Mercantile Bank Corporation (MBWM) Q3 2026 Earnings Call Transcript

Operator: Good morning, and welcome to the Mercantile Bank Corporation 26 Third Quarter Earnings Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference call over to Nichole Kladder, chief marketing officer of Mercantile Bank. Please go ahead.

Nichole Kladder: Hello, and thank you for joining us. Today, we will cover the company's financial results for the third quarter of 2026. Team members joining me this morning include Raymond E. Reitsma, president and chief executive as well as Chuck Christmas, executive vice president and chief financial officer. Our agenda will begin with prepared remarks by both Raymond and Chuck and will include references to our presentation, covering this quarter's results. You can access a copy of this presentation as well as the press release sent earlier today by visiting mercbank.com. After our prepared remarks, we will then open the call to your questions. Before we begin, it is my response to inform you that this call may involve certain forward looking statements such as projections of revenue, earnings, and capital structure, as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from any forward looking statements made today due to factors described in the company's latest Securities and Exchange Commission's filings. The company assumes no obligation to update any forward looking statements made during the call. Let's begin. Raymond?

Raymond E. Reitsma: Thank you, Nicole. Our results from the third quarter continue to build on the theme of commercial expertise generating a strong return profile. My comments will focus on highlights around the net interest margin, loan and deposit growth, asset quality, noninterest income, and noninterest expense. Chuck will then follow with the specifics of the quarter. The net interest margin improved to 3.73 during the third quarter of 2026, from 3.49% during the third quarter of 2025. This improvement was driven largely by a reduction in the cost of funds resulting from the acquisition of Eastern and the refinement of our deposit base including a decrease in broker deposits and the repricing fixed rate loans and securities with continued opportunities for asset repricing in 2026 and 2027. In addition, the margin expansion occurred in a dynamic interest rate environment. From the third quarter of 2025 to the first quarter of 2026, SOFR declined by 67 basis points and our net interest margin increased by 6 basis points. From the first quarter of 2026 to the third quarter of 2026, SOFR was unchanged and our net interest margin increased by 18 basis points highlighting the impact of the actions listed above. The chart on page 11 of the investor presentation illustrates these dynamics. Turning to loans. Commercial loans, our largest asset class, increased 9% from the prior year-end and quarter-end and helped drive a 17% increase in revenue compared with the third quarter of 2025. That growth occurred despite elevated pay downs from asset and business sales excess cash flow, and refinancing to the secondary markets totaling $448 million for the 9 months ending 09/30/2026 compared to $306 million during the respective 2025 period. At the same time, lending commitments including unfunded portions of construction loans stand at a 5-quarter high of $589 million at 09/30/2026 compared to $386 million at 09/30/2025. Asset quality continues to be strong with nonperforming assets representing only 14 basis points and 16 basis points of total assets at 09/30/2026 and 09/30/2025 respectively. Past due loans stand at just 3 basis points of total loans as of 09/30/2026. C&I and owner occupied commercial real estate remain near our target of 55% of the commercial portfolio with appropriate granularity relative to loan type classifications. These solid metrics reflect continued discipline in underwriting standards, a strong credit culture, and the quality of our client base. On the funding side, our focus on deposits continues to produce results. Total deposits increased 17% over the last 12 months ending 09/30/2026. including 22% growth in noninterest bearing deposits and 15% growth in interest bearing deposits. This growth principally reflects growth in commercial relationships development of relationships in the public funds markets, and, of course, the acquisition of Eastern Michigan Bank. Importantly, overall deposit growth occurred as certificates of deposit declined by approximately $180 million over the same period. This decline primarily represents brokered CDs and as a result, the overall quality of our funding mix continues to improve while our reliance and higher cost term funding continues to decline. Non interest income in total increased 16% during the first 9 months of 2026 compared to the respective 2025 period. Including a 34% in service charges on accounts, a 22% increase credit and debit card income, and an 11% increase in swap income, in large part reflecting growth in commercial relationships. We have characterized 2026 as a year of investment around people and technology, including a change in our core systems provider, which is reflected in our noninterest expense. Investments in people include additional costs around the company in general and, in Southeast Michigan as we take the opportunity afforded by disruption in that market. Chuck will comment on what our normalized run rate will look like in upcoming quarters. We remain excited about our combination with Eastern and the opportunities to add customers and employees to our bank as we capitalize on disruptions to markets in Michigan, particularly Southeast Michigan. That concludes my remarks. I will now turn the call over to Chuck.

Charles E. Christmas: Thanks, Raymond. Good morning, everyone. This morning, we announced net income of $24.1 million or $1.39 per diluted share for the third quarter of 2026, compared with net income of $23.8 million or $1.46 per diluted share for the third quarter of 2025. Net income during the first 9 months of 2026 totaled $72.7 million or $4.21 per diluted share compared to $65.9 million or $4.06 per diluted share during the first 9 months of 2025. Growth in net income during both time frames primarily reflected increased net interest income and noninterest income that more than offset higher noninterest expenses and federal income tax expense. Excluding nonrecurring costs associated with the year-end 2025 acquisition of Eastern Michigan, and the ongoing core and digital banking system conversion and the impacts of smaller onetime items, adjusted net income was $24.5 million or $1.42 per diluted share for the third quarter of 2026, $24.3 million or $1.50 per diluted share for the third quarter of 2025, $76.1 million or $4.41 per diluted share for the first 9 months of 2026 and $66.4 million or $4.09 per diluted share for the first 9 months of 2025. Adjusted diluted earnings per share decreased 8 cents or approximately 5% in the third quarter of 2026 compared to the third quarter of 2025, and increased $0.32 per diluted share or approximately 8% during the first 9 months of 2026 compared to the first 9 months of 2025. We believe using these non GAAP measurements reflects our core earnings performance and provides for a more accurate current period versus prior period comparisons. Interest income on loans increased during the third quarter and first 9 months of 2026 compared to the prior year periods, primarily reflecting loan growth that was partially offset by a lower yield on loans. Average loans totaled $4.97 billion during the third quarter of 2026, compared to $4.6 billion during the third quarter of 2025, an increase of $300 million Mercantile Bank experienced robust commercial loan fundings throughout 2026, but also received significant payoffs and partial paydowns of certain larger commercial loans aggregating $448 million. Our yield on loans during the third quarter of 2026 was 23 basis points lower than the third quarter of 2025, primarily reflecting the 75-basis point aggregate decline in the federal funds rate during the last 4 months of 2025. Interest income on securities increased during the third quarter and first 9 months of 2026 compared to the prior year periods, reflecting growth in the securities portfolio and a higher yield. The growth and higher yield reflect the acquisition of Eastern Michigan, along with ongoing portfolio expansion and the reinvestment of matured lower yielding investments at Mercantile Bank. Average balances were up $284 million and the average yield increased 53 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, declined during the third quarter of 2026 compared to the third quarter of 2025, but increased during the first 9 months of 2026 compared to the same time period in 2025. The average yield decreased 67 basis points quarter over quarter and 75 basis points year to date over year to date largely depicting the 75-basis point decrease in the fed funds rate during the last 4 months of 2025. The average balance was $9 million lower in the third quarter 2026 compared to the third quarter of 2025, was $110 million higher during the first 9 months of 2026 compared to the first 9 months of 2025. In total, interest income was $4.6 million and $14.5 million higher during the third quarter and first 9 months of 2026 compared to the respective prior year periods. Interest expense on deposits decreased during the third quarter and first 9 months of 2026 compared to the prior year periods, 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 reflected the acquisition of Eastern Michigan, along with growth and lower deposit costs at Mercantile Bank. Costs of interest bearing deposits at both banks were positively impacted by the decline in the fed funds rate in the latter part of 2025. Average interest bearing deposits totaled $4 billion during the third quarter 2026, compared to $3.61 billion during the third quarter of 2025, an increase of $389 million. The cost of all deposits was down 51 basis points during the third quarter of 2026 compared to the third quarter of 2025, and down 49 basis points during the first 9 months of 2026 compared to the same time period in 2025. Interest expense on Federal Home Loan Bank of Indian Indianapolis advances declined during the third quarter and first 9 months of 2026 compared to the prior periods largely reflecting a lower average balance that more than offset a higher average cost. Interest expense on other borrowed funds increased during the third quarter and first 9 months of 2026 compared to their prior year periods, largely reflecting the impact of a term loan we obtained in late 2025 to assist in the cash portion of the Eastern Michigan acquisition. In total, interest expense was $4.3 million and $9.6 million lower during the third quarter and first 9 months of 2026 compared to the prior year periods. Net interest income increased $8.9 million and $24 million during the third quarter and first 9 months of 2026, respectively, compared to the prior year periods primarily reflecting growth in earning assets and a higher net interest margin. Average earning assets totaled $6.52 billion during the third quarter of 2026, compared to $5.94 billion during the third quarter of 2025, an increase of $575 million. Average assets increased $664 million during the first 9 months of 2026 compared to the same time period in 2025. The growth in average earning assets during both time periods largely reflects the acquisition of Eastern Michigan at year end 2025 along with loan and investment growth at Mercantile Bank. The net interest margin was 3.73% during the third quarter of 2026, compared to 3.49% during the third quarter of 2025 and was 3.62% during the first 9 months of 2026 compared to 3.48% during the first 9 months of 2025. The improvement during both time periods is largely due to the Eastern Michigan acquisition. The yield on earning assets declined 22 basis points and 29 basis points during the third quarter and first 9 months of 2026 respectively, while the cost of funds declined 46 basis points and 43 basis points during the same 2026 time periods. We recorded provisions for credit losses of $700 thousand and negative $2.9 million for the third quarter and first 9 months of 2026, respectively. The third quarter provision expense mainly reflected a net increase of $1.7 million in specific allocations and an increase of $600 thousand associated with net loan growth, which was partially offset by a $1.5 million reduction resulting from faster prepayment speeds on the residential mortgage loan portfolio. The reserve balance increased $1 million during the third quarter of 2026 reflecting the $700 thousand provision expense and net loan recoveries of $300 thousand The reserve balance equaled 1.14% of total loans as of 09/30/2026, our sustained strength and loan quality metrics continues to be impactful to our loan loss reserve calculations. The baseline allowance largely determined from historical net loan charge off activity, represents only 1/3 of our current reserve balance, reflecting a low level of net loan charge off activity during our look back period from the beginning of 2011 through the end of the third quarter of 2026. Specific reserve allocations totaled just $2.6 million or about 5% of the reserve balance as of September 30. Noninterest expenses were $8.8 million and $25.8 million higher during the third quarter and first 9 months of 2026 respectively, compared to the prior year periods. Excluding onetime costs associated with the ongoing core and digital banking system conversion, and year end 2025 acquisition of Eastern Michigan, that aggregated $600 thousand and $4.4 million during the third quarter and first 9 months of 2026, respectively, and $600 thousand during both the third quarter and first 9 months of 2025, noninterest expenses increased $8.8 million and $21.9 million compared to the prior year periods. Eastern Michigan Bank's noninterest expenses totaled $4.1 million and $12.1 million during the third quarter and first 9 months of 2026, respectively. The increase in core operating costs largely reflects higher salary and benefit costs. Including expenses associated with personnel investments in Southeast Michigan and incentive accruals related to the ongoing core and digital banking system conversion and the integration of Eastern Michigan Bank. The remaining growth generally depicts inflation impacts and a larger balance sheet. Federal income tax expense was $1.2 million, $3.2 million higher during the third quarter and first 9 months of 2026, respectively, compared to the prior year periods, largely reflecting a higher level of pretax net income and a lower level of net benefits from transferable energy tax credits. The effective tax rate was 16.8% during both the third quarter first 9 months of 2026, compared to 13.4%, 14.9% during the respective time periods in 2025. The 2025 periods had higher levels of transferable energy tax credit activity given carryback opportunities. Additional acquisitions of Transferable Energy tax credits may be made from time to time subject to our investment policy, tax credit availability, and tax credits derived from our low income housing and historical tax credit activities. Both Mercantile and Eastern Michigan Bank have strong and well capitalized regulatory capital positions. Mercantile Bank's total risk based capital ratio was 13.4% at September 30, $200 million above the minimum threshold to be categorized as well capitalized. Eastern Michigan Bank's total risk based capital ratio was 23.9% as of September 30, $39 million above the minimum threshold to be categorized as well capitalized. We did not repurchase shares during the third quarter of 2026. We have $6.8 million available in our current repurchase plans. Regard to the fourth quarter, on Slide 27 of the investor presentation, we share our latest assumptions on the interest rate environment, and key performance metrics for the fourth quarter with the caveat that market conditions remain volatile making forecasting difficult. The forecast is predicated on no changes in the federal funds rate during the quarter, although we believe our net interest margin will remain relatively stable in a changing interest rate environment. We are projecting net loan growth in a range of 5% to 7% annualized which encompasses a strong commercial loan pipeline as well as expected commercial loan payoffs. We are forecasting a higher net interest margin during the quarter 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. We are projecting a federal tax rate of approximately 17% which encompasses continued growth in net benefits from our low income and historical tax credit activities along with additional transferable energy tax credit investments. Expected quarterly results for noninterest income and noninterest expense are also provided for your reference. Noninterest expense projections reflect ongoing personnel investments made in Southeast Michigan as well as to support operational areas as we switch core and digital banking providers to enhance the durability efficiency, and experience for our customers and employees. Non recurring costs associated with the core and digital banking system conversion, are not included. 1 time expenses associated with the recent personnel investments in Southeast Michigan and incentive accruals related to the ongoing core and digital banking system conversion and the integration of Eastern Michigan Bank totaled $2.4 million during the third quarter of 2 thousand 26. These costs are projected to aggregate $1.2 million during the fourth quarter of 2026, and $700 thousand during the first quarter of 2 thousand 27. Starting 04/01/2027, we project a $600 thousand quarterly reduction our data processing and statement processing costs. In closing, we are very pleased with our operating results during the third quarter and first 9 months of 2026. Continued strong financial condition, and believe we remain well positioned to successfully navigate through the myriad of challenges and uncertainties faced by all financial institutions. That concludes my remarks. I will now turn the call back to Raymond.

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

Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 1 again. At this time, we will pause momentarily to assemble our roster. Your first question comes from the line of Brendan Nosal with Hovde Group. Your line is open. Please go ahead. A reminder that if you are muted locally to unmute your device. Your next question comes from the line of Nathan Race with Piper Sandler. Your line is open. Please go ahead.

Nathan Race: Hey, guys. Good morning. Thanks for taking the questions.

Raymond E. Reitsma: Hi, Nathan. Morning. Good morning. Hey.

Nathan Race: Hey, Chuck. I was hoping to just start on the margin outlook. I appreciate the guide for 4Q. But as you look out to next year, I think in your comments, you alluded to you know, 25 basis points of rate cuts to the extent they occur next year, should be pretty margin neutral. I am just curious underpinning that, are you expecting pretty similar betas on both loans and deposits just perhaps given that some of the strong deposit growth you guys have generated over the last several quarters is maybe coming from some higher from some clients that maybe demand more around rate hikes or just any thoughts on just kind of deposit loan expectations in the next year?

Charles E. Christmas: Yeah. Nathan, great question. I think, you know, what we look at is the asset side is pretty easy to model out when you are looking at rate changes. it is-- it is obviously the non maturing deposits, which is the tricky part. In trying to understand what the betas are going to look like. And I think those. Quite frankly, I think those change over time, and I think the attitudes change. A lot in regard to how aggressive or nonaggressive the Fed is. If they kind of do a drip, say, 25 basis points, these are all examples, you know, each quarter. I do not think they are. The depositors and the markets are as sensitive to changing rate. But if the Fed gets aggressive, maybe 2 changes, you know, 2 increases a quarter or maybe throwing a 50-basis point out there. I just think it makes more attention. And I do think it has an impact on the betas. So that is that is 1 of those things that just is impossible to really model accurately. You know, we. You know, I think there is really 2 areas that we have seen most of the deposit growth, and this is obviously excluding the Eastern Michigan deposit portfolio that came over, which is fantastic. Both in cost as well as durability. Non interest bearing check accounts, which is primarily related to you know, continued expansion of the commercial loan portfolio. Including those that maybe get a line of credit, but are generally net depositors. The bank obviously love those. And then the money market accounts, you know, I would certainly would agree with the spirit of your question that the, you know, the rates on money market accounts are probably going to be the most sensitive and certainly the most, immediate. That we have out there. We do have a product where some of our bigger customers are actually. Their rate is tied to the Fed funds rate. So those do immediately reprice. So those are pretty easy to model. But our money market product is tiered, based on balance and, obviously, different rates for different balances. I will say that the, at least in the first increase here in September, changes that we actually made were a little bit less than what we had baked out, so a little bit of a benefit to the margin there. But it is early yet. You know, everybody's trying to dissect within our markets of what is going on and, you know, looking at their own balance sheet. So it is a very dynamic Hopefully, we can, our betas. Our actual betas are going to be less than what we modeled. But it is way too early to tell and I. Actually, I think it is subject to ongoing change anyways. But on an overall basis, you know, the way we model it out, the way that we balance have managed our balance sheet. You know, this is certainly our goal and our expectation that, you know, certainly over several quarters, that our margin would remain relatively stable. Maybe a small increase we do show in our results a model of a slight increase, in our margin if rates do go up. But on an overall basis, we are trying to be agnostic to rate changes. We cannot control interest rates. Nobody can predict interest rates. So our goal is to make, I will not say bulletproof, but make ourselves very durable in any changing interest rate environment. And not having to hope because obviously that is not a good strategy for long term. In regards to our margin. Hopefully, that helps you, Nathan.

Nathan Race: Yeah. Absolutely. that is really helpful. Thanks, Chuck. And maybe a larger, broader question for Ray. You know, just thinking about operating leverage for next year. You know, I think the last couple of years, there is been some substantial investments, you know, on the personnel side, particularly on deposit gathering, and you have obviously had success kinda getting the loan deposit ratio, you know, well below where it is been historically. So just curious if you think about, you know, kind of investments in personnel or additional production hires do you see additional opportunities on the rise? Or do you think 2027 is gonna be more of a year of kinda just realizing some of the investments that you have made and just generating overall more positive operating leverage into 2027.

Raymond E. Reitsma: Yeah. it is. that is a great question as well. And we are always trying to balance the investment with the anticipated return. But when there is what you might call a high level of disruption, there is quite a bit of opportunity both to hire people and to add new customers. So we have added a number of experienced commercial bankers around the corporation in the last quarter. Really outstanding talent from the super regional and national banks that we compete with. We hired our succession leadership person for our treasury management group, and we have a 1-year transition where both of those people are on the staff lots of support people around the growth, including credit and risk management and the like. So your assessment is correct. And we could slow down and reap more than if we continue to invest. But for the long haul, if the opportunities are there to add people that we think will really do a great job for us, we will continue to invest. So it remains to be seen a little bit, We are very pleased with the level of success that we have had in adding talent to the bank. And when we are convinced of its long term positive effect, we will continue to do that.

Nathan Race: Okay. Brett. And maybe 1 last 1 just for Chuck just to maybe put a finer point around what we can kind of think about a range for expenses for next year. You know, I appreciate the guide for, you know, $600 thousand of cost coming out in Q2 of next year. But, you know, just overall, just given that there could still be some opportunistic hires any thoughts on just overall expense growth next year? Any particular guideposts that you could point us toward

Charles E. Christmas: I guess my general thought is that budgeting for overhead is going to be difficult for next year. And to be honest, we are just in the initial stages of that. Obviously, working through the quarter end here. We will get busy, you know, putting the budget together, obviously, give guidance in January for 2027. I am hesitant to give too much out there. You know, obviously, have merit increases, and promotions and those types of things that will, you know, result in increased salary and benefit expense. You know, obviously, we are a service company. that is our. 1 of our biggest expenses on the on the income statement besides interest expense and federal income tax expense. You know, kind of echoing what Raymond was saying is, like, you know, we wanna continue to be very opportunistic. You know, based on what we have seen so far, you know, I would say late last year into this year. I mean, what is going on in the markets, we certainly see an opportunity to be opportunistic, but, obviously, it is all about the people and finding them. And certainly would be happy to bring them on if it if it makes sense. I would say from a real estate standpoint, you know, we are making in our we have been making some investments in real estate. And continue to do so, especially in Southeast Michigan as we build out that market. I would say the actual costs are going to be somewhat limited in 2027. Maybe in the back half. As whether we do some new construction or maybe buy an existing or lease an existing facility that needs some build out that is going to take a few quarters to get done. So might see some investments on the balance sheet, but I do not think the expenses will be very much. If any, maybe in the fourth quarter of next year. And then just kind of the-- you know, everything else that is, you know, in the cost of running a bank. But I think, you know, certainly our biggest expense is the 1 that at this point is somewhat of an unknown given some opportunities that may be presented between now and the end of next year? But, definitely, we will, you know, be happy to give guidance in January when, you know, we have completed our budget process and gone through that thoughtful considerations.

Nathan Race: For sure. Okay. Got it. I appreciate the color, guys. I will step back.

Raymond E. Reitsma: Thanks. Thank you. Thanks, Brendan.

Operator: Your next question comes from the line of Brendan Nosal With Hovde Group. Your line is open. Please go ahead.

Brendan Nosal: Hey. Good morning, folks. Can you hear me now?

Raymond E. Reitsma: Yes. We can.

Brendan Nosal: Alright. Sorry about that. Apologies. Chuck, just to kind of circle back to maybe the balance of liquidity. You noted in your prepared remarks that part of next quarter's margin expansion would come from holding less cash at the Fed. Can you just help us with kind of where you see the average cash balance coming in, in the fourth quarter versus this quarter's level of like $425 million.

Charles E. Christmas: I think we are, you know, we are hopeful to see that go down quite frankly. And, you know, obviously, will help the margin. I would say it is going to be a little bit lower than that, based on what we see and what our expect going forward. But I would say it is probably going to be still in the upper 300s. For the fourth quarter on an average basis. Brendan down during the quarter, but starting from a pretty high point. Yeah.

Brendan Nosal: Okay. Okay. that is helpful. Maybe kind of digging into Southeast Michigan. A little bit more. Could you just kind of give us more of like a full play-by-play on where are you started, you know, where you are today, and then what you are still hoping to accomplish down in that market in terms of personnel additions And then any thoughts on kind of timelines to get that group additive to the bottom line?

Raymond E. Reitsma: Yeah. Appreciate that question. it is it is a very difficult thing to predict exactly when we will be able to make talent acquisitions in the market. But we are very happy with the volume and the quality of the discussions that we have right now to add people to the team in addition to the ones we have already added. We had a fairly small number of commercial people in this Southeast Michigan say, 2 years ago. And we have ramped that team up to, you know, a good half-dozen commercial callers in that market. Now and expect that number to continue to increase over the next year. The pace of which is almost impossible to predict. But, again, we feel very good about the discussions that we have ongoing, the quality of those, and you know, the probability of success. But to quantify that as a nearly impossible task.

Brendan Nosal: Yeah. That. that is fair, but it is still helpful to kind of hear where you started and where you are now. Okay. Brett. Thank you for taking my questions. You bet.

Operator: Your next question comes from the line of Damon DelMonte with KBW. Your line is open. Please go ahead.

Damon DelMonte: Hey. Good morning, guys. Hope you are all doing well. Thanks for taking my questions. So first 1, just on the outlook for the non interest income, obviously, a step down here from the third quarter. So I am just wondering if you could give a little bit more granularity on that. Is that kind of reflective of a more challenging mortgage banking backdrop, or is it maybe more from, like, swap fee income or any color on that would be great.

Charles E. Christmas: Well, I think you hit both items. But, I think from a mortgage standpoint, I think it is more than anything else. We are actually, you know, very pleased with our mortgage group. If you look at our production, in a very tough environment, it is actually been going up. And, so incredible work by the entire team and as we continue to gain. You know, we look at that as gaining market share. In, again, a very tough environment. So I think that there is a decline in expected mortgage banking income, but I think it has more to. Yeah. I know it has far as projections go, it has more to do just with the seasonality and the set on of snow starting to fall here relatively soon. And I think we had a solid swap quarter and third quarter. Would like to duplicate that. Not sure we are going to get there. I think as rates have popped up and the market has been you know, pricing in additional rate cuts, it has certainly had a, you know, a noticeable impact on you know, 5, 7 year rates, you know, in the swap market. So it appears that our customers are a little more hesitant than they have been say, typically in the past to get into the swaps. But, you know, if they want a fixed rate, it is obviously a product that we can offer them. That will give them their desired fixed rate. But, again, that is that is 1 of those things that is also very difficult to predict. Not understanding what is going on in the marketplace, but just from timing as we were making commercial term loans and from quarter to quarter, you know, there is some lumpiness in there. But it is. You are spot on. it is those 2 items that are causing the expected reduction in the fourth quarter versus the third quarter.

Damon DelMonte: Got it. Okay. And then with regards to the 5% to 7% loan growth here in fourth quarter, Do you guys feel like the bulk of the payoff activity that you have been dealing with is kind of like peaked and it is subsiding now. I guess, do you have a good visibility on that at this point of the quarter?

Raymond E. Reitsma: So this is Raymond. To answer that question, I think you have to break down what some of those payoff, components are. You know, when there is a sale of a company or an asset, there is a really nice visibility to that, and we can predict what is going to happen in a quarter fairly accurately. The 1 that is very difficult to predict is the pay downs come from excess cash flow, and those have ramped up quite a bit in the quarter that we just completed. So if that continues to be true, that will be the toughest 1 to nail down. We feel good about our backlog. You can see it is at a 5-quarter high. And so the level of originations we are very comfortable with. The asset sale piece of it is I would call, moderate compared to recent experience. So the variable that will be toughest to define and will surprise us the most between here and the end of the year is what happens with excess cash flow generation.

Damon DelMonte: Okay. that is great color. Thank you. And then just 1 last quick 1. Chuck, do you happen to have the spot margin for September 30?

Charles E. Christmas: Oh, the spot margin for September 30. I can give you what it was in September. How's that? So Okay.

Damon DelMonte: Fair enough.

Charles E. Christmas: It was 3.74%.

Damon DelMonte: Okay. Brett. that is all that I had.

Charles E. Christmas: But I would make the comment that it, would have been higher as of September 30.

Damon DelMonte: Got it. Okay. Understood. Thanks a lot. Appreciate it.

Operator: Your next question comes from the line of Matthew Breese with Stephens Inc. Your line is open. Please go ahead.

Matthew Breese: Hey. Good morning.

Raymond E. Reitsma: Morning.

Matthew Breese: Yeah. I hear you loud and clear on some of the loan growth components. I guess my question is just given some of-- given the pipeline and payoff dynamics, if you think the projected level of loan growth in 4Q spills, into 2027, and whether you expect deposit growth to continue to outpace loan growth near term.

Raymond E. Reitsma: Yeah. I think, you know, those originations will come to rest at some point. So I guess the answer of will it spill I would anticipate that it would. I think deposit growth should roughly parallel loan growth And that would be the desired outcome.

Charles E. Christmas: Yeah. The 1 caveat there is what the public unit deposits, which obviously is seasonal for all banks. You know, we get some really solid inflows. With tax collections here in Michigan. In the third quarter, we see some of. We. That. Some of the outflow already took place in September. But that will continue in October, November. But even excluding that, the deposit growth that we have had, you know, so far in 2026, is really strong growth in regards to business. And the pipeline on the deposit growth for businesses to Raymond's point, is, I would say, general, it is just as strong as the loan pipeline. Yep.

Matthew Breese: Okay. And then maybe just touch on securities. Securities portfolio yields are still pretty far off from current market rates. Can you help me out with near term kind of cash flows on the securities portfolio and when we might see a more kind of significant shrinking of the gap between current yields and yields on the book.

Charles E. Christmas: Yeah. I would say on an overall basis, our duration of our portfolio is about 4 years. And we stick and have always stuck to a laddered maturity approach. Now there is a lot of calls in there. And we definitely have set up the securities portfolio over the last few years. To predict this to protect us, excuse me, in a significant down rate environment. Of, you know, buying very discounted agency bonds, say, you know, between 85 and 95 cents on a dollar. That it would take probably 200 to 300 basis point rate reductions for those to start getting called. Which would be a good insurance policy at least for a limited time. In regards to what we would see in interest income on our commercial loan portfolio. So feel really good about that. You know? So that is the, you know, the major interest rate risk tool that we do with our securities portfolio. I would say here in the fourth quarter, and into off next year, we have got some really, solid repricing opportunities. You know, some solid dollars at low rates. And I think, on page 11 of the deck, we have that spelled out for you. You know, we have got, $16 million at an average rate of 1.5% here in the fourth quarter and another $100 million, 2.5% average rate Next year, and that is added on top of the fixed rate CRE loans that, you know, another almost $60 million this quarter and another almost $200 million next year with rates that are just under 5%. So, you know, we have been getting that benefit, you know, throughout this year, I believe, say, even last year. But definitely throughout this year. You know, clearly, rates are today, you know, every. Any bond that is gonna be maturing and any loan that is gonna be maturing is gonna be refinanced. Or renewed at a higher rate. So there is going to continue to be some head or some tails tailwind there. As long as rates stay where they are now. And, we will just. You know, from specific to the investment question you had, you know, we will let the laddered maturity approach do what it is supposed to do. And, you know, improve yields as we go forward.

Matthew Breese: Okay. Last 1 for me. You know, if I look at the charge-off kind of patterns, the last couple of years have been really solid in the first 3 quarters of the year, but a little bit of a pickup in the fourth quarter. And I am curious if there is any strategy or intention to that. A lot of banks will kind of kitchen-sink or clean up stuff in the fourth quarter and whether or not that is expected to play out again this year?

Charles E. Christmas: No. That is total coincidence. I mean, we work each credit you know, it seems like, we have incredibly strong ad asset quality, obviously. But, you know, like all banks, you are always kind of chasing 1 or 2 I would say, sized credits. Around on the commercial side. And it is just been total coincidence as far as when the charge off has taken place. I think if you go back a quarter or 2 quarters or 3 quarters prior to the charge off, you know, you would have seen us establishing the specific reserve and then obviously going through the collection period. And then when we get to the end of that collection period, or towards the, you know, the back half of the game, of the baseball game, you know, we are gonna take the charge once things become a little bit more finalized. So total coincidence that it. That they have taken place in the fourth quarter.

Matthew Breese: Got it. I appreciate taking all my questions. I will leave it there. Thank you. Thank you.

Operator: A reminder that if you would like to ask a question, you may press star then 1 on your touch tone phone. To withdraw your question, please press star then 1 again. Your next question comes from the line of Nichole Kladder with Raymond James. Your line is open. Please go ahead.

Analyst: Hey. Good morning. Thanks for taking my questions.

Raymond E. Reitsma: You bet.

Analyst: Maybe just 1 follow-up on the on the lending environment. Obviously, sounds like you guys are seeing some pretty good growth in your pipeline, which should be encouraging for loan growth going forward. But maybe just in terms of the lay of the land, what you are hearing in terms of overall business confidence from your borrowers and their willingness to invest and expand at this point, especially given the recent rise in interest rates. If you could just give us an updated perspective on that, that would be great.

Raymond E. Reitsma: Sure. I do not think confidence has changed mid materially. there is been a bit of uncertainty in the environment that been talking about for a number of years. And I think that persists but I would not say that there is been a marked decrease in willingness to invest or a decrease in optimism about the future. So I think it is it is just more of the same.

Analyst: Okay. Brett. Thank you. And then, you know, obviously, you just kind of touched on credit, right before this, but know, just with the small pickup in nonperforming loans this quarter, anything to call out there? Obviously, remain at relatively low levels overall. But, if anything, the call out there, that would be great. Thank you.

Raymond E. Reitsma: Yeah. I would just underscore your observation that, it is low levels. And, if we have any activity at all, it shows up as a change to a relatively low level. And so know, every once in a while, a few drops of rainfall from the sky, and that is what happens. Here. So we just continue to have similar experience where there is no systemic issues in the economy or our portfolio. Just from time to time, there is a management failure or a particular company becomes under a unique bit of stress that leads to those kinds of recognitions in our loan quality metrics.

Analyst: Makes sense to me. Thank you very much.

Raymond E. Reitsma: You are welcome.

Operator: This concludes our question and answer session. I would like to turn the conference call over to Raymond Reitsma for any closing remarks.

Raymond E. Reitsma: I would just like to thank you for your participation in today's call and for your interest in Mercantile Bank Corporation, and this concludes the call. Thank you.

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