Good morning, and welcome to the Mercantile Bank Corporation 2025 First Quarter 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 will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Nichole Kladder, Chief Marketing Officer of Mercantile Bank. Please go ahead. Hello, and thanks for joining us.

Today, we will cover the company's financial results for the first quarter of 2025. The team members joining me this morning include Raymond Reitsma, President and Chief Executive Officer, as well as Charles Christmas, Executive Vice President and Chief Financial Officer. Our agenda will begin with prepared remarks by both Raymond and Charles, and we'll include references to our presentation covering this quarter's results. You can access a copy of the presentation as well as the press release sent earlier today by visiting mercbank.com. After our prepared remarks, we will then open the call to your questions. Before we begin, 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 latest Securities and Exchange Commission's filings. The company assumes no obligation to update any forward-looking statements made during the call. Let's begin. Raymond?

Thank you, Nichole. My comments will focus on the changes that have been made to the funding side of our balance sheet and the resulting impact on the income statement, as well as our loan growth, excellent asset quality, and growing core non-interest income. Taken together, these performance traits have allowed us to compile attractive compounded annual growth rates for the benefit of our shareholders. Year-end 2021 to year-end 2023, commercial and mortgage loan growth was strong. And while deposit growth was solid, it did not keep pace with loan growth. The outflow of deposits from the banking system post-COVID contributed to this trend. As a result, the bank's loan-to-deposit ratio increased to 110% at year-end 2023. In 2024, we focused on reducing this ratio with a goal to strengthen our on-balance sheet liquidity and overall financial profile. We succeeded in reducing the loan-to-deposit ratio to 98% by year-end. As described in previous calls, we undertook a three-pronged approach to building our deposit base with the objective of reducing the loan-to-deposit ratio into the mid-90% range over time. To reiterate, first, we broadened our focus on business deposits. Second, we dedicated resources to the governmental and public unit realm. Third, we restructured the retail customer focus away from activity and toward balance. These efforts led to increases in business deposits of 24%, and personal deposits of 9% for the twelve-month period ended March 31, 2025. Despite a long-standing seasonal pattern of reduced first-quarter deposits, our secular growth trend overcame the typical seasonal pattern and allowed us to report a loan-to-deposit ratio of 99% at the end of the first quarter of 2025 compared to 108% at the end of the first quarter of 2024. Commercial loan growth during the first three months of 2025 was $44 million or an annualized…

Thanks, Raymond. This morning, we announced net income of $19.5 million or $1.21 per diluted share for the first quarter of 2025, compared with net income of $21.6 million or $1.34 per diluted share for the respective prior year period. Although net interest income increased, net income was negatively impacted by lower non-interest income, increased non-interest costs, and a higher provision expense. Interest income on loans increased during the first quarter of 2025 compared to the respective prior year period reflecting strong loan growth that more than offset a lower yield on loans. Average loans totaled $4.63 billion during the first quarter of 2025, compared to $4.3 billion during the first quarter of 2024. Our yield on loans during the first quarter of 2025 was 34 basis points lower than the first quarter of 2024, largely reflecting the aggregate 100 basis point decline in the federal funds rate during the last four months of 2024. Interest income on securities increased during the first quarter of 2025 compared to the respective prior year period, reflecting growth in the securities portfolio, and the reinvestment of lower-yielding investments in a higher interest rate environment. Interest income on interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, also increased during the first quarter of 2025 compared to the respective prior year period, reflecting a higher average balance that more than offset a lower yield. In total, interest income was $3.6 million higher during the first quarter of 2025, compared to the first quarter of 2024. We recorded increased interest expense on deposits during the first quarter of 2025 compared to the respective prior year period primarily reflecting growth in money market and time deposit products. Average deposits totaled $4.59 billion during the first…

Thank you, Charles. That concludes our prepared remarks from management, and we will now move to the question and answer portion of the call.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. Our first question is from Brendan Nosal with Hovde Group. Please go ahead.

Hey. Good morning, Raymond. I hope you guys are doing well.

Morning. Alright. Just starting off here on the outlook for loan growth. You know, it looks like you guys tempered the loan growth outlook at least a little bit. You know, I guess looking at other banks, so far this quarter, you know, some have done so, some haven't. Just given kind of the myriad uncertainty in the outlook. So I'm just kinda curious you know, with what you folks have done to the outlook. Are you just being conservative given the potential drag in tariffs at this point, or are you seeing an actual slowdown in commercial loans and end so far? Thanks.

So our approach to that was driven by the fact that our commercial pipeline has two components. One is committed and accepted, committed to by the bank and accepted by the borrower when we're moving to closing. The other is discussions that are underway moving towards that end. And the proportion of the pipeline has moved with the uncertainty in the environment more towards discussion and gone lighter on the committed and accepted piece. Now the overall pipeline is as big as it's ever been. But the uncertainty has just put more of it in the discussion category as opposed to moving the closed category. With the estimation that the environment will remain somewhat uncertain in the near future, we decided to temper our expectations for loan growth in the numbers that we provide.

Yeah. That makes complete sense. Okay. Thank you. Maybe one more for me, turning to capital. You know, your capital ratios continue to build nicely. Just curious for your updated thoughts on deployment particularly if loan growth is a bit more muted this year given the environment and how you think about share repurchase just given where shares are trading right now? Thanks.

Yeah, Brendan. It's Charles. You know, as I always say, the buyback is always on stovetop and maybe in the back of the stove, but not the front. But it's something that we work with, you know, regularly with the board. You know, clearly, you know, the stock prices of everybody went down quite a bit. Here over the last few weeks, which, you know, makes the question of do we do buybacks a little more interesting than when our stock is performing well. You know, we look at ourselves as a growth company. And, you know, if there is some reduction in loan growth over the next few quarters or whatever that time may be, As Raymond mentioned, we still have a very strong pipeline, and we want to make sure that we've got sufficient capital to manage that asset growth, that loan growth specifically. And then also at the same time, we're growing our loan reducing our loan-to-deposit ratio, which makes asset growth even further. So at the end of the day, we want to make sure darn sure that we have sufficient capital to manage the growth plans of the company. You know, notwithstanding all the discussions and different forecasts that are out there, you know, some more dire than others, If there is an overall slowdown in the economic environment, we want to make sure that we've got you know, those capital support to get us through those time periods as well. So we have the plan. We have dollars in the plan. It is something that we regularly look at. To date, we haven't, obviously, pulled the trigger. But it is something that we look at. But on an overall basis, specifically to your question and Raymond kinda already addressed it, we think the slowdown in loan growth is relatively short term. Don't know how to define that short term. But, again, you know, making sure that we have the capital to support great loan growth opportunities that we have and want to take advantage of is job one.

Thank you for the thoughts, Charles. Appreciate it.

The next question is from Daniel Tamayo with Raymond James. Please go ahead.

Thank you. Good morning, guys.

Alright.

Maybe starting on the margin. So you took the margin guidance up from last quarter, it looks like just to mostly reflect the better than expected first-quarter margin. You know, first, just want to make sure, just clarify what you're assuming in terms of rate cuts in that margin guidance, Charles, and then I guess we can dig in a little bit after that.

Yeah. Sure. So I thought it best to put some guidance out there assuming that there's not gonna be any rate cuts. Clearly, the bond market, for one, thinks there are gonna be some rate cuts. And we're not necessarily disagreeing with that. But what we have to work with is a lot of folks such as Raymond James and everybody else has their own forecast. And so what I thought I would do what we would do is kinda start with a base case and say, if there are no rate cuts, this is what we look at our margin the range of our margin being in for the remainder of this year. And then we also and it's in our deck on slide ten, We also provide the results of our net interest income simulation which investors and analysts can look at and use in determining what they think that our company will would operate under those different interest rate scenarios. I would say that and I would think any of the does same thing. And when we run-in our simulations, we're relatively conservative. With our assumptions. And as you know, there's a tremendous amount of assumptions that go into simulations. But I think on an overall basis, it shows a realistic position of what may or may happen in those different interest rate environments. But because, again, because there was such a big unknown we just provided the guidance without that. I think what you see with our margin actually improving in the first quarter is both Raymond and I touched on in our scripts. Is the fact that, you know, we have built a balance sheet, which is definitely short term, but we do that on purpose. What we have seen over the last you know,…

That's helpful, Charles. Yeah. I guess, maybe on the on the CD side first, if you have any kind of detail on the repricing. You mentioned that's still happening here, but just curious kinda where those are repricing from and to and kind of the cadence that you're gonna see over the next twelve months.

Yeah. I think if you look at our total CDs, I would say probably a good 90% of them are maturing in the next twelve months or so. Relatively equally each month, there's no we don't do any CD specials or anything like that. So there's really quote unquote no lumpiness in our maturity schedule. And I would say on average, they're probably based on today's rates, we haven't adjusted our rates for all the uncertainty out there. They're coming down probably an average of about 75 basis points.

Okay. Okay. And that's relatively even over the next year the stuff that's renewing or maturing kind of back half of the year and into next year is still you're still gonna see that same 75 basis points or

Yeah. I would say it's pretty even I would say it's pretty even. Maybe a little bit more dollars in the first six months on the back half of six months, but I think we call it even throughout the next twelve months at the fairly fair statement.

Okay. And then on the loan side, so you had average loans and it looks like, in the first quarter where were the new loan yields that you were putting on? Kind of I think fourteen? Probably somewhere probably around 7% or so. You know, almost all the loans we put on are at floating rate. You know, so I would say, you know, prime minus fifty to prime. Somewhere in there if you want to use it on a prime basis. And we have about, $150 to $200 million a year in loans that are earning some commercial loans that are earning somewhere in the 4% to 4.5% range. Those are the ones that I referenced that are maturing and getting obviously refinanced in today's rate environment.

Got it. And then the investment is then the investment portfolio on top of that. Probably this year, I think we got $40 million left. Earning about 75 basis points. And then excuse me. That's yeah. And then going forward, we have probably around $80 million a year maturing. And I would say in the next couple of years, that's probably, like, 1.25% to 1.5%. That's maturing, and we're getting about 4%, 4.25% now. On our current investment strategies.

Okay. Great. And I guess the last just follow-up is competition on the loan yields. Did you see spreads tighten at all through the quarter or into the first quarter? Are you seeing that happen or has that been relatively stable?

Well, one of the things that we measure is the spread that we get in each of our risk rating categories, and those have been stable.

Okay. Terrific. Alright. Well, thanks for taking my questions, guys.

You're welcome.

The next question is from Damon DelMonte with KBW. Please go ahead.

Hey. Good morning, guys. Thanks for taking my questions here. Just to kinda close the loop here on the margin outlook, Charles, should we kind of expect a similar level of securities purchases in the coming quarters like we've seen over the last three or four quarters.

Yes. Yep. I mean, obviously, it's predicated on continued local deposit growth. Which we think will continue to be strong. But we're looking at you know, if you put the dollars amount we're expecting our loan growth in the terms of dollars and our securities growth in the terms of dollars to be relatively similar. Got it.

Okay. Great. That's helpful. And then on the expense guide, you know, it's good that we have a full expense number for the upcoming quarters. But as we kinda dig through some of those line items, you know, can we expect an increase in salary and benefits? It seemed like this quarter, was down from the fourth quarter. Do you do you kinda have, like, merit increases and things like that kicking in here in the second quarter?

Well, yeah. Merit increases took a took into account in the end of February. So there's a little bit more ramp up, you know, to get a full quarter of that. But in regards to the fourth quarter, one of the things that we had in the fourth quarter is we came through a very strong 2024. We did have an increase in our bonus accruals. Which obviously we believe is a good thing. But it's predicated on our continued strength throughout 2024, which actually got stronger. We felt better about it as we're coming through and hitting more and more on our metrics. Which has a sliding scale to it. So I would say in regards to 2024 salary and benefits, there was some, I'm a call it one time, but there was some increased bonus accruals in there.

Got it. Okay. Great. And then just one more, you know, obviously, credit trends are very strong, low NPAs. Minimal charge-offs, had some recoveries this quarter, I believe. You know, you built the reserve four basis points kind of as you factor in, you know, slower loan growth, but yet maybe a little bit of growing concern on the economic uncertainty. You know, how do we think about the reserve level from this quarter going forward? Do we look for a little bit more reserve build? Over the coming quarters, or do you feel like you addressed it enough here in this quarter?

Yeah. I mean, I don't I think it was really hard to answer it specifically, Damon. Obviously, there's so much uncertainty out there. I think that we, as a management team, have always been working hard, quite frankly, to battle the accounting rules. And the infamous CECL, which we have to talk about every quarter is it's a duration-based model. And we are a short-term commercial banker. And because of that, it's hard to get meaningful reserve coverage ratios. And then you add in and that is what it is. That's who we are, and that's the model we have to work with. Then you add on top of that is a company that has very strong asset quality, especially you know, since coming out of the great recession. So when you look at historical numbers, which obviously are applied as part of our model, you know, we're actually in a net recovery position. So we continue to fight the fight. We did see like I said, we get different economic forecasts. Our policy is to use a base as long as that base passes a smell test and looks like the base forecast from other providers. But in this environment, when there is so much uncertainty, you know, it's gonna take a quarter or two to figure this all out. We thought it prudent to go ahead and blend that base case with a more adverse case. And just use the average of the two. And that was just under a $2 million impact. So a large percentage. You can see our provision for the quarter was $2.1 million. So I would say at least 90% of that provision expense was because of us going forward and blending those two economic forecasts. Got it, which we think is the absolute prudent thing to do. So you know, who knows what economic forecasts look like? We get them from an independent source, and they'll put their heads together. In late June, they'll issue their updates. And we'll run that through our model. So that's always a pretty big unknown. But we definitely wanted to make sure that we weren't fooling ourselves, that we're entering into a period of high uncertainty and we wanted to make sure that we were on the right side of that calculation and we'll just take it how it comes, you know, from this point forward.

Got it. Okay. That's all very helpful. That's all that I had. Thank you.

You're welcome, Damon.

Again, if you have a question, please press star then one. The next question is from Nathan Race from Piper Sandler. Please go ahead.

Hi. Good morning, everyone. This is Adam Crowell on for Nathan Race, and thank you for taking my questions. I guess to start on the lower loan growth guidance over the near term and if loan demand was to materially soften, is there any expense levers that you could pull to kind of help mitigate that lower loan growth?

I don't think you know, we try to operate as efficient as we can. I would think, you know, not with if the asset quality stays unchanged and we see a meaningful reduction in loan growth, clearly, the provision expense would be impacted by that. But, you know, the way that we try to, you know, run our bank is structure our bank is for the long term. So well, obviously, we need to make sure that we're fortified for any you know, bumps in the road, you know, like we have now. How who knows how big that bump is gonna be? But, you know, we're not looking at just the neck what happens the next three months or six months when we're trying to structure our employee base, when we're looking at new products and services, for example, maybe new market to go into. You know, we're looking at this with, you know, with, you know, with binoculars looking way out into the future. So you know, maybe maybe if it was dire enough, we could maybe, you know, slow down some new projects and stuff like that. But we think long term, these projects are what we need. So we would have to take that on a case-by-case basis, but you know, we want to make sure that we continue to build this company, bring on the people, train the people, for our success in the long term.

Got it. No. I appreciate the color. And then switching to fees, does your fee income guide for the rest of the year include some normalization higher in swap fees, or should we assume a similar level to 1Q?

No. 1Q was I would call that an anomaly. You know, the nature of that is, you know, we have to get term loan growth. Generally speaking. I mean, the existing loans, we do swaps with them from time to time. But generally speaking, the driver of swap income is new term loan fundings. And we've already talked about it with the uncertainty. And most of our loan net loan growth in the first quarter was actually line drops. But I will say that so far here, we're three weeks into this quarter. And this quarter is looking very normal. Like. So I think we know that's gonna get lumpy from quarter to quarter. And so we would expect it to be more normalized going forward. And that is included in the guidance.

Got it. That's super helpful. One last question from me is I thought mortgage origination volumes held in pretty well in 1Q. Was just curious if you guys are expecting that typical seasonal uptick in mortgage during two q. Or with the macro uncertainty and rate volatility that maybe the uptick in two q isn't as strong as in prior years?

Yeah. That's possible that that could happen. I mean, up until March 31, we had an increase in the seasonal pattern. There's definitely a seasonal pattern here in Michigan in mortgage. You tend to shop for your home when the weather is a little bit more conducive to that. So right up until the end of the quarter, that pattern was increasing nicely. And then in the intervening time between the end of the quarter and today, that pattern has probably failed to continue to build as much as we'd like it to. In the last few days, it seems like it's picked up a bit. But this is the time of year where it would start to manifest itself. And I think the uncertainty has kinda kept it at bay a little bit. I don't really expect that to continue through the entire season, but major things like purchasing or refinancing a home and there's a lot more purchase than refi is going on right now, Uncertainty is kind of the enemy of that process. So some stability would certainly help that. To continue to grow.

Got it. That's it for me. Thank you for taking the questions.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Raymond Reitsma for any closing remarks.

I'd like to thank you for your participation in today's call and for your interest in Mercantile Bank, and that concludes today's call.

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