Mercantile Bank Corporation

Good morning, and welcome to the Mercantile Bank Corporation 2025 First Quarter Earnings Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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 first quarter of 2025. The team members joining me this morning include Ray Reismuth, 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 filing. The company assumes no obligation to update any forward-looking statements made during the call. Let's begin. Ray?

Thank you, Nicole. My comments will focus on the changes that have been made to the funding side of our balance sheet and the resulting impact on the income statement, as well as our loan growth, excellent asset quality, and growing core non-interest income. Taken together, these performance traits have allowed us to compile attractive compounded annual growth rates for the benefit of our shareholders. From year end 2021 to year end 2023, Commercial and mortgage loan growth was strong, and while deposit growth was solid, it did not keep pace with loan growth. The outflow of deposits from the banking system post-COVID contributed to this trend. As a result, the bank's loan to deposit ratio increased to 110% at year-end 2023. In 2024, we focused on reducing this ratio with the goal to strengthen our on-balance sheet liquidity and overall financial profile and succeeded in reducing the loan-to-deposit ratio to 98% by year end. As described in previous calls, we undertook a three-pronged approach to building our deposit base with the objective of reducing the loan-to-deposit ratio into the mid-90% range over time. To reiterate, first, we broadened our focus on business deposits. Second, we dedicated resources to the governmental and public unit realm. Third, we restructured the retail customer focus away from activity and toward balances. These efforts led to increases in business deposits of 24% and personal deposits of 9% for the 12-month period ended March 31, 2025. Despite a longstanding seasonal pattern of reduced first quarter deposits, our secular growth trend overcame the typical seasonal pattern and allowed us to report a loan-to-deposit ratio of 99%, at the end of the first quarter of 2025, compared to 108% at the end of the first quarter 2024. Commercial loan growth during the first three months of 2020, or I'm sorry, yes, during the first three months of 2025 was $44 million, or an annualized rate of nearly 5%. Customer reductions in loan balances from excess cash flow or sales of assets of $55 million during the first quarter of 2025 impacted our commercial loan totals. The commercial loan pipeline stands at $234 million, and commitments to fund commercial construction loans total $210 million, which has decreased from prior quarter end. While commitments to fund have decreased, discussions and progress are at an all-time high. Given the uncertainty in the environment, the pace at which these may turn into accepted commitments to fund is unknown. Taking these factors into account, we expect commercial loan growth in the immediate future to reduce slightly from the pace of the recent past. Mortgage loans on the balance sheet have grown substantially in the increasing rate environment experience over the past few years as borrowers have opted for arms, which reside on our balance sheet, rather than fixed rate loans, which are sold in the secondary market. We have successfully executed changes within our portfolio mortgage programs resulting in a greater portion of our mortgage production being sold rather than placed on our balance sheet. The positive outcomes include a 13% increase in mortgage banking income during the first quarter of 2025 compared to first quarter of 2024, and a nominal decrease in mortgage loans on our balance sheet during the 12-month period ending March 31, 2025. Our mortgage team continues to build market share despite a challenging rate environment. allowing results that diverge from the average in the market. While mortgage banking production is certainly rate dependent, the level of earnings from this activity that can be considered core or somewhat independent of the rate environment is increasing. Asset quality remains very strong as non-performing assets total $5.4 million at March 31, 2025, or nine basis points of total assets consisting primarily of residential real estate, and non-real estate commercial loans. There is only $41,000 in commercial real estate representation among the non-performing assets. Past due loans and dollars represent three basis points of total loans, and there is no outstanding ORE. We increased the allowance to loans ratio four basis points during the first three months of 2025, while the level of non-performing loans to total loans remained constant. to reflect the uncertainty inherent in the economic environment. Our lenders are the first line of observation and defense to recognize areas of emerging risk. Our risk rating model is robust, with a continued emphasis on current borrower cash flow, providing prompt sensitivity to any emerging challenges within a borrower's finances. That said, our customers continue to report strong results to date, and we expect to see that continue as they report first quarter results. Since early in the second quarter of 2025, a great deal of uncertainty has been present in the environment, and we expect to see varying impacts on our customers and their financial positions, from very modest impact to improvement or decline based on the specifics of their situation. This has been and will continue to be a topic of discussion with borrowers and a focus of our lending teams. Total non-interest income grew 12% in the core areas of payroll, treasury, management and mortgage banking during the first quarter of 2025 compared to the first quarter of 2024. Mortgage banking income grew 13% based upon the strategies outlined earlier and the resulting ability to sell a greater portion of originations on the secondary market. Service charges on accounts grew 20% reflecting higher activity levels and customer growth and less earnings credit offset to charges based on reduced balances in transaction accounts Payroll services grew 16% as our offerings continue to build traction in the marketplace. Finally, debit and credit card income grew 4%. Income from interest rate swaps declined to nominal levels as demand by borrowers for interest rate protection shifted with borrowers' future rate expectations and the timing of closings. Finally, a note about interest rate sensitivity. During the first quarter of 2025, immediately after the 100 basis point decrease in rates implemented by the Fed during the last four months of 2024, our net interest margin increased by six basis points compared to the fourth quarter of 2024, indicating our ability to manage the cost of funds and utilize our investment portfolio in a way that supports a durable net interest margin. We are pleased to report that our five-year compounded annual growth rate of 8.4% for tangible book value and 10.4% for earnings per share growth places us in the top two of our proxy peer group. That concludes my remarks. I will now turn the call over to Chuck.