Good morning, and welcome to the Mercantile Bank Corporation 2026 First Quarter Earnings Results Conference Call. [Operator Instructions] 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 the First Quarter of 2026. The team members joining me this morning include Ray Reitsma, President and Chief Executive Officer; as well as Chuck 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's filings. The company assumes no obligation to update any forward-looking statements made during the call. Let's begin. Ray?

Thanks, Nichole. Our results for the first quarter of 2026 continue to build on the theme of commercial expertise generating a strong return profile. The consummation of the purchase of Eastern Michigan on December 31, 2025, represents execution of our strategic objectives around deposit growth, loan growth and margin stability paired with strong asset quality and overall financial performance. We continue to demonstrate top cortile return on asset performance relative to our peers built upon the following traits: Trait #1, a strong and durable net interest margin. Over the last 5 quarters, the SOFR 90-day average rate has dropped 67 basis points while our margin increased by 8 basis points to 3.55%. This illustrates effective execution of our strategic objective to maintain a steady margin by matched funding of our assets and liabilities and refutes the notion that we have an asset-sensitive balance sheet despite the relatively large portion of floating our proportion of floating rate assets. Trait #2, very strong asset quality. Non-performing assets to total assets remain at the low levels typical of our company at 11 basis points of total assets as of March 31, 2026. Non-performing loans to total loans over the past 6.25 years averaged 12 basis points. The allowance for credit losses stands at 1.18% of total loans as of March 31, 2026, nearly 10x NPAs providing very strong coverage relative to past due and non-performing loan levels. These numbers demonstrate our long-term commitment to excellence in underwriting and loan administration. Trade #3, improved on-balance sheet liquidity and loan-to-deposit ratio. At the end of the first quarter of 2026, our own to-deposit ratio stood at 89% compared to 91% on December 31, 2025, and and 98% in December 31, 2024, and 110% on December 31, 2023. As of March 31, 2026, our loan --…

Thanks, Ray, and good morning to everybody. This morning, we announced net income of $22.7 million or $1.32 per diluted share for the first quarter of 2026 compared with net income of $19.5 million or $1.21 per diluted share for the first quarter of 2025. Higher net interest income and non-interest income, combined with lower provision expense more than offset increased overhead costs. Excluding after-tax onetime costs associated with the year-end 2025 acquisition of Eastern Michigan and previously announced core and digital banking system conversion, net income improved to $25.2 million or $1.46 per diluted share for the first quarter of 2026. Using this non-GAAP basis, which we believe more accurately reflects our core earnings performance. Interest income on loans increased slightly by $0.2 million during the first quarter of 2026 compared to the prior year first quarter, reflecting loan growth that offset a lower yield on loans. Average loans totaled $4.83 billion during the first quarter of 2026 compared to $4.63 billion during the first quarter of 2025, an increase of $199 million that largely reflects the acquisition of Eastern Michigan at year-end 2025. Mercantile Bank's robust commercial loan fundings during most of 2025 and -- in the first quarter of 2026 were largely mitigated by significant levels of payoffs and partial paydowns of certain larger commercial loans during those periods. Our yield on loans during the first quarter of 2026 was 24 basis points lower than the first quarter of 2025, primarily reflecting the aggregate a 75 basis point decrease in the Fed funds rate during the last 4 months of 2025. Interest income on securities increased $3.9 million during the first quarter of 2026 compared to the prior year quarter. reflecting growth in the securities portfolio and a higher yield. The growth in higher yield reflect the…

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

[Operator Instructions] Our first question comes from Brendan Nosal from Hovde Group.

Maybe just starting off here on the net interest margin. I guess this quarter came in towards the lower end of the guided range. It looks like you tempered the range for the remainder of the year by 10 basis points or so. I guess we haven't gotten any more rate cuts, and you're still not forecasting any in your outlook. So just kind of curious, what were the main drivers of that change to how you see the margin trend due to the balance of the year?

Yes. And the change -- Brendan, it's a good question. I'm glad you asked it because I wanted to make sure everybody understood that is a reflection of the change in our balance sheet mix. We are expecting -- and really because of the deposit growth that we've seen, I mean, as we talked about, as you saw in our release, we had incredibly strong deposit growth. The growth numbers themselves were incredibly strong, but that comes on the top of -- we typically lose anywhere from $80 million to $100 million in deposits in the first part of the quarter, as our commercial customers pay taxes, bonuses, partnership distributions. So typically, you don't see net growth in the first quarter. I can show you that our customers still paid all those items but yet we were able to demonstrate very, very strong deposit growth. And that deposit growth was throughout the different types of products and the types of customers, business, public unit and personal. And so what we saw was that increase in deposits came at the same time, we saw the paydowns in the commercial loans that didn't allow for commercial loan growth. So really all of that deposit growth went to the Federal Reserve Bank of Chicago. Obviously, a lower yield than what we would have expected on the loan portfolio. Going forward, we do expect, as I mentioned, that the margin will continue to improve pretty much at the same pace as what the expectations were originally back in January with the guidance, but we're just kind of starting at a lower spot. And I would say that we still expect deposit growth to continue at our budgeted pace, obviously, which makes for a very strong year. We do think with our commercial loan pipeline that despite the minimal level of net growth that we had in the first quarter that we will catch back up during the last 9 months of the quarter, and get to where we expected to be. So we're kind of ending with more deposits than what we thought we were, which results in a higher balance of the Fed, which has a small compression effect on our margins. So a lot going on there with the margin, but I think it's -- at the bottom line is just more deposits same level of loans, so those more deposit balances are going into the lower-yielding accounting at the Federal Reserve.

Okay. Chuck, that's really helpful color. Perhaps 1 more for me. just kind of pivoting. Can you just update us on the Southeast Michigan initiative you have ongoing with the new team down there? And then on a related note, any updated thoughts on opportunities to capitalize on M&A dislocation across the state?

Sure. This is Ray. We've added some commercial banking talent on the east side of the state, and they have gained some traction and are performing very well relative to our expectations, growing their book, not only on the asset side, but doing a very nice job on the liability side as well. We plan to continue to [Audio Gap]

Inside that you didn't want to keep on balance sheet.

No, that was entirely the [Audio Gap]

And do you feel that you have room to kind of grow into a loan loss reserve and let that drift a little bit lower as you get this loan growth? Or just looking for a little guidance on the provision line basically?

Yes. I think when you look at whether it's a negative, whether it's positive and over the last couple of quarters, as you mentioned, it has been negative it's been negative because of the lack of net loan growth onto our balance sheet. As you know, CECL has put banks into a corner in regards to how it calculates its loan loss reserve and how it manages it. With Mercantile having basically minimal losses since coming out of the great recession, we rely really heavily on qualitative factors. As a matter of fact, if you look at the composition of our reserve, about 60% of our reserve balance is supported by qualitative versus quantitative of course, quantitative primarily driven by lost history performance. So it's always a battle. We like to have -- we like strong capital. We also like a very strong reserve. We're very comfortable with the balance of our reserve. Ray already mentioned it relative to our NPAs, which themselves and to your point, Damon, have been pretty pristine for a very, very long time. So I think kind of back to your specific question, I think when we certainly expect to have given our guidance, some very strong loan growth, at least through the remainder of 2026, notwithstanding any other major impacts to our measurements within CECL, we certainly would expect a positive provision expense going forward. The wildcard is the economic forecast on an overall basis, the American United States economy continues to do well. And so we really don't see much. We haven't seen much change in economic conditions have an impact on our reserve for quite a while now. Just a little bit of positives and minuses as we go quarter-to-quarter. We don't really see a lot of changes in our qualitative measurements. A lot of that is levels of NPA, the way that we administer portfolios, those types of things. I don't see really any changes there. So I think the driver of our provision expense is loan growth. As long as we can keep the pristine asset quality, which we think certainly that we can. So future provision, I think, is going to be really dictated by loan growth. And for our comments this morning, we expect to have very solid loan growth for the rest of this year and certainly into the future periods as well.

Our next question comes from Nathan Race with Piper Sandler.

Chuck, just thinking about the level of cash or excess liquidity, you're looking at run rate going forward. Can you just get some light in terms of how much export liquidity you want to keep on the balance sheet maybe versus redeploying the securities portfolio. And within that context, curious if you're pretty content with the size of this book at this point, just based on the initiatives from the last several quarters. Or is kind of thought just to run with higher excess liquidity just given the loan growth guide?

Yes. I think it's a combination of both. It's a really good question. I think our securities, we're right around 16% of total assets now and the plan is to keep it there. Again, with commercial loan growth, that would drive total assets, which of case will drive the size of the securities portfolio. So we'll have to grow that in congruence with the growth and the rest of the balance sheet, primarily the commercial loan portfolio. Obviously, we love the deposit growth. We'd love to put it into the commercial loan portfolio or residential mortgage portfolio for that matter as soon as we can. But obviously, the deposit growth. We came into the year especially with Eastern joining us with a lot of excess cash sitting at the Federal Reserve, if you will. And that only grew because of the deposit growth and lack of net loan growth in the first quarter. We think that's going to turn. But I think on an overall basis, we'll keep a higher level than historical dollars at the Federal Reserve. But I think it will -- our expectation is it will be less because we do expect to fund loan growth. And with that, we'll have to increase somewhat the size of the securities portfolio. And where that ends with our reserve -- our balance at the Federal Reserve, it's hard to know with all those numbers. Certainly, we expect it to be quite a bit lower than what it has been. But I would say the balance -- my expectation of that balance is to be well much, much higher than historical norms. And I would say historical norm is probably closer to $80 million, maybe $100 million. So I would expect the balance to be well over $200 million at the end of the year.

Okay. Got it. That's really helpful. And Chuck, you mentioned, I think, fixed rate loan repricing is a margin tailwind as we get in the back half of this year. Can you just help us with the yield pickup that you have on that portfolio over the next few quarters?

Yes. It's based on the time frame on that is the rest of this year and into next year. And going from memory, I don't have it in front of me. I think the rate is about 5% on that portfolio, what's repricing.

And then is it fair to assume new loans on a blended basis are coming on 6.5% these days or?

Yes, upper 6% is around 7%.

Okay. Great. And then just lastly, do you have the spot rate cost of deposits in March and just generally how you're thinking about deposit costs trending if the Federal remains on pause this year?

Can you just repeat that second 1 about the cost? I don't quite get that question.

Yes. I was just wondering if you had the spot cost of the deposits in the -- in March and just how you're thinking about the trajectory of deposit costs if the Fed remains on pause this year?

I brought all this stuff with me, but I didn't bring it on a monthly basis. So I think, as I mentioned, we've seen the growth throughout almost all the categories, and we're down a little bit non-interest-bearing if you look at our balance sheet. But again, that's where a significant portion of those tax bonus payments and partnership distributions come out of. As Ray mentioned, the Southeast Michigan, they brought almost as much deposits as they have loans. And a lot of those deposits are coming with the loan relationships, so they tend to be operating accounts, which obviously, we love. So I would say it's a blend of all the different deposits from 0 to non-interest-bearing, 1% or 1.5% on interest checking, not much in savings. And then our money market account is in the 3s, depending on the type and the size of the balance. So I think it's pretty well a blend. We're not looking for any -- if you look at non-maturity deposits or everything but time deposits, we're not really looking for -- we're not certainly not budgeting for any change in rates on any of those things. And I think the growth will be relatively consistent within those buckets to provide for a steady cost of those types of deposits for the rest of the year.

Okay. That's really helpful. If I could just actually sneak one more in. Could you just update us in terms of how much of expenses do you expect to come out of the run rate in the first quarter next year following the core conversion?

We're looking for some pretty sizable savings, especially in regards to the new contract on our core. It will be sizable. Maybe that's something that -- that's still something that we're calculating, trying to figure out what this new core looks like, what we need from a personnel standpoint. Maybe we can continue to work on that and give you some better guidance in July.

Our next question comes from Daniel Tamayo with Raymond James. Your line is now open. Please go ahead.

Great. Maybe just to go back to the NIM guide and the loan growth, curious if you can kind of walk us through what may be downside risk given the reduction in margin guidance we saw -- we saw it today, but you did explain it with the deposits which I get. But if the payoffs kind of remain elevated throughout the year or for the next few quarters, curious, I guess, what's driving the confidence that, that will slow. But then if they don't, what kind of impact do you think that would have on the margin and NII?

Yes. Clear, Daniel, this is Chuck. And clearly, it depends on the magnitude. I think to kind of put things in perspective, we had started to talk about -- because we saw and we were starting to report on in this conference I think at least in July or probably not even April of last year that we saw some pretty big payoffs coming. Clearly, our bankers are talking to the borrowers all the time and understanding whether they were going to put a project in the secondary market, whether they were going to sell their businesses. We usually have a pretty -- some advanced notice where we become aware of the payoffs, especially the bigger ones get everybody's attention. And that has always been that way for whatever reason, the last 3 or 4 quarters, however you want to calculate it, we have seen -- we've talked about it, a pretty high level of payoffs. They're all unrelated to each other. It's just more of a timing coincidence than anything else. Now payoffs, refinancings to the secondary market are a normal part of what we see. And so, we do expect those to continue. But we do expect them to continue more at a normal or -- I would say, normal a typical level that you talked about and put in the release. When we look at our pipeline report, we're not only looking at loan fundings, but we're also looking at paydowns. We look at our pipeline on a net basis and taking the same process that we've always used, that we've always reported always taken into account and managing the balance sheet, we just don't see -- maybe that could change, but we just don't see the same level of payoffs that we've seen more recently, at…

No, that's helpful, Chunk. And remind us, I think last -- sorry, did you have anything else? Just remind us -- Okay. On the rate sensitivity, I know you have the table in the deck, but still not much impact from a 25 basis point rate cut perspective on your guidance?

Now. I think there's a -- we're pretty well matched on the balance sheet. We do have the repricing, as we mentioned, the commercial loan, fixed rates, the securities and even some time deposits that would reprice lower. We think that puts us in a pretty balanced position.

Okay. I guess just to go back to my original question, if you were in that position where loan growth ended up being a little bit slower than expected due to payoffs remaining elevated, would that put you in a position to utilize the buyback authorization in the remainder of the year? Or is that something that you're looking at kind of separate from the loan growth conversation?

Well, I think the loan growth is part of that. I think there's definitely other things to consider when we look at our capital position, where we want it to be relative to certainly the growth. We know that we're a growth company, we need growth to continue to enhance our earnings performance. And certainly, we want to make sure we got enough capital to support the level of growth opportunities that we see, which obviously from our comments this morning, we're very high on. So that's first and foremost. Clearly, we would look at our stock price. The bigger the discount to what we think is appropriate. We will get a bigger appetite. We're also looking at the proposed change in risk-based capital calculations. I'm sure everybody is going through and trying to figure out what that impact would be on the capital calculations. We're also a little bit -- kind of looking to maybe understand how the investing community and the regulators are going to look at that. Clearly, the proposed changes provide for higher capital ratios. Does that just set the new bar? Or do we really get the "spend that and use that?" Our initial calculations under a proposal put all those caveats out there. We're looking at about a -- I'm going to put a number out there, but obviously, it's going to be a ranger owned it. Our CET1 ratio would increase by about 75 basis points. in our total risk-based capital ratio by as much as 1%. So we're looking at some meaningful increases there. Clearly, that would have an impact on how we think about buying back stock. And then just all the other normal things. There's a lot going on in the world. The American United States economy has been incredibly resilient. It usually is, but there's a lot going on. The level of uncertainty is still very, very strong and evident that's out there. So this company has always been pretty cautious when it comes to managing its capital position. But we certainly do understand and appreciate the benefits that could present itself with stock buybacks. So it's always on the table. We regularly talk to our Board about that. Obviously, we haven't bought back any in quite a while now, but it's something that's toys on the stope top.

[Operator Instructions] Our next question comes from Matthew Breese with Stephens Inc.

I just first wanted to start with securities. Maybe help me walk through the anticipated maturities and cash flows of securities for the balance of the year. And what are some of the roll off versus roll on dynamics of securities?

Yes, I'm looking at the deck trying to remember if we have that in there. I thought we do. Yes, we do have that on Slide 17, and we start talking a little bit about the portfolio there. So most of the benefit there is in our agency portfolio. And so we're looking at, I think, another $50 million this year. That's got our average rate of, I think, just under 1% that does in the dollar amounts, but also the average rate do increase over time. But if you look at where rates are today, the types of bonds that we buy today, which I would say give us a yield of, call it, around 3.5%. I'm not sure if you look at on an annual basis if we had -- maybe if we go way out. But I would say certainly within the next 5 years, if not the next 7 years, we don't have a year where the average yield is higher than 3.5%. Now that yield -- that average yield does increase over time. Like I said, it's a little under 1% for the rest of the year. I think it's like 1.5% or so next year. and then it continues to increase. The dollars, we continue to be very diligent with a laddered approach. If you look at our mature -- not this year, but if you lay out the next 5 years, we have about $100 million a year maturing and then it slides off a little bit over that over the next 4 or 5 years. But so we have lots -- I'm being somebody base because I don't have exactly the numbers in front of me, but there is some solid repricing opportunities in that portfolio, along with the commercial loans that we talked about earlier.

So it's give or take $50 million for the year?

There's $50 million maturing this year yet, but there's $100 million maturing every year for the next 5.

Got it. Okay. And then I guess back to Nate's question on cash liquidity. The first part of my question is just around seasonality. Is there anything -- I guess, it will be determined by the deposit side of the balance sheet. But anything seasonal in the second quarter that draws down cash a little bit more than usual? And then secondly, I think you had said we should anticipate running north of $200 million in cash by the end of the year. So is it -- we're standing at like $580 million in total cash right now, that's going to come down by a few hundred million by the end of the year. Is that the right message?

Yes. So I think from a seasonality standpoint, we talked about what happens in the first quarter, which we were able to overcome and then some. We do see some declines here in April as the final tax payments are being made. So April is usually a south a down month, not as dramatic as the first quarter, but there generally is some decline here in April. But there are really no other seasonality for the second quarter. We will see seasonality in the third quarter with our public units as they start collecting their summer taxes. And -- but I would say that when we think about seasonality here, it's the first part of the first quarter, first part of the second quarter and throughout the third quarter. But yes, I think where the cash ends up at the Federal Reserve is anybody's guess. Again, it's going to be driven by both sides of the balance sheet, right? What continued deposit growth we get but certainly more so on the commercial lending side, residential mortgage side, trying to grow that portfolio or at least hold it steady, I should say, going forward and the growth in the securities book, as we keep that ratio at 16%. So that's all going to work out to whatever we keep at the Fed at the end of the day.

Got it. Okay. Last 1 for me. I think you had mentioned that incremental loan yields are in the high 6s, low 7s. Would love some color just on competitive conditions, both sides of balance sheet lending and deposits. And if anything is changing spread-wise?

Okay. I'll take deposits and let Ray chime in on the loan side. We have -- deposit rates have been very, very quiet. I would say, all year. Obviously, we battled the credit unions, and we won't get on that setback this morning. But I think from a banking standpoint, rates have been very consistent. We don't see a lot of specials going on right now. And I would say everybody is, in my opinion, kind of everybody is behaving what they're offering out there makes sense from what they're getting on the asset side. And the stability is relatively easy to work through.

And on the loan side, we have target spreads that we like to achieve relative to risk levels. And as we look across that continuum, there I'd say the competitive pressure there really hasn't changed for some time. It's been the normal level of competition that we've come to know and love in the banking industry.

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

Thank you for your participation in today's call and for your interest in Mercantile Bank Corporation. The call has now concluded. Thank you.

This concludes our conference. Thank you for attending today's presentation.