Mercantile Bank Corporation Q4 FY2025 earnings call

• Strategic Execution: Consummation of Eastern Michigan Bank purchase on 12/31/2025 aligned with strategic objectives on PASA, loan growth, and margin stability.
• Net Interest Margin: Over 5 quarters, SOFR dropped 68 bps but margin increased 2 bps to 3.43% due to effective match funding.
• Asset Quality: Very strong, with nonperforming loans at 11 basis points of total loans and allowance for credit losses at 1.21% of total loans.
• Liquidity and Ratios: Loan-to-deposit ratio at 91%, down from prior years; deposit mix improved with noninterest-bearing and lower-cost deposits.
• Growth Metrics: Deposit CAGR 9.2%, loan CAGR 8.6% over 5 years; commitments to make loans at $297M, including $271M in commercial/residential construction.
• Fee Income: Growth in treasury management services (19% service charges), payroll services (14% growth), mortgage banking income (6% growth).
• Portfolio Mix: Discipline in commercial loan growth with 55-45 split between C&I and owner-occupied CRE, prudent concentration in various sectors.
• Integration of Eastern Michigan Bank: Integration underway, cultures meshing well.

In 2025, Mercantile Bank Corporation reported net income of $22.8 million or $1.40 per diluted share, compared to $19.6 million or $1.22 per diluted share in 2024. Net interest income increased $2.7 million in the fourth quarter and $10 million for the full year. The loan-to-deposit ratio stood at 91% as of 12/31/2025. Deposit mix included 25% noninterest-bearing deposits and 24% lower-cost deposits. Over five years, deposits had a compound annual growth rate of 9.2% and loans 8.6%. Commitments to make loans totaled $297 million as of year-end 2025, with $271 million in commercial and residential construction loans.

• Loan Growth: Projected loan growth in 2026 range of 5% to 7% annualized, with commercial loan growth likely in 6-7%, residential mortgage steady.
• Net Interest Margin: Forecasted first quarter 2026 net interest margin to increase due to Eastern acquisition, and steady increases throughout the year as maturing low-yielding loans and investments are unwound, and higher-yielding time deposits are utilized.
• Tax Rate: Projecting federal tax rate of 17% for 2026, incorporating benefits from low-income housing and historical tax credits, and lower levels of transferable energy tax credits.
• Expenses: Noninterest expense projections include personnel investments for Southeast Michigan expansion and core/digital banking provider switch, with quarterly core deposit intangible amortization of $900,000.

• Interest Rate Volatility: Impact on net interest margin, though management aims to mitigate via balance sheet management.
• Economic Uncertainty: Potential impact on loan quality and economic forecasts affecting provision expenses.
• Integration Challenges: From acquiring Eastern Michigan Bank, though cultures are meshing well, integration could have operational impacts.

Q: Clarification on margin guidance, including purchase accounting accretion and core margin forecast A: Charles Christmas confirmed using year-end '25 rates for projections, purchase accounting in loan portfolio is ~$125k net per quarter, and Mercantile's legacy margin is low 3.4%, expecting steady margin into 2026, with first quarter seeing increase due to Eastern consummation.

Q: Loan growth assumptions, including offsets and portfolio runoffs A: Charles Christmas stated loan growth range of 5% to 7% annualized, with commercial growth likely 6-7%, residential mortgage steady, and considering commercial loan pipeline and payoffs.

Q: Margin and balance sheet impacts of Eastern Michigan's securities portfolio A: Raymond Reitsma mentioned not using all excess liquidity from Eastern, loan-to-deposit ratio expected to increase during 2026, and banks merging over time.

Q: Expense guide and reinvestment of cost saves from Eastern acquisition A: Charles Christmas noted cost saves from Eastern acquisition are more of a 2027 event, with 2026 expenses reflecting personnel investments in Southeast Michigan and core processor switch in 2027.

Q: Capital management and buyback appetite A: Charles Christmas indicated stronger appetite for buybacks than in recent months, considering strong capital levels and earnings projections.

Q: Eastern securities portfolio repricing A: Charles Christmas explained Eastern's securities portfolio was marked to current market, carried at higher yield, with short duration providing margin improvement.