Mercantile Bank Corporation

Good morning, and welcome to the Mercantile Bank Corporation second quarter 2025 earnings conference call. All participants will be in a 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. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note that 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 second 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 presentations covering this quarter's results. You can access a copy of the presentations as well as the press releases sent earlier today by visiting merckbank.com. After our prepared remarks, we will then open a 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. Ray?

Thank you, Nicole. My comments will focus on the factors driving our robust second quarter 2025 operating results and the key elements of our strategic partnership with Eastern Michigan Bank, which was announced this morning. Commercial loan growth for the first six months of 2025 was $114 million, or an annualized rate of 6.2%. This growth occurred despite customer reductions in loan balances, primarily from asset sales. which aggregated $154 million for the period, with $99 million attributable to the second quarter. We expect continuation of this trend with somewhat elevated CRE payoffs in the third quarter. Lending commitments are down slightly from the first quarter of 2025, but remain at a solid level of $437 million, and discussions in progress remain at historically high levels. Given the uncertainty inherent in the current economic environment, the pace at which these may turn into accepted commitments is also uncertain. Taken together, we expect loan growth of 1% to 2% in the third quarter and 3% to 5% in the fourth quarter. In the mortgage portfolio, we continue to successfully execute initiatives that reduce the volume of loans that reside on our balance sheet in favor of selling production in the secondary markets. Our mortgage team continues to build market share despite challenges from relatively high interest rates. Positive outcomes include a 23.4% increase in mortgage banking income for the first six months of 2025 compared to the first six months of 2024, and a decrease over the last year of $50 million in residential mortgages on the balance sheet. Asset quality remains strong as non-performing assets totaled $9.7 million at June 30, 2025, or 16 basis points of total assets. Past due loans represented six basis points of total loans at the end of the second quarter. Our lending teams are the first line of observation and defense to recognize areas of emerging risk. Our risk rating model is robust with continuing emphasis on current borrower cash flow, providing prompt sensitivity to any emerging challenges within a borrower's financial situation. That said, our customers continue to report strong results to date, despite the uncertainty and rapid change that has been present in the operating environment. Non-interest income grew significantly in several key areas during the first six months of 2025, compared to the respective 2024 period. As mentioned earlier, mortgage banking income grew 23.4%, as our team grew market share in a difficult interest rate environment. Service charges on accounts grew 18.1%, reflecting growth in our deposit base and increased activity levels. Payroll services grew at 15.2%, as our high-service model continues to build momentum in the marketplace. Credit and debit card income grew 3.7%. Interest rate swap income recovered significantly in the second quarter compared to the first quarter as borrowers' rate expectations aligned with use of the product. The deposit base of our company has been and will continue to be an area of significant focus. Our efforts to date have resulted in a 13% increase in local deposits at June 30, 2025, compared with June 30, 2024, which helped reduce our loan-to-deposit ratio from 107% to just under 100% over the same period. The strategic partnership with Eastern Michigan Bank provides a powerful supplement to our organic growth deposit gathering activities. In fact, Eastern Michigan checks several or multiple boxes based on mercantile strategic objectives. In addition to lowering the loan to deposit ratio, reducing the pro forma cost of funds and enhancing the balance sheet on balance sheet liquidity, We are afforded entry into new markets with a well-established franchise with proven leadership. Eastern has a clean credit profile and a strong track record of profitability. Mercantile and Eastern share a culture of excellent customer service and experience and investment in the communities we serve. And the combination of our companies will position us for continued growth and momentum. As noted in our release, we will be transitioning to Jack Henry in early 2027. One of the many unique traits that attracted us to Eastern Michigan is their decades of experience with our new core provider. Their institutional knowledge will help ensure that our transition is as frictionless as possible for our customers and employees. In addition to attractive strategic characteristics, the combination with Eastern has financially attractive traits, including double digit earnings accretion, mid single digit tangible book value dilution, and a mid-three-year earn-back period. We have waited for more than a decade since our last M&A activity for a partner like Eastern Michigan to come along, and our patience has been rewarded. We are pleased to be joining forces with our new colleagues at Eastern Michigan Bank and look forward to great success in the years ahead. That concludes my remarks. I will now turn the call over to Chuck.