Robert Burton - Lambert, Edwards, Investor Relations Michael Price - President and CEO Robert Kaminski - Executive Vice President and COO Chuck Christmas - Senior Vice President and CFO Sam Stone - Executive Vice President

Matthew Forgotson - Sandler O'Neill John Rodis - FIG Partners Damon DelMonte - KBW Daniel Cardenas - Raymond James

Good morning and welcome to the Mercantile Bank Corporation First Quarter 2015 Earnings Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Robert Burton. Please go ahead.

Thank you, Kate. Good morning everyone and thank you for joining you Mercantile Bank Corporation’s conference call and webcast to discuss the company’s financial results for the first quarter of 2015. I’m Robert Burton with Lambert, Edwards, Mercantile’s Investor Relations firm and joining me are members of their management team including Michael Price, President and Chief Executive Officer; Robert Kaminski, Executive Vice President and Chief Operating Officer; and Chuck Christmas, Senior Vice President and Chief Financial Officer and Sam Stone Executive Vice President. We will begin the call with management’s prepared remarks and then open the call up to questions. However, before we begin today’s call, 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 that the Company’s actual results could differ materially from any forward-looking statements made today due to the important 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. If anyone does not already have a copy of the press release issued by Mercantile today, you can access it at the company’s website which is www.mercbank.com.

Hopefully, you have all had chance to review our earnings release. We reported $0.39 per share compared with $.041 a year ago. While the first quarter of 2015 contained a $1.9 million negative provision benefit equivalent to $0.14 per diluted share that benefit declined $400,000 or $0.02 per diluted share for the current quarter. That been said in the reported results were in line with management expectations and are a very encouraging start to 2015. We're fully realized the level of initial efficiencies we have projected at the time of merger with Firstbank which equates to approximately $1.4 million per quarter, above the low interest rate environment continues to weigh our net interest income results, we saw sustainable above average performance in that interest margin, which was in line with our expectations for the quarter and year and underscores the key benefit of combining the deposit base of legacy Firstbank with a larger market exposure Mercantile.

As a result both ROAA and ROAE improved over the fourth quarter and tracking in line with our expectations. As part of our strong capital position and our commitment to shareholder return, we earlier today announced the quarterly cash dividend of $0.14 per share. We also initiated our previously announced share buyback program during the quarter. Looking forward to the remainder of 2015, we see further opportunity to participate in the continuing economic recovery of Michigan, as Michigan’s premier community bank. Our business activity levels reflect the overall continued gains and employment and business expansion they are being reported for Michigan and particularly the Grand Rapids market. The area of economic indicators remained positive suggesting growth will continue through the coming months. At this time I'd like to turn our call over to Chuck.

Thanks, Mike and good morning everybody. This morning we announced net income of $6.6 million for the first quarter of 2015 or $0.39 per diluted share. During the first quarter of 2014, net income was 3.6 million or $0.41 per diluted share. Although we recorded a negative provision expense from both the first quarter of 2015 and 2014, the negative provision expense during the first quarter 2015 equated to $0.02 per diluted share compared to $0.14 per diluted share during the first quarter of last year. We are pleased with our financial condition and earnings performance for the first quarter of 2015. We believe we are very well positioned to take advantage of lending and market opportunities to enhance our strong position as Michigan’s community bank, while delivering consistent results for our shareholders. Our net interest margin continues to reflect the benefit of the Firstbank merger, we recorded a net interest margin of 3.83% during the first quarter of 2015 compared to 3.42% during the first quarter of 2014. A majority of improvement reflects Firstbank’s lower cost of funds and purchase accounting entries relating to fair value adjustments associated with the merger. Our net interest margin improved by 4 basis points during the first quarter of 2015 when compared to the first quarter of 2014, although our yield on loans declined by 6 basis points primarily due to the ongoing very low interest rate environment, our yield on earning assets increased by 2 basis points due a large part to funding loan growth with the cash flow for low yielding securities and other interest bearing assets. Our cost of funds declined by 2 basis points during the first quarter of 2015 when compared to the first quarter of last year. We recorded loan discount accretion totaling $1.4 million during the first quarter of 2015 based on our most recent evaluations, we currently expect to record further loan discount accretion totaling about $1.2 million per quarter during the remainder of 2015. Actual accretion amounts recorded in future periods may differ from our forecast due to a variety of reasons, including periodic re-estimations and the payment performance of the acquired loan portfolio. We recorded time deposit and FHLB advance amortizations totaling $0.6 million during the first quarter of 2015. We expect to record further amortizations totaling 0.6 million during the second quarters of 2015 and then final of $0.2 million during the third quarter of this year. As we noted in prior merger-related SEC filings, these particular fair value adjustments will be completed at the end of July. We’ve also recorded trust preferred security amortization since the merger as consummated totaling $0.2 million during the first quarter of this year unless we call or part of our trust preferred securities, we currently have no plans to do so, we expect to record further amortizations totaling about $0.2 million per quarter until the year 2036. We expect our net interest margin to be in the range of 3.80% to 3.85% during the second quarter and then decline slightly to a range of 3.75% to 3.80% during the third and fourth quarters of this year. The primary reason for the anticipated decline is aforementioned elimination of the time deposit and FHLB advance amortizations in July. While the ongoing very low interest environment continues to exert compression pressure on our net interest margin, we expect to continue to use low yielding, excess overnight investments and cash flows from monthly paydowns on lower yielding mortgage-backed securities and the periodic maturities and calls on lower yielding U.S. government agency and municipal bonds to fund a large portion of our expected loan growth throughout the remainder of 2015. Reflecting the market’s current 2015 interest rate forecast, which includes a 25 basis point increase in the federal funds and prime rate during the third and fourth quarter, we have modeled such increases as part of our 2015 budget process. Per our net interest income simulations disclosed in prior Form 10-Qs and 10-Ks and as confirmed in our budget process, the forecasted increases in short-term interest rates are expected to have only a nominal impact on our net interest margin. The overall quality of our loan portfolio combined with recoveries of prior period loan charge-offs and the eliminations of and reductions in many specific reserves have produced a positive impact on our loan loss reserve calculation and allowed us to make no or negative provisions in nine consecutive quarters and in 12 out of last 13 quarters. We recorded negative provision expense 0.4 million for the first quarter of 2015. Gross loan charge-offs totaled $0.5 million during the first quarter while recoveries of prior period loan charge-offs totaled 1.9 million resulted in a net recovery of 1.4 for the quarter. Our loan loss reserve was 21.1 million at the end of the first quarter or over 1.5% of total originated loans and remained higher than our historical averages. We recorded non-interest income of $3.7 million during the first quarter of 2015, recording improvement in most fee income categories. During the first quarter, we recorded $0.2 million related to interchange income and credit and debit cards reflected a onetime change and the time we received such income. With caution and mortgage banking income can be difficult to forecast, we continued to expect non-interest income to come in around 3.0 million to 3.3 million per quarter during the remainder of 2015. We recorded non-interest expenses of $19.2 million of the first quarter of 2015 and are now realizing all of the cost save associated with the merger. We are currently projecting quarterly non-interest expenses to total in a range of 18.8 million to 19.1 million during the remainder of 2015. Our effective tax rate for 2015 is expected to be around 31% to 32%. We remain a well-capitalized banking organization. As of March 31st, our bank’s total risk-based capital ratio was 14.1% and in dollars was approximately 100 million higher than the 10% minimum required to be categorized as well capitalized. Those are my prepared remarks. And I'll turn the call over to Bob.

Thank you Chuck, and good morning. The first quarter produced strong commercial loan funding with nearly $100 million in advances to new and existing customers. All of our regions produced some new loan relationships. Loan activity was most significant in the Grand Rapids market. This loan funding is reflected on a solid loan pipeline that we have maintained in our lending groups over the past several quarters. Within the first quarter we saw most of our loan funding taking place during the months of January and March. Our loan officers and customer contact staff continued to effectively perform client acquisition activities that are the core of our relationship banking strategies and will serve us well in the coming months and quarters ahead. While new loan -- while new lending activity was substantial, there were numerous payoffs that had the effect of tempering the net loan growth during the first quarter. These payoffs occurred due to a variety of situations. Ours would their businesses or they the bank loans higher risk rated loans that moved out of the bank and borrowers were removed by other lenders with interest rate much more aggressive than our pricing and miles could justify. Competition remains quite intense for loans in all of our markets. The Mercantile continues to operate its business model determine to gain new customers based on a consultative mutually beneficial relationship banking approach. While maintaining integrity of the bank that interest margin. With a strong pipeline we are convinced that this style of banking continues to resonate well with our prospects and customers. As the quality remained very solid during the first quarter. Our lending staff and risk asset group continued to promptly identify and address any emerging potential problem loans working with borrowers to deal with the issues that may be causing the increased risk. We have also had ongoing success with recoveries of loans previously charged off. If that continues to maintain a good balance in the commercial portfolio between non-owner occupied commercial real estate and commercial investor loan plus owner occupied commercial real estate. While we are engaging new prospects in all loan categories, is the commercial and industrial loan packages that present us with the greatest opportunities to develop the fullest and most complete banking relationships. And since start of the year, we have deployed two additional treasury management sales staff members in our central and western Michigan markets and to see new opportunities created by the merger, especially C&I relationships. Customers and prospects continued to respond favorably to our client calling efforts and more specifically of our cash management products as well as our payroll processing services. Mortgage banking activity was strong during the first quarter, we continue to develop a structure and staffing in the Grand Rapids county markets. We see significant opportunities with an increased focus to build our retail mortgage presence in this market. One of our strategic initiatives in 2015 is the continued development of our internal training. As such, one of our senior managers has accepted the position of Director of the Bank’s Training and Communication functions. This individual will be responsible for analyzing all the trainees within the organization and then developing and coordinating internal and external training programs to fulfill these needs. Finally, during our conference call in January we outlined several key initiatives in 2015 to create some non-interest income opportunities, generate some cost savings and allow us to identify some additional efficiencies that will better service our customers. We continue to make good progress in all these areas. Those are my prepared comments. I’ll now turn it back over to Mike.

Thank you Bob and thank you Chuck. At this point Kate we would like to open the call up for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Matthew Forgotson of Sandler O'Neill. Please go ahead.

Just as far as expenses are concerned, was there any outside renewable or other seasonal expense that you might be inclined to pull out? And can you also talk about your comfort with the kind of expenses reverting to that $87 million and $90 million range?

Yes Matt yes we had to pull again this year but there was certainly so much. It’s no removal but of course now the graph is getting in the graphs but they’re off-budgeted and while it just have some impact on a quarterly basis it’s certainly not overall material. As I mentioned in my prepared remarks that range we still feel pretty good about and I think we should be able to hit that certainly has been mentioned we do have some initiatives that we’re starting to put in place now some of those which should have a positive impact on overhead costs so those are not budgeted and while it would take a little while just pull all those up and get the full benefit up during the second quarter, we should be fully expecting to start seeing the benefit of that and we’re just comment on that in further calls.

It sounds like if I'm reading it correctly it could it's not that budget you are suggesting that which has could even fall modestly below the low end of the range if all go as planned. Is that correct?

The other price will be a little bit aggressive. The bottom of the range I would say with maybe closer to the bottom of the range. But I don't think far below that.

As far as capital return is concerned I think you've lay out kind of a long term conceptual target PC ratio that in 0.5% or so with balance sheet seemingly kind of muted this year. Can you talk about kind of how we get there, the vis-a-vie share repurchase or dividends or just kind of your approach on those levels?

Yes, certainly we would like to use that all up with loan gross and like you said and like I mentioned lot of that loan growth is kind of come right on the balance sheet. So that's all I'm going change by all that much. But certainly that would be to our net interest margin, net interest income. As we take those money at a lower yielding investment in earning and put that into loan portfolio. So certainly that's obviously what we want to do and strive to do. We did increase the cash dividend up to $0.14 in the first quarter kept unchanged. But still we think relatively strong 2.8% yield based on our current stock price. So we'll continue to talk with our board of directors about cash dividends whether we what we do with our normal only cash dividend is potentially down the road or chance for the special dividend that certainly in the cards no plans to do. So currently, obviously we put in the play our stock repurchase program upto $20 million over the next few periods and obviously we'll see how our stock performs there and how we incorporate that plan into fruition and put that into play. But we are looking for all those different items obviously I'm sure sooner or later someone will ask Michael of M&A that remains the possibility not be eminent but that remains the possibility as well. So we're looking at all those different things and certainly we are in a very strong capital position to grow the company in several different ways and at the same time manage that capital level through dividend stock repurchase programs, those types of things.

The next question comes from the John Rodis of FIG Partners. Please go ahead.

Good morning guys. Hey, Chuck. Just wanted to make sure who is correct on the operating expenses. Did you say 18.8 million to 19.1 million per quarter going forward?

That is correct.

Okay. Maybe just you mentioned as far as capital allocation Chuck you talked about the buyback and you bought looks like roughly 100,000 shares in the quarter. Can you just talk about what you guys are sort of thinking for the remainder of the year as far as sort of pace of the activity?

Yes I think John for the most part I’ll start and then I’ll let other people jump in. I think for the most part we’re sort of just going to look to our stock reforms and obviously if the stock goes down they probably have a bigger appetite the stock goes up maybe less of an appetite but kind of looking at that as relatively longer term solution it’s not something we put in the play in the first quarter, I think we are going to ease that all because we know in the quarter something like that but just kind of more of a medium to longer term program that we can put into play depending on what the stock price is doing.

Okay so just to be more or less opportunistic I guess?

Yes you said it much quicker than I did.

This is Sam, John we did about 10% of the program in the first quarter and we have the capital capacity to complete the program in this year, but the pace at which we go depends on lot of things including trading volume in the market and how many blocks show up. And if there are block sellers we’re likely to do more than [indiscernible] and so a lot of things factor into the pace that we move at. We’re not trying to be the driving force behind the stock price, we like to see the market set the stock price.

Makes sense. Maybe Chuck or Sam another question for you guys just the securities portfolio continues to trend down I was just wondering do you see it going meaningfully below say 400 million?

This is Chuck I got to see where we’re at right now.

413 million at the end of the quarter.

Yes it’s going to be actually under 400 million by the time we get to the end of June John. We’ve got about $13 million in municipal bonds that either are going to mature or get called on May 1st. I think most people know that May 1st and November 1st tend to be pretty busy times in a municipal bond portfolio, so we’ll be under 400 million by the time we get to June 30th that’s part of the plan again we plan on just a run-off of the portfolio part of that’d be pay downs and mortgage backs which is about runs about $2 a month. We aforementioned on our municipals they will be busy they will be periodic maturities and I’m sure some more calls coming in that portfolio. And then as you might expect over last couple of months especially we’ve seen a pick-up and called our longer term callable bonds and so that’s all good because again we planned on that to fund our loan growth. We’re sitting pretty high right now with interest bearing deposits as you can see on our balance sheet which is our federal reserve account much higher than what we want that to be. We look at our fed account for those interest bearing deposits in our fed funds. We want to keep that around 50 million, so we’re [indiscernible] double where we want to be right now. Part of that is -- a good part of that reason so that’s higher is that we’ve had really strong deposit growth during the first quarter. We typically especially legacy Mercantile saw reductions in deposits in the first quarter as businesses paid bonuses and taxes out we seen some of that but especially towards the end of the first quarter we saw a strong increase as especially in our non-interest bearing business deposit account. So it’s kind of good news bad news that you have more excess overnight funding than what you want but for the most part that reflects ongoing increases in our deposits. And overtime hopefully sooner than later we have to put those monies into the loan portfolio combined with the normal run-off of the securities portfolio. We certainly have the ability if that opportunity comes that the bonds are going to mature later in 2015 and certainly 2016 and 2017. We can certainly sell those with pretty nominal gain or loss because they’d be so close to maturity and kind of accelerate that reduction. Overall we want our securities portfolio to get down to around 10% or 11% of assets, so we’ll be far well ahead of that $400 million figure you’ve talked about by applying all said and done as we reallocate and restructure if you will our earning assets.

And Chuck just as far as getting down to 10% to 11%, is that by say year-end ’15, year-end ’16, what’s sort of timeline?

Yes unless we saw huge net loan growth it won’t be a 2015 event, but if we continue to get loan growth like we think is going to be happening and obviously the big question is always the pay offs. 2000 maybe by the end of 2016 I don’t think it’d be before then, but we’ve got the great loan growth and it’s really in our pricing and underwriting guidelines. Again I wouldn’t hesitate to sell bonds prior to maturity to accelerate that remix.

Our next question is from Damon DelMonte of KBW. Please go ahead.

Chuck could you just clarify your comments on the margin outlook. I think you’d said you’re looking for 380 to 385 in the second quarter and could you just repeat what you’re looking for for the back half of the year?

Yes probably -- this is kind of like a 375 to 380. We’ll lose some of the [indiscernible] to merger related entries during [indiscernible] reduction of interest expense and again we continue to see like everybody compression at loan yields again that remix of our earning assets will hope that step back. So that's kind of how we get trending down just a little bit to what we are now. But 375 to 388 seems to make sense to us.

Okay, great. And then can you guys provide a little color or little update on the large commercial credit that kind of going on performing last quarter and I know you may mentioned it out in the press release. But any updates as where that stands and what the outlook over the next couple of quarter is for that credit?

As we say in the press release as we mention we go on make some good progress towards resolution of the credit during the first quarter and we think we'll have some more information about the second quarter. But no additional update at this point in time.

Okay. Alright, that's helpful. Then I guess just lastly mortgage banking volumes remained healthy this quarter. What were the volume the gain on sale this quarter versus last quarter?

Good question. I know I don't have that information.

Yes, I think I have. We were pretty flat, we were 688,000 in the first quarter compared to 691 in the fourth quarter.

Yes, I thought that the first quarter was pretty consistent with the fourth quarter and at the least the way it looks now is that the second quarter should be relatively similar to the first quarter. I mean obviously certainly in the quarter, I know we had a pretty strong pipeline going in the quarter.

Okay. Above the dollar amount of gains on those is similar. How is the volume? I mean it seems like the back into what the gain until margin is, are you seeing better or worse spreads?

The margins holding up well. I don't have those volume numbers with me first time.

The next question is Matt Schaefer of D. A. Davidson. Please go ahead.

Could you guys remind us the 375 to 380 range in the second half of the year, is that dependent on the set at all?

It includes a couple of 25 [indiscernible] increases so we clubbed that into our budget but I would tell you and as we continue to talk about and reported in our filing any increases in the fed will have a modest improvement in that interest income, I don’t think it would, we are not looking at more than 5 basis point on the front of our margin. So I think whatever the fed does whether they do not mean or may be up to through a couple of 25 basis point increases we are still comfortable with that range.

[Operator Instructions]. The next question comes from Daniel Cardenas of Raymond James. Please go ahead.

A couple of seeping questions for me, in the first quarter margin, that have any, was there any benefit from interest recapture has – I mean we saw your quality improved, you had recoveries on further quarters, just wanted to see if there was any impact on the improved credit quality on the margin this quarter?

No, what we got the recovery. I think the interest income that we got associated with that recovery was about $50,000 Dan. So we will take every dollar we can get certainly. And we have got, in addition that we have got some recovery from [indiscernible] legal bills that we have expensed but from a margin prospective that was, it was pretty core margin.

Good and then with the $100 million in commercial loan originations during the quarter, may be some color on what the average size was and how that kind of compares to your legacy portfolio?

I think the average size was right in our sweet spot probably in the range of couple of million, three million dollars, that consisted of widespread from some bigger loans in smaller loans in our more rural markets, but good to see some origination activities taking place in all of our markets although as I mentioned in my comments some of the majority of the growth took place in Grand Rapids but we’re encouraged by the activities the response to our planning efforts in all our markets, as I mentioned is a pay offs and disappointed to see those were higher than we had planned but it does point to our disappointment regarding net interest margin, now wanting to get into fitting more and some credits where preference are merely after the loss rate and – but with that strategy we’re able to generate $100 million and loan originations which can be under stated.

And you may have said this in the call I may have missed it, but any color as to what the approximate yield or the average yield on these commitments looks like?

I don’t think any of us has that in front of us, but certainly we’re looking right around prime I would say on average obviously that’s going to be a factor especially on the rate of credit but [indiscernible] is kind of a good standard.

And then any change in the line utilizations this quarter versus last quarter?

Not in the existing line utilizations but one of the things that we have seen is that the credits that we have extended over last two quarters we’re seeing those funded up as we had expected so we put a lot of new C&I customers into the bank over the last few quarters and we are seeing growth in lines of credit and total outstandings because of that but overall line utilization has stayed pretty consistent.

And then last question is as I look at your regulatory capital ratios, was there any impact this quarter from CRE, I mean just kind of looking to get a sense for why the numbers the ratios anyway declined on a sequential quarter basis?

There was some certainly some moving parts and we’re all sitting here with our professional vendors trying to figure out exactly what the FDIC was doing and Bob was actually doing to us but there were definitely some moving parts there and probably the biggest impacts there was what they called high volatile CRE which our construction loans that needs certain definitions with primarily pay downs and equity into the projects. I think we had about $60 million of that reported. Of that 60 million historically would have been a 100% risk weighted, now it’s a 150% risk weighting, so there was an increase there. And the other bigger increase that we had is that lines of credit – unused lines of credit under a year on the commercial side now have to get risk weighted at 20% and that used to be 0% and I don’t have a calculation in front of me but I think that was around $70 million of added risk weighted assets. So it’s about 100 million right there between those two items, those were the biggest items that we had.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Price for any closing remarks.

Thank you Kate and thank you all for your interest in our company. We look forward to talking again with you next quarter. And at this time we will end the call.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.