Mercantile Bank Corporation Q3 FY2025 earnings call

• Net Interest Margin: Strong and stable, with a 3.5% margin despite SOFR dropping 96 basis points over five quarters. Effective match funding of assets and liabilities.
• Asset Quality: Past due loans at 16 basis points of total loans, non-performing loans to loans averaged 13 basis points over five years plus YTD, allowance for credit losses at 1.28% of total loans.
• Liquidity and Loan-to-Deposit Ratio: Loan-to-deposit ratio at 96%, down from prior years. Deposit mix includes 25% non-interest-bearing and 20% lower-cost deposits. Planned acquisition of Eastern Michigan Financial Corporation will positively impact these measures.
• Deposit and Loan Growth: Annualized deposit growth 9% in 2025, with 6-year CAGR of 11.8%. Total loans CAGR 10% over 6 years. Third quarter loans contracted due to paydowns, but commitments to make loans at $3.7 billion, an all-time high.
• Fee Income: Growth in commercial deposit relationships led to 18% increase in service charges on accounts. Payroll services up 15% YTD. Mortgage banking income up 12% YTD.
• Acquisition Impact: Planned acquisition of Eastern Michigan Financial Corporation will contribute to improved liquidity, loan-to-deposit ratio, and net interest margin.

Mercantile Bank Corporation's 2025 third quarter results showed net income of $23.8 million or $1.46 per diluted share, up from $19.6 million or $1.22 per diluted share in 2024. Net interest income increased $3.7 million in the third quarter and $7.3 million for the year compared to prior year periods. Average loans were $4.6 billion in 2025, up from $4.47 billion in 2024, with a growth rate over 4%. Average deposits were $4.83 billion in 2025, up from $4.34 billion in 2024, with a growth rate over 11%. The net interest margin was relatively steady over the past five quarters, ranging from 3.41% to 3.52%, averaging 3.48%.

• Loan Growth: Projecting loan growth in range of 5% to 7% annualized in the fourth quarter. Long-term mid-single digit loan growth expected.
• Net Interest Margin: Forecast to remain relatively steady within past five quarters' range despite interest rate changes.
• Tax Rate: Projected federal income tax rate of 15% for the quarter, with potential for lower rates through transferable energy tax credits and other tax activities.
• Acquisition Closure: Assumes acquisition of Eastern Michigan will be concluded by end of 2025, with associated costs factored into guidance.

• Interest Rate Changes: Potential headwind to net interest margin from rate cuts, but offset by acquisition benefits and strategic balance sheet management.
• Loan Paydown Timing: Uncertainty in timing of loan paydowns, which can impact quarterly loan growth figures.
• Tax Credit Availability: Dependence on availability and acquisition of transferable energy tax credits, which could affect tax expense projections.

Q: On credit quality and normalized charge-off ratio?

A: Charles mentioned typically budgets between 5-10 basis points of net charge-offs, with historical perspective excluding Great Recession supporting this.

Q: Net interest margin beyond fourth quarter?

A: Acquisition will benefit margin; lower rate loans and securities reprice, time deposits at higher rates, but Fed rate cuts are a headwind, but margin expected to remain steady.

Q: Loan growth guidance and paydowns?

A: Paydowns impact quarterly loan growth, but strong pipeline and expected closings in fourth quarter support 5%-7% growth, with mid-single digits expected long-term.

Q: Expenses and acquisition costs?

A: Fourth quarter guidance includes $1 million in acquisition costs, with assumption of acquisition closure by end of quarter.

Q: Tax impact on expenses?

A: Tax credits impact federal income tax line, not overhead expenses.

Q: Expense cadence and cost savings from Eastern Michigan deal?

A: Cost saves from Eastern Michigan primarily in 2027 with core conversion planned for February 2027; some upfront costs in 2026, but significant savings thereafter.

Q: Provision and growth in fourth quarter?

A: First and second quarters can be barometers, with strong credit quality and annual prepayment speed considerations.

Q: M&A opportunities and commercial clients?

A: Historical pattern of M&A leading to business development and talent attraction; specific details of this deal to unfold.

Q: Specific allocation on commercial credit?

A: $3 million specific allocation on commercial credit, process ongoing with full attention, too early to determine final loss and timing.

Q: Debit/credit card income?

A: Card income growing well, volume-driven, with opportunities for continued growth in existing and new commercial customers