluding these costs, diluted earnings per share increased $0.07, or 8%, for the fourth quarter of 2021 and $1.18 for over 43% for the full year 2021 compared to the respective 2020 periods. 13:26 Turning to side 26, interest income on loans during the three and 12 months, 2021 period declined from the respective prior year periods, as lower PPP loan fee accretion and a lower interest rate environment offset growth in core commercial loans and residential mortgage loans. 13:45 Interest income on securities in the fourth quarter of 2021 was 44% higher compared to the same period 2020, in large part reflecting growth in the securities portfolio over the past 12 months to meet internal policy guidelines and deploy a portion of the excess liquid funds position. 14:04 Securities interest income in the full year 2021 increased about 7% from 2020, if accelerated discount accretion on called U.S. Government agency bonds in 2020, is excluded. In total interest income for the most recent quarter decreased $0.6 million from the fourth quarter of 2020 and was down $4.8 million for the full year 2021 as compared to the full year 2020. 14:34 Interest expense declined…

26:00 Thank you, Chuck. That concludes management's presentation. We'll now turn the call to questions and answers.

26:10 We will now begin the question-and-answer session. Our first question will come from Brendan Nosal of Piper Sandler. Please go ahead.

26:44 Hey. Good morning, guys. How are you?

26:45 Good morning, Brendan. Good, and you?

26:47 Good. Thanks. Maybe just to start off here on the expense side of things. I think, Chuck, kind of given the -- the quarterly guide you provided that kind of implies roughly $106 million of full year cost at the midpoint of that range which I think will be pretty much flat with the core expense level, you guys put up in 2021. So just given, I guess one, inflationary environment and two, what sounds like a pretty good revenue opportunity environment for you folks, how do you guys’ kind of keep a lid on costs in 2022 and hold it flat there?

27:22 Yeah. A couple of things going on, and I think you're rate pressed on a little bit with our operating efficiency and our ability to continue to grow the company without a growing -- corresponding growth in our operating environment, part of that is, we have excess capacity that we're utilizing. And I think it's also a very important point and Ray, also brought this up as we have always stayed very current on technology. So, while we definitely increase our technology spend every year. There is nothing outsized year-over-year in doing that approach, so pleased about that. I think another part of that is, we are expecting a reduction in mortgage banking. And with that will come a reduction in associated commission expense.

28:10 All right. That's helpful commentary. And then one more for me, just turning to loan growth. I mean typically I think of Mercantile has had upper-single digit grower on average. But obviously, this is a much different environment you're clearly seeing better opportunities as shown by 20%, core loan growth this year. So, just help us size up, how you think about the potential for loan growth in 2022?

28:38 Yeah. This is Ray. I mean the potential is, is pretty robust as our backlogs had not fallen off appreciably as we funded all this growth. You always have to think about the caveat of asset sales and business sales by our customers which can offset their growth, but we are well positioned to continue to grow into the future and have a number of relationships that are moving from prospect status to customer status. Our customers are continuing to do well in their business and I also think that the inflationary environment will lead to our customers carrying higher levels of receivables and inventory, which will lead to higher funding needs from the bank. So, I think all those factors together make us fairly bullish on the gross level. And then net level depends a lot on which businesses sell or reduce loan balances from some of those non-controllable factors that we face every day of the year.

29:53 I think Brendan, what reflects is the success of the relationship building that we've continue to do. Even during the pandemic, when there was a lot of distraction with focus being shifted to round one and round two of PPP and helping customers navigate through some of their challenges, but our team continue to prospect. There are a list of businesses and they wanted to bring on board Mercantile in some cases, we've talked about previously, we're able to help those prospects with their PPP loans and build further goodwill. And so, what you're seeing now with the pipelines, as Ray, said continuing to be replenished is just the effect of that, we've added some new lending talents to our team that is opening some new doors for us in terms of other opportunities in the community that, that we hadn't had previous exposure with. So, all that together really makes us feel very confident about the ability to continue robust loan growth in 2022.

30:59 All right. Great. Thank you for taking the questions.

31:02 Thanks, Brendan.

31:06 Our question comes from Damon DelMonte of KBW. Please go ahead.

31:13 Hey. Good morning, guys. Hope everybody is doing well today.

31:15 Doing well, Damon. Thank you.

31:17 Great. So, first question on, just to kind of close the loop on the loan growth outlook. Are you confident that you can keep a double digit pace? I know this year is 20% ex-PPP and Ray, as you said it's very robust outlook, but are you thinking like something in the -- like the 10% to 12% range? Or do you think, you could repeat something like you saw here this past year?

31:43 Hey, Damon. This is Chuck. I'll take a swing at it, as I didn't get a chance on the last one, but -- yeah. I think from a budget standpoint, we're in the pretty high-single digits. I think as Ray mentioned, the one wildcard is always out there is pay-offs for those that we encourage as part of our loan portfolio administration or as we definitely see from time-to-time the selling of the business, selling of the underlying collateral. That stuff, that's one that's always difficult to predict. Basically, it's impossible to predict with any degree of accuracy. The pipeline remains very strong and certainly indicative of ongoing growth, but we also want to be at least from a budgetary standpoint, do want to take into account the unknown, but expected pay offs.

32:32 Got it. Okay. That's helpful. Thanks.

32:36 Part of the part of the situation with the type of lending that we do that timing is everything and while relationships maybe loyal to the bank in terms of the funding of those opportunities may vary from quarter-to-quarter. You have a bunching of some funding's and some other quarters that there is a lag. So, I think overall, we feel really good about the ability to do those high-single digits in the way of growth as Chuck, just suggested, but we've seen from quarter-to-quarter there can be some choppiness, but in the end, over the long haul, I think the sustained growth is what we'll continue to demonstrate.

33:13 Yeah. I appreciate the color. And then, with regards to like kind of the core margin, Chuck, could you help kind of walk us through that, like, I know you mean for the dollar amount, I think and the PPP impact, but could you just go back through like the PPP impact on the margin, as well as the drag from the excess liquidity?

33:33 Yeah. I think, from a margin that’s -- it’s a loaded question you got there, and obviously a lot of different tentacles to it. We give the information about the PPP, we got $1 million remaining less than that. I expect the vast majority of the remaining PPP funds either to be paid off or the fee income to be fully accretive by the end of this quarter. So, we'll get $1 million out of that mostly in the first quarter. So that will be, I hope to this quarter this first quarter here. Excess liquidity, it's all about how fast we can utilize that excess liquidity, there is definitely we expect some deposit movements within there, we're definitely led in our wholesale funds run off, although that's a measured approach gradual throughout the year, so that will take some time. 34:26 We just talked about loan growth, certainly, we would love to use all of our excess liquidity for loan growth and we do think there'll be solid loan growth, but hard to tell exactly from that. So, I guess everybody can put their pencils to decrease what they want to say how far down our excess liquidity go by the end of the year. We think a majority of it will be gone by the end of the year, but it will be gradual given our matted approach to wholesale funding and our ongoing loan growth throughout the year. Obviously, it looks like the Federal Reserve is going to start raising short-term interest rates. We're definitely an asset sensitive bank if nothing else and our $900 million in asset, but that will, that would of course the expectation was that would reprice as they change the rate on that if there was a change to the federal…

40:00 Got it. Okay. Those -- good color there. Thank you. And then I guess just lastly and quickly on the non-interest income. You've obviously made some investments in mortgage banking, you've talked about the kind of the focus on the purchase market versus the refi, and you've added teams and locations and whatnot. But are you expecting a material pullback from this year's result? Can you kind of give a little perspective on what you think you guys could do in 2022?

40:36 Sure, Damon. From a volume standpoint, just from a production, we’re budgeting about a 25% decline that's all made up of refinance. We actually expect -- we expect refinance be down more than 25%, but we expect our purchases to be up to mitigate that to some degree, but overall, it's 25% reduction in volume. We're also projecting and we have been seeing some reduction in the gain rate which is just a function of the market. So, there'll be a little bit of a headwind associated with that one. Certainly, we will continue to endeavor to try to sell as much of our product as we can. Historically and even currently, we basically sell fixed and keep floating. I'm sure you've seen that our on-balance sheet balances have been going up in residential mortgage loans and that is something that we're taking a pretty strong look at right now. Do we want to start selling, floating rate mortgages? That's a question that we have that we're asking ourselves. A vast majority of the floating rates are sellable into the secondary market. It's just been our approach to keep those on the balance sheet. But that's just part of our ongoing analysis of our balance sheet and the composition that we want it to be as well as our goals in regards to mortgage income.

41:56 Got it. Okay. That's all I had for now. Thank you very much.

42:01 Thanks, Damon

42:02 Welcome

42:03 And our next question will come from Daniel Tamayo of Raymond James. Please go ahead.

42:16 Good morning, guys.

42:18 Good morning, Daniel.

42:21 Maybe just to touch on the swap fees, again, I know you talked about it earlier in the prepared comments, but what -- in case I missed it. What are your expectations going forward? I know the number was a bit lower, obviously in the fourth quarter. But given, if we do end up in a rising rate environment which seems likely where do you see that kind of run rate for swap fees going forward? Thanks.

42:50 Yeah, Dan. This is Chuck. Another difficult one to answer, but I think one of the things that we do want to highlight is that 2021 this year very strong, income on swaps for us and basically, we introduced that just a little over a year ago. I think from a core standpoint, we feel really good about the fact that this is going to be an ongoing product for us. We're certainly going to want to push the product, and those customers that want longer term fixed rate financing and the lenders are doing a really good job of expressing that desire out on their calls in their calling efforts. So, kind of regard, I mean, certainly when rates change there'll be some impact on swap activity, but we do expect that this to be a core part of our offering on the commercial side. 43:44 One of the things that benefited us in 2021 is that some of the loans that we put into the swap program were refinances of existing fixed-rate loans and virtually all of our fixed rate loans have prepayment fees on them. And in those cases, and this is especially true in the third quarter, we did a handful of loans that went into the swap program that had prepayment fees and basically the customer can go ahead and pay those fees in cash which is how typically collects under prepayment fee. What we've allowed them to roll that prepayment fee into the swap rate basically embed that fee into the rates that we're doing on the swap. And in the vast majority of cases, they've elected to do the latter. 44:27 So what that does is, it gives us -- we're going to collect a fee, one way or the other, it's just a matter that we recorded an interest income on loans, if they pay us in cash or as they get reported as a swap fee if they embedded into the swaps. So, one way or the other net fee is going to show up. We're talking about swap fees. We budget a little bit for the embedding of prepayment fees into our budget, but not to the degree that we saw last year. So, I think if you kind of extrapolate that third quarter on a little bit for my comments, I think that will give you what we think will be a pretty good run rate for this product as we move forward.

45:09 Okay. Great. Thank you. And then finally just on credit quality, reserves continue to come down. You've talked about the COVID environmental factor. How much of that is, I think you talked about it, but if you could just kind of remind me how much of the COVID environmental factor is remaining and maybe what kind of impact that may have on where reserves land as we -- as you get through kind of the end of our get back to normal phase here?

45:44 Yeah. Sure. So, we introduced the COVID back in 2000 (ph), I think all banks did in varying ways that they did it within their models. And we just simply added is another environmental factor. It's included in our incurred model and it's also included in our CECL model exactly the same way. So, the impact is the same, like all banks because of the really strong asset quality since the great recession a significant portion of reserve balances are supported by environmental and that's just because of the base loss rates are relatively low given the low level of charge-offs over the last decade or so. 46:24 So, and you saw it in our fourth quarter, even our second quarter is when we do -- when we do change in environmental, it does have a relatively large impact on our reserve build. The COVID itself, it's a little over $6 million is the current impact to our reserve. We had never, we have -- since we introduced that we have not changed that rating, if you will, it's at its highest range. So, there is the ability and probably likelihood knock on wood, that we're able to start reducing that. I don't think it will be an all or nothing. 47:01 I think over time, we'll probably start like we did the economic conditions in 2021, my expectation is that we would start reducing that COVID number as we move forward on a quarter-by-quarter basis and slowly and hopefully moving that obviously we all want that environmental factor to go away. But I think it will be a gradual approach and not a -- not an overnight or one quarter approach.

47:30 Thank you. That's all I got.

47:34 Thanks, Dan.

47:36 This concludes our question-and-answer session. I would like to turn the conference back over to Bob Kaminski for any closing remarks.

47:46 Thank you very much for your interest in our company. We hope you and your families continue to stay healthy and safe. We look forward to speaking with you again in April, at the end of the first quarter. This call is adjourned. Thank you.

48:00 The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.