Mercantile Bank Corporation

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 the... 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 filings. The company assumes no obligation to update any forward-looking statements made during the call. Let's begin, Ray.

Thanks, Nicole. Our results for 2025 continue to build on the theme of commercial expertise, generating a strong return profile. The consummation of our purchase of Eastern Michigan Bank on December 31st, 2025 represents execution of our strategic objectives around deposit and loan growth and margin stability, paired with strong asset quality and overall financial performance. We continue to demonstrate top quartile ROA performance relative to our peers, built upon the following trails. Trade number one, strong and durable net interest margin. Over the last five quarters, the SOFR 90-day average rate has dropped 68 basis points, while our margin increased by two basis points to 3.43%. This illustrates effective execution of our strategic objective to maintain a steady margin by match funding our assets and liabilities and refutes the notion that we have an asset-sensitive balance sheet, despite the relatively large portion of floating rate assets. Trade number two, very strong asset quality. Past due loans remain at low levels, typical of our company, at 11 basis points of total loans. Not performing loans to total loans over the last six years averaged 12 basis points. The allowance for credit losses stands at 1.21% of total loans as of December 31st, 2025, providing very strong coverage relative to past due and not performing loan loans. These numbers demonstrate our longstanding commitment excellence in underwriting and loan administration. Trade number three, improved on-balance sheet liquidity and loan-to-deposit ratio. Our loan-to-deposit ratio stands at 91% compared to 98% on December 31, 2024 and 110% on December 31, 2023. Our deposit mix includes 25% non-interest-bearing deposits and 24% lower-cost deposits. contributed to the stability of our net interest margin. Our acquisition of Eastern Michigan Bank contributed positively to these metrics. Trait number four, strong deposit and loan compounded annual growth rates. Our recent focus on deposit growth is not new to our bank. In fact, the last five year end periods demonstrate a deposit compounded annual growth rate of 9.2%. Over the same time period, Total loans demonstrate a compounded annual growth rate of 8.6%. Loan growth will continue to be impacted by an elevated level of loan payoffs compared to historical norms in the first quarter of 2026. However, December 31, 2025, commitments to make loans total $297 million. Commitments to make commercial and residential construction loans total $271 million. Each of these represent historically high levels. We expect that growth for 2026 will fall within the range of previously defined expectations of mid-single digits. Trait number five, continued strong growth in key fee income categories. Growth in commercial deposit relationships has supported growth in treasury management services, resulting in a 19% increase in service charges on accounts during 2025. Our payroll service offerings continue to report very consistent growth and the current year's growth of 14% is consistent with prior periods. Our mortgage team continues to build market share and generate a high portion of saleable loans, contributing to a 6% growth in mortgage banking income compared to the respective 2024 period. Trait number six, stability and commercial loan portfolio mix. We have maintained discipline in our approach to commercial loan growth, maintaining a 55-45 split between C&I, owner-occupied CRE loans combined with other commercial loan segments and proven concentration in categories such as office, retail, assisted living, hotel, and automotive exporters. In sum, these trades have allowed us to report a year-over-year EPS growth rate of 11%, 1.4% return on average assets, and a 14.1% Additionally, our tangible book value per share compounded annual growth rate of 9% and five-year earnings per share compounded annual growth rate of 15.1% historically places us in the top of our proxy group. We remain excited about our recently completed combination with Eastern Michigan Financial Corporation. Integration of operations is underway and the cultures have meshed very well in the early stages of the process. That concludes my remarks and I'll turn the call over to Jeff.

Thanks, Ray. This morning we announced net income of $22.8 million or $1.40 per diluted share for the fourth quarter of 2025 compared with net income of $19.6 million or $1.22 per diluted share for the fourth quarter of 2024. Net income during all of 2025 totaled $88.8 million or $5.47 per diluted share, compared to $79.6 million, or $4.93 per diluted share, for all of 2024. Growth in net income during both timeframes largely reflected increased net interest income and non-interest income, lower provision expense, and reduced federal income tax expense, which more than offset increased overhead costs. Interest income on loans declined during the fourth quarter and all of 2025 compared to the prior year periods, reflecting a lower yield on loans that was not fully mitigated by loan growth. Our yield on loans during the fourth quarter of 2025 was 26 basis points lower than the fourth quarter of 2024, largely reflecting the aggregate 75 basis point decrease in the federal funds rate during the last four months of 2025. Average loans totaled $4.63 billion during the fourth quarter of 2025, compared to $4.57 billion during the fourth quarter of 2024, an increase of $62 million. Interest income on securities increased during the fourth quarter and all of 2025, compared to the prior year periods, reflecting growth in the securities portfolio and the reinvestment of lower-yielding maturing investments. Interest income on other earning assets, a large portion of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, declined during the fourth quarter of 2025 compared to the fourth quarter of 2024, reflecting a lower average yield that more than offset a higher average balance. Interest income on other earning assets increased during all of 2025 compared to all of 2024, reflecting a higher average balance that was partially offset by a lower yield. In total, interest income was $0.2 million lower and $8.7 million higher during the fourth quarter and all of 2025 compared to the respective prior year periods. Interest expense on deposits decreased during the fourth quarter of 2025 compared to the prior year period, in large part due to a lower average cost of deposits reflecting the aforementioned decline in the federal funds rate that more than offset growth in average deposits. Average deposits totaled $4.83 billion during the fourth quarter of 2025 compared to $4.52 billion during the fourth quarter of 2024, an increase of $302 million. The cost of deposits was down 32 basis points during the fourth quarter of 2025 compared to the fourth quarter of 2024. Conversely, Interest expense on deposits increased during all of 2025 compared to all of 2024. Although the cost of deposits declined 23 basis points, growth in average deposits between the two periods of $483 million resulted in a net increase in interest expense on deposits. Interest expense on the Federal Home Loan Bank of Indianapolis advances declined during the fourth quarter and all of 2025 compared to the prior year periods, reflecting a lower average balance. Interest expense on other borrowed funds declined during the fourth quarter and all of 2025 compared to the prior year periods, largely reflecting lower rates on our trust preferred securities due to the lower interest rate environment. In total, interest expense was $2.9 million and $1.3 million lower during the fourth quarter of 2025 and all of 2025. compared to the respective prior year periods. Net interest income increased $2.7 million and $10.0 million during the fourth quarter in all of 2025 compared to the respective prior year time periods. Impacting our net interest margin over the past couple of years has been our strategic initiative to lower the loan deposit ratio, which generally entails deposit growth exceeding loan growth and using the additional monies to purchase securities. A large portion of deposit growth has been in higher yielding money market and time deposit products, while the purchase securities provide a lower yield than loan products. Despite that strategic initiative and the aforementioned decline in the federal funds rate, our quarterly net interest margin has been relatively stable over the past five quarters, ranging from a high of 3.49% to a low of 3.41%, averaging 3.46%. We remain committed to managing our balance sheet in a manner that minimizes the impact of changing interest rate environments on our net interest margin. Basic fund management practices, such as match funding, combined with scheduled maturities of lower-yielding fixed-rate commercial loans and securities and higher-rate time deposits, along with scheduled rate adjustments on our residential mortgage loans should provide for a relatively stable net interest margin in future periods. Our net interest margin increased two basis points during the fourth quarter of 2025 compared to the fourth quarter of 2024. Our yield on earning assets declined 28 basis points during that time period, largely reflecting the aggregate 75 basis point decline in the federal funds rate during the last four months of 2025, While our cost of funds declined 30 basis points, primarily reflecting lower rates paid on money market and time deposits, which more than offset an increased mix of higher costing money market and time deposits. While average loans increased $62 million during the fourth quarter of 2025, compared to the fourth quarter of 2024, average deposits grew $302 million during the same time period, providing a net surplus of funds totaling $240 million. We used that net surplus of funds to grow our average securities portfolio by $160 million and reduce our average Federal Home Loan Bank of Indianapolis advances portfolio by $73 million. We recorded a negative provision expense of $0.7 million and a provision expense of $3.2 million during the fourth quarter and all of 2025, respectively, compared to provision expense of $1.5 million and $7.4 million during the respective 2024 period. The fourth quarter negative provision expense was primarily comprised of an improved economic forecast and changes in loan mix and reflects relatively low net loan growth due to larger than typical commercial loan payouts. The full year 2025 provision expense primarily reflected a $1.9 million reserve increase related to changes in the economic forecast, a $1.8 million net increase in specific allocations, driven by a $5.5 million allocation for a commercial construction loan relationship that was placed on non-accrual during the second quarter of 2025, and a $1.5 million net increase in qualitative facts. which were partially offset by a $2.3 million and $1.3 million reduction related to a shorter average duration of the residential mortgage loan portfolio resulting from faster prepayment speed and changes in our baseline loss rates, respectively. The reserve balance decreased $0.9 million during the fourth quarter of 2025, reflecting the negative $0.7 million provision expense and net loan charge-offs of $2.6 million, partially mitigated from a $2.4 million increase associated with the acquisition of Eastern. The reserve balance increased $3.7 million during all of 2025, reflecting provision expense of $3.2 million and $2.4 million increase associated with the Eastern acquisition. which more than offset net loan charge-offs of $1.9 million. The reserve balance equaled 1.21% of total loans as of year-end 2025 compared to 1.18% at year-end 2024. Nine interest expenses were $2.9 million and $10.2 million higher during the fourth quarter and all of 2025 compared to the respective prior year time period. The increases during both time periods largely reflect higher salary and benefit costs, including annual merit pay increases and market adjustments. Higher data processing costs also comprise a notable portion of the increased non-interest expense levels, primarily reflecting higher transaction volume and software support costs, along with the introduction of new cash management products and services. Costs associated with the acquisition of Eastern total $1.2 million and $1.8 million during the fourth quarter and all of 2025, respectively. Allocations to the reserve for unfunded loan commitment, largely reflecting a sizable increase in the level of committed and accepted commercial loans, increased $1.1 million and $1.6 million during the fourth quarter and all of 2025, compared to the respective prior year time periods. Excuse me. Despite increased pre-tax income during the fourth quarter and all of 2025 compared to the respective prior year period, we were able to reduce our federal income tax expense by $0.4 million and $4.0 million, respectively. The reductions largely reflect the acquisition of transferable energy tax credits during 2025, providing for reductions in federal income tax expense of $1.0 million and $3.5 million during the fourth quarter and all of 2025, respectively. Our federal income tax expense was further reduced by net benefits associated with our low-income housing and historical tax credit activities, which equals $0.8 million and $1.8 million during the fourth quarter and all of 2025, respectively. Recording of these tax benefits resulted in fourth quarter year 2025 effective tax rates of about 12% and 14% respectively. Additional acquisitions of transferable energy tax credits may be made from time to time, subject to our investment policy, tax credit availability, and tax credits derived from our low-income housing and historical tax credit activities. We remain in a strong and well-capitalized regulatory capital position. Mercantile Bank's total risk-based capital ratio was 13.8% at year end 2025, $213 million above the minimum threshold to be categorized as well-capitalized. Eastern Michigan Bank's total risk-based capital ratio was 15.3% at year end 2025, $20 million above the minimum threshold to be categorized as well-capitalized. We did not repurchase shares during 2025, we have $6.8 million available in our current repurchase plan. Our tangible book value per common share continues to grow up $3.64 or almost 11% during 2025. On slide 26 of the presentation, we share our latest assumptions on the interest rate environment and key performance metrics for 2026 with the caveat that market conditions remain volatile making forecasting difficult. This forecast is predicated on no changes in the federal funds rate during 2026, although we believe our net interest margin will remain relatively stable in a changing interest rate environment as it did during 2025. We are projecting loan growth in a range of 5% to 7% annualized during each quarter, which encompasses a strong commercial loan pipeline, as well as expected meaningful payoffs over the next several months. We are forecasting our first quarter 2026 net interest margin to increase from the fourth quarter of 2025 net interest margin in large part reflecting the Eastern acquisition and further steady increases throughout the year as we benefit from maturing relatively low yielding fixed rate commercial real estate loans and investments along with higher yielding time deposits. We are projecting a federal tax rate of 17% which encompasses continued growth in net benefits from our low-income housing and historical tax credit activities, along with additional but lower levels of transferable energy tax credit investments. Expected quarterly results for non-interest income and non-interest expense are also provided for your reference. Non-interest expense projections reflect personnel investments that were made in the latter part of 2025 and expected during 2026 to support expansion in southeast Michigan, as well as to support operational areas as we switch core and digital banking providers to enhance the durability, efficiency, and experience for customers and employees. The non-interest cost projections also include quarterly core deposit and tangible amortization of $0.9 million. In closing, we are very pleased with our operating results and financial condition during 2025 and believe we remain well positioned to continue to successfully navigate through the myriad of challenges and uncertainties faced by all financial institutions. That concludes my prepared remarks. I'm now trying to call back over to Ray.