MERCANTILE BANK CORP Q1 FY2026 earnings call

• Strong net interest margin: Over last five quarters, SOFR 90-day average rate dropped 67 bps, but margin increased 8 bps to 3.55%. - Very strong asset quality: Non-performing assets to total assets at 11 basis points, allowance for credit losses at 1.18% of total loans. - Improved liquidity and loan-to-deposit ratio: Loan-to-deposit ratio at 89% at end of Q1 2026, deposit mix stable. - Strong deposit and loan compounded annual growth rates: Deposit CAGR 9.2% over last five years, loan CAGR 8.6% over same period. Loan growth impacted by payoffs in Q1 2026 but commitments to new commercial loans and construction loans at quarter highs. - Strong fee income growth: Service charges on accounts up 35%, credit/debit card offerings up 17.6%, mortgage banking income up 12.4%. - Well-managed expenses: Net revenue grew 18.1%, occupancy and data processing costs virtually unchanged as % of net revenue, salaries and benefits increased, allocations to reserve for unfunded loan commitments and core deposit intangible asset amortization increased. Integration of Eastern Michigan is well underway with meshed cultures.

Net interest income increased $7.4 million in Q1 2026 compared to Q1 2025, primarily due to growth in earning assets and a higher net interest margin. Net revenue grew 18.1% to $67.6 million. Non-performing assets to total assets remained at low levels at 11 basis points. Deposit mix included 25% non-interest-bearing deposits and 25% lower-cost deposits. Loan-to-deposit ratio was 89% at end of Q1 2026. Commercial deposit relationships supported growth in treasury management services, with service charges on accounts up 35% y-o-y. Credit and debit card offerings grew 17.6% y-o-y. Mortgage banking income grew 12.4% y-o-y. Return on average assets was 1.4% and return on average equity was 12.5% for Q1 2026.

• Forecasts net interest margin to remain relatively stable in changing interest rate environment, with second quarter margin similar to first quarter and steady increases in last half of year. - Projects loan growth in range of 5% to 7% annualized during each quarter, with strong commercial loan pipeline and fewer commercial payoffs. - Projects federal tax rate of 17% due to growth in net benefits from low-income housing and historical tax credit activities, along with additional transferable energy tax investments. - Non-interest expense projections reflect personnel investments to support expansion in Southeast Michigan and core/digital banking system conversion, with one-time costs not included.

Q: On net interest margin, quarter came in toward lower end of guided range, what were main drivers?

A: More deposits, same level of loans, with deposits going into lower yielding account at Federal Reserve.

Q: Update on Southeast Michigan initiative and M&A dislocation?

A: Added commercial banking talent on east side of state, performing well, plan to add more talent; on M&A, looking for congruent culture, ability to prudently grow assets with outstanding asset quality, improve deposit system and be profitable.

Q: Fair value accretion in margin?

A: Only about one basis point impact excluding securities portfolio.

Q: Loan growth outlook, payoffs from legacy or Eastern Michigan?

A: Entirely from legacy.

Q: Provision going forward with loan growth?

A: Expect positive provision expense going forward, driver is loan growth as long as asset quality remains pristine.

Q: Cash or excess liquidity, size of securities book?

A: Securities at around 16% of total assets, plan to keep it there, balance at Federal Reserve expected to be well over historical norms.

Q: Yield pickup on fixed rate loan repricing and deposit costs?

A: Fixed rate loan repricing portfolio rate about 5%, new loans on blended basis upper sixes; deposit costs trend steady with growth throughout categories.

Q: Impact of loan growth slower than expected due to payoffs on margin and NIH?

A: Depends on magnitude, expect payoffs to normalize, maybe two to five basis points of margin compression below guidance.

Q: Seasonality of cash and competitive conditions on deposits and loans?

A: Seasonality in first part of first and second quarters, third quarter with public units collecting summer taxes; deposit rates quiet, competitive pressure on loans normal.