Mercantile Bank (MBWM) Q1 2026 Earnings Transcript

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DATE

Tuesday, April 21, 2026 at 10 a.m. ET

CALL PARTICIPANTS

• President — Raymond Reitsma
• Executive Vice President and Chief Financial Officer — Charles Christmas

TAKEAWAYS

• Net Income -- $22.7 million, or $1.32 per diluted share, reported for the period, up from $19.5 million, or $1.21 per diluted share, in the prior year.
• Net Income (Non-GAAP) -- Excluding after-tax one-time costs, net income reached $25.2 million, or $1.46 per diluted share, attributed to the Eastern Michigan acquisition and system conversion impacts.
• Revenue -- Net revenue increased 18.1% to $67.6 million from $57.3 million, reflecting higher net interest income and noninterest income.
• Net Interest Margin (NIM) -- NIM rose to 3.55% from 3.47%, despite a 31-basis-point decline in yield on earning assets; margin stability attributed to matched funding and balance sheet management.
• Deposit Growth -- Deposits grew 15.8%, with growth proportionally split between non-interest-bearing and interest-bearing accounts; average interest-bearing deposits rose by $555 million to $4 billion.
• Loan Growth -- Average loans totaled $4.83 billion, up $199 million, primarily reflecting the Eastern Michigan acquisition; first-quarter loan growth constrained by $180 million in payoffs and paydowns.
• Loan Commitments -- New commercial loan commitments totaled $289 million, and construction loan commitments $272 million, each a five-quarter high as of period-end.
• NPA Ratio and Reserve Coverage -- Non-performing assets (NPA) to total assets at 0.11%; allowance for credit losses was 1.18% of total loans, nearly 10x NPA coverage.
• Provision Expense -- Negative provision expense of $1.8 million, driven by improved economic forecasts and reduced loan growth; reserve balance declined $1.5 million to 1.18% of loans.
• Compounded Annual Growth Rates -- Five-year deposit CAGR of 9.2% and loan CAGR of 8.6% were noted; tangible book value per share grew by 9%, and earnings per share CAGR was 15.1% over five years.
• Fee Income Growth -- Treasury management service charges up 35%, credit and debit card fees up 17.6%, and mortgage banking income up 12.4%.
• Expense Trends -- Core non-interest expense increased $7.8 million, mostly from salary and benefit costs, with an additional $1.2 million to the reserve for unfunded commitments and $0.9 million from core deposit intangible amortization due to the Eastern Michigan acquisition.
• Loan-to-Deposit Ratio -- Decreased to 89% from 91% at prior year-end and from 110% two years prior, reflecting improved liquidity.
• Capital Ratios -- Mercantile Bank's total risk-based capital ratio was $13.8 million, $215 million above well-capitalized threshold; Eastern Michigan Bank at 20.5%, $30 million above threshold.
• Share Repurchases -- No shares repurchased during the quarter; $6.8 million remains under the current authorization.
• Forward Guidance -- Management projects 5%-7% annualized loan growth, stable NIM in the next quarter with gradual increases in the second half, and a projected federal tax rate of 17%.
• Interest Rate Sensitivity -- CFO Charles Christmas said, "we're pretty well matched on the balance sheet...puts us in a pretty balanced position" regarding a 25-basis-point rate cut scenario.

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RISKS

• Elevated commercial loan payoffs and paydowns, noted at $180 million in the quarter, constrained net loan growth. If continued, this "would end up with a higher level of money sitting at the Federal Reserve, which would put a damper some compression on our margin," according to CFO Charles Christmas.
• Management acknowledged that margin compression could occur if loan payoffs remain elevated, potentially resulting in a 2- to 5-basis-point margin impact, as explicitly stated in response to investor questioning.

SUMMARY

Mercantile Bank Corporation (NASDAQ:MBWM) achieved deposit growth of 15.8% and reported non-GAAP net income of $25.2 million, highlighting successful execution of its deposit and loan growth strategies following the Eastern Michigan acquisition. Net interest margin expanded to 3.55%, outperforming a declining SOFR rate environment, and core fee income categories posted double-digit growth driven by commercial deposit relationships and card services. Active management of matched funding supported margin stability, while the company maintained low non-performing asset levels, with an NPA-to-assets ratio of 0.11% and a coverage ratio of nearly 10x. Inflationary pressures, combined with ongoing investments in Southeast Michigan and system conversion, have increased operating expenses, yet the company remains well capitalized and forecasts mid-single-digit percentage loan growth with stable or improving margins for the remainder of the year.

• Integration of Eastern Michigan Financial Corporation operations progressed as planned, with culture alignment described as positive by management.
• Management cited unmatched first-quarter deposit growth despite seasonal outflows, attributing the result to diversified client additions across business, public unit, and personal accounts.
• CFO Charles Christmas stated that, absent further balance sheet mix shifts, "the margin will continue to improve pretty much at the same pace as what the expectations were originally back in January with the guidance, but we're just kind of starting at a lower spot."
• Loan production momentum persists, with commitments for both new commercial and construction loans reaching five-quarter highs by March 31, 2026, signaling strong future funding activity.
• Management anticipates that loan growth, not credit quality deterioration, will be the primary driver of provision expense in coming quarters given the bank's "pristine" asset quality history.

INDUSTRY GLOSSARY

• SOFR: Secured Overnight Financing Rate, a benchmark interest rate for dollar-denominated derivatives and loans, used in NIM context.
• NPA: Non-performing assets; loans or assets on which the bank is not receiving scheduled payments.
• Loan-to-Deposit Ratio: Indicates the proportion of a bank’s loans funded by deposits, a liquidity and risk measure.
• Core Deposit Intangible: An accounting asset representing the value assigned to stable, low-cost deposit relationships acquired in a merger or acquisition.
• CECL: Current Expected Credit Loss; an accounting standard requiring estimation of future credit losses over the life of loans.

Full Conference Call Transcript

Raymond Reitsma: Thanks, Nichole. Our results for the first quarter of 2026 continue to build on the theme of commercial expertise generating a strong return profile. The consummation of the purchase of Eastern Michigan on December 31, 2025, represents execution of our strategic objectives around deposit growth, loan growth and margin stability paired with strong asset quality and overall financial performance. We continue to demonstrate top cortile return on asset performance relative to our peers built upon the following traits: Trait #1, a strong and durable net interest margin. Over the last 5 quarters, the SOFR 90-day average rate has dropped 67 basis points while our margin increased by 8 basis points to 3.55%.

This illustrates effective execution of our strategic objective to maintain a steady margin by matched funding of our assets and liabilities and refutes the notion that we have an asset-sensitive balance sheet despite the relatively large portion of floating our proportion of floating rate assets. Trait #2, very strong asset quality. Non-performing assets to total assets remain at the low levels typical of our company at 11 basis points of total assets as of March 31, 2026. Non-performing loans to total loans over the past 6.25 years averaged 12 basis points.

The allowance for credit losses stands at 1.18% of total loans as of March 31, 2026, nearly 10x NPAs providing very strong coverage relative to past due and non-performing loan levels. These numbers demonstrate our long-term commitment to excellence in underwriting and loan administration. Trade #3, improved on-balance sheet liquidity and loan-to-deposit ratio. At the end of the first quarter of 2026, our own to-deposit ratio stood at 89% compared to 91% on December 31, 2025, and 98% in December 31, 2024, and 110% on December 31, 2023.

As of March 31, 2026, our loan -- our deposit mix included 25% and non-interest-bearing deposits and 25% lower cost deposits, unchanged from year-end to 2025, but up from 20% at the end of the third quarter of 2025, which has contributed to the stability of our net interest margin. Our acquisition of Eastern Michigan contributed positively to these measures. Deposit growth for the first quarter of 2026 compared to the first quarter of 2025 was 15.8%. The growth was roughly proportional in non-interest-bearing to interest-bearing accounts. Trade #4, strong deposit and loan compounded annual growth rates. Our recent focus on deposit growth is not new to our bank.

In fact, the last 5 year in 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%. As foreshadowed -- in prior quarter's commentary, loan growth was impacted by an elevated level of loan payoffs compared to historical norms in the first quarter of 2026. Payoffs from borrower sales of assets were over $40 million above the elevated quarterly average experience in 2025 and planned refinancing of multifamily projects to the secondary markets, were nearly 5x the quarterly average amount in 2025 or nearly $40 million in gross dollar terms.

However, March 31, 2026, commitments to make new commercial loans totaled $289 million and commitments to fund existing commercial and residential construction loans totaled $272 million with each amount representing 5 quarter highs. We expect that loan payoffs will moderate in upcoming quarters and net loan growth for 2026 will follow within the range of previously defined expectations of mid-single-digit percentages. Quarter-to-date loan growth is well aligned with our year-end expectations. Trade #5, continued strong growth in key fee income categories. Growth in commercial deposit relationships has supported growth in treasury management services resulting in a 35% increase in service charges on accounts during the first quarter of '26 compared to the first quarter of 2025.

Our credit and debit card offerings report growth of 17.6% in the first 3 months of 2026 compared to the respective 2025 period. Our mortgage team continues to build market share and generate a higher proportion of salable loans contributing to 12.4% growth in mortgage banking income during the first quarter of '26 compared to the prior year first quarter. Trade #6, well-managed expenses. Net revenue, defined as net interest income plus noninterest income grew 18.1% to $67.6 million during the first quarter of 2026, from $57.3 million in the respective 2025 period. Occupancy costs and data processing costs were virtually unchanged as a percentage of net revenue.

And salaries and benefits increased from 34.2% to 35% of net revenue, primarily reflecting our investment in the Southeast Michigan market. Other expenses include a $1.2 million increase in allocations to reserve for unfunded loan commitments compared to the respective 2025 period, reflecting the growth in our loan backlog and a $0.9 million increase in the core deposit intangible asset amortization account arising from the acquisition of Eastern Michigan. In sum, these trades have allowed us to report a quarter-over-quarter earnings per share growth rate of 9%, a 1.4% return on average assets and a 12.5% return on average equity for the first quarter of 2026 and an increase in tangible book value per share over the prior quarter.

Additionally, our 5-year tangible value per share a growth rate of 9% and 5-year earnings per share, compounded annual growth rate of 15.1% historically placed us in the top tier of our proxy group. We remain excited about our recently completed combination with Eastern Michigan Financial Corporation. The integration of operations is well underway and the cultures have meshed very well in the early stages of the process. That concludes my remarks. I will now turn the call over to Chuck.

Charles Christmas: Thanks, Ray, and good morning to everybody. This morning, we announced net income of $22.7 million or $1.32 per diluted share for the first quarter of 2026 compared with net income of $19.5 million or $1.21 per diluted share for the first quarter of 2025. Higher net interest income and non-interest income, combined with lower provision expense more than offset increased overhead costs. Excluding after-tax onetime costs associated with the year-end 2025 acquisition of Eastern Michigan and previously announced core and digital banking system conversion, net income improved to $25.2 million or $1.46 per diluted share for the first quarter of 2026. Using this non-GAAP basis, which we believe more accurately reflects our core earnings performance.

Interest income on loans increased slightly by $0.2 million during the first quarter of 2026 compared to the prior year first quarter, reflecting loan growth that offset a lower yield on loans. Average loans totaled $4.83 billion during the first quarter of 2026 compared to $4.63 billion during the first quarter of 2025, an increase of $199 million that largely reflects the acquisition of Eastern Michigan at year-end 2025. Mercantile Bank's robust commercial loan fundings during most of 2025 and -- in the first quarter of 2026 were largely mitigated by significant levels of payoffs and partial paydowns of certain larger commercial loans during those periods.

Our yield on loans during the first quarter of 2026 was 24 basis points lower than the first quarter of 2025, primarily reflecting the aggregate a 75 basis point decrease in the Fed funds rate during the last 4 months of 2025. Interest income on securities increased $3.9 million during the first quarter of 2026 compared to the prior year quarter. reflecting growth in the securities portfolio and a higher yield. The growth in higher yield reflect the acquisition of Eastern Michigan, along with the ongoing portfolio growth and the reinvestment of maturing lower-yielding investments at Mercantile Bank. Average balances were up $357 million, and the average yield increased 54 basis points quarter-over-quarter.

Interest income on other interest earning assets, a large portion of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, increased $1 million during the first quarter of 2026 compared to the prior year first quarter. [Audio Gap] Bank, while the 80 basis point decline in yield primarily reflects the aggregate 75 basis point decrease in the federal funds rate during the last 4 months of 2025. In total, interest income was $5.1 million higher during the first quarter of 2026 compared to the prior year first quarter.

Interest expense on deposits decreased $1.9 million during the first quarter of 2026 compared to the prior year first quarter, reflecting a lower cost of deposits that more than offset interest bearing deposit growth. The growth in interest-bearing deposit balances and the lower cost of these funds reflect the acquisition of Eastern Michigan, along with growth and lower deposit costs at Mercantile Bank. Cost of interest-bearing deposits at both banks were positively impacted by the aforementioned decline in the federal funds rate during the latter part of 2025. Average interest-bearing deposits totaled $4 billion during the first quarter of 2026 compared to $3.44 billion during the first quarter of 2025, an increase of $555 million.

The cost of all deposits was down 46 basis points during the first quarter of 2026 compared to the first quarter of 2025. Interest expense on Federal Home Loan Bank of Indianapolis advances declined $0.3 million during the first quarter of 2026 compared to the prior year first quarter, largely reflecting a lower average balance. And interest expense on other borrowed funds increased $0.3 million during the first quarter of 2026 compared to the prior year first quarter, largely reflecting the impact of a $30 million term loan we obtained late in 2025 to assist in the cash portion of the Eastern Michigan acquisition.

In total, interest expense was $2.3 million lower during the first quarter of 2026 compared to the prior year first quarter. Net interest income increased $7.4 million during the first quarter of 2026 compared to the prior year first quarter, primarily reflecting growth in earning assets and a higher net interest margin. Average earning assets totaled $6.42 billion during the first quarter of 2026 compared to $5.70 billion during the first quarter of 2025, an increase of $719 million that largely reflects the acquisition of Eastern Michigan at year-end 2025, along with securities and overnight funds growth at Mercantile Bank.

The net interest margin was 3.55% during the first quarter of 2026 compared to 3.47% during the first quarter of 2025. The improvement is largely due to the Eastern Michigan acquisition. The yield on earning assets declined 31 basis points, while the cost of funds declined 39 basis points during the first quarter of 2026 compared to the prior year first quarter. Impact on our net interest margin over the past couple of years was our strategic initiative to lower the loan-to-deposit ratio, which generally entailed deposit growth exceeding loan growth and using additional monies to purchase securities.

A large portion of deposit growth was in the higher costing money market and time deposit products, while the purchased securities provided a lower yield than loan products. Despite that strategic initiative and declines in the federal funds rate during the latter parts of 2025 and 2024, our quarterly net interest margin was relatively stable during that time period ranging from a high of 3.52% to a low of 3.41% and averaging 3.47%. We remain committed to managing our balance sheet in a manner that minimizes the impact of changing interest rate environment on our net interest margin.

Basic funds management practices such as matched funding, combined with scheduled maturities of lower-yielding fixed-rate commercial loans and securities and a higher rate time deposits along with the scheduled rate adjustments on residential mortgage loans should provide for [indiscernible] will be stable net interest margin in future periods. We recorded a negative provision expense of $1.8 million during the first quarter of 2026, compared to a positive provision expense of $2.1 million during the prior year first quarter.

The first quarter negative provision expense was primarily comprised of improved economic forecast, changes in loan mix, a reduction in the residential mortgage loan portfolio, a decline in specific allocations and limited net growth in commercial loans due to the significant volume of loan payoff and partial paydowns. The reserve balance decreased $1.5 million during the first quarter of 2026, reflecting the net impact of the negative $1.8 million provision expense and net loan recoveries of $0.3 million. The reserve balance equaled 1.18% of total loans as of March 31, 2026, and compared to 1.21% at year-end 2025.

Non-interest expenses were $11 million higher during the first quarter of 2026 compared to the prior year first quarter. excluding onetime costs associated with the year-end 2025 acquisition of Eastern Michigan and previously announced core and digital banking system conversion that aggregated $3.2 million. Non-interest expenses increased $7.8 million. The increase in core operating costs largely reflects higher salary and benefit costs. In addition, we recorded a $1.2 million increase in allocations to the reserve for unfunded loan commitments primarily reflecting a significantly higher level of commercial loan commitments that have been accepted by customers. The remaining increase in non-interest expense quarter-over-quarter generally depicts the cost of inflation and the increased cost of a larger balance sheet and office network.

Eastern Michigan Bank's non-interest expenses totaled $4 million during the first quarter of 2026. Despite a $3.2 million increase in pretax income during the first quarter of 2026 compared to the prior year first quarter, our federal income tax expense increased only $0.1 million. The acquisition of transferable energy credits and net benefits associated with our low income housing and historical tax credit activities equaled $0.8 million during the first quarter of 2026. The tax benefit resulting from these activities -- both Mercantile Bank and Eastern Michigan Bank have strong and well-capitalized [indiscernible] Mercantile Bank's total risk-based capital ratio was $13.8 million as of March 31, 2026, $215 million above the minimum threshold to be categorized as well capitalized.

Eastern Michigan Bank's total risk-based capital ratio was 20.5% as of March 31, 2026, $30 million above the minimum threshold to be categorized as well capitalized. We did not repurchase shares during the first quarter of 2026. We have $6.8 million available in our current repurchase plan. On Slide 23 of the investor presentation, we share our latest assumptions on the interest rate environment and key performance metrics for the remainder of 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 the remainder of 2026, although we believe our net interest margin will remain relatively stable in a changing interest rate environment as it did during the latter part of 2024 and throughout 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 fewer commercial payoffs during the remainder of the year.

We are forecasting our second quarter net interest margin to be similar to that of the first quarter with steady increases throughout the last half of the year as we benefit from commercial loan growth, lower levels of monies at the Federal Reserve Bank of Chicago and maturing low-yielding fixed rate commercial real estate loans and investments, along with higher costing 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 transferable energy tax 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, first quarter of 2026 and expected during the remainder of 2026 and 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, the efficiency and experience for customers and employees. One-time-type costs associated with the core and digital banking system conversion are not included. In closing, we are very pleased with our operating results during the first quarter of 2026 and continued strong financial condition 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'll now turn the call back to Ray.

Raymond Reitsma: Thank you, Chuck. That concludes the prepared remarks from management. We will now move to the question-and-answer portion of the call.

Operator: [Operator Instructions] Our first question comes from Brendan Nosal from Hovde Group.

Brendan Nosal: Maybe just starting off here on the net interest margin. I guess this quarter came in towards the lower end of the guided range. It looks like you tempered the range for the remainder of the year by 10 basis points or so. I guess we haven't gotten any more rate cuts, and you're still not forecasting any in your outlook. So just kind of curious, what were the main drivers of that change to how you see the margin trend due to the balance of the year?

Charles Christmas: Yes. And the change -- Brendan, it's a good question. I'm glad you asked it because I wanted to make sure everybody understood that is a reflection of the change in our balance sheet mix. We are expecting -- and really because of the deposit growth that we've seen, I mean, as we talked about, as you saw in our release, we had incredibly strong deposit growth. The growth numbers themselves were incredibly strong, but that comes on the top of -- we typically lose anywhere from $80 million to $100 million in deposits in the first part of the quarter, as our commercial customers pay taxes, bonuses, partnership distributions.

So typically, you don't see net growth in the first quarter. I can show you that our customers still paid all those items but yet we were able to demonstrate very, very strong deposit growth. And that deposit growth was throughout the different types of products and the types of customers, business, public unit and personal. And so what we saw was that increase in deposits came at the same time, we saw the paydowns in the commercial loans that didn't allow for commercial loan growth. So really all of that deposit growth went to the Federal Reserve Bank of Chicago. Obviously, a lower yield than what we would have expected on the loan portfolio.

Going forward, we do expect, as I mentioned, that the margin will continue to improve pretty much at the same pace as what the expectations were originally back in January with the guidance, but we're just kind of starting at a lower spot. And I would say that we still expect deposit growth to continue at our budgeted pace, obviously, which makes for a very strong year. We do think with our commercial loan pipeline that despite the minimal level of net growth that we had in the first quarter that we will catch back up during the last 9 months of the quarter, and get to where we expected to be.

So we're kind of ending with more deposits than what we thought we were, which results in a higher balance of the Fed, which has a small compression effect on our margins. So a lot going on there with the margin, but I think it's -- at the bottom line is just more deposits same level of loans, so those more deposit balances are going into the lower-yielding accounting at the Federal Reserve.

Brendan Nosal: Okay. Chuck, that's really helpful color. Perhaps 1 more for me. just kind of pivoting. Can you just update us on the Southeast Michigan initiative you have ongoing with the new team down there? And then on a related note, any updated thoughts on opportunities to capitalize on M&A dislocation across the state?

Raymond Reitsma: Sure. This is Ray. We've added some commercial banking talent on the east side of the state, and they have gained some traction and are performing very well relative to our expectations, growing their book, not only on the asset side, but doing a very nice job on the liability side as well. We plan to continue to [Audio Gap]

Damon Del Monte: Inside that you didn't want to keep on balance sheet.

Raymond Reitsma: No, that was entirely the [Audio Gap]

Damon Del Monte: And do you feel that you have room to kind of grow into a loan loss reserve and let that drift a little bit lower as you get this loan growth? Or just looking for a little guidance on the provision line basically?

Charles Christmas: Yes. I think when you look at whether it's a negative, whether it's positive and over the last couple of quarters, as you mentioned, it has been negative it's been negative because of the lack of net loan growth onto our balance sheet. As you know, CECL has put banks into a corner in regards to how it calculates its loan loss reserve and how it manages it. With Mercantile having basically minimal losses since coming out of the great recession, we rely really heavily on qualitative factors.

As a matter of fact, if you look at the composition of our reserve, about 60% of our reserve balance is supported by qualitative versus quantitative of course, quantitative primarily driven by lost history performance. So it's always a battle. We like to have -- we like strong capital. We also like a very strong reserve. We're very comfortable with the balance of our reserve. Ray already mentioned it relative to our NPAs, which themselves and to your point, Damon, have been pretty pristine for a very, very long time.

So I think kind of back to your specific question, I think when we certainly expect to have given our guidance, some very strong loan growth, at least through the remainder of 2026, notwithstanding any other major impacts to our measurements within CECL, we certainly would expect a positive provision expense going forward. The wildcard is the economic forecast on an overall basis, the American United States economy continues to do well. And so we really don't see much. We haven't seen much change in economic conditions have an impact on our reserve for quite a while now. Just a little bit of positives and minuses as we go quarter-to-quarter.

We don't really see a lot of changes in our qualitative measurements. A lot of that is levels of NPA, the way that we administer portfolios, those types of things. I don't see really any changes there. So I think the driver of our provision expense is loan growth. As long as we can keep the pristine asset quality, which we think certainly that we can. So future provision, I think, is going to be really dictated by loan growth. And for our comments this morning, we expect to have very solid loan growth for the rest of this year and certainly into the future periods as well.

Operator: Our next question comes from Nathan Race with Piper Sandler.

Nathan Race: Chuck, just thinking about the level of cash or excess liquidity, you're looking at run rate going forward. Can you just get some light in terms of how much export liquidity you want to keep on the balance sheet maybe versus redeploying the securities portfolio. And within that context, curious if you're pretty content with the size of this book at this point, just based on the initiatives from the last several quarters. Or is kind of thought just to run with higher excess liquidity just given the loan growth guide?

Charles Christmas: Yes. I think it's a combination of both. It's a really good question. I think our securities, we're right around 16% of total assets now and the plan is to keep it there. Again, with commercial loan growth, that would drive total assets, which of case will drive the size of the securities portfolio. So we'll have to grow that in congruence with the growth and the rest of the balance sheet, primarily the commercial loan portfolio. Obviously, we love the deposit growth. We'd love to put it into the commercial loan portfolio or residential mortgage portfolio for that matter as soon as we can. But obviously, the deposit growth.

We came into the year especially with Eastern joining us with a lot of excess cash sitting at the Federal Reserve, if you will. And that only grew because of the deposit growth and lack of net loan growth in the first quarter. We think that's going to turn. But I think on an overall basis, we'll keep a higher level than historical dollars at the Federal Reserve. But I think it will -- our expectation is it will be less because we do expect to fund loan growth. And with that, we'll have to increase somewhat the size of the securities portfolio.

And where that ends with our reserve -- our balance at the Federal Reserve, it's hard to know with all those numbers. Certainly, we expect it to be quite a bit lower than what it has been. But I would say the balance -- my expectation of that balance is to be well much, much higher than historical norms. And I would say historical norm is probably closer to $80 million, maybe $100 million. So I would expect the balance to be well over $200 million at the end of the year.

Nathan Race: Okay. Got it. That's really helpful. And Chuck, you mentioned, I think, fixed rate loan repricing is a margin tailwind as we get in the back half of this year. Can you just help us with the yield pickup that you have on that portfolio over the next few quarters?

Charles Christmas: Yes. It's based on the time frame on that is the rest of this year and into next year. And going from memory, I don't have it in front of me. I think the rate is about 5% on that portfolio, what's repricing.

Nathan Race: And then is it fair to assume new loans on a blended basis are coming on 6.5% these days or?

Charles Christmas: Yes, upper 6% is around 7%.

Nathan Race: Okay. Great. And then just lastly, do you have the spot rate cost of deposits in March and just generally how you're thinking about deposit costs trending if the Federal remains on pause this year?

Charles Christmas: Can you just repeat that second 1 about the cost? I don't quite get that question.

Nathan Race: Yes. I was just wondering if you had the spot cost of the deposits in the -- in March and just how you're thinking about the trajectory of deposit costs if the Fed remains on pause this year?

Charles Christmas: I brought all this stuff with me, but I didn't bring it on a monthly basis. So I think, as I mentioned, we've seen the growth throughout almost all the categories, and we're down a little bit non-interest-bearing if you look at our balance sheet. But again, that's where a significant portion of those tax bonus payments and partnership distributions come out of. As Ray mentioned, the Southeast Michigan, they brought almost as much deposits as they have loans. And a lot of those deposits are coming with the loan relationships, so they tend to be operating accounts, which obviously, we love.

So I would say it's a blend of all the different deposits from 0 to non-interest-bearing, 1% or 1.5% on interest checking, not much in savings. And then our money market account is in the 3s, depending on the type and the size of the balance. So I think it's pretty well a blend. We're not looking for any -- if you look at non-maturity deposits or everything but time deposits, we're not really looking for -- we're not certainly not budgeting for any change in rates on any of those things.

And I think the growth will be relatively consistent within those buckets to provide for a steady cost of those types of deposits for the rest of the year.

Nathan Race: Okay. That's really helpful. If I could just actually sneak one more in. Could you just update us in terms of how much of expenses do you expect to come out of the run rate in the first quarter next year following the core conversion?

Charles Christmas: We're looking for some pretty sizable savings, especially in regards to the new contract on our core. It will be sizable. Maybe that's something that -- that's still something that we're calculating, trying to figure out what this new core looks like, what we need from a personnel standpoint. Maybe we can continue to work on that and give you some better guidance in July.

Operator: Our next question comes from Daniel Tamayo with Raymond James. Your line is now open. Please go ahead.

Daniel Tamayo: Great. Maybe just to go back to the NIM guide and the loan growth, curious if you can kind of walk us through what may be downside risk given the reduction in margin guidance we saw -- we saw it today, but you did explain it with the deposits which I get. But if the payoffs kind of remain elevated throughout the year or for the next few quarters, curious, I guess, what's driving the confidence that, that will slow. But then if they don't, what kind of impact do you think that would have on the margin and NII?

Charles Christmas: Yes. Clear, Daniel, this is Chuck. And clearly, it depends on the magnitude. I think to kind of put things in perspective, we had started to talk about -- because we saw and we were starting to report on in this conference I think at least in July or probably not even April of last year that we saw some pretty big payoffs coming. Clearly, our bankers are talking to the borrowers all the time and understanding whether they were going to put a project in the secondary market, whether they were going to sell their businesses. We usually have a pretty -- some advanced notice where we become aware of the payoffs, especially the bigger ones get everybody's attention.

And that has always been that way for whatever reason, the last 3 or 4 quarters, however you want to calculate it, we have seen -- we've talked about it, a pretty high level of payoffs. They're all unrelated to each other. It's just more of a timing coincidence than anything else. Now payoffs, refinancings to the secondary market are a normal part of what we see. And so, we do expect those to continue. But we do expect them to continue more at a normal or -- I would say, normal a typical level that you talked about and put in the release.

When we look at our pipeline report, we're not only looking at loan fundings, but we're also looking at paydowns. We look at our pipeline on a net basis and taking the same process that we've always used, that we've always reported always taken into account and managing the balance sheet, we just don't see -- maybe that could change, but we just don't see the same level of payoffs that we've seen more recently, at least for the remainder of 2026. Again, we will see some. We know there's some out there, just not to the level that we've seen. Now having said that, as we reported, we had $180 million, and I'll call it pay downs.

There's various categories there in the first quarter alone. That's just on the larger credits. Now we also have, call it, $15 million, $20 million of month just a normal amortization. You put all that together, we funded well over $200 million in commercial loans during the quarter. And that's reflective of a very strong pipeline. And our pipeline right now is even stronger than it was at the end of 2025.

So we feel very confident about the level of loan fundings that we're going to have executive management team feels confident on payoffs, given the history that our commercial bankers have shown to be on top of these types of things as they work with their borrowers day in and day out. So we feel very confident sitting here that we're going to see some strong 5% to 7% annualized growth. That's a forecast. I think the surprise would be not in the funding side, but we'd be in the payoff side. If somebody suddenly find there's a rational payoffs coming up. And we see the same level of deposit growth as we're budgeting.

Yes, we would end up with a higher level of money sitting at the Federal Reserve, which would put a damper some compression on our margin. Again, the size is going to drive, whether that's 2 basis points, 5 basis points or something like that. So I would kind of put it in kind of what I would see as maybe a normalization of some higher levels of payoffs, I would say, maybe 2 to 5 basis points of margin compression below what the guidance is not from where we are today. But that's kind of a guess as far as that 2 to 5 basis points.

But hopefully, my explanation of what we would look at and what the -- what would drive the impact, hopefully made some sense for you.

Daniel Tamayo: No, that's helpful, Chunk. And remind us, I think last -- sorry, did you have anything else? Just remind us -- Okay. On the rate sensitivity, I know you have the table in the deck, but still not much impact from a 25 basis point rate cut perspective on your guidance?

Charles Christmas: Now. I think there's a -- we're pretty well matched on the balance sheet. We do have the repricing, as we mentioned, the commercial loan, fixed rates, the securities and even some time deposits that would reprice lower. We think that puts us in a pretty balanced position.

Daniel Tamayo: Okay. I guess just to go back to my original question, if you were in that position where loan growth ended up being a little bit slower than expected due to payoffs remaining elevated, would that put you in a position to utilize the buyback authorization in the remainder of the year? Or is that something that you're looking at kind of separate from the loan growth conversation?

Charles Christmas: Well, I think the loan growth is part of that. I think there's definitely other things to consider when we look at our capital position, where we want it to be relative to certainly the growth. We know that we're a growth company, we need growth to continue to enhance our earnings performance. And certainly, we want to make sure we got enough capital to support the level of growth opportunities that we see, which obviously from our comments this morning, we're very high on. So that's first and foremost. Clearly, we would look at our stock price. The bigger the discount to what we think is appropriate. We will get a bigger appetite.

We're also looking at the proposed change in risk-based capital calculations. I'm sure everybody is going through and trying to figure out what that impact would be on the capital calculations. We're also a little bit -- kind of looking to maybe understand how the investing community and the regulators are going to look at that. Clearly, the proposed changes provide for higher capital ratios. Does that just set the new bar? Or do we really get the "spend that and use that?" Our initial calculations under a proposal put all those caveats out there. We're looking at about a -- I'm going to put a number out there, but obviously, it's going to be a ranger owned it.

Our CET1 ratio would increase by about 75 basis points. in our total risk-based capital ratio by as much as 1%. So we're looking at some meaningful increases there. Clearly, that would have an impact on how we think about buying back stock. And then just all the other normal things. There's a lot going on in the world. The American United States economy has been incredibly resilient. It usually is, but there's a lot going on. The level of uncertainty is still very, very strong and evident that's out there. So this company has always been pretty cautious when it comes to managing its capital position.

But we certainly do understand and appreciate the benefits that could present itself with stock buybacks. So it's always on the table. We regularly talk to our Board about that. Obviously, we haven't bought back any in quite a while now, but it's something that's toys on the stope top.

Operator: [Operator Instructions] Our next question comes from Matthew Breese with Stephens Inc.

Matthew Breese: I just first wanted to start with securities. Maybe help me walk through the anticipated maturities and cash flows of securities for the balance of the year. And what are some of the roll off versus roll on dynamics of securities?

Charles Christmas: Yes, I'm looking at the deck trying to remember if we have that in there. I thought we do. Yes, we do have that on Slide 17, and we start talking a little bit about the portfolio there. So most of the benefit there is in our agency portfolio. And so we're looking at, I think, another $50 million this year. That's got our average rate of, I think, just under 1% that does in the dollar amounts, but also the average rate do increase over time. But if you look at where rates are today, the types of bonds that we buy today, which I would say give us a yield of, call it, around 3.5%.

I'm not sure if you look at on an annual basis if we had -- maybe if we go way out. But I would say certainly within the next 5 years, if not the next 7 years, we don't have a year where the average yield is higher than 3.5%. Now that yield -- that average yield does increase over time. Like I said, it's a little under 1% for the rest of the year. I think it's like 1.5% or so next year. and then it continues to increase. The dollars, we continue to be very diligent with a laddered approach.

If you look at our mature -- not this year, but if you lay out the next 5 years, we have about $100 million a year maturing and then it slides off a little bit over that over the next 4 or 5 years. But so we have lots -- I'm being somebody base because I don't have exactly the numbers in front of me, but there is some solid repricing opportunities in that portfolio, along with the commercial loans that we talked about earlier.

Matthew Breese: So it's give or take $50 million for the year?

Charles Christmas: There's $50 million maturing this year yet, but there's $100 million maturing every year for the next 5.

Matthew Breese: Got it. Okay. And then I guess back to Nate's question on cash liquidity. The first part of my question is just around seasonality. Is there anything -- I guess, it will be determined by the deposit side of the balance sheet. But anything seasonal in the second quarter that draws down cash a little bit more than usual? And then secondly, I think you had said we should anticipate running north of $200 million in cash by the end of the year. So is it -- we're standing at like $580 million in total cash right now, that's going to come down by a few hundred million by the end of the year. Is that the right message?

Charles Christmas: Yes. So I think from a seasonality standpoint, we talked about what happens in the first quarter, which we were able to overcome and then some. We do see some declines here in April as the final tax payments are being made. So April is usually a south a down month, not as dramatic as the first quarter, but there generally is some decline here in April. But there are really no other seasonality for the second quarter. We will see seasonality in the third quarter with our public units as they start collecting their summer taxes.

And -- but I would say that when we think about seasonality here, it's the first part of the first quarter, first part of the second quarter and throughout the third quarter. But yes, I think where the cash ends up at the Federal Reserve is anybody's guess. Again, it's going to be driven by both sides of the balance sheet, right? What continued deposit growth we get but certainly more so on the commercial lending side, residential mortgage side, trying to grow that portfolio or at least hold it steady, I should say, going forward and the growth in the securities book, as we keep that ratio at 16%.

So that's all going to work out to whatever we keep at the Fed at the end of the day.

Matthew Breese: Got it. Okay. Last 1 for me. I think you had mentioned that incremental loan yields are in the high 6s, low 7s. Would love some color just on competitive conditions, both sides of balance sheet lending and deposits. And if anything is changing spread-wise?

Charles Christmas: Okay. I'll take deposits and let Ray chime in on the loan side. We have -- deposit rates have been very, very quiet. I would say, all year. Obviously, we battled the credit unions, and we won't get on that setback this morning. But I think from a banking standpoint, rates have been very consistent. We don't see a lot of specials going on right now. And I would say everybody is, in my opinion, kind of everybody is behaving what they're offering out there makes sense from what they're getting on the asset side. And the stability is relatively easy to work through.

Raymond Reitsma: And on the loan side, we have target spreads that we like to achieve relative to risk levels. And as we look across that continuum, there I'd say the competitive pressure there really hasn't changed for some time. It's been the normal level of competition that we've come to know and love in the banking industry.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Ray Reitsma for closing remarks.

Raymond Reitsma: Thank you for your participation in today's call and for your interest in Mercantile Bank Corporation. The call has now concluded. Thank you.

Operator: This concludes our conference. Thank you for attending today's presentation.

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