Good morning and welcome to the Mercantile Bank Corporation 2025 4th 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 Nicole Clatter, 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 fourth quarter of 2025. The team members joining me this morning include Ray Reitzma, 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 MerckBank.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, right?

Thanks, Nicole. Our results for 20... Paired with strong asset quality number five. Continued strong growth in key... Growth and commercial deposit relationships has supported growth in treasury management services, resulting in an increase to build market share in the 79.1% of 2020 during both time and non-interest income.

Lower provision expense more than offset interest income on loans declined during the fourth quarter and all of 2025 compared to the prior yield, reflecting a lower yield on loans that was not fully mitigated by loan growth. Our yield on loans during the fourth quarter of 2025 was 26 basis points lower than the fourth quarter of 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 dollars during the fourth quarter of 2024 an increase of 62 million dollars interest income on securities increased during the fourth quarter in all of 2025 compared to the prior year periods reflecting growth in the securities portfolio and the reinvestment of lower yield 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 the fourth quarter of 2025 compared to the fourth quarter of 2024, reflecting a lower average yield that more than offset interest income on other earning assets increased compared to all of 2020, reflecting a higher average balance that was partially offset by a lower yield. In total, interest income was $0.2 million lower and $8.7 million higher in 2025 compared to the respective 25 compared to the prior year period in large part due to a lower average cost of deposits reflecting the aforementioned decline in the federal funds rate that more than offset 25 compared to 4.52 billion during the fourth quarter of 2024 an increase of 302 the cost of deposit 25 compared to this increased rate of 2024 although the cost of the million dollars resulted in a net increase in interest interest expense all of 2025 compared to the prior year periods reflecting lower a reflecting a lower average our funds declined during the fourth quarter in all of 2025 compared to the prior year periods largely reflecting lower rates on our trust preferred securities due to the lower interest rate environment in total Interest expense was $2.9 million and $1.3 million lower in all of 2025 compared to the respective. Net interest income increased $2.7 million and $10.0 million during the fourth quarter in all of 2025 compared to the respective. Impacting our net interest margin over the past couple of years has been our strategic initiative to lower the loan and deposit, which generally entails deposit growth exceeding loan growth and using the additional monies to purchase has been in higher yielding money market and time deposit products while the purchase securities provide a lower yield than loan products. Despite that strategic initiative and the aforementioned decline in the federal funds rate has been relatively stable over the past five quarters, ranging from a high of 3.49% to a low of 3.41% or 6%. We are committed to managing our balance sheet in a manner that minimizes the impact of changing interest rate environments on our net interest margin. Basic funds management practices, such as match funding, combined with scheduled maturities of lower yielding fixed rate commercial loans and securities, and higher rate time deposits, along with residential mortgage loans should provide for a relatively stable net interest margin in future periods. Our net interest margin increased two basis points during the fourth quarter of 2025 compared to the fourth quarter of 2024. Our yield on earning assets declined 28 basis points during that time period, largely reflecting the aggregate 75 basis points directly reflecting lower rates paid on money market and time deposits, which more than offset costing money market and time deposits. While average loans increased $62 million during the fourth quarter of 2025 compared to the fourth quarter of 2024, $302 million during the same time period, providing a net surplus of funds totaling $240 million. We used that net surplus of funds to grow our average securities portfolio by $160 million and reduce our average federal Home Loan Bank portfolio, we recorded a negative $3.2 million during the fourth quarter in all of 2020 funds of $1.5 million and $7.4 million during the respective 2024 period. The fourth quarter negative provision expense was primarily comprised of improved and changes in loan mix to below net loan growth due to larger than typical commercial. The full year 2025 provision expense primarily reflected a $1.9 million reserve increase related to the $1.8 million net increase turned by a $5.5 million allocation for a commercial construction loan relationship that was placed on non-accruals during the second quarter of 2025 million net increase in qualitative fact. A $2.3 million and $1.3 million reduction related to a shorter mortgage loan portfolio through prepayment speed line loss rates in the quarter of 2025, reflecting the negative $0.7 million provision expense, and net loan charge-offs of $2.6 million mitigated from a $2.4 million increase associated with the acquisition. The reserve balance increased $3.7 million during all of 2025, reflecting provision expense of $3.2 million and $2.4 million increase associated with the Eastern acquisition. which more than offset net loan charge-offs of $1.9 million. The reserve balance equaled 1.21% of total loans as of year-end 2025, compared to 1.18% at year-end 2024. Non-interest expenses were $2.9 million and $10.2 million higher. During the fourth quarter and all of 2025, the increases during both time periods largely reflect higher salary and benefit costs, costs, including annual merit pay and higher data processing costs also comprise a notable portion of the increased non-interest expense levels, primarily reflecting higher transaction volume and software support costs, along with the introduction of new cash associated with the acquisition of Eastern total of $1.2 million and $1.8 million during the fourth quarter in all of 2025, respectively. Allocations to the Reserve for Unfunded Loan Commitment largely reflect a sizable increase in an increased $1.1 million and $1.6 million compared to the respective. Despite increased pre-tax income during the fourth quarter and all of 2025, compared to the respective prices in $4.0 million, the reductions largely reflect the acquisition of transferable energy tax credits during 2025, providing for reductions in federal income tax expense of $1.0 million and $3.5 million in all of 2025 response was further reduced by net benefits associated with our low income housing and historical tax credit activities which equals $0.8 million and $1.8 million of 2020. According to these tax benefits year 2025 attacks of about 12 percent and for additional acquisitions of transferable energy taxes $213 million above the minimum threshold to be categorized. Michigan Bank's total risk-based capital ratio was 15.3% at year-end 2025, $20 million above the minimum threshold. During 2025, we have $6.8 million available in our current repurchase plan. Our tangible book value per common share continues to grow up $3.64, or almost 11% during 2025. slide 26 of the latest assumptions on the interest rate environment and key performance metrics for 2026 with the caveat that market conditions remain volatile making forecasting difficult this forecast is predicated on no changes in the federal funds rate during 2026 although we believe our net interest margin will remain relatively stable in a changing interest rate environment as it did during 2025. We are projecting loan growth in a range of 5% to 7% annualized, which encompasses a strong commercial loan pipeline, as well as expected meaningful payoffs over the next summer of 2025 net interest margin, and further steady increases throughout the year as we benefit from maturing relatively low-yielding fixed end investments, along with higher-yielding time deposits we are projecting a federal which encompasses continued growth and net benefits from our low-income housing along with additional but lower levels of transferable energy tax credit investment snow investments that were made in the latter part of 2025 and expected during 2026 to in southeast michigan as well as to support operational areas as we switch core digital banking providers to enhance the durability, efficient cost projections, and intangible hammering $10 million. During 2020, we navigate through the myriad of challenges, and this includes my prepared remarks. I'll now turn the call back over.

Thank you. We will now begin the question and answer session. To ask a question, please press star 1 on your telephone T-pad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, press star 1 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, Jamie. Yeah, maybe starting on the margin guidance, Chuck, just for clarification, I just want to make sure you do have the December rate cut in the guidance. And then I'm curious if you could pull out kind of the purchase accounting accretion that's baked into the increase in the first quarter. You 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, X 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 and 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 a relatively steady margin going into 2026. So kind of the difference between, say, the low maybe touching the mid 3.4s, getting up to 355 to 365 in the first quarter, a lot of that's reflecting of the eastern consummation.

Okay. Thanks for that. That's helpful. And then, you know, I guess in terms of the assumptions baked into the margin guidance after that, the five basis points a quarter expansion, again, X rate cuts. Are you assuming any kind of change in non-interest-bearing concentration? I 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 non-interest-bearing perspective.

Are you assuming that in the in the guidance now the assumption with non-interest balances is what we typically do is we tie that any change in that balance to the growth in commercial loans which is in that five to seven percent so I think that's reflective of probably a six percent growth and non-interest balances got it okay and then lastly just a I guess just a clarification on the loan growth.

You mentioned the 5% to 7% commercial. There's, I guess, with 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 it. We're showing commercial growth probably in the six to seven percent, and then we're expecting residential mortgage portfolio to stay relatively steady.

Okay. All right. Great. All right. Thanks for taking all my questions. Appreciate it.

You're very welcome, Denny.

Your next question comes from Brendan Nosel from Havdi Group. Please go ahead.

Hey, good morning, folks. Hope you're doing well. Hey, Brendan. 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, you know, we're not using all of the excess liquidity that we're gaining from the Eastern. We're definitely using part of that. I think when you look at our overall numbers, we ended the year, including Eastern, at about a 91% loan or 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 until the banks do merge a little over a year from now.

Yeah. Okay. 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 ads 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. They're added to our backlog. and we continue to be in the market for more lending talent southeast michigan is a vast area of opportunity 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 thanks for taking my questions your next question comes from nathan race with piper sandler please go ahead hey guys good morning thanks for taking the question chuck on the expense guide um when

i look at what eastern's been running at relative to the 4q level you know it doesn't imply that there's um cost things coming through from eastern um relative to the target laid out on the deck um from last year so just curious you know is some of those cost caves being reinvested in some of the hires that were just touched on or if 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, we're 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 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 raised 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 there um you know that's a lot of investment and we expect um you know solid loan growth in that in that market uh but clearly that will come down the road um so you know there'll be a some some investment to impact there um you know we'll definitely look at you know adding some additional facilities in that market as we grow out that market i don't really expect any costs 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, to which will take place in February of 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. um but the but the investments will be there and are laid out in our numbers understood it's really helpful um and then chuck can you just update us with these during 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 uh 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 tenants 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 slower 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, and looking at slide 19, can you update us just in terms of the repricing of the two, in terms of how much that reprices over the next four quarters or so?

Which part? I was looking for the pager i missed some of your questions sorry the two uh billion in asset repricing on the bottom of uh slide 19 how much of that repriced over the next four quarters and by yeah i would yeah i would say yeah i would say probably um 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 okay great i appreciate 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, you know, fourth quarter was, on an organic basis, was pretty modest. You know, 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 paydown slowing or is it more that the appetite from customers is moving higher?

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, we'll 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 um and uh and we expect that to settle down later in the year and uh so overall feel pretty comfortable that we'll be able to hit that number got it okay that's helpful thank you um 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 um but just curious just to your thoughts with you know now the deal's closed your your uh capital levels remain very strong. I'm just wondering what you're thinking about the buyback and any appetite as we go into 26.

Yeah, Damon, this is Chuck. I would say our appetite is, I would determine is stronger appetite than we've had over, say, the last 12 to 18 months. Obviously, a lot going on with our company specifically. You know, everybody sees the markets are, I'll 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 put the Eastern, get that consummated, we see where we're at. We see the comfort with our projections on the earning side and the continue, which is very important, the continued expectation for strong asset quality. We look at perhaps getting more into the buyback arena. Clearly, the stock price itself and multiples of that will come into play. So, 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 that duration on that portfolio was relatively short. So it provides us for some nice improvement on the margin, especially this year and in the 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 star 1 on your telephone keypad. To withdraw your question, press star one again. Your next question comes from the line of John Rodas with Jannie. Please go ahead.

Hey, good morning. 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. or 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, this 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, can you just talk about how much you would expect in cost saves next year, either on a percent or dollar basis yeah i think the difficulty there is you know what we do with personnel investments not only in southeast michigan which ray mentioned 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 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 shows some solid growth on the balance sheet side, which would, of course, have the net result would be a very positive impact on that income. So you're right, it's pretty far out there. But 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 there's a lot of opportunity. We're in solid markets. We again and certainly feel very positive about what the future holds.

Okay. Okay. Thanks. 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 Ray Reitzma for any closing remarks.

In today's call and for your interest in Mercantile Bank, that concludes...

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