Good morning and welcome to the Mercantile Bank Corporation 2025 Fourth Quarter Earnings Results Conference Call. All participants will be in a listen-only mode. 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 thank you for joining us. Today, we will cover the company's financial results for 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 Ray and Chuck and will 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 filings. The company assumes no obligation to update any forward-looking statements made during the call. Let's begin.

Thanks, Nichole. Our results for 2025 continue to build on the theme of commercial expertise generating a strong return profile. The consummation of our purchase of Eastern Michigan Bank on 12/31/2025 represents execution of our strategic objectives around PASA and loan growth and margin stability, paired with strong asset quality and overall financial performance. We continue to demonstrate top quartile ROA performance relative to our peers built upon the following traits. Trait number one, strong and durable net interest margin. Over the last five quarters, SOFR ninety-day average rate has dropped 68 basis points while our margin increased by two basis points to 3.43%. This illustrates effective execution of our strategic objectives to maintain a steady margin by match funding our assets and liabilities and refute the notion that we have an asset-sensitive balance sheet despite the relatively large portion of floating rate assets. Trait number two, very strong asset quality. As do loans remain at low levels, typical of our company at 11 basis points of total loans. Nonperforming loans to total loans over the last six years averaged 12 basis points. The allowance for credit losses stands at 1.21% of total loans as of 12/31/2025, providing very strong coverage relative to past due and non-performing loans. These numbers demonstrate our long-standing commitment to excellence in underwriting and loan administration. Trait number three, improved on-balance sheet liquidity and loan-to-deposit ratio. Our loan-to-deposit ratio stands at 91%, compared to 98% on 12/31/2024 and 110% on 12/31/2023. Our deposit mix includes 25% noninterest-bearing deposits, and 24% lower-cost deposits, an increase from 20% in the prior quarter which has contributed to the stability of our net interest margin. Our acquisition of Eastern Michigan Bank contributed positively to these measures. Trait number four, strong deposit and loan compounded annual growth. Our recent focus…

Thanks, Ray. This morning, we announced net income of $22.8 million or $1.40 per diluted share for 2025 compared with net income of $19.6 million or $1.22 per diluted share for 2024. Net income during all of 2025 totaled $88.8 million or $5.47 per diluted share compared to $79.6 million or $4.93 per diluted share for all of 2024. Growth in net income during both time frames largely reflected increased net interest income and noninterest income, lower provision expense, and reduced federal income tax expense which more than offset increased overhead costs. Interest income on loans declined during the fourth quarter and all of 2025 compared to the prior year periods, reflecting a lower yield on loans that was not fully mitigated by loan growth. Our yield on loans during 2025 was 26 basis points lower than in 2024 largely reflecting the aggregate 75 basis point decrease in the federal funds rate during the last four months of 2025. Average loans totaled $4.63 billion during the fourth quarter of 2025, compared to $4.57 billion during 2024, an increase of $62 million. Interest income on securities increased during the fourth quarter and all of 2025 compared to the prior year period, reflecting growth in the securities portfolio and the reinvestment of lower-yielding maturing investments. Interest income on other earning assets, a large portion of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, declined during 2025 compared to 2024, reflecting a lower average yield that more than offset a higher average balance. Interest income on other earning assets increased during all of 2025 compared to all of 2024 reflecting a higher average balance that was partially offset by a lower yield. In total, interest income was $200,000 lower and $8.7 million higher during the fourth quarter…

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

Thank you. We will now begin the question and answer session. To ask a question, please press star one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, press star one again. At this time, we will pause momentarily to assemble our roster. The first question comes from Daniel Tamayo with Raymond James. Please go ahead.

Thank you. Good morning, Ray. Good morning, Chuck.

Good morning, Danny.

Hey. Yeah. Maybe starting on the margin guidance, Chuck, just for clarification, just want to make sure you do have the December rate cut in the guidance. And then curious if you could pull out kind of the purchase accounting accretion that's baked into the increase in the first quarter. Talked a lot about kind of stability, even though the forecast or the guidance is going up by about five basis points a quarter next year. Ex the rate cuts. But just curious what that core margin forecast is looking like next quarter?

Yeah. Confirming that, you know, we used the rates as of year-end '25 to put the projections together. The purchase accounting in the loan portfolio is about $125,000 net per quarter. I believe that's per quarter. You know, there's also I don't have the numbers, but there's also significant benefit relatively speaking, from the securities portfolio as there was a net unrealized loss in that portfolio at the time of consummation. So I would say when you look at Mercantile's legacy margin of low 3.4%, I would expect it at a relatively steady margin going into 2026. So kind of the difference between say, the low, excuse me, low maybe touching the mid three fours, getting up to 3.55% to 3.65% in the first quarter, a lot of that's reflecting of the Eastern consummation.

Okay. Thanks for that. It's helpful. And then, you know, I guess in terms of the assumptions baked into the margin guidance after that, five basis points a quarter expansion, again, ex rate cuts. Are you assuming any kind of change in noninterest-bearing concentration? You know, if we guess there's no cuts in that, but assuming we get a trend down in rates, you guys have been a little bit higher historically from a noninterest-bearing perspective. Are you assuming that in the guidance?

No. The assumption with noninterest balances is what we typically do. Is we tie any change in that balance to the growth in commercial loans, which is in that 5% to 7%. So I think that's reflective of probably a 6% growth in noninterest balances.

Got it. Okay. And then lastly, just a clarification on the loan growth. You mentioned the 5% to 7% commercial. There's, I guess, the offsets and potentially buybacks and any kind of runoffs in other portfolios. The total number, you think closer to five next year for loan growth, or is five to seven still the right way to think about it?

No. I think five to seven is the right way to show. We're showing commercial growth of probably, you know, it's probably in the six to 7%. And then we're expecting the residential mortgage portfolio to stay relatively steady.

Okay. Alright. Great. Alright. Thanks for taking all my questions. Appreciate it.

You're very welcome, Danny.

Your next question comes from Brendan Nosal from Hovde Group. Please go ahead.

Hey. Good morning, folks. Hope you're doing well.

Hey, Brendan.

I just wanted to dig into kind of the margin and balance sheet impacts of Eastern a little bit more, particularly around their securities portfolio. Just kind of curious, how much liquidity deployment of Eastern Michigan are you baking into that margin outlook? And kind of what does that imply for the overall balance of average earning assets as we move through the year?

Yeah. I think we're not using all of the excess liquidity that we're gaining from Eastern. We're definitely using part of that. I think when you look at our overall numbers, we ended the year including at about a 91% loan-to-deposit ratio. We are expecting that to go up during the year. Just based on our overall strategy and what we think is going to take place in the loan portfolio. So, you know, we're operating two separate banks, and the way that we're getting, you know, functionally, the way that we're getting that money is Eastern is depositing some of their excess liquidity into Mercantile Bank. Certainly keeping more than sufficient funds at the Federal Reserve for their daily liquidity needs as well. So we're definitely using part of it. But from a functionality standpoint, it's hard to use all of it. And so the banks do merge a little over a year from now.

Yep. Okay. That's helpful. One more from me just changing topics here to Southeast Michigan. I think you mentioned in your prep remarks that there were some team ads in that market late in the year, which impacted expenses. Just can you offer some color on what you've added to date down there? And then additional appetite for team edge or lift outs just given the M&A dislocation we're seeing in Detroit?

Yeah. This is Ray. We've added a lending team down there that has gotten off to a very nice start, added to our backlog. And we continue to be in the market for more lending talent. Southeast Michigan is a vast area, and adding one team does not come anywhere near covering it. So we'd be willing to continue to add the right sorts of people to our team to accomplish our objectives there.

Okay. Fantastic. Thanks for taking my questions.

Thanks, Brendan.

Your next question comes from Nathan Race with Piper Sandler. Please go ahead.

Hey, guys. Good morning. Thanks for taking my question.

Good morning, Nathan.

Chuck, on the expense guide, when I look at what Eastern's been running at relative to the 4Q level, it doesn't imply that there's cost that is coming through from Eastern relative to the target laid out in the deck from last year. So just curious, are some of those cost saves being reinvested in some of the hires that were just touched on, or can you just kind of unpack if there's any other reinvestments going on?

Yeah. I think, you know, the plan from any cost saves from the Eastern acquisition on the personnel front is really going to be kind of later in 2027. By keeping the banks separate, we really needed everybody, you know, that was part of Eastern at the time of consummation to stay, you know, in very large regards. And so, you know, most of the cost saves or the cost saves associated with Eastern are more of a 2027 event. And I think that kind of builds on what we see for 2026, kind of touching on, you know, with the last question and Ray's response in regards to expanding our presence in Southeast Michigan. You know, the people that we hired in the latter part of last year, obviously, continuing for a full year this year. Our desire to hire additional folks there, you know, that's a lot of investment, and we expect, you know, solid loan growth in that market. But, clearly, that will come down the road. So, you know, there'll be some investment impact there. You know, we'll definitely look at, you know, adding some additional facilities in that as we grow out that market. I don't really expect any cost from and really any significant cost in 2026 associated with that part of the expansion. That'll be more of a 2027 impact. But then tying that into which is also tied into the acquisition of Eastern is our switch on our core processor, which will take place in February 2027. And there'll be some pretty significant cost saves and just as importantly, some very, very nice efficiencies internally, and a better and much higher durability than what we've had with our current setup. And a better experience, not only for our employees internally but also for our customers. So I won't call this the year of investment, but, clearly, what's being reflected in our thoughts for 2026 are those expectations and still expect a very solid year. But the investments will be there and are laid out in our numbers.

Understood. It's really helpful. And then, Chuck, can you just update us with Eastern in the fold now and, you know, some of that excess liquidity deployment that you alluded to earlier, what the sensitivity is around margin to any 25 basis point cut that we would have on the short end?

Yeah. We think that, you know, any changes in the interest rate environment, we think we're pretty well protected from those. You know, as we say all the time, we want to be agnostic with changes in interest rates. We here firmly don't believe in anything. Any part of our operation, but also interest rates is that hope is not a strategy. We want to be purposeful in what we do. And make sure that we've got the fundamentals and the discipline to manage our balance sheet in a way that if rates go up, down, or don't change, you know, any change in the margin will be I won't call it nominal, but will be mitigated in large regard. Clearly, we want to work at strengthening the margin on an overall basis without getting away from the tenets of managing through interest rate risk. And you see some of that with our projections for the margin for the rest of this year. As we unwind some of the balance sheet from investments and loans that were made in a much lower interest rate environment. But on an overall basis, you know, we think our margin is pretty well insulated from changes in interest rates.

Gotcha. And on that last point, Chuck, in looking at slide 19, can you update us just in terms of the repricing of the two billion in assets in terms of how much that reprices over the next four quarters or so?

Which part? I was looking for the page, or I missed some of your questions. Sorry.

The two billion in asset repricing on the bottom of slide 19, how much of that reprice over the next four quarters? And by

Yeah. I would say probably about a third of it over the next year, but I think what's most important in that number is when you look at the existing yields on those assets, this year and next year, there's a lot of repricing opportunities. We had the same last year. And that carries forward this year. And into next year as well. And so the assets that are fixed rate that will mature in 2028 and beyond are more likened to current rates.

Okay. Great. I appreciate all the color. Thanks, guys.

You're very welcome.

Your next question comes from Damon Del Monte with KBW. Please go ahead.

Hey, good morning, guys. Hope you're doing well, and thanks for taking my questions. First question just on the loan growth outlook. Fourth quarter was on an organic basis was pretty modest. Just talk a little bit about what's giving you the optimism to kind of have that 5% to 7% you know, for an annualized number in 2026? Is it more a function of the pay downs slowing or is it more that the appetite from customers is moving higher?

Hey, Damon. This is Ray. The level of funding that we've had over that period of time that you referenced has been pretty solid. And as you referenced, the payoffs were high in the fourth quarter. And we expect that to continue to be true in the first quarter, but the backlog is at almost a historically high level. So if we don't hit exactly in the first quarter what we project will, you know, make that up in quarters after that. So we feel really comfortable with our ability to be able to originate loans. The payoffs have been high for the last five quarters, actually. And we expect that to settle down later in the year. And so overall, feel pretty comfortable that we'll be able to hit that number.

Got it. Okay. That's helpful. Thank you. And then just update us with your thoughts on capital management. I know there's a small amount of buybacks left. I think it's like $6.8 million. But just curious as to your thoughts with now that the deal is closed, your capital levels remain very strong. I was wondering what you're thinking about the buyback and any appetite as we go into 2026?

Yeah, Damon, this is Chuck. I would say our appetite is I would term it as stronger appetite than we've had over, say, the last twelve to eighteen months. Obviously, a lot going on with our company specifically. You know, everybody sees the markets are call it, turmoil almost every morning, it seems. So you know, we've been pretty cautious in how we manage capital. But I think as we, you know, put the Eastern, get that consummated, we see where we're at. We see the comfort with our projections on the earnings side and that continue, which is very important, that continued expectation for strong asset quality. You know, we look at, you know, perhaps getting more into the buyback arena. You know, clearly, the stock price itself and, you know, multiples of that will come into play. So I don't I'm not making any promises, but I would say we have a bigger appetite going forward with buybacks than we've had more recently.

Got it. Okay. And then just lastly, just to clarify on the Eastern securities portfolio. Did you actually liquidate that and you're reinvesting that? Or did you just mark it at the time of close and you carry it at a higher yield now?

Yeah. It was the latter. It was marked to current market and it's carried at a higher yield. And the duration on that portfolio was relatively short. So it provides us for some nice improvement on the margin especially this year and into next year.

Got it. Okay. Great. Thank you very much.

You're welcome, Damon.

A reminder, if you would like to ask a question, please press 1 on your telephone keypad. To withdraw your question, press 1 again. Your next question comes from the line of John Rodis with Janney. Please go ahead.

Hey, good morning.

Morning, John.

Hey. Just back to expenses, Chuck. Just to be clear, so your guidance on page 26, you know, minimal cost saves for this year, and then I think you said but that does include the CDI amortization of roughly $900,000 a quarter. Is that correct?

That is correct. Yep.

Okay. And then I guess as we look to next year, to 2027, I know it's a long way away, but how should I mean, just big picture, how should we think of expenses? I mean, is it low to mid-single-digit growth and then add in some cost saves and, you know, you just talk about how much you would expect in cost saves next year either on a percent or dollar basis?

I think the difficulty there is, you know, what we do with personnel investments not only in Southeast Michigan, which Ray mentioned, you know, obviously, it's a very big market for us. But other markets as well. You know, there are some cost saves coming from Eastern. They're not massive. Relative to the size and the needs that we have over there. We are expecting some meaningful reductions in the data processing area. Especially with the new contract with our new provider. I would say, you know, we would look to put you know, we would like to save some money but that might be a very nice avenue for us to continue to pay for, if you will, any expansion with personnel and or facilities. With being able to, keep overhead relatively stable. But certainly show some solid growth on the balance sheet side. Which would, you of course, have the net result would be a very positive impact on net income. So you're right. It's pretty far out there. But there we know there's cost saves coming. In 2027. We'll just see how that has to play out. But, clearly, you know, we've always believed that this company has a lot of opportunity to grow. For lots of different reasons through its life. And going forward, the environment will continue to change. But we want to make sure that we're taking advantage of the opportunities that we have. And it maybe gets a little bit lumpy from time to time. As we make those investments and as we get those benefits in future periods. But we you know, there's a lot of opportunity. We're in solid markets. We have some great opportunities in the Southeast of Michigan and certainly feel very positive about what the future holds.

Okay. Thanks for your thoughts, Chuck. I appreciate it.

You're welcome.

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

Thank you for your participation in today's call and for your interest in Mercantile Bank. That concludes today's call.

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