Q3 2025 Mercantile Bank Corp Earnings Call
Chuck Christmas: Good morning and welcome to the Mercantile Bank Corporation 2025 Third Quarter Earnings Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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 over to Nichole Kladder, Chief Marketing Officer of Mercantile Bank Corporation. Please go ahead.
Good morning and welcome to the Mercantile Bank Corporation, 2025, third quarter, earnings results conference call. All participants will be in listen-only mode. Should you need assistance? Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions.
Nichole Kladder: Hello, and thank you for joining us today. Today, we will cover the company's financial results for the third quarter of 2025. The team members joining me this morning include Ray Reitsma, President and Chief Executive Officer, as well as Chuck Christmas, Executive Vice President and Chief Financial Officer. Our agenda will begin with prepared remarks by both Ray and Chuck, and we'll include references to our presentation covering this quarter's results. You can access a copy of the 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 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.
Please note this event is being recorded. I would now like to turn the conference over to Nichole Kladder, Chief Marketing Officer of Mercantile Bank. Please go ahead.
Hello, and thank you for joining us today.
Quarter of 2025, the team members joining me this morning include Ray Rice, President and Chief Executive Officer, as well as Chuck Christmas, Executive Vice President and Chief Financial Officer.
Our agenda will begin with prepared remarks by both Raymond Reitsma and Charles Christmas and will include references to our presentation covering this quarter's results.
You can access a copy of the 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.
Nichole Kladder: 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 filings. The company assumes no obligation to update any forward-looking statements made during the call. Let's begin. Ray?
Before we begin, it is my responsibility to inform you that this call may involve certain forward-looking statements, such as projections of revenue, earnings, and capital structure, as well as statements on the plans and objectives of the company's business.
The company's actual results could differ materially from any forward-looking statements made today due to factors described in the company's latest Securities and Exchange Commission filings.
Ray Reitsma: Thanks, Nichole. Our results for the third quarter of 2025 build on the theme of commercial expertise generating a strong return profile. We continue to demonstrate top quartile ROA performance relative to our peers built upon the following traits. Trait number one, a strong and stable net interest margin. Over the last five quarters, the SOFR 90-day average rate has dropped 96 basis points, while our margin has dropped by a mere two basis points to 3.5%. This illustrates effective execution of our strategic objective to maintain a steady margin via 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 rate assets. Trait number two, very strong asset quality. Past due loans remain at the low levels typical of our company at 16 basis points of total loans.
The company assumes no obligation to update any forward-looking statements made during the call. Let's begin, Ray. Thanks, Nicole. Our results for the third quarter of 2025 build on the theme of commercial expertise generating a strong return profile.
We continue to demonstrate top core tile ROA performance relative to our peers, built upon the following trades.
Trait number 1: a strong and stable net interest margin over the last 5 quarters. The SOFR 90-day average rate has dropped 96 basis points, while our margin has dropped by a mere 2.2 basis points to 3.5%. This illustrates effective execution of our strategic objective to maintain a steady margin via a match 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 rate assets.
Trait number 2: very strong asset quality.
Ray Reitsma: Non-performing loans to loans over the last five years, plus the year-to-date period, average 13 basis points. The allowance for credit losses stands at 1.28% of total loans as of September 30, 2025, providing very strong coverage relative to past due and non-performing loan levels. These numbers demonstrate our long-standing commitment to excellence in underwriting and loan administration. Trait number three, improved on-balance sheet liquidity and loan-to-deposit ratio. Our loan-to-deposit ratio stands at 96% compared to 102% on September 30, 2024, and 110% on December 31, 2023. Our deposit mix includes 25% non-interest-bearing deposits and 20% lower-cost deposits, which have contributed to the stability of our net interest margin. Our previously announced planned acquisition of Eastern Michigan Financial Corporation will continue or will contribute positively to each of these measures. Trait number four, strong deposit and loan compounded annual growth rates.
Past due loans remain at low levels, typical of our company, at 16 basis points of total loans. Non-performing loans to loans, over the last 5 years, plus the year-to-date period, averaged 13 basis points.
The allowance for credit losses stands at 1.28% of total loans as of September 30, 2025, providing very strong coverage relative to past due and non-performing loan levels. These numbers demonstrate our long-standing commitment to excellence in underwriting and loan administration.
Trait. Number 3, improved on sheet on balance sheet, liquidity and loan to deposit ratio. Our loan to deposit, ratio stands at 96% compared to 102% on September 30 202 and 110% on. December 31 2023, our deposit mix includes 25%. Non-interest bearing deposits and 20% lower cost deposits. Which have contributed to the stability of our net interest margin.
Our previously announced planned acquisition of Eastern Michigan. Financial Corporation will continue or will contribute positively to each of these measures.
Ray Reitsma: For the third quarter of 2025, annualized deposit growth was 9%. Our recent focus on deposit growth is not new to our bank. In fact, the last six year-end periods demonstrate a deposit compounded annual growth rate of 11.8%. Over the same time period, total loans demonstrate a compounded annual growth rate of 10%. From a third quarter 2025 perspective, loans contracted an annualized 7% as loan paydowns anticipated in the second half of the year were concentrated in the third quarter. We believe this contraction is a one-quarter anomaly as the September 30, 2025, commitments to make loans total $307 million, an all-time high which exceeds the average of the prior four quarters by 32%. We expect that loan growth for 2025 in total will fall within the range of previously defined expectations of mid-single digits. Trait number five, continued strong growth in key fee income categories.
Trait number 4: strong deposit and loan compounded annual growth rates. For the third quarter of 2025, the annualized deposit growth was 9%. Our recent focus on deposit growth is not new to our bank. In fact, the last six year-end periods demonstrate a deposit compounded annual growth rate of 11.8%.
Over the same time period, total loans demonstrate a compounded annual growth rate of 10% from a third quarter 2025 perspective. Loans contracted in annualized 7% as loan paydowns are anticipated in the second half of the year, with a concentration in the third quarter. We believe this contraction is a one-quarter anomaly, as the September 30, 2025 commitments to make loans total $307 million, an all-time high, which exceeds the average.
The prior four quarters increased by 32%.
We expect that long-term growth for 2025 in total will fall within the range of previously defined expectations of mid-single digits.
Ray Reitsma: Growth in commercial deposit relationships has supported growth in treasury management services, resulting in an 18% increase in service charges on accounts during the first nine months of 2025. Our payroll service offerings continue to report very consistent growth, and the current year nine-month growth of 15% is consistent with prior periods. Our mortgage team continues to build market share and generate a high portion of salable loans, contributing to 12% growth in mortgage banking income during the first nine months compared to the respective 2024 period. Trait number six, stability in commercial loan portfolio mix. We have maintained discipline in our approach to commercial loan growth, maintaining a 55/45 split between CNI and owner-occupied CRE loans combined and all other commercial loan segments and prudent concentrations in categories such as office, retail, assisted living, hotel, and automotive exposures.
Trait number 5 continued: strong growth in key fee income categories.
Growth in commercial deposit relationships has supported growth in Treasury Management Services, resulting in an 18% increase in service charges on accounts. During the first nine months of 2025,
Our payroll service offerings continued to report very consistent growth. In the current year, the growth of 15% over the first 9 months is consistent with prior periods.
Both in mortgage and banking income, during the first nine months compared to the respective 2024 period.
Trait number 6: stability and commercial loan portfolio mix.
We have maintained discipline in our approach to commercial loan growth. Maintaining a 5545 split between C and I and owner occupied, CRA loans.
Ray Reitsma: In sum, these traits have allowed us to report a 20% quarter-over-quarter earnings per share growth, a 1.5% return on average assets, and a 14.7% return on average equity for the third quarter of 2025, and a 13% increase in tangible book value per share over the last four quarters. Additionally, our five-year tangible book value per share compounded annual growth rate of 8.4% and five-year earnings per share compounded annual growth rate of 10.4% each place us in the top two of our proxy peer group. We remain excited about the upcoming combination with Eastern Michigan Financial Corporation, which has financially attractive traits, including double-digit earnings accretion, mid-single-digit tangible book value dilution, and a mid-three-year earned back period. That concludes my remarks. I'll now turn the call over to Chuck.
combined a combined and all other commercial loan segments and proven concentrations in categories such as office, retail, assisted living, hotel, and automotive exposures.
In sum, these traits have allowed us to report a 20% quarter-over-quarter earnings per share growth.
A 1.5% return on average assets and a 14.7% return on average equity for the third quarter of 2025, along with a 13% increase in tangible book value per share over the last four quarters.
Additionally, our 5-year tangible book value per share. Compounded, annual growth rate of 8.4% and 5 year earnings per share compounded, annual growth rate of 10.4%. Each place is in the top 2 of our proxy period group.
Chuck Christmas: Thanks, Ray. This morning, we announced net income of $23.8 million or $1.46 per diluted share for the third quarter of 2025, compared with net income of $19.6 million or $1.22 per diluted share for the third quarter of 2024. Net income during the first nine months of 2025 totals $65.9 million or $4.06 per diluted share, compared with $60 million or $3.72 per diluted share for the respective prior year period. Growth in net income during both timeframes largely reflected increased net interest income and non-interest income, lower provision expense, and reduced federal income tax expense, which more than offset increased overhead costs. Interest income on loans was similar during the third quarter and first nine months of 2025 compared to the prior year periods, reflecting loan growth that was mitigated by a lower yield on loans.
We remain excited about the upcoming combination with Eastern Michigan Financial Corporation, which has financially attractive traits, including double-digit earnings accretion, mid single-digit tangible book value dilution, and a mid-three-year earned back period. That concludes my remarks. I'll now turn the call over to Chuck.
Thanks, Trey. This morning, we announced net income of $23.8 million, or $1.46 per diluted share, for the third quarter of 2025, compared with net income of $19.6 million, or $1.22 per diluted share, for the third quarter of 2024.
Net income during the first nine months of 2025 totaled $65.9 million, or 4.6 cents per diluted share, compared with $60 million, or $3.72 per diluted share, for the respective prior year period.
Growth in net income during both time frames largely reflected increased net interest income and non-interest income, lower provision expense, and reduced federal income tax expense, which more than offset increased overhead costs.
Chuck Christmas: Average loans totaled $4.6 billion during the third quarter of 2025 compared to $4.47 billion during the third quarter of 2024, an increase of $201 million, which equates to a growth rate of over 4%. Our yield on loans during the third quarter of 2025 was 31 basis points lower than the third quarter of 2024, largely reflecting the aggregate 100 basis point decline in the federal funds rate during the last four months of 2024 and the additional 25 basis point decrease during late third quarter of 2025. Interest income on securities increased during the third quarter and first nine months of 2025 compared to the prior year periods, reflecting growth in the securities portfolio and the reinvestment of lower-yielding investments in a higher interest rate environment.
Interesting. Loan growth during the third quarter and first nine months of 2025 was similar compared to the prior year periods, reflecting loan growth that was mitigated by a lower yield on loans.
Average loans totaled $4.6 billion during the third quarter of 2025 compared to $4.47 billion during the third quarter of 2024.
an increase of 201 million, which equates to a growth rate of over 4%.
Are you allowed loans during the third quarter of 2025? It was 31 basis points lower than the third quarter of 2024, largely reflecting the aggregate 100 basis point decline in the federal funds rate during the last four months of 2024, and the additional 25 basis point decrease during late third quarter 2025.
Chuck Christmas: Interest income on interest-earning deposits, a vast majority of which comprise the funds on deposit with the Federal Reserve Bank of Chicago, increased during the third quarter and first nine months of 2025 compared to the respective prior year periods, reflecting higher average balances that were partially offset by lower yields. In total, interest income was $2.2 million and $8.9 million higher during the third quarter and first nine months of 2025 compared to the respective prior year periods. Interest expense on deposits decreased during the third quarter of 2025 compared to the prior year period, in large part due to a lower average cost of deposits, reflecting the aforementioned decline in the federal funds rate that more than offset growth in average deposits.
Securities increased during the third quarter and first nine months of 2025, compared to the prior year periods, reflecting growth in the securities portfolio and the reinvestment of lower-yielding investments in a higher interest rate environment.
Interesting income on interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, increased during the third quarter and first nine months of 2025 compared to the respective prior year periods, reflecting higher average balances that were partially offset by lower yield.
In total, interest income was $2.2 million and $8.9 million higher during the third quarter and first nine months of 2025, compared to the respective prior year periods.
Chuck Christmas: Average deposits totaled $4.83 billion during the third quarter of 2025 compared to $4.34 billion during the third quarter of 2024, an increase of $489 million, which equates to a growth rate of over 11%. The cost of deposits was down 32 basis points during the third quarter of 2025 compared to the third quarter of 2024. Conversely, interest expense on deposits increased during the first nine months of 2025 compared to the prior year period. Although the cost of deposits declined 18 basis points, growth in average deposits between the two periods of $544 million, equating to a growth rate of over 13%, resulted in a net increase in interest expense on deposits. Interest expense on Federal Home Loan Bank advances declined during the third quarter and first nine months of 2025 compared to the prior year periods, largely reflecting a lower average balance.
Interest expense on deposits decreased during the third quarter of 2025 compared to the prior year period, largely due to a lower average cost of deposits, reflecting the aforementioned decline in the federal funds rate that more than offset growth in average deposits.
Average deposits totaled $4.83 billion during the third quarter of 2025.
Compared to $4.34 billion, during the third quarter of 2024, there was an increase of $489 million, which equates to a growth rate of over 11%.
The cost of deposits was down 32 basis points during the third quarter of 2025 compared to the third quarter of 2024.
Deposits increased during the first nine months of 2025 compared to the prior period.
Although the cost of deposits declined, an 18 basis point growth in average deposits between the two periods of $544 million, equating to a growth rate of over 13%, resulted in a net increase in interest expense on deposits.
Chuck Christmas: Interest expense on other borrowed funds declined during the third quarter and first nine months of 2025 compared to the prior year periods, largely reflecting lower rates in our trust-preferred securities due to the lower interest rate environment. In total, interest expense was $1.5 million lower during the third quarter of 2025 and $1.6 million higher during the first nine months of 2025 compared to the respective prior year periods. Net interest income increased $3.7 million and $7.3 million during the third quarter and first nine months of 2025 compared to the respective prior year periods. Impacting our net interest margin over the past couple of years has been our strategic initiative to lower the loan-to-deposit ratio, which generally entails deposit growth exceeding loan growth and using the additional monies to purchase securities.
Interest expense on Federal Home Loan Bank of Indianapolis advances declined during the third quarter and first nine months of 2025, compared to the prior year periods, largely reflecting a lower average balance.
And interest expense on other borrowed funds declined during the third quarter and first nine months of 2025 compared to the prior periods, largely reflecting lower rates in our trust preferred securities due to the lower interest rate environment.
In total, interest expenses were $1.5 million lower during the third quarter of 2025 and $1.6 million higher during the first month of 2025, compared to the respective prior year periods.
Net interest income increased $3.7 million and $7.3 million during the third quarter and the first nine months of 2025, compared to the respective prior periods. Impacting our net interest margin over the last couple of years has been our strategic initiative to lower the loan-to-deposit ratio, which generally entails deposit growth exceeding loan growth and using the additional money.
Chuck Christmas: A large portion of deposit growth has been in the higher-costing money market and time deposit products, while the purchased securities provide a lower yield than loan products. Despite that strategic initiative and the aforementioned decline in the federal funds rate, our quarterly net interest margin has been relatively steady over the past five quarters, ranging from a high of 3.52% to a low of 3.41%, averaging 3.48%. Our net interest margin forecast for the fourth quarter of 2025 reflects similar results. We remain committed to managing our balance sheet in a manner that minimizes the impact of changing interest rate environments on our net interest margin.
IES to purchase securities.
A large portion of the deposit growth has been in the higher costing money market and time deposit products.
While the purchase securities provide a lower yield than loan products.
But despite that strategic initiative and the aforementioned decline in the federal funds rate, our quarterly net interest margin has been in a relatively has been relatively steady over the past 5 quarters ranging from a high of 3.52% to a low of 3.41% averaging 3.48%
And our net interest margin forecast for the fourth quarter of 2025 reflects similar results.
Chuck Christmas: Basic funds management practices such as match funding, combined with scheduled maturities of lower fixed-rate commercial loans and securities and higher-rate time deposits, along with scheduled rate adjustments on residential mortgage loans, should provide for a relatively stable net interest margin in future periods. Our net interest margin declined two basis points during the third quarter of 2025 compared to the third quarter of 2024. Our yield on earning assets declined 33 basis points during that time period, largely reflecting the aggregate 100 basis point decline in the Fed funds rate during the last four months of 2024 and the additional 25 basis point decrease during late third quarter of 2025, while our cost of funds declined 31 basis points, primarily reflecting lower rates paid on money market and time deposits, which more than offset an increased mix of higher-costing money market and time deposits.
We remain committed to managing our balance sheet in a manner that minimizes the impact of changing interest rate environments on our net interest margin.
Basic funds management practices such as match funding, combined with scheduled maturities of lower fixed-rate commercial loans and securities, and higher-rate time deposits along with scheduled rate adjustments on residential mortgage loans, aim to provide for a relatively stable net interest margin in future periods.
Our net interest margin declined 2 basis points during the third quarter of 2025 compared to the third quarter of 2024.
Chuck Christmas: While average loans increased $201 million, or almost 5%, for the third quarter of 2024 to the third quarter of 2025, average deposits grew $489 million, or over 11% during the same time period, providing a net surplus of funds totaling $288 million. We used that net surplus of funds to grow our average securities portfolio by $163 million and reduce our average Federal Home Loan Bank advances portfolio by $64 million. In addition, our average balance at the Federal Reserve Bank of Chicago increased $95 million. We recorded a provision expense of $0.2 million and $3.9 million during the third quarter and first nine months of 2025, respectively, compared to $1.1 million and $5.9 million during the respective 2024 periods.
Are you on earning assets? Declined 33 basis points during that time period, largely reflecting the aggregate 100 basis point decline in the Fed funds rate during the last 4 months of 2024 and the additional 25 basis point decrease during late third quarter, 2025. While our cost of funds declined 31 basis points, primarily reflecting lower rates paid on money markets and time deposits, which more than offset an increased mix of higher costing money market and time deposits.
Well, average loans increased by $201 million, or almost 5%, from the third quarter of 2024 to the third quarter of 2025.
Average deposits grew to $489 million, or over 11%. During the same time period, we provided a net surplus of funds totaling $2.888 billion.
We used that net surplus of funds to grow our average securities portfolio by $163 million and reduce our average Federal Home Loan Bank of Indianapolis advanced portfolio by $64 million. In addition, our average balance at the Federal Reserve Bank of Chicago increased by $95 million.
Chuck Christmas: The reserve balance increased $0.8 million during the third quarter of 2025, reflecting the $0.2 million provision expense and net loan recoveries of $0.6 million, with the reserve balance increasing $4.7 million during the first nine months of 2025, reflecting the $3.9 million provision expense and net loan recoveries of $0.8 million. The reserve balance equaled 1.28% of total loans as of September 30, 2025, compared to 1.18% at year-end 2024. The third quarter provision expense was primarily comprised of a $2.9 million increase in specific reserve allocations and a $0.9 million net increase in qualitative factor allocations, which were largely mitigated by a $2.3 million reduction associated with higher residential mortgage and consumer loan prepayments that shortened the average lives of those portfolio segments and a $0.9 million decline from a reduction in total loans.
We recorded a provision expense of $0.2 million and $3.9 million during the third quarter and first nine months of 2025, respectively, compared to $1.1 million and $5.9 million during the respective 2024 periods.
The reserve balance increased $0.8 million during the third quarter of 2025, reflecting a $0.2 million provision expense and net loan recoveries of $0.6 million, with the reserve balance increasing $4.7 million during the first nine months of 2025.
Reflecting the $3.9 million provision expense and that loan recovery is $0.8 million.
Chuck Christmas: Non-interest expenses were $2.4 million and $7.3 million higher during the third quarter and first nine months of 2025 compared to the respective prior year time periods. The increase largely reflects higher salary and benefit costs, including annual merit pay increases and market adjustments. Higher data processing costs also comprise a notable portion of the increased non-interest expense levels, primarily reflecting higher transaction volumes and software support costs, along with the introduction of new cash management products and services. Despite increased pre-tax income during the third quarter and the first nine months of 2025 compared to the respective prior year periods, we were able to reduce our federal income tax expense by $1.3 million and $3.6 million, respectively.
Provision expense was primarily comprised of a $2.9 million increase in specific reserve allocations and a $0.9 million net increase in qualitative factor allocations, which were largely mitigated by a $2.3 million reduction associated with higher residential, mortgage, and consumer loan prepayments that shortened the average lives of those portfolio segments, and a $0.9 million decline from a reduction in total loans.
Interest expenses were $2.4 million and $7.3 million higher during the third quarter and first nine months of 2025 compared to the respective prior time periods.
The increased larger reflects higher salary and benefit costs, including annual merit pay increases and market adjustments.
Higher data processing costs also comprise a notable portion of the increase in interest expense levels.
Primarily reflecting higher transaction volumes and software support costs, along with the introduction of new cash management products and services.
Chuck Christmas: The reductions largely reflect the acquisition of transferable energy tax credits during the second and third quarters of 2025, providing for reductions in federal income tax expense of $1 million and $2.6 million during the third quarter and first nine months of 2025, respectively. Our federal income tax expense was further reduced by benefits associated with our low-income housing and historical tax credit activities, which totaled $0.7 million and $1.2 million during the third quarter and first nine months of 2025, respectively. The recording of these tax benefits resulted in third quarter and year-to-date 2025 effective tax rates of 13% and 15%, respectively. We are scheduled to close on another transferable energy tax credit by the end of October, which will reduce our federal income tax expense by about $950,000.
Despite increased pre-tax income during the third quarter and the first nine months of 2025 compared to the respective prior year periods, we were able to reduce our federal income tax expense by $1.3 million and $3.6 million, respectively.
The reductions largely reflect the acquisition of transferable energy tax credits during the second and third quarters of 2025.
Providing for reductions in federal income tax, an expense of $1 million and $2.6 million.
During the third quarter and first nine months of 2025, respectively.
Our federal income tax expense was further reduced by benefits associated with our low-income housing and historical tax credit activities, which totals $0.7 million and $1.2 million during the third quarter and first nine months of 2025, respectively.
The recording of these tax benefits resulted in third quarter and year-to-date 2025 effective tax rates of 13% and 15%, respectively.
Chuck Christmas: Additional acquisitions of transferable energy credits may be made from time to time, subject to our investment policy, tax credit availability, and tax credits derived from our low-income housing and historical tax credit activities. We remain in a strong and well-capitalized regulatory capital position. Our bank's total risk-based capital ratio was 14.3% as of September 30, 2025, about $236 million above the minimum threshold to be categorized as well-capitalized. We did not repurchase shares during the first nine months of 2025. We have $6.8 million available in our current repurchase plan. Our tangible book value per common share continues to grow, up $4.27, or almost 13%, during the first nine months of 2025. The improvement primarily reflects retained earnings growth of $48 million and a decline of $21 million in after-tax unrealized losses on securities.
We are scheduled to close on another transferable energy tax credit by the end of October, which will reduce our federal income tax expense by about $950,000.
Additional acquisitions of transferable energy credits may be made from time to time, subject to our investment policy. Tax credit availability and tax credits derive from our low-income housing and historical tax credit activities.
We remain in a strong and well-capitalized regulatory capital position. Our bank's total risk-based capital ratio was 14.3% as of September 30, 2025, about $236 million above the minimum threshold to be categorized as well-capitalized.
We did not repurchase shares during the first nine months of 2025. We have $6.8 million available in our current repurchase plan.
Our tangible book value per common share continues to grow, up $4.27, or almost 13%, during the first 9 months of 2025.
Chuck Christmas: On slide 25 of the presentation, we share our latest assumptions on the interest rate environment and key performance metrics for the remainder of 2025, with the caveat that market conditions remain volatile, making forecasting difficult. This forecast is predicated on a 25 basis point reduction to the Fed funds rate on October 29. We are projecting loan growth in a range of 5% to 7% annualized during the fourth quarter. Despite the expected federal funds rate reduction, we are forecasting our net interest margin to remain relatively steady and within the range over the past five quarters. We are projecting a federal tax rate of 15% for the quarter. Expected quarterly results in non-interest income and non-interest expense are also provided for your reference, noting that non-interest expense projections include the assumption that the acquisition of Eastern Michigan Financial Corporation will be concluded by the end of this year.
The improvement primarily reflects retained earnings growth of $48 million and a decline of $21 million in after-tax unrealized losses on securities.
I'm on slide 25 of the presentation. We share our latest assumptions on the interest rate environment and key performance metrics for the remainder of 2025.
With the caveat that market conditions remain volatile, making forecasting difficult.
This forecast is predicated on a 25 basis point reduction to the Fed funds rate on October 29th.
We are projecting loan growth in a range of 5% to 7% annualized during the fourth quarter.
Despite the expected federal funds rate reduction, we are forecasting our net interest margin to remain relatively steady and within the range over the past five quarters.
And we are projecting a federal income tax rate of 15% for the quarter.
Expected quarterly results, non-interest income, and non-interest expense are also provided for your reference, noting that non-interest expense projections include the assumption that the acquisition of Eastern.
Chuck Christmas: In closing, we are very pleased with our operating results and financial condition during the first nine months of 2025 and believe we remain well-positioned to continue to successfully navigate through the myriad of challenges and uncertainties faced by all financial institutions. That concludes my prepared remarks. I'll now turn the call back over to Ray.
Michigan will be concluded by the end of the year.
In closing, we are very pleased with our operating results and financial conditions during the first nine months of 2025.
And believe we remain well positioned to.
To continue to successfully navigate through the myriad of challenges and uncertainties faced by all financial institutions.
Ray Reitsma: Thank you, Chuck. That concludes the prepared remarks from management, and we will now move to the question and answer portion of the call.
That concludes my prepared remarks. I'll now turn the call back over to Ray.
Marks 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 one 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 and then two. Our first question comes from Brendan Nosal with Hovde Group. Please go ahead.
We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys to withdraw your question. Please press star and then 2.
Our first question comes from Brendan nozzle. With hoved group, please go ahead
[Analyst 1]: Hey, good morning, guys. Hope you're doing well.
Nichole Kladder: Morning. Morning.
Hey, good morning, guys. Hope you're doing well.
[Analyst 1]: Maybe just starting off here on credit quality. I think you had net recoveries in seven over the past eight quarters. I'm just kind of curious, where are you finding recoveries at this point in a cycle? Just given how clean the book has been for the past couple of years, what do you think of as a normalized charge-off ratio given your credit box and portfolio mix at this point?
Morning morning.
Um maybe you're starting off here on on credit quality. Um I think you had net recoveries and 7 of the past 8 quarters. Um I'm just kind of curious. Where are you finding recoveries at at this point in a cycle uh and just given how clean the book has been for the past couple of years. Like, what what do you think of as a normalized charge operatio? Uh, given your credit box and and portfolio I missed at this point.
Ray Reitsma: As it relates to where they come from, you know we've taken a pretty conservative stance over our company's history on what we charge off, and we're fairly relentless about, you know, recovering those once we do charge them off. Some of those go back a ways, and we just, you know, kind of never say die as it relates to a charge-off. As it relates to a normalized level, I'll let Chuck answer that.
Well, is it related to where they come from? You know, we've taken a pretty conservative stance over our company's history on what we charge off, and we're fairly relentless about recovering those ones we do charge off. So, some of those go back a ways and, um,
and uh, we
[Analyst 1]: Yeah, I'll make one comment specifically on third quarter. Part of that recovery was on a loan that we charged off in the fourth quarter of last year, and that credit remains in active recovery status. We typically budget between 5 and 10 basis points of net charge-offs. I think from a historical perspective, obviously excluding the Great Recession, that makes sense to us. Okay. That's helpful, Carter. Maybe turning to the net interest and margin, just kind of thinking conceptually about the margin a little bit beyond the fourth quarter. I guess on the one hand, rate cuts are maybe a modest headwind for the margins, but you're going to be putting all that liquidity from Eastern Michigan to work across next year. How do those things balance out in the direction that the margin takes over the next couple of quarters?
Just so you know, it's kind of a "never say die" attitude as it relates to a charge-off, particularly in relation to a normalized level. I'll let you check in. So, yeah. If I make one comment specifically on the third quarter, part of that recovery was on a loan that we charged off in the fourth quarter of last year, and that credit remains in an active recovery status.
Um, we typically budget between 5 and 10 basis points for charge-offs. Um, I think from a historical perspective, you know, obviously excluding the Great Recession, that makes sense to us.
Ray Reitsma: Yeah, I think you're spot on. Obviously, the acquisition will be beneficial to the net interest margin. That was clearly something that we saw and look forward to benefiting from. I think part, as I mentioned in my prepared remarks, we do have the lower rate loans and securities that will continue to reprice quite a bit. Even if the market rates continue to come down, there's still quite a bit of significant opportunity there to gain some interest income. We do have time deposits that are at higher rates than current market even today. Those will be, everything we just talked about will be, very strong tailwinds. The one headwind is the reduction of the Fed funds rate. Part of the answer to your question is just how aggressive the Fed gets.
Okay. Okay, okay, that's helpful caller. Um, maybe turning to the net interest margin. Um, just kind of thinking, you know, conceptually about the margin, um, a little bit beyond the fourth quarter. Um, you know, I guess on the 1 hand, um, you know, rate cuts are maybe a modest headwind for the margin, but you're going to be putting all that liquidity from Eastern Michigan, uh, to work across the next year. So we've got out of those things balance out to kind of into the direction of the margin takes over the the next couple of of quarters
Yeah, I think you're spot on obviously is the the acquisition will be well will be at that. Be beneficial to the that interest margin. That was clearly you know um something that we saw and and look forward to uh, benefiting from. Um, you know, I think part, you know, we as I mentioned, in my prepared remarks, we do have the lower rate, uh, loans and securities that will continue to reprice. Uh, you know, quite
Ray Reitsma: We believe on an overall basis that regardless of what the Fed does, our net interest margin will remain relatively steady because of all those things.
[Analyst 1]: Okay. Just as a follow-up on that lower rate loan and securities repricing, can you just size up that opportunity over the next 12 months? How much backbook, low-rate stuff do you have coming due and at what rates?
Quite a bit. Even if the rates do Market rates continue to come down, there's still quite a bit of significant opportunity. There to gain some, some interest income. And, uh, you know, we do have time deposits, um, that are at higher rates than current market even today. Um, so those will be, you know, everything we just talked about will be, you know, very strong Tailwind. Um, you know, the 1 head win is, is the reduction of the FED funds rate and, um, you know, party answer to your question is just how aggressive the FED gets, but we believe on an overall basis that regardless of what the FED does are net. Interest margin, will will remain will remain relatively steady because of all those things.
Ray Reitsma: I would say probably, I'm going to go by memory here. We have about $90 million in securities that have an average yield of about 1%. We're getting about 3.75% to maybe 4% currently on that. We have about $160 million in commercial real estate loans that will mature next year. Those, I think, are at an average rate of about 4.5%. We also have some portfolio adjustable rate mortgage loans. I don't know off the top of my head, but there's some that are coming up for initial repricing. There's definitely some solid tailwind in those as well.
Okay. Um, and then just as a follow-up on that lower rate loan and security repricing, can you just size up that opportunity over the next 12 months? How much of that low rate stuff do you have coming to?
And I would rate, yeah, I would say probably. Well, I'm going to go by memory here. So we have about $90 million in securities.
That have an average yield of about 1%.
Uh, we're getting about 375 to maybe 4% currently on that.
Um, we have about $160 million in commercial real estate loans.
That will mature next year.
And those, I think, are at an average rate of about 4.5%.
[Analyst 1]: Okay. All right. Thank you all for taking my questions. I appreciate it.
And then we also have some portfolio adjustable rate mortgage loans. I don’t know the exact figures off the top of my head, but there are some that are coming up for initial repricing, and there’s definitely some solid gain in those as well.
Ray Reitsma: You bet. You bet.
Okay. All right. Uh, well, thank you all for taking my question. I appreciate it.
Operator: The next question comes from Daniel Tamayo with Raymond James. Please go ahead.
You bet.
In the next question comes from Daniel Tamiyo with Raymond James. Please go ahead.
[Analyst 2]: Thank you. Good morning, guys.
Ray Reitsma: Morning.
Thank you. Good morning, guys.
[Analyst 2]: I guess first just on the paydowns, you talked a lot about it in the prepared remarks. Did I hear this right that it was basically the paydowns that you were expecting for the back half of the year you recognized in the third quarter? If that's the case, how should we think about that 5% to 7% loan growth guidance? I mean, that's about where, you know, it's basically where you guys have been historically. Is there a chance that's elevated in the fourth quarter and then back to normal next year? What's the thinking around that number and how the paydowns play into that?
I, I guess first on the pay downs, um, you know, you talked a lot about it in the prepared marks. Um,
It was basically the pay downs that you were expecting for the back half of the year you recognized in the third quarter. Um, and if that's the case,
You know, how should we think about that 5% to 7% loan growth guidance? I mean, that's about where, you know, it's basically where you guys have been historically. Is there a chance that's...
[Analyst 1]: Yeah, Dan, this is Chuck, and I'll take a first stab at it. One of the things about paydowns is, you know, some of them are coming. Generally, we get the paydowns from the sale of the assets, the underlying assets, or the refinance of the loan to the secondary market. That's especially true for multifamily. You kind of get an idea that they're coming, but clearly, we don't have any control over that. The timing becomes relatively suspect. Sitting towards the end of the second quarter, the ones that we got in the third quarter, we knew they were coming. It was just a matter of at what month and in which quarter that was going to take place. We're always getting some level of paydowns from quarter to quarter because of the activity of our borrowers, and that's not going to change.
You know, elevated in the fourth quarter and then back to normal next year or or what's what's the the thinking around that that number and and how paid ons plan to that?
Yeah, Dan, this is Chuck and I I'll take a first stab at it and, uh, you know, 1 of the things about pay Downs is, you know, some of them are coming. Um, you know, generally we get the pay downs from the sale of the assets, the underlying assets,
Or the refinance of the loan to the secondary market. And that's especially true for multifamily.
[Analyst 1]: I think we just kind of, like our commercial loan funding, sometimes quarter to quarter, it gets a little bit bigger. It's a little more lumpy as you go quarter to quarter. The same thing happens with fundings. The same thing happens with payoffs as well. As Ray mentioned, we got a very, very strong pipeline right now. The big question in regards to the fourth quarter is when does all of that close? We definitely have some expected closings here in the first half of the quarter, but we also have some fundings that are expected to close towards year-end. Whether that happens in December or whether that happens in January, that's just difficult to tell. That's just relative to our lumpiness. Sometimes we get quarter to quarters that are a little bit more abnormally lumpy, if I can say that.
And you kind of get an idea that they're coming, but clearly we don't have any control over that. Uh, so the timing becomes, you know, relatively suspect. Um but you know sitting in the towards the end of the second quarter, the ones that we got in the third quarter, we were, we knew they were coming, it was just a matter of at what month and at which quarter that was going to take place. Um, you know, we were always getting some level of pay Downs uh, from quarter to quarter because of the activity of our borrowers and that's not going to change. I think we just kind of you know like our commercial loan funding sometimes quarter to quarter. It gets a little bit uh bigger. You know, it's a little more lumpy as you go quarter to quarter. Um,
[Analyst 1]: I think in regards to the future, we're looking at continued mid-single digits of loan growth. We tried to peg that. I tried to peg that at 5% to 7% for the fourth quarter, knowing what I was just talking about, that there, you know, that could be a little bit off. If it's going to be off, it's probably more likely that the loan growth will be higher than that, with a lot of that coming right at the quarter end. As we start to prepare our budget, we really haven't started doing a lot with that yet. Again, the higher end of maybe 5% to 7%, maybe 6% to 8% is kind of what we're thinking about for next year.
And so the same thing happens with funding. The same thing happens with payoffs as well. Um, as as Ray mentioned, we got a very, very strong pipeline right now. Uh, the big question in regards to the fourth quarter is when does all of that close. Um, you know, we definitely have some expected closings here in the first half of the quarter. Uh, but we also have some, um, fundings that are expected to close, you know, towards your end and, you know, whether that happens in December or whether that happens in January, that's just difficult to tell. Um, so that that's just relative to our lumpiness and sometimes we get quarter to quarters that are a little bit more abnormally. Lumpy if I can say that, um, I think in regards to the Future, we're looking at continued, you know, mid single digits of, of loan growth, uh, we tried to Peg that I tried the peg that at 5 to 7% for the fourth quarter, knowing what I was just talking about uh, that there, you know, that could be a little bit off. Uh, if it's going to be off, it's probably more likely that the loan growth will be higher than that, uh, with a lot.
[Analyst 2]: Okay. Very helpful. Thank you. I guess, you know, taking a look at the expenses, they're a little bit higher in the third quarter than I was looking for. The guidance takes a step up from that. Just curious if there's anything unexpected or unusual in the expense base, you know, or if that's a relatively clean number, putting aside the acquisition, to look at going into the fourth quarter. I mean, 2026.
A lot of that is coming in right at the quarter end. Um, but you know, as we start to prepare our budget, we really haven't started, you know, doing a lot with that yet. Um, again, the higher end of maybe 5% to 7%, maybe 6% to 8%, is kind of what we're thinking about for next year.
Okay, very helpful. Thank you.
[Analyst 1]: Yeah, Danny, I would say the third quarter, except for the ones that we highlighted, the acquisition costs and the contribution to our foundation, I think those are good run rates if you make those two adjustments. I will say in the guidance that we gave for the fourth quarter, that includes about $1 million in acquisition costs. That makes the assumption that the acquisition is closed by the end of this quarter.
Um, and then, I guess, you know, taking a look at the expenses, they're a little bit higher in the, in the third quarter than, um, I was looking for and then the guidance, uh, takes a step up from that, just curious. If, if there's anything, uh, unexpected or unusual in in the expense base, you know, or, or if that's a relatively clean number, um, putting aside the acquisition to to uh, to look at going into the fourth quarter. I mean, uh, 2016, sorry, yeah Danny, I would say the third quarter, you know, except for the ones that we highlighted that the, you know, the acquisition costs and the the contribution to our foundation. I think, uh, you know, there's definitely, you know, I think those are good run rates if you make those 2 adjustments, but I will say in the guidance that we gave for the fourth quarter, that includes about a million dollars in acquisition costs, and that makes the assumption that the acquisition is closed by the end of this quarter.
[Analyst 2]: Okay. That includes $1 million of acquisition. All right, that's helpful. That brings things back to kind of where we thought they were. I appreciate it. I was going to, so there's nothing on the tax line that is factoring in with the credits that flows through expenses now, right? That doesn't impact that.
That includes the million of acquisition. All right, that's helpful and that brings things back to.
Where we?
Where we thought they were. Um, okay, I appreciate it. I was going to, so there's nothing on the tax line that...
[Analyst 1]: Yeah. The tax things that we talk about are just the impact on the federal income tax line item. They don't impact overhead.
Um is factoring in with the with the, with the credits, that that flows through expenses now, right? That doesn't impact that.
[Analyst 2]: Okay. Great. Okay. I'll step back. Thanks, guys.
Yeah, the tax things that we talk about are just the impact on the federal income tax line item. They don't impact overhead.
Okay, great.
[Analyst 1]: Thank you.
Okay, I'll step back. Thanks, guys.
Operator: The next question comes from Damon DelMonte with KBW. Please go ahead.
Thank you.
[Analyst 1]: Hey, good morning, guys. Hope you're all doing well. Just to follow up on the expense question there, can you just remind us, Chuck, the timing or the cadence of when you expect to realize the cost saves as far as, you know, the systems conversion and where you can really see some of that leverage from the cost savings from the Eastern Michigan Financial Corporation deal?
And the next question comes from Damon Delonte with KBW. Please go ahead.
Hey, good morning, guys. Hope you're all doing well. Um, just a follow-up on the expense question there. Um,
Can you just remind us, Chuck, the timing or the cadence of when you expect to realize the cost saves?
Ray Reitsma: Yeah. There are obviously two big things going on there. There will be some cost saves next year relative to the Eastern Michigan Financial Corporation acquisition, although quite frankly, most of the cost saves are going to start taking place in 2027. We're planning on the core conversion, I should say, in February of 2027. Until that time, we'll actually be a two-bank holding company with Mercantile Bank Corporation and Eastern Michigan Financial Corporation both continuing to run as they are today. From a day-to-day operations standpoint, the cost saves are really a 2027 event. With the merger itself of the parent companies, there will definitely be some cost saves, some overhead cost saves there. As we talked about with the announcement, the cost saves are going to be a little bit longer than typical because of the delay in the merging of the two banks together themselves.
As far as, like, you know, the systems conversion and kind of where you can really see some of that leverage from the cost savings from the Ethan deal.
Um, there'll be some cost savings next year relative to the Eastern. Um.
Acquisition. Although, quite frankly, most of the cost savings are going to start taking place in 2027. We're planning on the core merger—the core conversion, I should say—will be in February of 2027.
Ray Reitsma: Like I said, the core conversion is set for February of 2027. There will be some costs that we'll expense in 2026 relative to the preparation for that. We'll definitely highlight that in the income statement as it comes through. Once the conversion takes place, there will be some pretty significant savings as we go forward from that. There is going to be a little bit of a mistiming there as we prepare for the core conversion already started, but definitely through next year, there will be some upfront costs, but the savings thereafter will be significantly higher than those upfront costs.
And until that time, we'll actually be a 2 Bank holding company with Mercantile and Eastern both running, uh, continuing to run as they are today. Um, so from an, from a day-to-day operations standpoint the cost saves are really a 2027 event. Now with the merger itself of the parent company is they'll definitely be some cost saves some overhead cost saves there. Uh, but as we talked about with the announcement is that the cost savings are going to be a little bit longer than typical because of the the delay in the merging of the 2 Banks together themselves. And then like I said, the core conversion is set for February of 2027. There will be some some costs that will expense in 2026 relative to the preparation for that. Uh, we'll definitely highlight that in the income statement as it comes through. Um, but once the conversion takes place, there'll be some pretty significant savings. Uh, as we go forward from that, there's going to be a little bit of a mistiming there.
[Analyst 1]: Got it. Great. Appreciate that, Carter. With regards to the tax rate, how do you think about 2026 if you do not have any more purchased transferable energy tax credits? Do you expect there to be some in 2026 that would impact that number?
As we prepare for the cork conversion, I already started. But definitely through next year, uh, there'll be some upfront costs, but the savings thereafter will be significantly higher than those upfront costs.
Got it. Great, appreciate that color. Um, and with regards to the tax rate, um, you know, how do you think about 26? If like you don't have any more purchased transferable tax credits,
Ray Reitsma: Yeah. Damon, as I mentioned, we're just starting to get into the tax rate. I think if you said, you know, you're not going to do any energy credits, that's probably going to be somewhere around 18%, maybe 17.5%, somewhere in there. Don't quote me on that. We are planning on doing some additional transferable energy tax credits. You know, right now, we're closing one, I think, later this week or next week. They're still available. Obviously, there's a lot of due diligence that needs to go through that process. We do have capacity to do them next year. We are planning on doing that next year. We'll even budget for that. If we're able to maximize what we can do from a tax perspective, our tax rate will probably be closer to 16%.
Or do you expect there to be changes in 2026? That would impact that number.
Yeah, so they may, as I mentioned, we're just starting to get into the tax rate. I think if you said, you know, you're not going to do any energy credits,
That's probably going to be somewhere around an 18, maybe 17.5 percent, somewhere in there. Don't quote me on that. Um, but we are planning on doing some additional energy tax credits.
And, um, you know, right now they're, you know, we're closing 1, I think later this week or next week. Um, they're still available. Obviously, there's a lot of due diligence that needs to go through that process.
[Analyst 1]: Got it. Okay. Great. Lastly, obviously, credit trends are pretty positive here, but as we think about the provision and growth kind of coming back online here in the fourth quarter, do we kind of use the first and second quarter as a good barometer for what we could look for for a quarterly provision in the fourth quarter?
And, um, we do have the capacity to do them next year. We are planning on doing that next year. We'll even budget for that. If we're able to maximize what we can do from a tax perspective, our tax rate will probably be closer to 16%.
Ray Reitsma: Yeah, I think that's pretty good. Obviously, the credit quality remains very strong. We're always chasing some credits, even good times and bad times, but we continue to do that and establish specific reserves when we think that's appropriate to do. The prepayment speeds on the mortgage loans, which obviously had an impact on the third quarter, that's an annual event for us for the most part. We look at it at each quarter, but in general, we look at it comprehensively once a year. If rates change dramatically and we see some significant changes in prepayments from quarter to quarter, we'll definitely address it. I would say on an overall basis, taking into account our asset quality and our growth expectations, I think your comment is accurate.
Got it. Okay, great. And then, just lastly, um, obviously credit trends are pretty positive here, but as we think about the provision and growth kind of coming back online here in the fourth quarter, um, you know, do we kind of use the first and second quarter as a good barometer for what we could look for for a quarterly provision in the fourth quarter?
Yeah, I think that's, I think that's pretty good. Um, you know, obviously the credit quality remains very strong and um, you know, we're always chasing some credits and good times and bad times, but we continue to do that. And, um, you know, establish specific reserves when when we think that's appropriate, um, to do, uh, the prepayment speeds on the mortgage loans, which obviously had an impact on the third quarter. That's an annual event for us, for the most part, we look at it each quarter, but in general, we look at it in comprehensively uh, once a year. Uh, so not a, you know, if rates changed dramatically and we see some significant changes in prepayments, you know, from quarter to quarter, we'll definitely address it. Um,
[Analyst 1]: Great. Okay. That's all that I had. Thank you very much.
But I would say, on an overall basis, taking into account our asset quality and our growth expectations, I think your comment is accurate.
Ray Reitsma: Yep.
Great. Okay, that's all that I had. Thank you very much.
Operator: The next question comes from Nathan Race with Piper Sandler. Please go ahead.
Yep.
[Analyst 3]: Hey, guys. Good morning. Thank you for taking the questions.
And the next question comes from Nathan Race with Piper Sandler. Please go ahead.
[Analyst 1]: Sure.
[Analyst 3]: Going back to the margin discussion, curious how aggressive you guys can be in terms of reducing deposit rates on the $3.8 billion in funding that you call out on slide 18. If you could mention, Chuck, maybe what the spot rate of deposits were at the end of the quarter relative to the 2.20% all-in costs in Q3.
Hey guys. Good morning. Thank you for taking the questions.
Um, going back to the margin discussion. Um, you know, curious, you know how aggressive you guys can be in terms of, you know, reducing deposit rates on the, you know, 3.8
uh,
Ray Reitsma: Yeah, a lot of numbers there. I think one of the things that we have done, and we've done this as part of bringing in money market accounts, which obviously we've seen a lot of growth in, is we've told the depositors that we change rates in that product relative to the change in rates in the Fed funds rate. There's been no surprises there. As a matter of fact, some of those deposit accounts actually legally are tied to the Fed funds rate, but that's how we manage.
Billions of voting that you called out on slide 18. If you could mention, Chuck, what the spot rate of deposits was at the end of the quarter, relative to the $220 Allen cost and 32.
Yeah, a lot of numbers there. I think one of the things that we have done, and we've done this as part of bringing in money market accounts, which obviously we've seen a lot of growth in.
Chuck Christmas: of the products within the money market account. We've been, you know, and we would continue to either increase them basis point for basis point or reduce them basis point for basis point, at least into the near future, based on changes in the Fed funds rate. That's immediate, so it matches up well with any changes, you know, with the changes that would happen on our commercial loans relative to any changes that take place with the Fed funds rate. Some solid matching there. You know, time deposits, a vast majority of our time deposits mature within one year. I would say, based on rates today, that's about 50 basis points, on average, of a reduction in time deposits. That would take into account the expected of next week's cut. Most of the rest of the benefit is on the asset side.
Within the money market account.
We've been, you know, and we would continue to either increase them basis point for basis point or reduce them basis point for basis point, at least into the near future, um, based on changes in the Fed Funds rate. So, that's immediate. So, it matches up well.
Um with the uh any changes, you know, with the changes that would happen on our commercial loans, relative to any changes that take place. Um
With the Fed funds rate, um, so you know, some solid matching their, um, you know, a time deposits. A vast majority of our time deposits mature within one year, and I would say based on rates today, that's about 50 basis points.
Uh, on average, there was a reduction in time deposits.
Um, so that would take into account the expected outcomes of next week's.
um, kind
And, uh, then, you know, most of the rest of the benefit is on the asset side.
Nichole Kladder: Okay. Great. There was a notable M&A transaction involving two large competitors in your home state. I'm just curious, bigger picture, where you may see opportunities either to maybe add production talent or just add some high-quality commercial clients over the next couple of years as that integration unfolds?
Chuck Christmas: Yeah. Historically, combinations of those types have been fertile ground for us in terms of developing business and attracting more talent. How this one plays out remains to be seen, but that has been the historical pattern.
Okay, great. And obviously there was a notable M&A transaction involving, you know, two large competitors in your home state there. Um, so just curious, you know, bigger picture, where you may see opportunities either to maybe add production talent or just add, you know, some high-quality commercial clients over the next couple of years as that integration unfolds?
Yeah, I mean historically, uh, combinations of those types have been uh, uh, fertile ground for us in terms of developing business and attracting more talent. And, uh, you know, how this 1 plays out remains to be seen but, uh, that has been the historical pattern.
Nichole Kladder: Okay. Understood. One last one, I think you called out, you know, a $3 million specific allocation on the commercial credit that moved to non-performing in Q2. Just curious, you know, expectations on potential loss there and timing as well, just given that specific allocation?
Chuck Christmas: Yeah. It's really too early to tell. It's a process we're working through, and it has our full attention. As we get further into it, we'll make the decisions on those scores that are appropriate.
Okay, understood and then 1 last 1, um, I think you called out, you know, a million dollar specific um allocation on the commercial credit that moved to non-performing. Um, in 2q, you know, just curious, you know, expectations on potential loss there and timing as well. Just giving that specific allocation
Operator: We have been very aggressive in putting specific allocations against that credit.
Nichole Kladder: Yeah, understood. I appreciate all the color. Thanks, guys.
Yeah, it's really too early to tell and, uh, it's a process we're working through and it has our full attention. But, uh, you know, as we, uh, get further into it, we'll make the, uh, decisions on those scores that are appropriate. But I will add that we've been very aggressive in putting specific allocations against that credit. Yeah.
Chuck Christmas: Yeah, you bet.
Understood. I appreciate all the color. Thanks, guys.
Nichole Kladder: Again, if you have a question, please press star and then one. Our next question comes from Brendan Nosal with Hovde Group. Please go ahead.
You bet.
Ray Reitsma: Hey, just one or two follow-ups here. I hate to beat the dead horse, on the expense number for next quarter. I just want to make sure I get the pieces. Does that number for the fourth quarter that you're providing include a partial quarter of run rate expenses from Eastern Michigan Financial Corporation, or is it just the merger charges?
Again, if you have a question, please press start. And then 1. Our next question comes from Brandon Nozzle with Hoved Group. Please go ahead.
Chuck Christmas: No, just the merger charges. We're basically planning for a year-end consummation, so there would be no income statement from Eastern on our numbers. The only thing would be there is about $1 million, anticipated $1 million or so, basically closing costs.
Hey just 1 or 2, follow-ups here. Um hate to beat the dead horse uh on the expense number for next quarter. I just want to make sure I get the pieces. Um the does that number for the fourth quarter that you're providing include a partial quarters of run rate expenses from from Eastern. Uh, or is it just the merger charges.
No, just the merger Chargers, we're basically planning for a year end, uh, consummation. So there will be no income statement from Eastern on our numbers. Uh, so the only thing would be there is about a million dollars. It's anticipated million dollars or so, uh, basically closing costs
Ray Reitsma: Okay. Perfect. Just one on fee income, just because it hasn't been asked about yet. The debit and credit card income line was up like 30%, both linked quarter and year over year. Just kind of curious if there's anything funky going on in that line item this quarter and kind of where you expect that particular number to come in versus this quarter's $3.1 million.
Chuck Christmas: Yeah. Those numbers sound a little high to us as far as the increases go. I would say, just in general, on the commercial card program, it continues to grow quite, quite well. You know, it's designed primarily for our commercial customers. It's a product that's well-received and, most importantly, well-used. That line item is very much a volume-driven line item. The more that we can sell, but also ensuring that it's a solid product and one that our customers can and want to use, that's also very important because, again, it is a transaction-driven line that's been doing very well for us. As we continue to get penetration of those programs into our existing base, and of course, with the new growth, especially on the C&I side, there are plenty of opportunities to continue to grow that line item.
Okay perfect. Um and then just 1 on on fee income. Just because it hasn't been asked about yet. Um the the debit and credit uh sorry the debit and credit card income line was up like 30% both, you know, link quarter and year-over-year, just kind of curious. If there's anything funky going on in that line item, this quarter and and kind of where you expect that particular number to come in versus this quarter is 3.1 million
Yeah, those numbers sound a little high to us.
Is the increase is go, I would say just in general on the card program. It continues to grow quite quite well. Um, you know, it's designed primarily for our commercial customers. Uh, it's a product that's well received, and most importantly well-used. Uh that's very much that line item is very much, a volume driven uh, line item. And so the more that we can sell but also ensuring that our
Ray Reitsma: Okay. All right, thanks for taking the follow-ups. I appreciate it.
Because that, that it’s a solid product and the one that our customers can and want to use, uh, that’s also very important because again, it is a transaction-driven line. Um, that’s been doing very well for us and as we continue to, um, get penetration of those programs into our existing base, and of course, with the new growth, especially on the CNI side, uh, plenty of opportunities to continue to grow that line item.
Chuck Christmas: You bet.
Okay. All right. Uh, thanks for taking the follow-ups; I appreciate it.
Nichole Kladder: This concludes our question and answer session. I would like to turn the conference back over to Ray Reitsma for any closing remarks.
Operator: We want to thank you for your participation in today's call and for your interest in Mercantile Bank. That concludes the call. Thank you.
It concludes our question and answer session. I would like to turn the conference back over to Ray Reitsma for any closing remarks.
Okay, we want to thank you for your participation in today's call and for your interest in Mercantile Bank. That concludes the call. Thank you.
Nichole Kladder: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Attending today's presentation, you may now disconnect.