Executive Summary / Key Takeaways

• Strategic Transformation Driving Stability: Mercantile Bank Corporation (MBWM) has successfully executed a multi-pronged strategy to enhance on-balance sheet liquidity and reduce its loan-to-deposit (LTD) ratio from 110% at year-end 2023 to 96% by Q3 2025, primarily through robust local deposit growth and a refined mortgage business model.
• Resilient Net Interest Margin Amidst Rate Volatility: Despite significant federal funds rate fluctuations, MBWM has maintained a remarkably stable net interest margin (NIM), dropping only two basis points over the last five quarters, demonstrating effective asset-liability match funding and a strategic aim to be "interest rate agnostic."
• Strong Asset Quality and Proactive Risk Management: The company consistently exhibits very strong asset quality, with low non-performing loans and robust allowance for credit losses, underpinned by conservative underwriting and a proactive approach to economic uncertainty, including blending adverse economic scenarios into its provision modeling.
• Eastern Michigan Acquisition Fuels Future Expansion: The definitive merger agreement with Eastern Michigan Financial Corporation (EFIN) marks a significant growth catalyst, promising double-digit earnings accretion, enhanced liquidity, and strategic entry into new markets, while leveraging EFIN's expertise for MBWM's upcoming core system transition to Jack Henry.
• Consistent Shareholder Value Creation: MBWM boasts impressive long-term shareholder returns, with a five-year compounded annual growth rate of 8.4% for tangible book value and 10.4% for earnings per share, placing it in the top two of its proxy peer group.

Setting the Scene: A Disciplined Approach to Regional Banking

Mercantile Bank Corporation, established in 1997 and headquartered in Grand Rapids, Michigan, operates as a focused regional bank. It provides comprehensive commercial and retail banking services to small- to medium-sized businesses and individuals across the United States. The company's overarching strategy centers on disciplined growth, fostering strong community relationships, and meticulous asset-liability management. This approach has historically enabled MBWM to carve out a significant niche, particularly in Michigan, by prioritizing personalized service and deep local market understanding over sheer scale.

The banking industry, particularly for regional players, is characterized by intense competition from larger national and super-regional banks, as well as an evolving landscape influenced by fintech innovators. Larger competitors such as Fifth Third Bancorp (FITB), Huntington Bancshares (HBAN), Comerica Incorporated (CMA), and KeyCorp (KEY) often possess broader geographic footprints, greater capital resources for extensive marketing, and more advanced digital infrastructure. These larger institutions typically exhibit stronger revenue growth and higher operating margins due to economies of scale and diversified income streams. Indirect competitors, including online banks and fintech companies, further challenge traditional models by offering highly accessible digital-only services and specialized payment solutions.

Mercantile Bank's competitive advantage lies in its strong community presence and relationship-based banking model. This fosters enhanced customer loyalty and provides stable, recurring revenue from deposits and loans. Its regulatory licenses also act as a significant barrier to entry, allowing MBWM to offer a full suite of banking services that new, smaller entrants cannot easily replicate. However, MBWM's smaller scale compared to its larger regional peers can lead to higher operational costs and potentially more modest growth rates.

While MBWM does not highlight proprietary, differentiated technology in the same vein as a specialized tech company, its strategic investments in core banking systems and digital offerings are crucial operational differentiators. The company is actively transitioning to Jack Henry as its core provider in early 2027, a move strategically timed with the expiration of its current provider's contract. This transition is aimed at ensuring a "very reliable" core system that delivers "the best service, the best products" to both employees and customers. The upcoming merger with Eastern Michigan Financial Corporation (EFIN) is particularly advantageous in this regard, as EFIN brings "decades of experience" with Jack Henry, promising a "frictionless" transition. This strategic enhancement of its technological backbone, combined with its existing digital banking products and services that contribute to non-interest income, underpins MBWM's ability to compete effectively by improving efficiency and customer experience within its relationship-driven model.

Strategic Evolution and Operational Excellence

Mercantile Bank has recently undergone a significant strategic evolution, particularly on the funding side of its balance sheet. From year-end 2021 to year-end 2023, rapid commercial and mortgage loan growth, coupled with post-COVID deposit outflows, pushed the bank's loan-to-deposit (LTD) ratio to an elevated 110% by the end of 2023. In response, MBWM initiated a focused strategy in 2024 to bolster on-balance sheet liquidity and improve its financial profile. This involved a three-pronged approach to deposit gathering: broadening its focus on business deposits, dedicating resources to the governmental and public unit sector, and restructuring its retail customer approach towards total balances.

These efforts yielded substantial results, with local deposits increasing by over 20% in 2024 and continuing into 2025. This robust deposit growth not only funded strong loan expansion but also allowed for a reduction in wholesale funding sources. By September 30, 2025, the LTD ratio had significantly improved to 96%. Concurrently, MBWM strategically adjusted its mortgage programs to sell a greater portion of originations in the secondary market rather than retaining adjustable-rate mortgages (ARMs) on its balance sheet. This shift contributed to a 62% increase in mortgage banking income in fiscal 2024 compared to 2023, and a nominal decrease in residential mortgages on the balance sheet by March 31, 2025.

A pivotal development occurred on July 22, 2025, with the announcement of a definitive merger agreement to acquire Eastern Michigan Financial Corporation (EFIN) for approximately $90.30 million. This acquisition, MBWM's first in over a decade, is strategically designed to further lower the loan-to-deposit ratio, reduce the pro forma cost of funds, enhance liquidity, and provide entry into new markets with a well-established franchise. The merger is anticipated to close in the fourth quarter of 2025. Mercantile will initially operate as a two-bank holding company, with Eastern Michigan Bank consolidating into Mercantile Bank in the first quarter of 2027. This timing aligns with MBWM's planned transition to Jack Henry as its core provider, leveraging EFIN's "decades of experience" with the system to ensure a smooth and "frictionless" conversion. The combination is projected to be double-digit accretive to earnings, with mid-single-digit tangible book value dilution and a mid-three-year earn-back period.

Financial Performance: A Story of Stability and Growth

Mercantile Bank Corporation's financial performance in 2025 demonstrates a strong return profile, characterized by resilient profitability and robust asset quality. For the third quarter of 2025, net income reached $23.8 million, or $1.46 per diluted share, a notable increase from $19.6 million, or $1.22 per diluted share, in the third quarter of 2024. For the first nine months of 2025, net income totaled $65.9 million, or $4.06 per diluted share, compared to $60 million, or $3.72 per diluted share, in the prior-year period. This growth was primarily driven by increased net interest income and noninterest income, coupled with lower provision expense and reduced federal income tax expense.

The company's net interest margin (NIM) has exhibited remarkable stability, dropping by only two basis points over the last five quarters despite a 96 basis point decline in the SOFR ninety-day average rate. This stability underscores the "effective execution of our strategic objective to maintain a steady margin via match funding of our assets and liabilities." While the yield on earning assets declined in 2025 due to lower interest rates on variable-rate commercial loans, this was largely offset by a disciplined management of the cost of funds. Interest income on loans for the nine months ended September 30, 2025, was $220.99 million, with a yield of 6.33%. Total loans stood at $4.62 billion as of September 30, 2025.

Noninterest income has been a growing contributor to profitability. For the nine months ended September 30, 2025, total noninterest income was $30.55 million. Key drivers include service charges on deposit and sweep accounts, which increased to $5.87 million (up 18% in the first nine months of 2025), reflecting growth in treasury management activity. Payroll services income also saw consistent growth, reaching $2.65 million (up 15% in the first nine months of 2025). Mortgage banking income, at $9.69 million for the first nine months of 2025, was up $1 million year-over-year, benefiting from the strategy to sell a greater portion of originations. Noninterest expense increased to $99.23 million for the first nine months of 2025, primarily due to higher compensation and benefits, increased data processing costs, and acquisition costs related to the EFIN merger.

`

Federal income tax expense saw a significant reduction, totaling $11.54 million for the first nine months of 2025, down from $15.09 million in the prior-year period. This was largely attributable to the acquisition of transferable energy tax credits and benefits from investments in tax credit structures, resulting in a lower effective tax rate of 14.90% for the first nine months of 2025.

Capital and Liquidity: Fortifying the Foundation

MBWM maintains a robust capital position, with its bank's total risk-based capital ratio at 14.3% as of September 30, 2025. This comfortably exceeds the 10% minimum required to be categorized as "well-capitalized" by approximately $236 million. Shareholders' equity increased by $73.1 million during the first nine months of 2025, reaching $657.63 million. This growth was driven by net income and a $21.3 million after-tax increase in the market value of available-for-sale securities, reflecting declining market interest rates. The tangible book value per common share increased by $4.27, or almost 13%, during the first nine months of 2025.

Liquidity management is a core strength, with the loan-to-deposit ratio improving to 96% by September 30, 2025. This was achieved through a strategic focus on local deposit growth, which outpaced loan and investment growth. The deposit mix is favorable, with 25% non-interest-bearing deposits and 20% lower-cost deposits contributing to NIM stability. Interest-earning deposits, predominantly with the Federal Reserve Bank of Chicago, averaged $284 million during the first nine months of 2025, reflecting a deliberate strategy to maintain higher on-balance sheet liquidity.

Wholesale funds, including out-of-area deposits and FHLBI advances, remained stable at approximately 10% of total funds. The company also maintains significant borrowing capacity, with a $1.08 billion line of credit with the FHLBI, of which $725 million was available as of September 30, 2025.

Asset Quality and Risk Management: A Prudent Stance

Mercantile Bank's asset quality remains exceptionally strong, a testament to its conservative underwriting and diligent loan administration. Past due loans stood at a mere 16 basis points of total loans, and non-performing loans to total loans averaged 13 basis points over the last five years plus the year-to-date period. The allowance for credit losses (ACL) is robust, at 1.28% of total loans as of September 30, 2025, providing "very strong coverage relative to past due and non-performing loan levels."

The provision for credit losses for the first nine months of 2025 was $3.9 million. This primarily reflected a $4.6 million net increase in specific allocations, notably for a commercial construction loan placed on nonaccrual, a $1.9 million reserve increase due to changes in the economic forecast, and a $1.7 million net increase in qualitative factors. Management explicitly stated that a "large percentage... was because of us going forward and blending those two economic forecasts," indicating a proactive and prudent approach to accounting for economic uncertainty. The company's lending teams serve as the "first line of observation and defense to recognize areas of emerging risk," utilizing a "robust" risk rating model with a continuous emphasis on current borrower cash flow.

Outlook and Future Growth Drivers

Mercantile Bank Corporation's outlook is characterized by continued growth and strategic integration. Loan growth for 2025 is expected to be in the "mid-single digits," with an annualized growth rate of 5% to 7% projected for the fourth quarter. For 2026, management anticipates loan growth in the "higher end of maybe five to seven, maybe 6% to 8%." This optimism is supported by a robust commercial loan pipeline, which, despite some recent lumpiness in paydowns, remains at an "all-time high" with $3.7 billion in commitments to make loans as of September 30, 2025.

The net interest margin is forecasted to "remain relatively steady and within the range over the past five quarters" for the remainder of 2025, even with an anticipated 25 basis point reduction in the federal funds rate in October 2025. This stability is a direct result of the company's match-funding strategy and the expected repricing of lower-rate loans and securities, alongside higher-rate time deposits. The federal income tax rate for Q4 2025 is projected at 15%, with a potential for a 2026 rate closer to 16% due to planned acquisitions of transferable energy tax credits.

The Eastern Michigan Financial Corporation merger is a significant catalyst for future growth. Beyond the immediate financial accretion, it provides MBWM with entry into new markets and a substantial enhancement to its core deposit base and liquidity. The integration, including the core system transition to Jack Henry in early 2027, is expected to generate significant cost savings and operational efficiencies in the long term.

Conclusion

Mercantile Bank Corporation presents a compelling investment thesis rooted in its disciplined growth strategy, robust financial performance, and proactive risk management. The company's successful efforts to strengthen its balance sheet liquidity and stabilize its net interest margin, even amidst volatile interest rate environments, highlight its operational resilience and strategic foresight. The impending acquisition of Eastern Michigan Financial Corporation is poised to accelerate MBWM's growth trajectory, enhance its market presence, and further solidify its financial foundation.

While the banking sector faces ongoing economic uncertainties and intense competition, MBWM's consistent asset quality, prudent capital management, and strategic investments in its core technology and market expansion position it favorably. Investors seeking exposure to a well-managed regional bank with a strong track record of shareholder value creation and a clear roadmap for future growth will find MBWM's story particularly attractive. The company's ability to leverage its community-focused model with strategic operational enhancements and accretive acquisitions underscores its potential for continued outperformance.