Good morning, and welcome to the Mercantile Bank Corporation First Quarter 2023 earnings results conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there'll be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I'd like to turn the conference to Zach MuKewa, Lambert Investor Relations. Please go ahead.
Good morning, everyone, thank you for joining Mercantile Bank Corporation's conference call and webcast to discuss the company's financial results for the first quarter. 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, Ray Reitsma, Chief Operating Officer and President of the bank. We'll begin the call with management's prepared remarks and presentation to review the quarter's results, open the call to 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 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 factors described in the company's letter, Securities and Exchange Commission's 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 first quarter 2023 press release and presentation deck issued by Mercantile today, you can access it at the company's website at www.mercbank.com. At this time, I'd like to turn the call over to Mercantile's President and Chief Executive Officer, Bob Kaminski.
Thank you, Zach, and thanks to all of you for joining us on the conference call today. Mercantile released its March 31st financial results this morning, which reported a strong quarter and a great start to 2023. Importantly, this information demonstrates continued strength and stability of Mercantile Bank Corporation and its subsidiary, Mercantile Bank. As we have witnessed during the latter part of the first quarter, events have happened in our industry that have caused concerns about the health of the banking system in this country. Today, we will share with you our quarterly results and other detailed information that illustrates the solid foundation on which Mercantile is based and the continuation of the strong fundamentals that have been a consistent trait of Mercantile, irrespective of the economic environment and other external factors.
During the call this morning, we will provide you with details on our deposit base from the first quarter, which will illustrate the attractive diversification of our funding base. We will discuss our strong capital levels, solid liquidity, loan portfolio composition and stratification and asset quality, as well as efficient overhead management. Ray and Chuck will have complete details on these items in their comments. For the first quarter, Mercantile posted earnings of $1.31 per share on revenues of $55.3 million, compared to $0.73 per share on revenues of $40.2 million for the same period in 2022. This morning, we also announced a cash dividend of $0.33 per share payable on June 14, 2023, the same dividend that was paid during the first quarter.
Our team has been able to adeptly manage net interest margin. As a result of the composition of our asset base, net interest income continued to show nice growth compared to the respective prior year period. Deposit costs continued to perform favorably compared to expectations. While those costs have risen during the first three months of 2023, the pace of the increase has been slower than has been anticipated. This has continued to benefit net interest margin, allowing Mercantile to maintain this profitability measurement at a higher level than we would consider normalized. Overhead expenses remain well managed. Net loan growth was lighter than expectations during the first quarter as the timing of some advances was pushed back due to normal closing scheduling situations.
Some borrowers are also taking additional time before embarking on projects to reassess and ensure that the economics are still appropriate given the levels of inflation and higher borrowing costs. Loan pipelines remain at solid levels, however, and many credits whose funding has been pushed back will fund early in the second quarter. Asset quality continues to be extremely strong, however, with normal levels of past dues and non-performing loans, and only $661,000 in other real estate, with the vast majority being a former bank branch. The Mercantile commercial loan portfolio remains extremely well balanced between C&I and commercial real estate, with the CRE comprised of very risk appropriate segmentations among the various real estate types, including low levels of exposure in the retail and office types.
Our lending teams remain heavily engaged with our clients, which is the hallmark of a relationship-based community banking approach. On an overall basis, our clients continue to manage through macro and industry specific challenges that emerge and remain confident in their business's ability to perform successfully in the near term and the long term. Ray will have more color on the loan portfolio shortly. The Michigan economy continues to perform in steady fashion, with overall unemployment remaining unchanged as of February 28th at 4.3% compared to year-end 2022. Non-farm employment is up 2.1% at February 28th from the prior 12-month period, including manufacturing jobs up 2.6%, trade, transportation, and utilities up 0.8%, education and health services up 2.5%, and leisure and hospitality up 5.3%.
The Mercantile team of bankers continues to represent our company as a dependable and trusted partner for our clients and communities. The successes that we enjoy would not be possible without the incredible work and dedication of our team members. Time and time again, despite the challenges that emerge, Mercantile has stepped up to provide financial advice, guidance, and solutions to clients and potential clients. Relationship banking manifests itself in many different forms to different constituents. Our business partners know that the relationship with Mercantile is based upon our culture of excellence. Those foundational principles allow customers to rely upon us regardless of the economic conditions and other external forces that will affect them in our communities. It is relationships that are established on trust and develop with years of experience that provide the basis for successful performance by our company, which benefits all of our stakeholders.
Those are my prepared comments. Ray will now take the microphone next, followed by Chuck.
Thanks, Bob. My comments will center upon the dynamics in our commercial loan, mortgage loan, and deposit portfolios, as well as the components of non-interest income. Core commercial loan growth was relatively flat for the quarter as we posted growth of $8 million. This modest level of growth was impacted by $41 million in paydowns from excess cash flow or cash reserves and $19 million from asset sales. Our commercial backlog has grown sequentially over the last four year-ends to an all-time high at December 31, 2022, and as of March 31, 2023, the backlog remains at similar levels to that reported at year-end.
The pipeline for commercial construction commitments that we expect to fund over the next 12 to 18 months totals $285 million compared to $197 million last quarter, reflecting the Bank's support of the need for light industrial and multifamily projects in the markets we serve. The portfolio has been well-positioned for the rising rate environment, as 64% of the portfolio is comprised of floating-rate loans compared to 50% one year ago, accomplished largely through our swap program. Asset quality remains strong, with nominal levels of past due loans and non-performing loans to total loans of 20 basis points, unchanged from the prior quarter. While we are proud of our strong asset quality metrics, we remain vigilant in our underwriting standards and monitoring efforts to identify any sign of deterioration in our loan portfolio.
Our lenders are the first line of defense to recognize areas of emerging risk. Our risk rating model is robust, with an emphasis on current borrower cash flow in our rating model, providing sensitivity to any challenges emerging within a borrower's finances. All that said, our customers continue to report strong results to date and have not begun to experience the impacts of a potential recessionary environment. We continue to monitor concentration limits within our non-owner-occupied commercial real estate loan portfolio, including office buildings, which presently comprise 6% of total loans, multifamily at 6% of total loans, and retail at 4% of total loans. The mortgage business continues to be impacted by the raising rate environment, seasonality, and a lack of available housing inventory in the markets we serve.
Higher rates have led to more demand for ARMs, and the lack of inventory has led to more construction activity. We hold each of these types of loans on our balance sheet, and as a result, residential mortgages have increased 52% over the prior year. Compared to a gain on sales event and immediate recognition of revenue, a portfolio loan takes about 24 months to generate an equal amount of income. We continue to pursue share in the purchase market, with originations in the first quarter decreasing 44% compared to the first quarter last year due to the increase in rates since that time. Availability under residential construction loans is $58 million this quarter compared to $72 million last quarter. Refinance activity is 23% of last year's comparable quarter.
Non-interest income for the first quarter is down 25% compared to the respective year-ago quarter. The primary contributor to the overall reduction was the previously described decrease in mortgage banking income of 63%, along with a 31% decrease in service charges on accounts which resulted from higher earnings credit rates and a 23% decrease in swap income. In sum, decline in these categories more than offset increases in credit and debit card income of 9.5% and in payroll services income of 17%. During the quarter, deposits decreased by $115 million or 3%. This decrease was in evidence primarily in non-interest-bearing accounts. An analysis of accounts which displayed a material balance decrease revealed that the vast majority were attributable to normal business activity.
The remainder, consisting of eight relationships totaling $26 million, or less than 1% of total deposits was attributable to customers who reacted to the headlines surrounding the banking industry and moved deposits to another bank or a non-bank investment. We have developed a number of strategic initiatives around deposit opportunities that exist within portions of our customer base and the markets that we serve. That concludes my comments. I will now turn the call over to Chuck.
Thanks, Ray, and good morning to everybody. As noted on slide 10, this morning we announced net income of $21 million or $1.31 per diluted share for the first quarter of 2023, compared with net income of $11.5 million or $0.73 per diluted share for the respective prior year period. The improved operating results were in large part driven by higher net interest income stemming from an improving net interest margin and ongoing robust loan growth and continued strength in asset quality metrics providing for limited provision expense. Turning to slide 11, interest income on loans increased significantly during the first quarter of 2023 compared to the prior year period, reflecting the increase in interest rate environment and strong growth in core commercial and residential mortgage loans.
Our first quarter 2023 loan yield was 203 basis points higher than the first quarter of 2022, reflecting the combined impact of an aggregate 475 basis point increase in the federal funds rate since March of 2022 and approximately two-thirds of our commercial loans having a floating rate. Interest income on securities also increased during the first quarter of 2023 compared to the prior year period, primarily reflecting growth in the investment portfolio and the higher interest rate environment. Interest income on interest earning assets, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, was relatively unchanged during the first quarter of 2023 compared to the prior year period.
While the rate paid by the FRB of Chicago has increased substantially, our average balance was considerably lower. In total, interest income was $24.6 million higher during the first quarter of 2023 when compared to the prior year period. We recorded increased interest expense on deposits in our sweep accounts during the first quarter of 2023 compared to the prior year period, reflecting the increase in interest rate environment and enhanced competition for deposits. Interest expense on other borrowed money increased during the first quarter of 2023 compared to the prior year period, reflecting the higher cost of our trust-preferred securities. Interest expense on FHLB advances declined slightly, reflecting the net impact of a lower average balance outstanding but higher average rate.
In total, interest expense was $7.1 million higher than the first quarter of 2023 when compared to the prior year period. Net interest income increased $17.5 million during the first quarter of 2023 compared to the prior year period. We recorded a credit loss provision expense of $0.6 million during the first quarter of 2023 compared to $0.1 million in the prior year period. Provision expense in both periods mainly reflected reserve allocations necessitated by loan growth, with the recording of net loan recoveries and ongoing strong loan quality metrics in large part mitigating additional reserves associated with the loan growth.
We did not adjust any qualitative reserve factors during the first quarter of 2023, and the impact of the updated economic forecast was less than $0.1 million. Continuing on slide 13, overhead costs increased $2.9 million during the first quarter of 2023 compared to the prior year period. Salary and benefit expenses were $1.2 million higher during the first quarter of 2023 compared to the prior year period. Bonus accruals totaled $1.4 million during the first quarter of 2023. No bonus accruals were recorded during the first quarter of 2022. Lower mortgage lender commissions mitigated the impact of annual merit increases.
Other overhead costs increased $1.4 million during the first quarter of 2023 compared to the prior year period. Included in this dollar amount is a $0.4 million write-down on a former branch facility that is under agreement to be sold. FDIC insurance expense increased $0.3 million due to the industry-wide assessment increase that became effective at the beginning of 2023, while the interest cost of swap cash collateral and the credit reserve on swaps increased in aggregate $0.5 million. Continuing on slide 14, our net interest margin was 4.28% during the first quarter of 2023, up 171 basis points compared to the prior year period.
The improved net interest margin is primarily a reflection of increased yield on earning assets, in large part reflecting the increase in interest rate environment over the past 12 months. Our yield on loans has increased 203 basis points since the first quarter of 2022, reflecting the combination of the increase in interest rate environment and approximately 2/3 of our commercial loans having floating rates. Our average commercial loan rate has increased 284 basis points over the past 12 months, a significant increase on a portfolio that averaged $3.1 billion during that time period.
After increasing only about 3 basis points per quarter over the first three quarters of 2022, our cost of funds has increased 17 basis points during the fourth quarter of 2022, and another 42 basis points during the first quarter of 2023. Despite the increase in interest rate environment, our deposit rates and those of our competitors were not meaningfully raised during the first 9 months of 2022, which we believe reflected a relatively low level of competition for deposits given the excess liquidity positions of most financial institutions during that time. As interest rates continue to rise and excess liquidity positions decline, deposit rates are now increasing, and we believe deposit rate betas will ultimately return to historical levels.
We added a couple of slides to our presentation depicting information on our investment portfolio, which are slides numbers 20 and 21. All of our investments are categorized as available for sale. As of March 31, 2023, about 64% of our investment portfolio was comprised of US government agency bonds with approximately 31% comprised of municipal bonds, all of which were issued by municipal entities within the state of Michigan and a high percentage within our market areas. Mortgage-backed securities, all of which are guaranteed by a US government agency, comprise only 5% of the investment portfolio. The maturities of the US government agency and municipal bond segments are generally structured on a laddered basis. A significant majority of the US government agency bonds mature within the next seven years, with over three-fourths of the municipal bonds maturing over the next 10 years.
On slide 18, we depict the unrealized gain and loss of the investment portfolio from the 1st quarter of 2021 to the 1st quarter of 2023. The net unrealized loss started to increase meaningfully during the 1st quarter of 2022. To date, the net unrealized loss peaked at $92 million at September 30, 2022, and has since declined to $71 million as of March 31, 2023. The significant increase in the net unrealized loss reflects the increase in interest rate environment. It is important to note that the same increase in interest rate environment has had a substantial impact on our net interest margin, leading to significant growth in net interest income and net income. Turning to slide 19, we have provided repricing data on our loan portfolio.
Nearly two-thirds of our commercial loans have a floating rate, while about 87% of our fixed rate commercial loans mature within 5 years. Our retail loans are largely comprised of 7/1 and 10/1 adjustable-rate mortgage loans, with most subject to adjustment within the next seven years. In aggregate, approximately 83% of our total loans are subject to repricing within the next five years. On slides 23, 24, and 25, we provide data on our deposit base. You will note that we include sweep accounts in our deposit tables and calculations as those accounts reflect monies from entities, primarily municipalities, that elect to place their funds in a sweep account product that is fully secured by US government agency bonds.
Even with the seasonal decline we experience during the first quarter of each year, non-interest bearing checking accounts comprise a significant 36% of total deposits and sweep accounts. A large portion of these funds are associated with commercial lending relationships, especially commercial and industrial companies. The level of uninsured deposits, which totals 48% as of March 31, 2023, has remained relatively stable over many years. On slide 24, excuse me, we provide information on depositors with balances of $5 million or more. As of March 31, 2023, we had 69 relationships which aggregated $1.1 billion. Almost 80% of the relationships and approximately 85% of the deposits were with businesses and/or individuals, with the remaining comprised of municipal entities. Of those 69 relationships, 30 of them have had balances exceeding $5 million for at least 5 years.
As a commercial bank, a majority of our deposits are comprised of commercial accounts. On slide number 25, we depict our deposit balances as of March 31, 2023, and year-end 2022. Business deposits were down $124 million during the first quarter, primarily reflecting business customer seasonal payments of taxes and bonuses and partnership disbursements. Aggregate personal deposit totals increased slightly during the first quarter. On slide number 26, we depict our primary sources of liquidity as of March 31, 2023. We do periodically use our unsecured federal funds line of credit with a major correspondent bank, as we did on March 31, 2023 at $17 million. The FHLB of Indianapolis has been our only source of wholesale funds since June of 2022, when our last remaining broker deposit matured.
We obtained advances from the Federal Home Loan Bank of Indianapolis as needed to manage loan and deposit flows. It is also our primary vehicle to manage interest rate risks associated with fixed rate commercial loans and the residential mortgage portfolio, as we generally obtain fixed rate bullet advances with tenures of four to seven years. We remain in a strong and well-capitalized regulatory capital position. As of March 31, 2023, our bank's total risk-based capital ratio was 13.8% and was $175 million above the regulatory minimum threshold to be categorized as well-capitalized. We did not repurchase shares during the first quarter of 2023. We have $6.8 million available in our current repurchase plan.
While net unrealized gains and losses in our investment portfolio are excluded from regulatory capital calculations, on slide number 22, we depict our Tier 1 leverage and total risk-based capital ratios assuming the calculations did include that adjustment. While our regulatory capital ratios were negatively impacted by the pro forma calculations, our capital position remains strong. As of March 31, 2023, our Tier 1 leverage capital ratio declines from 12.2% down to 11.1%, and our total risk-based capital ratio declines from 13.8% down to 12.7%. Our excess capital, as measured by the total risk-based capital ratio, is also negatively impacted. However, it totals a strong $125 million over the minimum regulatory to be categorized as well-capitalized.
On slide 27, we share our latest assumptions on the interest rate environment and key performance metrics for the remainder of 2023, with the caveat that market conditions remain volatile, making forecasting difficult. The forecast is predicated on no changes to the federal funds rate during the remainder of 2023 and no significant recessionary pressures on asset quality and provision expense. We are projecting total loan growth in the range of 6%-8%, with commercial loan growth of around 5%. While our commercial loan pipeline remains strong, we experienced a high level of payoffs and paydowns in 2022, especially in the latter part of the year, which continued into the first quarter of this year.
We are forecasting our net interest margin to decline as 2023 progresses as we experience increases in our cost of funds from competitive pressures and growth in interest-bearing liabilities to fund loan growth while our earning asset yield remains relatively stable. In closing, we are very pleased with our first quarter 2023 operating results and believe we remain well positioned to continue to successfully navigate through the myriad of challenges faced by all of us. Those are my prepared remarks. I'll now turn the call back over to Bob.
Thank you, Chuck. That concludes management's prepared comments, and we'll now open the call to the Q&A session.
We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Brendan Nosal with Piper Sandler. You may now go ahead.
Hey, good morning, guys. Congrats on the nice quarter.
All right, thank you.
Just to start off here on the margin. I mean, I think the NIM held in a lot better this quarter than I would have thought. But it looks like you kind of tempered the outlook by about 15 basis points over the next couple of quarters despite the higher starting point. If you just kind of walk us through the major moving pieces and the new guidance as you see it, and how you ended up at a lower go-forward level despite the strong first quarter results.
Yeah. Thanks, Brendan. This is Chuck. Yeah, the margin ended up being better than the guidance that I had provided in January. A lot of that was just more timing is the deposit price rate increases that I was projecting for the first quarter really didn't come into play until during the back half. If you were to look at us on a monthly basis, our margin for the back half of the quarter, especially March, would have been much closer to what we had budgeted for the entire quarter. I think as far as, you know, some additional degradation in our margin for the guidance I'm giving today versus what we did in January, is a reflection primarily of the deposit, you know, rate pressures that we're seeing out there.
That's especially true on CD products as well as our money market accounts. I think, you know, one of the things that the banking industry is facing with this deposit pricing is the short-term rates that are very, very high, relative to, you know, certainly medium and longer term trends when it comes to just basic Treasury products. It's a lot more than just other banks that we're having to face competitive pressures. It's also non-bank products that are also out there, especially on a short-term basis, given the inverted yield curve, that are placing pressure on deposit rates as well.
Got it. Thanks for the color, Chuck.
You're welcome.
Maybe moving on to deposits itself. You know, some pressure on the overall balance over the past couple of quarters, but clearly still well above pre-COVID levels. I know that it's tough to pinpoint, but do you have any sense of how much more overall runoff you're expecting over the balance of the year? Then kind of the remixing as well out of non-interest-bearing, and then just how that plays into the overall equation of funding versus loan growth.
No, great question. A lot of points there. I think our expectation is that deposits in general remain relatively stable for the remainder of this year. We do expect some increases. You know, we get that seasonality in January of every year. We saw that money leave, but obviously those funds have to be built up throughout the year as, you know, those same customers and depositors expect to make similar withdrawals in January of next year. I think on an overall basis, we would expect our core deposits, especially in the non-interest-bearing area, to increase not gradually, but steadily over time. I think, you know, it's very difficult to try to figure out what's going on with core deposits other than that.
As I mentioned in my comments, our personal deposits were unchanged. Where we saw the withdrawals, as Ray touched on more specifically in his comments, were on the business side. You know, we are definitely seeing some deposits go back into, you know, higher yielding money market accounts as well as time deposits. I think that that's just kind of a reverse of what we saw in 2020 and 2021 when rates got so low. I think those monies were originally in CD products. They just went into savings or another deposit product and got parked there. Now with CD rates increasing as they have, we're starting to see those funds migrate back to the time deposit product, which of course is, you know, is going to cost us more money.
That's what's factored into that margin calculation, is the fact that, you know, we expect continued migration, from lower yielding non-maturing deposits into the higher yielding CDs. Of course, we have existing CDs, you know, that have been open over the last couple of years are maturing into the higher rate environment as well. That's really the big driver, of the cost of funds going forward.
Got it. Thanks for taking the questions.
You're welcome.
Thank you.
Our next question will come from Daniel Tamayo with Raymond James. You may now go ahead.
Hey, good morning, everybody. First of all, thank you for all the disclosures. I know that was sure a ton of work to put together, but that's very helpful for all of us. I guess first on just following up on deposit costs. You talked about the margin being lower in March. I was wondering if you could put a little bit more of a finer point on kind of what that was at the end of the period or in March, and specifically in terms of deposit costs, what you were seeing towards the end of the quarter?
Let me grab that for you really quick. What we saw in deposit costs, our cost of all of our deposits were about 104 for March. At our total cost, if you look at it as a percent of average assets, it was about 1.15%. It's just kind of more of a, you know, what we're expecting for the rest of this year is just a continuation of those types of calculations.
Okay. Did you have an overall margin in March?
Oh, I'm sorry. Yeah, it was, 4.17%.
Okay. Still pretty high. I guess just following up on that, the mix shift that you talked about being baked into your guidance. I think you said you're expecting non-interest-bearing and core deposits to grow over time. Fair to assume that you're expecting that mix shift to take place as well over the rest of the year. Kind of just curious how much you think that 38% of non-interest-bearing changes over the coming year or what you're baking in.
I think we're expecting that percentage of non-interest-bearing to stay relatively stable, if not increase a little bit, because as I mentioned, we've got to have these companies, you know, build those balances back up in anticipation of the, you know, the tax and bonus and partnership disbursements that they would expect to make in January. My expectation on an overall basis is that non-interest-bearing checking accounts would hold steady at least, maybe, increase a little bit throughout the year as we see that typical seasonality work through our balance sheet. You know, one of the things that, as I mentioned, we're definitely seeing some non-maturing deposit funds go into the CD products, which is driving an increase in cost of funds.
You know, the CDs that are repricing are, you know, generally speaking below 1%, and they're going into products that are in the upper 3s and low 4s. There's a lot of, you know, repricing going on just with CD products. As I mentioned, seeing some migration from savings accounts and those types of deposits into the CD products as well, which is also, you know, a significant repricing. I think what we try to do, as we typically do, is try to be pretty conservative on our expectation of non-maturing deposits. When we build our balance sheets, you know, from a projection standpoint, try to do that with some of our higher costing funds, whether that's time deposits, borrowings, you know, some high yielding money market account products.
Clearly, we're out there as hard as we can day in and day out trying to grow all of our deposits. Certainly from a projection standpoint, want to be conservative.
Okay, great. Lastly, on the loan side, just curious where the new loan yields were coming in kind of towards the end of the quarter. You mentioned that you would expect those to continue to go up given the variable nature. I'm just curious where those settle relative to what's on the portfolio now. Kind of a bigger picture question around, you know, with deposits stable, loan deposit ratio 110% and, you know, 6%-8% loan growth in the forecast. How high do you expect that value to get or, you know? I mean, it seems already somewhat elevated, so just curious how you're thinking about that ratio.
Yeah. You know, as I mentioned in my comments, we always throw sweep accounts into that because those really truly are deposit accounts in our mind. It's still a little bit over 100%, so not trying to change your question. I think if you look at us historically, especially in excluding the last couple of years, with the pandemic and all those impacts on our balance sheet, our loan or deposit ratio or however you wanna calculate that, has always been the highest at the end of the first quarter because of that seasonality withdrawals that we see. You know, we're a commercial bank, and a lot of our deposits are commercial. So that seasonality we see with our commercial customers is very noticeable within our balance sheet.
I think we would you know, we don't expect that ratio to go any higher. You know, it's not our intent to play games with that ratio, so to speak. You know, as I mentioned in my comments, you know, we're not using broker deposits right now and haven't for almost a year. Instead, we relied on borrowing from the FHLB. You know, if we were to go and get broker deposits instead, clearly that would help our number. We're not interested in doing something specifically to help or assist, one particular number. When we're out there, managing our balance sheet, we wanna do it in effective and obviously as efficient and low cost as possible.
What we have found, especially going longer term like we do with the FHLB advances, the rates that we get from the Federal Home Loan Bank of Indianapolis are considerably lower than the rates we're gonna get on broker deposits of a similar tenure. The biggest reason for that is in the brokered market, at least, at least up until most recently, there's not been a lot of supply of 3 and 5-year money out there as everybody had decided to keep short in a low interest rate environment. It makes sense for quite a few reasons, and certainly on an overall basis for us to use the FHLB, using broker deposits as we had done, you know, throughout Mercantile's history up until last year.
On an overall basis, my expectation is that loan deposit ratio will not go up any higher. Hopefully, you know, we'll get some nice wins with all the different initiatives that Ray briefly mentioned in his comments, and we can see that ratio decline. Having said all that, you know, our company has almost always been somewhere around, you know, 95%, 100% loan or deposit ratio, maybe 105%, especially at the end of the first quarter. On an overall basis, it's a position that we're comfortable managing. You know, we've got a lot of experience with it. As Bob mentioned in his opening remarks, we are a relationship-driven company. We don't get very many surprises. We're not transactional or try not to be transactional.
Those were those are where the surprises come within the balance sheet when you're in that type of business. Given all that, well, I think we're pretty comfortable with where we're at. Clearly, growing deposits is a big challenge. It's always really been a big challenge because we've been, you know, so successful at growing our loan balances. Deposit growth has always been a challenge for this company, we really don't see that any different now than we had in the past.
Certainly the activities that took place in March and throughout at least the early part of April got everybody's attention, we spend even more time especially with our larger depositors giving them comfort and the strength of our company and making sure that they understood that our bank and like virtually every other bank was nothing like Silicon. As Ray mentioned, you know, very limited withdrawals that we saw out of our bank from that episode. Yeah, it's a big challenge. We're gonna continue to grow our deposits as best we can, but we're gonna manage the balance sheet, which makes the most sense at a long-term basis as we manage interest rate risk along with our liquidity positions.
Thank you for all that color. Sorry if I missed it. Did you have the new loan yields at the end of the quarter?
You know, basically what we do on the fixed rate basis, you know, we have a very strategic loan pricing model that we use. You know, basically, you know, on fixed rate, we're gonna do it a spread over cost of funds. I think, you know, looking at the five-year, and we use the FHLB of Indianapolis advance rates. I think the current rate is right around 4%, I think. You would add 250-300 basis points to that, and that would be, I think, a standard rate that we would do on a five-year, you know, balloon or, on some equivalent financing over 5 to 7 years.
Terrific. Thanks for all the color. That's it for me.
You're welcome, Denny.
Our next question will come from Erik Zwick with Hovde Group. You may now go ahead.
Good morning, everyone. I wanted to start, maybe a question for either Bob or Ray. Just given the pipeline for construction at this point, and, you know, I guess conventional wisdom might suggest that, you know, lending to construction at the end of an economic cycle or impending slowdown, could have an elevated level of risk. Wondering if you could just talk about maybe the differences in the Michigan market that you're seeing there on the industrial side and multifamily in terms of the end demand for these projects and, you know, that leads to your confidence to extend new credit at this point. Additionally, your confidence that they will move to completion and move to the permanent market at some point.
This is Ray. There's really two elements in that. There's a light industrial construction element, and then there's the multifamily. On the light industrial side
Things that are being constructed have tenants, the space is required. It's in very high demand here in West Michigan. We feel very good about that sector. Moving to the multifamily side, the recent evidence has been pretty strong that the inventory shortage continues to exist in terms of housing, from studies that have been done for the city of Grand Rapids to information that we're hearing from realtors about how intense the competition is for homes when they go up for sale. All those things support anecdotally the need for more housing units, and in the form of multifamily. I would offer that, you know, yesterday, we took 14 apps in the bank for mortgages. 12 of those had no address associated with them, so they were pre-qualifications.
That would speak to the shortage of inventory. Occupancy rates are extremely high in the existing inventory. All those factors together, make us comfortable along with sponsors of these projects that are very strong and experienced and have the ability through their existing portfolio to accurately ascertain the conditions in the market.
Yeah. This is Bob, and I would certainly underscore what Ray just said. As we talked about all through the pandemic and even going back further than that, coming out of the Great Recession, we had implemented many concentration reports, examination of what's going into the portfolio, what's coming out, and looking at those diversification levels of our real estate. As Ray said, partnering with experienced developers who've got many years in working on the projects that they're engaged with at the current time. It's something that we've historically watched, had a very close watch on and continue to do so today, especially with what some people are predicting in the form of recession coming up.
We feel really good about our entire portfolio and certainly the CRE captures a lot of our attention on an ongoing basis, but we feel really good about what's comprising that bucket of loans at the current time.
That's great color. Thanks, guys. Next one, I guess for Chuck maybe. Just looking at what the futures, the Fed funds kind of futures curve and the yield curve is suggesting that we're getting towards the end of the rate hiking cycle and could potentially see a, you know, a normalization maybe starting at the end of 23 or into 24 with rates coming back down. With the balance sheet still being constructed with a relatively kind of asset sensitive positioning, how do you, how do you think about that longer term if rates were to start to come back down and, you know, would you potentially look to utilize any hedges or anything to protect the downside or limit the negative impacts there?
Yeah. I don't think we have any specific programs on our balance sheet with derivatives. Specifically speaking to your question there, I think what we try to do on an overall basis is shorten the duration of our balance sheet as much as we possibly can. One of the things that when you look at any graph out there, you know, even over Mercantile's existence, which isn't that long, what we see is just a tremendous amount of volatility in interest rates for a myriad of reasons. You know, a couple of you nobody probably would have ever, you know, put into any type of analysis. I think the best defense is to make sure our balance sheet is as short as it can. If there is any, you know, timing mismatches within our balance sheet, it's only relatively short-lived.
That, you know, if we do see a rate environment decline, yeah, it's gonna impact our floating rate commercial loans. We also, you know, are looking at the liability side to make sure that we're matching up the duration and repricing opportunities on those liabilities as best we can. On an overall basis, trying to match up the duration repricing opportunities of our assets with our liabilities. On an overall basis, in addition to that, is try to just shorten the duration of our entire balance sheet.
Got it. Thank you. Just one last one for me. I think you mentioned about 6.8 million shares available under your repurchase authorization. Just curious about your appetite for potentially buying back some shares in 2023 relative to other uses of capital at this point.
Yeah. We have the $6.8 million in our current plan. We didn't buy back any shares last year, and as I mentioned, and as you just repeated, we don't do anything this year. I think, given what took place in March, you know, capital is incredibly important, and we've made the decision at least to date that we'll maintain our capital position as best we can and not engage in any repurchase activity. You know, we come out of our blackout period on Friday of this week, and clearly, you know, admittedly, when we look at our stock price and our valuations, it's definitely very tempting to get into the market and start buying back our stock.
We have certainly been active in buying back our stock over time in previous periods, although I would say it's never been incredibly active. You know, we're not trying to be out there to purchase back a significant and really significant number of shares. I think we want to be out there, be opportunistic and also support our, you know, support our current shareholders by trying to support the price as best we can. At the end of the day, we look at that as a finance transaction. You know, does that better the company on an overall basis? I think, you know, we're right now we're reticent to engage in any buybacks, but obviously that's up for, you know, reevaluation at any time going forward.
We certainly have the plan, available to us if we want to endeavor back into buying some shares back.
Thanks so much for taking my questions today.
You're welcome, sir.
Again, if you have a question, please press star then one. Our next question will come from Damon Del Monte with KBW. You may now go ahead.
Hey, good morning, guys. Thanks for taking my questions and thanks for all the disclosures in the slides today. I guess just with respect to the outlook for loan growth, I think you guys are saying 6%-8%, you know, over the remaining quarters of this year. Ray, you may have said this in your prepared remarks, but could you just kind of go over the kind of the split between the commercial side and the retail side for that expected growth?
We have the retail side growing about $180 million, I think, for the year and a similar amount for the commercial side. They're fairly balanced in the growth. Right now, as I mentioned, ARMs are more popular and than fixed rates, so those are finding their way onto our balance sheet as opposed to being sold. If the inverted yield curve is correct, we'll have an opportunity to refinance many of those into 15- and 30-year obligations and maybe reduce the weight of those on our balance sheet at some point in the future. I mean, obviously that's dependent on rates, time will tell. For the near term, I'd say a fairly equal representation between the two.
Got it. Okay. Thanks. With respect to the outlook for expenses, you know, any internal discussions about ways to maybe kind of shave some expenses out of that overall expense structure?
I think, you know, Damon DelMonte, this is Chuck Christmas. I think that's, you know, something that we endeavor to do every day. I wouldn't think that there's anything, any type of fluff or anything within our overhead structure. You know, we're very dutifully trying to become as an efficient bank as we possibly can, rationalize our branch system, making sure we're employing technology, whatever we can, whether that's how customers interact with our company, whether it's, you know, automated, you know, the new automated teller machines or, you know, on banking, online banking or anything like that. We're always endeavoring to become more efficient in how we deliver our products and services to our customers. Makes it more efficient and more cost-effective for us.
I think I'm not sure what else to say except, we're doing as best we can. I think if you look at our overhead costs on an overall basis, especially from, say, an occupancy equipment in some of those areas, I think we're doing a really good job, and we're gonna continue to do that. The swap program, obviously, just because of where rates were and cash collateral and interest rates going up, there's some additional costs there. The FDIC didn't do us any favors by raising our assessment 58%, just for opening our doors. Of course, inflation had a big impact on our salary and benefits as well.
you know, I don't think there's anything that we can say, "Hey, let's cut this out. Let's cut that out." I think on an overall basis, we continue to look for ways to run more efficiently and utilize our resources as best we can.
This is Bob. I'll add to that by saying we certainly look at efficiencies all the time, and that's where you've seen, for instance, the branch write down because we're able to shed a particular branch, and we've done that numerous times over the last couple of years. I will also say, however, that we're committed to attracting and retaining the best employees we can because they are really who allow us to do the things that we can do from a customer standpoint and also continue that forward investment in technology. As Chuck mentioned, the digital frame, the use of data, the ability to automate processes are something that we continue to take a look at.
For that, we need to make the investment in technology, which we always have been committed to. That's an important part of who we are. We never defer investments in technology or expenses because we do not wanna get behind and we have not, and we never will.
Got it. That's helpful. Thank you. I guess just lastly, you know, credit continues to be extremely strong for you guys. Chuck, could you kind of help frame out expectations for the provision, you know, kind of balancing off loan growth and potentially a softer economic backdrop as we go through the remainder of 2023?
That's a really loaded question.
You know, Damon, there's a reason why I didn't put provision expense on page 27. Yeah, I think, you know, clearly, you know, our loan portfolio is going to react to that of our market, right? I mean, I think we do a really good job of selecting our borrowers, you know, customers we want to do business with, structuring them properly that's mutually beneficial. I think, you know, my humble opinion, I think the guys here would agree, is that our asset quality has generally been stronger than that of the industry, and we would think that that would continue. Regardless of what the economic environment is out there. I think, you know, certainly the economic environment is going to be the big determinant there.
Two ways it's going to impact the provision. One is, you know, specifically on our portfolio. you know, if there's a bunch of downgrades that we have to do, clearly that's going to require a higher reserve through provision expense. Of course, with our friend CECL, we've got that economic forecast out there that's independent, and we get that forecast, and we compare it to other forecasts to make sure that it's, you know, I call it, you know, kind of the check system and just to make sure it makes sense that our forecast is similar to that of others. Clearly that forecast can have a big weighting on our provision. I think one of the things that we've seen and in talking with other bank CFOs who use different models and different forecasters than what we do.
The similarity is what's driving these forecasts is the unemployment rate. You know, we've seen a degradation in GDP forecasts over the last few years, and we really haven't seen an overly significant impact to the reserve calculation as a result of that. What we have seen is a relatively steady or just slightly over time, increasing unemployment rate. As I mentioned, you know, the impact in the first quarter from the updated economic forecast was literally less than $100,000, you know, on a loan portfolio, you know, that's, you know, close to $4 billion. Pretty nominal there. I would say it's the economic forecast, especially in regards to those unemployment expectations and obviously the, you know, the impact to our specific customers.
As we, you know, have to go in there and change any loan grades. We still have all of our qualitative factors as well. We didn't make any changes, as I mentioned in the first quarter. I think most of those kind of represent the overall environment that we have. I think that those would kind of move in similar fashion to the overall upgrades, downgrades within our portfolio as well as the economic forecast that we put into the model.
Okay. Just from like a reserving level, I mean, if things remain relatively healthy, do you feel that your 108 level is a adequate reserve or do you feel like that's going to kind of grow a little bit as you continue to grow loans this year?
That's an interesting question and a public one of a kind. Certainly I believe that my reserve right now is very adequate given the risk that's in the portfolio. You know, again, I think the coverage ratio is just an outcome of what we have to do, you know, granularly. To the items that we just talked about. Yeah, certainly if there's downgrades, certainly if we see a degradation in the forecast, we're going to have to add provision expense and that would cause an increase in the coverage ratio. Given where we're at now in a very, very strong loan portfolio and an overly, you know, good, I would call it economic forecast, you know, with continued.
I think, you know, the forecast that we see out there is an unemployment rate that I think overall was now 3.5. We see that growing to 4.5 in most of the forecasts over the next couple of years. I would say that, you know, 4.5% is still a really strong unemployment number. Again, we'll just see how the economies react to, you know, what the Fed is doing, what they may do in the future. Obviously, any other stresses that we see in the financial markets. You know, I guess I would say I don't see that coverage ratio going any lower, given where we're at right now in regards to the economic forecast and the overall condition of our loan portfolio.
Clearly, if there are stresses within the economy and/or our loan portfolio, I think you would expect, and I would certainly expect to see that coverage ratio have to increase.
Got it. Okay. All right, no more questions on credit. everything else that I had was, has been asked and answered. That's all I had. Thank you very much.
You're welcome, Damon.
Thank you.
This concludes our question and answer session. I'd like to turn the conference back over to Bob Kaminski for any closing remarks.
Thank you very much for your interest in Mercantile Bank Corporation. We look forward to speaking with you next after the end of the second quarter in July. This call has now ended. Thank you.