Q2 2026 Mercantile Bank Corp Earnings Call

July 21, 2026

Speaker #1: 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 0.

Speaker #1: 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 Nicole Kladder, Chief Marketing Officer of MERCANTILE BANK.

Speaker #1: Please go ahead.

Speaker #2: Hello, and thank you for joining us. Today we will cover the company's financial results for the second quarter of 2026. 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.

Speaker #2: 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.

Speaker #2: 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.

Speaker #2: The company's actual results will differ materially—excuse me, could differ materially—from any forward-looking statements made today due to factors described in the company's latest securities and exchange commissions filings.

Speaker #2: The company assumes no obligation to update any forward-looking statements made during the call. Let's begin. Ray?

Speaker #3: Thank you, Nichole. Our results for the second quarter of 2026 continue to build on the theme of commercial expertise generating a strong return profile.

Speaker #3: The consummation of the purchase of Eastern Michigan on December 31, 2025, represents execution of our strategic objectives around deposit growth, loan growth, and margin stability, paired with strong asset quality and overall financial performance.

Speaker #3: We continue to demonstrate top quartile ROA performance relative to our peers, built around the following traits: a strong and durable net interest margin, over the last 5 quarters the SOFR 90-day average rate has dropped 71 basis points, while our margin increased by 11 basis points to 3.59%.

Speaker #3: This illustrates effective execution of our strategic objective to maintain a steady margin via 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.

Speaker #3: Very strong asset quality, non-performing assets to total assets remain at the low levels typical of our company, at 9 basis points of total assets as of June 30, 2026.

Speaker #3: Non-performing loans to total loans over the last 6.5 years average 12 basis points. The allowance for credit losses stands at 1.13% of total loans as of June 30, 2026, and on a dollar volume basis was nearly 10 times the level of non-performing loans.

Speaker #3: Providing a very strong coverage relative to past due and non-performing loan levels. These numbers demonstrate our longstanding commitment to excellence in loan underwriting and administration.

Speaker #3: Improved on-balance sheet liquidity and loan-to-deposit ratio. At the end of the second quarter of 2026, our loan-to-deposit ratio stood at 93% compared to 100% at June 30, 2025, and 91% on December 31, 2025, 98% on December 31, 2024, and 110% on December 31, 2023.

Ray Reitsma: Our results for Q2 2026 continue to build on the theme of commercial expertise generating a strong return profile. The consummation of the purchase of Eastern Michigan on 31 December 2025 represents execution of our strategic objectives around deposit growth, loan growth, and margin stability, paired with strong asset quality and overall financial performance. We continue to demonstrate top-quartile ROA performance relative to our peers, built around the following traits. A strong and durable net interest margin.

Speaker #1: Our results for the second quarter of 2026 continue to build on the theme of commercial expertise generating a strong return profile. The consummation of the purchase of Eastern Michigan on December 31, 2025, represents execution of our strategic objectives around deposit growth, loan growth, and margin stability.

Speaker #3: As of June 30, 2026, our deposit mix included 27% non-interest-bearing deposits, and 24% lower-cost deposits, up from 25% and 20% respectively at the end of the second quarter of 2025, which has contributed to the stability of our net margin.

Speaker #1: Paired with strong asset quality and overall financial performance, we continue to demonstrate top quartile ROA performance relative to our peers, built around the following traits: a strong and durable net interest margin, over the last 5 quarters the SOFR 90-day average rate has dropped 71 basis points, while our margin increased by 11 basis points to 3.59%.

Ray Reitsma: Over the last five quarters, the SOFR 90-day average rate has dropped 71 basis points while our margin increased by 11 basis points to 3.59%. 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. Very strong asset quality.

Speaker #3: Net interest margin. Our acquisition of Eastern Michigan contributed positively to these measures. Deposit growth during the 12 months ended June 30, 2026, was 12.4% with growth in the non-interest-bearing accounts outpacing the growth in interest-bearing accounts during that period.

Speaker #1: This illustrates effective execution of our strategic objective to maintain a steady margin via 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.

Speaker #3: Our recent focus on deposit growth is not new to our bank. In fact, the last 5-year-end periods demonstrate a deposit compounded annual growth rate of 9.2%.

Speaker #1: Very strong asset quality—non-performing assets to total assets remain at the low levels typical of our company, at 9 basis points of total assets as of June 30, 2026.

Ray Reitsma: Non-performing assets to total assets remain at the low levels typical of our company at nine basis points of total assets as of 30 June 2026. Non-performing loans to total loans over the last six and a half years averaged 12 basis points. The allowance for credit losses stands at 1.13% of total loans as of 30 June 2026, and on a dollar volume basis was nearly 10 times the level of non-performing loans, providing a very strong coverage relative to past due and non-performing loan levels.

Ray Reitsma: Non-performing assets to total assets remain at the low levels typical of our company at 9 basis points of total assets as of 30 June 2026. Non-performing loans to total loans over the last six and a half years averaged 12 basis points. The allowance for credit losses stands at 1.13% of total loans as of 30 June 2026, and on a dollar volume basis was nearly 10x the level of non-performing loans, providing a very strong coverage relative to past due and non-performing loan levels.

Speaker #3: Strong commercial loan growth. Commercial loan growth in the second quarter of 2026 was 115 million dollars, and annualized growth rate of 11.7%. As foreshadowed in the prior quarter's commentary, loan payoffs did moderate from the prior 4 quarters experience, reducing by 60 million dollars compared to the prior quarter.

Speaker #1: Non-performing loans to total loans over the last six and a half years averaged 12 basis points. The allowance for credit losses stands at 1.13% of total loans as of June 30, 2026, and on a dollar-volume basis was nearly 10 times the level of non-performing loans.

Speaker #1: Providing very strong coverage relative to past-due and non-performing loan levels. These numbers demonstrate our longstanding commitment to excellence in loan underwriting and administration.

Speaker #3: June 30, 2026 commitments to make new commercial loans total 224 million dollars, and commitments to fund existing commercial and residential construction loans total 283 million dollars, with each amount at or near 5-quarter highs.

Ray Reitsma: These numbers demonstrate our longstanding commitment to excellence in loan underwriting and administration. Improved on-balance sheet liquidity and loan to deposit ratio. At the end of Q2 2026, our loan to deposit ratio stood at 93%, compared to 100% at 30 June 2025, and 91% on 31 December 2025, 98% on 31 December 2024, and 110% on 31 December 2023.

Speaker #1: Improved on-balance sheet liquidity and loan-to-deposit ratio. At the end of the second quarter of 2026, our loan-to-deposit ratio stood at 93% compared to 100% at June 30, 2025; 91% on December 31, 2025; 98% on December 31, 2024; and 110% on December 31, 2023.

Speaker #3: We expect that loan growth for 2026 will fall within the range of previously defined expectations of mid-single-digit percentages. Continued strong growth in key fee income categories.

Speaker #3: Growth in commercial deposit relationships has supported growth in treasury management services, resulting in a 35% increase in service charges on accounts during the second quarter of 2026 compared to the second quarter of 2025.

Speaker #1: As of June 30, 2026, our deposit mix included 27% non-interest-bearing deposits, and 24% lower-cost deposits, up from 25% and 20% respectively at the end of the second quarter of 2025, which has contributed to the stability of our net margin.

Ray Reitsma: As of 30 June 2026, our deposit mix included 27% non-interest-bearing deposits and 24% lower-cost deposits, up from 25% and 20% respectively at the end of Q2 2025, which has contributed to the stability of our net interest margin. Our acquisition of Eastern Michigan contributed positively to these measures.

Speaker #3: Our credit and debit card offerings report growth of 21% in the first 6 months of 2026, compared to the respective 2025 period. While managed expenses.

Speaker #1: Net interest margin. Our acquisition of Eastern Michigan contributed positively to these measures. Deposit growth during the 12 months ended June 30, 2026, was 12.4%, with growth in the non-interest-bearing accounts outpacing the growth in interest-bearing accounts during that period.

Speaker #3: Net revenue defined as net interest income plus non-interest income grew 15.3% to 136.3 million dollars during the first 6 months of 2026, from 118.2 million dollars in the respective 2025 period.

Ray Reitsma: Deposit growth during the 12 months ended 30 June 2026 was 12.4%, with growth in the non-interest-bearing accounts outpacing the growth in interest-bearing accounts during that period. Our recent focus on deposit growth is not new to our bank. In fact, the last five year-end periods demonstrate a deposit compounded annual growth rate of 9.2%. Strong commercial loan growth. Commercial loan growth in Q2 2026 was $115 million, an annualized growth rate of 11.7%.

Speaker #1: Our recent focus on deposit growth is not new to our bank. In fact, the last five year-end periods demonstrate a deposit compounded annual growth rate of 9.2%.

Speaker #3: I can see cost plus data processing costs were virtually unchanged as a percentage of net revenue, and salaries and benefits increased from 34% to 35% of net revenue, primarily reflecting our investment in the Southeast Michigan market.

Speaker #1: Strong commercial loan growth. Commercial loan growth in the second quarter of 2026 was $115 million, an annualized growth rate of 11.7%. As foreshadowed in the prior quarter's commentary, loan payoffs did moderate from the prior four quarters’ experience, reducing by $60 million compared to the prior quarter.

Speaker #3: In sum, these traits have allowed us to report a quarter-over-quarter EPS growth of 10% in the second quarter of 2026, compared to the prior year's second quarter, a 1.52% return on average assets, and a 14% return on average equity in the second quarter of 2026, and an annualized 11.6% increase in the tangible book value per share in the current year's second quarter compared to the first quarter of 2026.

Ray Reitsma: As foreshadowed in the prior quarter's commentary, loan payoffs did moderate from the prior four quarters' experience, reducing by $60 million compared to the prior quarter. 30 June 2026 commitments to make new commercial loans total $224 million, and commitments to fund existing commercial and residential construction loans total $283 million, with each amount at or near five-quarter highs.

Speaker #1: June 30, 2026, commitments to make new commercial loans total $224 million, and commitments to fund existing commercial and residential construction loans total $283 million, with each amount at or near five-quarter highs.

Speaker #3: Additionally, our 5-year tangible book value per share compounded annual growth rate of 9% in 5-year earnings per share compounded annual growth rate of 15.1%, historically placed us in the top of our top tier of our proxy group.

Speaker #1: We expect that loan growth for 2026 will fall within the range of previously defined expectations of mid-single-digit percentages. Continued strong growth in key fee income categories.

Ray Reitsma: We expect that loan growth for 2026 will fall within the range of previously defined expectations of mid-single-digit percentages. Continued strong growth in key fee income categories. Growth in commercial deposit relationships has supported growth in treasury management services, resulting in a 35% increase in service charges on accounts during Q2 2026 compared to Q2 2025. Our credit and debit card offerings report growth of 21% in H1 2026 compared to the respective 2025 period. Well-managed expenses.

Ray Reitsma: We expect that loan growth for 2026 will fall within the range of previously defined expectations of mid-single-digit %s. Continued strong growth in key fee income categories. Growth in commercial deposit relationships has supported growth in treasury management services, resulting in a 35% increase in service charges on accounts during Q2 2026 compared to Q2 2025. Our credit and debit card offerings report growth of 21% in H1 2026 compared to the respective 2025 period. Well-managed expenses.

Speaker #3: We remain excited about the recently completed combination with Eastern Michigan: the integration of operations is well underway, and the cultures have meshed very well.

Speaker #1: Growth in commercial deposit relationships has supported growth in treasury management services, resulting in a 35% increase in service charges on accounts during the second quarter of 2026 compared to the second quarter of 2025.

Speaker #3: That concludes my remarks, and I'll now turn the call over to Chuck.

Speaker #1: Thanks, Ray. This morning, we announced net income of 25.9 million dollars, or $1.50 per diluted share, for the second quarter of 2026, compared with net income of 22.6 million dollars, or $1.39 per diluted share, for the second quarter of 2025.

Speaker #1: Our credit and debit card offerings report growth of 21% in the first 6 months of 2026, compared to the respective 2025 period. Well-managed expenses.

Speaker #1: Net revenue defined as net interest income plus non-interest income grew 15.3% to 136.3 million dollars during the first 6 months of 2026, from 118.2 million dollars in the respective 2025 period.

Ray Reitsma: Net revenue, defined as net interest income plus non-interest income, grew 15.3% to $136.3 million during H1 2026 from $118.2 million in the respective H1 2025 period. Occupancy costs plus data processing costs were virtually unchanged as a percentage of net revenue, and salaries and benefits increased from 34% to 35% of net revenue, primarily reflecting our investment in the Southeast Michigan market.

Speaker #1: Net income during the first 6 months of 2026 totaled 48.6 million dollars, or $2.82 per diluted share, compared to 42.2 million dollars, or $2.60 per diluted share, during the first 6 months of 2025.

Speaker #1: I can see cost plus data processing costs were virtually unchanged as a percentage of net revenue, and salaries and benefits increased from 34% to 35% of net revenue, primarily reflecting our investment in the Southeast Michigan market.

Speaker #1: Growth in net income during both time frames primarily reflected increased net interest income and lower provision expense, that more than offset higher non-interest expense costs and federal income tax expense.

Speaker #1: In sum, these traits have allowed us to report quarter-over-quarter EPS growth of 10% in the second quarter of 2026 compared to the prior year's second quarter, a 1.52% return on average assets, a 14% return on average equity in the second quarter of 2026, and an annualized 11.6% increase in tangible book value per share in the current year's second quarter compared to the first quarter of 2026.

Ray Reitsma: In sum, these traits have allowed us to report a quarter-over-quarter EPS growth of 10% in Q2 2026 compared to the prior year Q2, a 1.52% return on average assets, and a 14% return on average equity in Q2 2026, and an annualized 11.6% increase in the tangible book value per share in the current year Q2 compared to Q1 2026.

Speaker #1: Excluding non-recurring costs associated with the year-end 2025 acquisition of Eastern Michigan, in previously announced core and digital banking system conversion, adjusted net income was 26.4 million dollars, or $1.53 per diluted share, for the second quarter of 2026, and 51.7 million dollars, or $2.99 per diluted share, for the first 6 months of 2026.

Speaker #1: Adjusted diluted earnings per share increased 14 cents, or approximately 10%, in the second quarter of 2026 compared to the second quarter of 2025, an increase 39 cents per diluted share, or approximately 15%, during the first 6 months of 2026 compared to the first 6 months of 2025.

Speaker #1: Additionally, our 5-year tangible book value per share compounded annual growth rate of 9%, and 5-year earnings per share compounded annual growth rate of 15.1%, historically placed us at the top tier of our proxy group.

Ray Reitsma: Our five-year tangible book value per share compounded annual growth rate of 9% and five-year earnings per share compounded annual growth rate of 15.1% historically place us in the top tier of our proxy group. We remain excited about the recently completed combination with Eastern Michigan. The integration of operations is well underway, and the cultures have meshed very well. That concludes my remarks, and we'll now turn the call over to Chuck.

Speaker #1: We remain excited about the recently completed combination with Eastern Michigan. The integration of operations is well underway, and the cultures have meshed very well.

Speaker #1: We believe using these non-GAAP measurements reflects our core earnings performance and provides for more accurate current-period versus prior-period comparisons. Interest income on loans was relatively unchanged during the second quarter and first 6 months of 2026, compared to the prior year periods, reflecting loan growth that was offset by a lower yield on loans.

Speaker #1: That concludes my remarks, and I'll now turn the call over to Chuck.

Speaker #2: Thanks, Ray. This morning, we announced net income of $25.9 million, or $1.50 per diluted share, for the second quarter of 2026, compared with net income of $22.6 million, or $1.39 per diluted share, for the second quarter of 2025.

[Company Representative] (Mercantile Bank): Thanks, Ray. This morning, we announced net income of $25.9 million, or $1.50 per diluted share for Q2 2026, compared with net income of $22.6 million, or $1.39 per diluted share for Q2 2025. Net income during H1 2026 totals $48.6 million, or $2.82 per diluted share, compared to $42.2 million, or $2.60 per diluted share during H1 2025. Growth in net income during both time frames primarily reflected increased net interest income and lower provision expense that more than offset higher non-interest expense costs and Federal income tax expense.

Chuck Christmas: Thanks, Ray. This morning, we announced net income of $25.9 million, or $1.50 per diluted share for Q2 2026, compared with net income of $22.6 million, or $1.39 per diluted share for Q2 2025. Net income during H1 2026 totals $48.6 million, or $2.82 per diluted share, compared to $42.2 million, or $2.60 per diluted share during H1 2025. Growth in net income during both time frames primarily reflected increased net interest income and lower provision expense that more than offset higher non-interest expense costs and Federal income tax expense.

Speaker #1: Average loans totaled 4.89 billion dollars during the second quarter of 2026, compared to 4.70 billion during the second quarter of 2025, an increase of 197 million dollars.

Speaker #2: Net income during the first six months of 2026 totaled $48.6 million, or $2.82 per diluted share, compared to $42.2 million, or $2.60 per diluted share, during the first six months of 2025.

Speaker #1: Mercantile banks' robust commercial loan fundings of 535 million dollars during the last 12 months were largely mitigated by significant levels of payoffs and partial paydowns on certain larger commercial loans during those periods, which aggregated 459 million dollars.

Speaker #2: Growth in net income during both time frames primarily reflected increased net interest income and lower provision expense, which more than offset higher non-interest expense costs and federal income tax expense.

Speaker #1: Our yield on loans during the second quarter of 2026 was 28 basis points lower than the second quarter of 2025, primarily reflecting the 75 basis point aggregate decline in the federal funds rate during the last 4 months of 2025.

Speaker #2: Excluding non-recurring costs associated with the year-end 2025 acquisition of Eastern Michigan and the previously announced core and digital banking system conversion, adjusted net income was $26.4 million, or $1.53 per diluted share, for the second quarter of 2026, and $51.7 million, or $2.99 per diluted share, for the first six months of 2026.

[Company Representative] (Mercantile Bank): Excluding non-recurring costs associated with the year-end 2025 acquisition of Eastern Michigan and previously announced core and digital banking system conversion, adjusted net income was $26.4 million, or $1.53 per diluted share for Q2 2026, and $51.7 million, or $2.99 per diluted share for H1 2026. Adjusted diluted earnings per share increased $0.14, or approximately 10%, in Q2 2026 compared to Q2 2025, and increased $0.39 per diluted share, or approximately 15%, during H1 2026 compared to H1 2025. We believe using these non-GAAP measurements reflects our core earnings performance and provides for more accurate current period versus prior period comparisons.

Chuck Christmas: Excluding non-recurring costs associated with the year-end 2025 acquisition of Eastern Michigan and previously announced core and digital banking system conversion, adjusted net income was $26.4 million, or $1.53 per diluted share for Q2 2026, and $51.7 million, or $2.99 per diluted share for H1 2026.

Speaker #1: Interest income on securities increased during the second quarter and first 6 months of 2026, compared to the prior year periods. Reflecting growth in the securities portfolio and a higher yield.

Speaker #1: The growth and higher yield reflect the acquisition of Eastern Michigan along with ongoing portfolio growth and reinvestment of mature lower-yielding investments at Mercantile Bank.

Speaker #2: Adjusted diluted earnings per share increased $0.14, or approximately 10%, in the second quarter of 2026 compared to the second quarter of 2025, and increased $0.39 per diluted share, or approximately 15%, during the first six months of 2026 compared to the first six months of 2025.

Chuck Christmas: Adjusted diluted earnings per share increased $0.14, or approximately 10%, in Q2 2026 compared to Q2 2025, and increased $0.39 per diluted share, or approximately 15%, during H1 2026 compared to H1 2025. We believe using these non-GAAP measurements reflects our core earnings performance and provides for more accurate current period versus prior period comparisons.

Speaker #1: Average balances were at 325 million dollars, and the average yield increased 54 basis points quarter over quarter. Interest income on other earning assets, a large portion of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, increased during the second quarter and first 6 months of 2026, compared to the prior year periods, reflecting a higher average balance that more than offset a lower average yield.

Speaker #2: We believe using these non-GAAP measurements reflects our core earnings performance and provides for more accurate current-period versus prior-period comparisons. Interest income on loans was relatively unchanged during the second quarter and first six months of 2026, compared to the prior-year periods, reflecting loan growth that was offset by a lower yield on loans.

[Company Representative] (Mercantile Bank): Interest income on loans was relatively unchanged during Q2 and H1 of 2026 compared to the prior year periods, reflecting loan growth that was offset by a lower yield on loans. Average loans totaled $4.89 billion during Q2 of 2026, compared to $4.70 billion during Q2 of 2025, an increase of $197 million. Mercantile Bank's robust commercial loan fundings of $535 million during the last 12 months were largely mitigated by significant levels of payoffs and partial paydowns on certain larger commercial loans during those periods, which aggregated $459 million. Our yield on loans during Q2 of 2026 was 28 basis points lower than Q2 of 2025, primarily reflecting the 75 basis point aggregate decline in the federal funds rate during the last four months of 2025.

Chuck Christmas: Interest income on loans was relatively unchanged during Q2 and H1 of 2026 compared to the prior year periods, reflecting loan growth that was offset by a lower yield on loans. Average loans totaled $4.89 billion during Q2 of 2026, compared to $4.70 billion during Q2 of 2025, an increase of $197 million.

Speaker #1: The average balance was up 178 million dollars, while the average yield declined 87 basis points quarter over quarter. Latter of which largely depicts the aggregate 75 basis point decrease in the federal funds rate during the last 4 months of 2025.

Speaker #2: Average loans totaled $4.89 billion during the second quarter of 2026, compared to $4.70 billion during the second quarter of 2025, an increase of $197 million.

Speaker #1: In total, interest income was 4.7 million dollars, and 9.8 million dollars higher during the second quarter and first 6 months of 2026, compared to the respective prior year periods.

Speaker #2: Mercantile banks' robust commercial loan fundings of 535 million dollars during the last 12 months were largely mitigated by significant levels of payoffs and partial paydowns on certain larger commercial loans during those periods, which aggregated 459 million dollars.

Chuck Christmas: Mercantile Bank's robust commercial loan fundings of $535 million during the last 12 months were largely mitigated by significant levels of payoffs and partial paydowns on certain larger commercial loans during those periods, which aggregated $459 million. Our yield on loans during Q2 of 2026 was 28 basis points lower than Q2 of 2025, primarily reflecting the 75 basis point aggregate decline in the federal funds rate during the last four months of 2025.

Speaker #1: Interest expense on deposits decreased, during the second quarter and first 6 months of 2026, compared to the prior year periods. Reflecting a lower cost of deposits that more than offset interest-bearing deposit growth.

Speaker #2: Our yield on loans during the second quarter of 2026 was 28 basis points lower than the second quarter of 2025, primarily reflecting the 75 basis point aggregate decline in the federal funds rate during the last 4 months of 2025.

Speaker #1: The growth in interest-bearing deposit balances and the lower cost of these funds reflect the acquisition of Eastern Michigan along with growth and lower deposit costs at Mercantile Bank.

Speaker #1: Cost of interest-bearing deposits at both banks were positively impacted by the aforementioned decline in the Fed funds rate in the latter part of 2025.

Speaker #2: Interest income on securities increased during the second quarter and first six months of 2026, compared to the prior year periods, reflecting growth in the securities portfolio and a higher yield.

[Company Representative] (Mercantile Bank): Interest income on securities increased during Q2 and H1 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 growth and reinvestment of mature, lower yielding investments at Mercantile Bank. Average balances were up $325 million, and the average yield increased 54 basis points quarter-over-quarter. Interest income on other earning assets, a large portion of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, increased during Q2 and H1 of 2026 compared to the prior year periods, reflecting a higher average balance that more than offset a lower average yield.

Chuck Christmas: Interest income on securities increased during Q2 and H1 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 growth and reinvestment of mature, lower yielding investments at Mercantile Bank.

Speaker #1: Average interest-bearing deposits totaled 3.96 billion dollars during the second quarter of 2026, compared to 3.46 billion dollars during the second quarter of 2025, an increase of 493 million dollars.

Speaker #2: The growth and higher yield reflect the acquisition of Eastern Michigan, along with ongoing portfolio growth and the reinvestment of mature, lower-yielding investments at Mercantile Bank.

Speaker #2: Average balances were at $325 million, and the average yield increased 54 basis points quarter over quarter. Interest income on other earning assets, a large portion of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, increased during the second quarter and first six months of 2026 compared to the prior year periods, reflecting a higher average balance that more than offset a lower average yield.

Chuck Christmas: Average balances were up $325 million, and the average yield increased 54 basis points quarter-over-quarter. Interest income on other earning assets, a large portion of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, increased during Q2 and H1 of 2026 compared to the prior year periods, reflecting a higher average balance that more than offset a lower average yield.

Speaker #1: The cost of all deposits was down 50 basis points during the second quarter of 2026, compared to the second quarter of 2025. Interest expense on federal home loan bank of Indianapolis advances declined during the second quarter and first 6 months of 2026, compared to the prior year periods, largely reflecting a lower average balance.

Speaker #1: Interest expense on other borrowed funds increased during the second quarter and first 6 months of 2026, compared to the 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.

Speaker #2: The average balance was up 178 million dollars, while the average yield declined 87 basis points quarter over quarter. Latter, which largely depicts the aggregate 75 basis point decrease, in the federal funds rate during the last 4 months of 2025.

[Company Representative] (Mercantile Bank): The average balance was up $178 million, while the average yield declined 87 basis points quarter-over-quarter, the latter of which largely depicts the aggregate 75 basis point decrease in the federal funds rate during the last four months of 2025. In total, interest income was $4.7 million and $9.8 million higher during Q2 and H1 of 2026 compared to the respective prior year periods. Interest expense on deposits decreased during Q2 and H1 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 costs of these funds reflect the acquisition of Eastern Michigan, along with growth and lower deposit costs at Mercantile Bank.

Chuck Christmas: The average balance was up $178 million, while the average yield declined 87 basis points quarter-over-quarter, the latter of which largely depicts the aggregate 75 basis point decrease in the federal funds rate during the last four months of 2025. In total, interest income was $4.7 million and $9.8 million higher during Q2 and H1 of 2026 compared to the respective prior year periods.

Speaker #1: In total, interest expense was 3.0 million dollars and 5.3 million dollars lower during the second quarter and first 6 months of 2026, compared to the prior year periods.

Speaker #2: In total, interest income was $4.7 million and $9.8 million higher during the second quarter and first six months of 2026, respectively, compared to the respective prior-year periods.

Speaker #1: Net interest income increased 7.8 million dollars and 15.1 million dollars during the second quarter and first 6 months of 2026, respectively, compared to the prior year periods, primarily reflecting growth in earning assets and a higher net interest margin.

Speaker #2: Interest expense on deposits decreased during the second quarter and first six months of 2026, compared to the prior year periods, reflecting a lower cost of deposits that more than offset interest-bearing deposit growth.

Chuck Christmas: Interest expense on deposits decreased during Q2 and H1 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 costs of these funds reflect the acquisition of Eastern Michigan, along with growth and lower deposit costs at Mercantile Bank.

Speaker #1: Average earning assets totaled 6.43 billion dollars during the second quarter of 2026, compared to 5.73 billion dollars during the second quarter of 2025, an increase of 699 million dollars that largely reflects the acquisition of Eastern Michigan at year-end 2025, along with the securities and overnight funds growth at Mercantile Bank.

Speaker #2: The growth in interest-bearing deposit balances and the lower cost of these funds reflect the acquisition of Eastern Michigan along with growth and lower deposit costs at Mercantile Bank.

Speaker #2: Cost of interest-bearing deposits at both banks were positively impacted by the aforementioned decline in the Fed funds rate in the latter part of 2025.

[Company Representative] (Mercantile Bank): Costs of interest-bearing deposits at both banks were positively impacted by the aforementioned decline in the fed funds rate in the latter part of 2025. Average interest-bearing deposits totaled $3.96 billion during Q2 of 2026, compared to $3.46 billion during Q2 of 2025, an increase of $493 million. The cost of all deposits was down 50 basis points during Q2 of 2026 compared to Q2 of 2025. Interest expense on Federal Home Loan Bank of Indianapolis advances declined during Q2 and H1 of 2026 compared to the prior year periods, largely reflecting a lower average balance.

Chuck Christmas: Costs of interest-bearing deposits at both banks were positively impacted by the aforementioned decline in the fed funds rate in the latter part of 2025. Average interest-bearing deposits totaled $3.96 billion during Q2 of 2026, compared to $3.46 billion during Q2 of 2025, an increase of $493 million. The cost of all deposits was down 50 basis points during Q2 of 2026 compared to Q2 of 2025. Interest expense on Federal Home Loan Bank of Indianapolis advances declined during Q2 and H1 of 2026 compared to the prior year periods, largely reflecting a lower average balance.

Speaker #1: The net interest margin was 3.59 percent during the second quarter of 2026, compared to 3.48 percent during the second quarter of 2025. The improvement is largely due to the Eastern Michigan acquisition.

Speaker #2: Average interest-bearing deposits totaled $3.96 billion during the second quarter of 2026, compared to $3.46 billion during the second quarter of 2025, an increase of $493 million.

Speaker #1: The yield on earning assets declined 33 basis points, while the cost of funds declined 44 basis points, during the second quarter of 2026, compared to the prior year second quarter.

Speaker #2: The cost of all deposits was down 50 basis points during the second quarter of 2026, compared to the second quarter of 2025. Interest expense on federal home loan bank of Indianapolis advances declined during the second quarter and first 6 months of 2026, compared to the prior year periods, largely reflecting a lower average balance.

Speaker #1: Impacting our net interest margin over the past couple of years was our strategic initiative to lower the loan-to-deposit ratio which generally entailed deposit growth exceeding loan growth, and using additional monies to purchase securities.

Speaker #2: Interest expense on other borrowed funds increased during the second quarter and first six months of 2026, compared to the 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.

[Company Representative] (Mercantile Bank): Interest expense on other borrowed funds increased during Q2 and H1 of 2026 compared to the 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 $3.0 million and $5.3 million lower during Q2 and H1 of 2026 compared to the prior year periods. Net interest income increased $7.8 million and $15.1 million during Q2 and H1 of 2026, respectively, compared to the prior year periods, primarily reflecting growth in earning assets and a higher net interest margin.

Chuck Christmas: Interest expense on other borrowed funds increased during Q2 and H1 of 2026 compared to the 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 $3.0 million and $5.3 million lower during Q2 and H1 of 2026 compared to the prior year periods. Net interest income increased $7.8 million and $15.1 million during Q2 and H1 of 2026, respectively, compared to the prior year periods, primarily reflecting growth in earning assets and a higher net interest margin.

Speaker #1: A large portion of deposit growth was in higher-costing money market and time deposit products, while the purchased securities provided a lower yield than loan products.

Speaker #1: Despite that strategic initiative and declines in the federal funds rate during the latter parts of 2005 and 2024, our quarterly net interest margin has remained relatively stable.

Speaker #2: In total, interest expense was $3.0 million and $5.3 million lower during the second quarter and first six months of 2026, compared to the prior year periods.

Speaker #1: Over the past 8 quarters, our net interest margin has averaged 3.49 percent, with a high of 3.59 percent and a low of 3.41 percent.

Speaker #2: Net interest income increased $7.8 million and $15.1 million during the second quarter and first six months of 2026, respectively, compared to the prior year periods, primarily reflecting growth in earning assets and a higher net interest margin.

Speaker #1: We remain committed to managing our balance sheet in a manner that minimizes the impact of changing interest rates environment on our net interest margin.

Speaker #1: Basic funds management practices such as match funding, combined with scheduled maturities of lower-yielding 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.

Speaker #2: Average earning assets totaled $6.43 billion during the second quarter of 2026, compared to $5.73 billion during the second quarter of 2025, an increase of $699 million that largely reflects the acquisition of Eastern Michigan at year-end 2025, along with securities and overnight funds growth at Mercantile Bank.

[Company Representative] (Mercantile Bank): Average earning assets totaled $6.43 billion during Q2 of 2026, compared to $5.73 billion during Q2 of 2025, an increase of $699 million that largely reflects the acquisition of Eastern Michigan at year-end 2025, along with the securities and overnight funds growth at Mercantile Bank. The net interest margin was 3.59% during Q2 of 2026 compared to 3.48% during Q2 of 2025. The improvement is largely due to the Eastern Michigan acquisition. The yield on earning assets declined 33 basis points, while the cost of funds declined 44 basis points during Q2 of 2026 compared to the prior year Q2. Impacting our net interest margin over the past couple of years was our strategic initiative to lower the loan-to-deposit ratio, which generally entailed deposit growth exceeding loan growth and using additional monies to purchase securities.

Chuck Christmas: Average earning assets totaled $6.43 billion during Q2 of 2026, compared to $5.73 billion during Q2 of 2025, an increase of $699 million that largely reflects the acquisition of Eastern Michigan at year-end 2025, along with the securities and overnight funds growth at Mercantile Bank. The net interest margin was 3.59% during Q2 of 2026 compared to 3.48% during Q2 of 2025.

Speaker #1: We recorded provisions for credit losses of negative 1.8 million dollars and negative 3.6 million dollars during the second quarter and first 6 months of 2026, respectively.

Speaker #2: The net interest margin was 3.59 percent during the second quarter of 2026, compared to 3.48 percent during the second quarter of 2025. The improvement is largely due to the Eastern Michigan acquisition.

Speaker #1: The second quarter negative provision expense mainly reflected the elimination of a 2.7 million dollar specific allocation associated with the resolution of a nonperforming commercial construction loan which was partially offset by changes in the economic forecast, general allocations necessitated by net loan growth, and an increase in certain qualitative factor allocations.

Chuck Christmas: The improvement is largely due to the Eastern Michigan acquisition. The yield on earning assets declined 33 basis points, while the cost of funds declined 44 basis points during Q2 of 2026 compared to the prior year Q2. Impacting our net interest margin over the past couple of years was our strategic initiative to lower the loan-to-deposit ratio, which generally entailed deposit growth exceeding loan growth and using additional monies to purchase securities.

Speaker #2: The yield on earning assets declined 33 basis points, while the cost of funds declined 44 basis points during the second quarter of 2026, compared to the prior year’s second quarter.

Speaker #1: The reserve balance decreased 1.3 million dollars during the second quarter of 2026, reflecting the negative 1.8 million dollar provision expense and net loan recoveries of 0.5 million dollars.

Speaker #2: Impacting our net interest margin over the past couple of years was our strategic initiative to lower the loan-to-deposit ratio, which generally entailed deposit growth exceeding loan growth and using additional monies to purchase securities.

Speaker #2: A large portion of deposit growth was in higher-cost money market and time deposit products, while the purchased securities provided a lower yield than loan products.

[Company Representative] (Mercantile Bank): A large portion of deposit growth was in higher cost of money market and time deposit products, while the purchased securities provided a lower yield than loan products. Despite that strategic initiative and declines in the federal funds rate during the latter parts of 2005 and 2024, our quarterly net interest margin has remained relatively stable. Over the past eight quarters, our net interest margin has averaged 3.49%, with a high of 3.59% and a low of 3.41%. We remain committed to managing our balance sheet in a manner that minimizes the impact of changing interest rates environment on our net interest margin. Basic funds management practices such as match funding, combined with scheduled maturities of lower yielding 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.

Chuck Christmas: A large portion of deposit growth was in higher cost of money market and time deposit products, while the purchased securities provided a lower yield than loan products. Despite that strategic initiative and declines in the federal funds rate during the latter parts of 2005 and 2024, our quarterly net interest margin has remained relatively stable. Over the past eight quarters, our net interest margin has averaged 3.49%, with a high of 3.59% and a low of 3.41%.

Speaker #1: The reserve balance equals 1.13 percent of total loans at June 30th, 2026. Our sustained strength in loan quality metrics continues to be impactful to our loan loss reserve calculations.

Speaker #2: Despite that strategic initiative and declines in the federal funds rate during the latter parts of 2005 and 2024, our quarterly net interest margin has remained relatively stable.

Speaker #1: The baseline allowance, largely determined from historical net loan charge-off activity, y, represents only one-third 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 second quarter of 2026.

Speaker #2: Over the past 8 quarters, our net interest margin has averaged 3.49 percent, with a high of 3.59 percent and a low of 3.41 percent.

Speaker #2: We remain committed to managing our balance sheet in a manner that minimizes the impact of a changing interest rate environment on our net interest margin.

Chuck Christmas: We remain committed to managing our balance sheet in a manner that minimizes the impact of changing interest rates environment on our net interest margin. Basic funds management practices such as match funding, combined with scheduled maturities of lower yielding 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.

Speaker #1: Specific reserve allocations on nonperforming loans total just 0.9 million dollars or about 2 percent of the reserve balance at the end of the second quarter.

Speaker #2: Basic funds management practices, such as match funding combined with scheduled maturities of lower-yielding, 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.

Speaker #1: Non-interest expenses were 6.0 million dollars and 17.0 million dollars higher during the second quarter and first 6 months of 2026, respectively, compared to the prior year periods.

Speaker #1: Excluding one-time costs associated with the ongoing core and digital banking system conversion, and year-end 2025 acquisition of Eastern Michigan, that aggregated 0.6 million dollars and 3.9 million dollars during the second quarter and first 6 months of 2026, respectively, non-interest expenses increased 5.4 million dollars and 13.1 million dollars compared to the prior year-end periods.

Speaker #2: We recorded provisions for credit losses of negative $1.8 million and negative $3.6 million during the second quarter and first six months of 2026, respectively.

[Company Representative] (Mercantile Bank): We recorded provisions for credit losses of -$1.8 million and -$3.6 million during Q2 and H1 of 2026, respectively. The Q2 negative provision expense mainly reflected the elimination of a $2.7 million specific allocation associated with the resolution of a non-performing commercial construction loan, which was partially offset by changes in the economic forecast, general allocations necessitated by net loan growth, and an increase in certain qualitative factor allocations. The reserve balance decreased $1.3 million during Q2 of 2026, reflecting the -$1.8 million provision expense and net loan recoveries of $0.5 million. The reserve balance equals 1.13% of total loans at 30 June 2026. Our sustained strength in loan quality metrics continues to be impactful to our loan loss reserve calculations.

Chuck Christmas: We recorded provisions for credit losses of -$1.8 million and -$3.6 million during Q2 and H1 of 2026, respectively. The Q2 negative provision expense mainly reflected the elimination of a $2.7 million specific allocation associated with the resolution of a non-performing commercial construction loan, which was partially offset by changes in the economic forecast, general allocations necessitated by net loan growth, and an increase in certain qualitative factor allocations.

Speaker #2: The second quarter negative provision expense mainly reflected the elimination of a $2.7 million specific allocation associated with the resolution of a nonperforming commercial construction loan, which was partially offset by changes in the economic forecast, general allocations necessitated by net loan growth, and an increase in certain qualitative factor allocations.

Speaker #1: Eastern Michigan Bank's non-interest expenses totaled 4.0 million dollars and 8.0 million dollars during the second quarter and first 6 months of 2026, respectively. The increase in core operating costs largely reflects higher salary benefit costs with the remaining growth generally depicting the impacts of inflation, and a larger balance sheet.

Speaker #2: The reserve balance decreased $1.3 million during the second quarter of 2026, reflecting the negative $1.8 million provision expense and net loan recoveries of $0.5 million.

Chuck Christmas: The reserve balance decreased $1.3 million during Q2 of 2026, reflecting the -$1.8 million provision expense and net loan recoveries of $0.5 million. The reserve balance equals 1.13% of total loans at 30 June 2026. Our sustained strength in loan quality metrics continues to be impactful to our loan loss reserve calculations.

Speaker #1: In addition, we recorded a 1.4 million dollar decrease in allocations to the reserve for unfunded loan commitments primarily reflecting a lower level of commercial loan commitments largely stemming from the high level of commercial loan fundings that took place during the second quarter.

Speaker #2: The reserve balance equals 1.13 percent of total loans at June 30th, 2026. Our sustained strength in loan quality metrics continues to be impactful to our loan loss reserve calculations.

Speaker #2: The baseline allowance, largely determined from historical net loan charge-off activity, represents only one-third 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 second quarter of 2026.

[Company Representative] (Mercantile Bank): The baseline allowance, largely determined from historical net loan charge-off activity, represents only one-third of our current reserve balance, reflecting a low level of net loan charge-offs activity during our look-back period from the beginning of 2011 through the end of Q2 2026. Specific reserve allocations on non-performing loans totaled just $0.9 million, or about 2% of the reserve balance at the end of Q2. Non-interest expenses were $6.0 million and $17.0 million higher during Q2 and H1 2026, respectively, compared to the prior year periods. Excluding one-time costs associated with the ongoing core and digital banking system conversion and year-end 2025 acquisition of Eastern Michigan Bank that aggregated $0.6 million and $3.9 million during Q2 and H1 2026, respectively, non-interest expenses increased $5.4 million and $13.1 million compared to the prior year-end periods.

Chuck Christmas: The baseline allowance, largely determined from historical net loan charge-off activity, represents only one-third of our current reserve balance, reflecting a low level of net loan charge-offs activity during our look-back period from the beginning of 2011 through the end of Q2 2026. Specific reserve allocations on non-performing loans totaled just $0.9 million, or about 2% of the reserve balance at the end of Q2. Non-interest expenses were $6.0 million and $17.0 million higher during Q2 and H1 2026, respectively, compared to the prior year periods.

Speaker #1: Federal income tax was 1.9 million dollars and 2.0 million dollars higher during the second quarter and first 6 months of 2026, respectively, compared to the prior year periods.

Speaker #1: Largely reflecting a higher level of pre-tax net income and a lower level of net benefits from transferable energy tax credits. The effect of tax rate was 16.9 percent during the second quarter and first 6 months of 2026, compared to 12.9 percent in the 15.7 percent during the respective time periods in 2025.

Speaker #2: Specific reserve allocations on nonperforming loans total just $0.9 million, or about 2 percent of the reserve balance at the end of the second quarter.

Speaker #2: Non-interest expenses were 6.0 million dollars and 17.0 million dollars higher during the second quarter and first 6 months of 2026, respectively, compared to the prior year periods.

Speaker #1: The 2025 periods had higher levels of transferable energy tax credit activity given carry-back 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.

Speaker #2: Excluding one-time costs associated with the ongoing core and digital banking system conversion, and the year-end 2025 acquisition of Eastern Michigan that aggregated $0.6 million and $3.9 million during the second quarter and first six months of 2026, respectively, non-interest expenses increased $5.4 million and $13.1 million compared to the prior year-end periods.

Chuck Christmas: Excluding one-time costs associated with the ongoing core and digital banking system conversion and year-end 2025 acquisition of Eastern Michigan Bank that aggregated $0.6 million and $3.9 million during Q2 and H1 2026, respectively, non-interest expenses increased $5.4 million and $13.1 million compared to the prior year-end periods.

Speaker #1: Both Mercantile Bank and Eastern Michigan Bank have strong and well-capitalized regulatory capital positions. Mercantile Bank's total capital ratio risk-based capital ratio was 13.5 percent as of June 30, 2026, 205 million dollars above the minimum threshold to be categorized as well-capitalized.

Speaker #2: Eastern Michigan Bank's noninterest expenses totaled $4.0 million and $8.0 million during the second quarter and first six months of 2026, respectively. The increase in core operating costs largely reflects higher salary and benefit costs, with the remaining growth generally depicting the impacts of inflation and a larger balance sheet.

[Company Representative] (Mercantile Bank): Eastern Michigan Bank's non-interest expenses totaled $4.0 million and $8.0 million during Q2 and H1 2026, respectively. The increase in core operating costs largely reflects higher salary and benefit costs, with the remaining growth generally depicting the impacts of inflation and a larger balance sheet. In addition, we recorded a $1.4 million decrease in allocations to the reserve for unfunded loan commitments, primarily reflecting a lower level of commercial loan commitments, largely stemming from the high level of commercial loan fundings that took place during Q2. Federal income tax was $1.9 million and $2.0 million higher during Q2 and H1 2026, respectively, compared to the prior year periods, largely reflecting a higher level of pre-tax net income and a lower level of net benefits from transferable energy tax credits.

Chuck Christmas: Eastern Michigan Bank's non-interest expenses totaled $4.0 million and $8.0 million during Q2 and H1 2026, respectively. The increase in core operating costs largely reflects higher salary and benefit costs, with the remaining growth generally depicting the impacts of inflation and a larger balance sheet.

Speaker #1: Eastern Michigan Bank's total risk-based capital ratio was 23.1 percent as of June 30, 2026, 36 million dollars above the minimum threshold to be categorized as well-capitalized.

Speaker #2: In addition, we recorded a $1.4 million decrease in allocations to the reserve for unfunded loan commitments, primarily reflecting a lower level of commercial loan commitments, largely stemming from the high level of commercial loan fundings that took place during the second quarter.

Chuck Christmas: In addition, we recorded a $1.4 million decrease in allocations to the reserve for unfunded loan commitments, primarily reflecting a lower level of commercial loan commitments, largely stemming from the high level of commercial loan fundings that took place during Q2. Federal income tax was $1.9 million and $2.0 million higher during Q2 and H1 2026, respectively, compared to the prior year periods, largely reflecting a higher level of pre-tax net income and a lower level of net benefits from transferable energy tax credits.

Speaker #1: We did not repurchase shares during the second quarter of 2026. We have 6.8 million dollars available in our current repurchase plan. Thoughts on the remainder of 2026.

Speaker #1: On slide 23, on slide number 23 in the investor presentation, we share our assumptions on the interest rate environment and key performance metrics for the remainder of 2026, but the caveat that market conditions remain volatile making forecasting difficult.

Speaker #2: Federal income tax was $1.9 million and $2.0 million higher during the second quarter and first six months of 2026, respectively, compared to the prior year periods.

Speaker #2: This largely reflects a higher level of pre-tax net income and a lower level of net benefits from transferable energy tax credits. The effective tax rate was 16.9 percent during the second quarter and first six months of 2026, compared to 12.9 percent and 15.7 percent during the respective time periods in 2025.

Speaker #1: This forecast is predicated on no changes in the federal funds rate during the remainder of 2026, although we believe our net interest margin will remain relatively stable in a changing interest rate environment as it has over the past eight quarters.

[Company Representative] (Mercantile Bank): The effective tax rate was 16.9% during Q2 and H1 2026, compared to 12.9% and 15.7% during the respective time periods in 2025. The 2025 periods had higher levels of transferable energy tax credit activity, given carry-back 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 Bank and Eastern Michigan Bank have strong and well-capitalized regulatory capital positions. Mercantile Bank's total risk-based capital ratio was 13.5% as of 30 June 2026, $205 million above the minimum threshold to be categorized as well-capitalized. Eastern Michigan Bank's total risk-based capital ratio was 23.1% as of 30 June 2026, $36 million above the minimum threshold to be categorized as well-capitalized.

Chuck Christmas: The effective tax rate was 16.9% during Q2 and H1 2026, compared to 12.9% and 15.7% during the respective time periods in 2025. The 2025 periods had higher levels of transferable energy tax credit activity, given carry-back 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.

Speaker #1: We are projecting loan growth in a range of 5 percent to 7 percent annualized during each quarter which encompasses a strong commercial loan pipeline as well as expected fewer commercial loan payoffs during the remainder of the year.

Speaker #2: The 2025 periods had higher levels of transferable energy tax credit activity given carry-back 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.

Speaker #1: We are forecasting a higher net interest margin during the last 6 months of 2026 compared to the first 6 months of 2026 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.

Speaker #2: Both Mercantile Bank and Eastern Michigan Bank have strong and well-capitalized regulatory capital positions. Mercantile Bank's total risk-based capital ratio was 13.5 percent as of June 30, 2026, $205 million above the minimum threshold to be categorized as well-capitalized.

Chuck Christmas: Both Mercantile Bank and Eastern Michigan Bank have strong and well-capitalized regulatory capital positions. Mercantile Bank's total risk-based capital ratio was 13.5% as of 30 June 2026, $205 million above the minimum threshold to be categorized as well-capitalized. Eastern Michigan Bank's total risk-based capital ratio was 23.1% as of 30 June 2026, $36 million above the minimum threshold to be categorized as well-capitalized.

Speaker #1: We are projecting a federal income tax a federal tax rate of 17 percent which encompasses continued growth in net benefits from our low-income housing and historical tax credit activities along with additional transferable energy tax credit investments.

Speaker #1: Expected quarterly results for non-interest income and non-interest expense are also provided for your reference. Non-interest expense projections reflect personnel investments that were made in the latter part of 2025 and first 6 months of 2026 and expected during the remainder of 2026 to support expansion in Southeast Michigan as well as to support operational areas as we switch core and digital banking providers to enhance the durability, efficiency, and experience for our customers and employees.

Speaker #2: Eastern Michigan Bank's total risk-based capital ratio was 23.1 percent as of June 30, 2026, $36 million above the minimum threshold to be categorized as well-capitalized.

Speaker #2: We did not repurchase shares during the second quarter of 2026. We have $6.8 million available in our current repurchase plan. Thoughts on the remainder of 2026?

[Company Representative] (Mercantile Bank): We did not repurchase shares during Q2 2026. We have $6.8 million available in our current repurchase plan. Thoughts on the remainder of 2026. On slide 23 in the investor presentation, we share our assumptions on the interest rate environment and key performance metrics for the remainder of 2026, with the caveat that market conditions remain volatile, making forecasting difficult. This forecast is predicated on no changes in the federal funds rate during the remainder of 2026, although we believe our net interest margin will remain relatively stable in a changing interest rate environment, as it has over the past 8 quarters. We are projecting loan growth in a range of 5% to 7% annualized during each quarter, which encompasses a strong commercial loan pipeline, as well as expected fewer commercial loan payoffs during the remainder of the year.

Chuck Christmas: We did not repurchase shares during Q2 2026. We have $6.8 million available in our current repurchase plan. Thoughts on the remainder of 2026. On slide 23 in the investor presentation, we share our assumptions on the interest rate environment and key performance metrics for the remainder of 2026, with the caveat that market conditions remain volatile, making forecasting difficult.

Speaker #2: On slide 23, in the investor presentation, we share our assumptions on the interest rate environment and key performance metrics for the remainder of 2026, with the caveat that market conditions remain volatile, making forecasting difficult.

Speaker #1: Costs associated with the core and digital banking system conversion are not included. In closing, we are very pleased with our operating results during the second quarter and first 6 months of 2026 and continued strong financial conditions.

Speaker #2: This forecast is predicated on no changes in the federal funds rate during the remainder of 2026, although we believe our net interest margin will remain relatively stable in a changing interest rate environment, as it has over the past eight quarters.

Chuck Christmas: This forecast is predicated on no changes in the federal funds rate during the remainder of 2026, although we believe our net interest margin will remain relatively stable in a changing interest rate environment, as it has over the past 8 quarters. We are projecting loan growth in a range of 5% to 7% annualized during each quarter, which encompasses a strong commercial loan pipeline, as well as expected fewer commercial loan payoffs during the remainder of the year.

Speaker #1: And believe we remain well-positioned to successfully navigate through the myriad of challenges and uncertainties faced by all financial institutions. That concludes my prepared remarks.

Speaker #2: We are projecting loan growth in a range of 5 percent to 7 percent annualized during each quarter, which encompasses a strong commercial loan pipeline as well as expected fewer commercial loan payoffs during the remainder of the year.

Speaker #1: I'll now turn the call back over to Ray.

Speaker #2: Thank you, Chuck. That concludes the prepared remarks from management, and we will now move to the question-and-answer portion of the call.

Speaker #3: 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.

Speaker #2: We are forecasting a higher net interest margin during the last six months of 2026, compared to the first six months of 2026, 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.

[Company Representative] (Mercantile Bank): We are forecasting a higher net interest margin during H2 2026 compared to H1 2026, 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 17%, which encompasses continued growth in net benefits from our low-income housing and historical tax credit activities, along with additional transferable energy tax credit investments. Expected quarterly results for non-interest income and non-interest expense are also provided for your reference.

Chuck Christmas: We are forecasting a higher net interest margin during H2 2026 compared to H1 2026, 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.

Speaker #3: To withdraw your question, please press star, then 1. At this time, we will pause momentarily to assemble our roster. The first question comes from Daniel Tamayo with Raymond James.

Speaker #2: We are projecting a federal income tax rate of 17 percent, which encompasses continued growth in net benefits from our low-income housing and historical tax credit activities, along with additional transferable energy tax credit investments.

Chuck Christmas: We are projecting a federal tax rate of 17%, which encompasses continued growth in net benefits from our low-income housing and historical tax credit activities, along with additional transferable energy tax credit investments. Expected quarterly results for non-interest income and non-interest expense are also provided for your reference.

Speaker #3: Your line is now open.

Speaker #4: All right. Thanks, guys. Good morning. Maybe we can just start on the expense increase and the guidance there. I hear what you were saying there, Chuck, in the commentary about the increased personnel investments and the expansion in Michigan.

Speaker #2: Expected quarterly results for non-interest income and non-interest expense are also provided for your reference. Non-interest expense projections reflect personnel investments that were made in the latter part of 2025 and first 6 months of 2026, and expected during the remainder of 2026 to support expansion in Southeast Michigan, as well as to support operational areas as we switch core and digital banking providers to enhance the durability, efficiency, and experience for our customers and employees.

[Company Representative] (Mercantile Bank): Non-interest expense projections reflect personnel investments that were made in the latter part of 2025 and H1 2026, and expected during the remainder of 2026 to support expansion in Southeast Michigan, as well as to support operational areas as we switch core and digital banking providers to enhance the durability, efficiency, and experience for our customers and employees. Costs associated with the core and digital banking system conversion are not included. In closing, we are very pleased with our operating results during Q2 and H1 2026, and 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 prepared remarks. I'll now turn the call back over to Ray.

Chuck Christmas: Non-interest expense projections reflect personnel investments that were made in the latter part of 2025 and H1 2026, and expected during the remainder of 2026 to support expansion in Southeast Michigan, as well as to support operational areas as we switch core and digital banking providers to enhance the durability, efficiency, and experience for our customers and employees.

Speaker #4: Maybe you could just parse out kind of what's related to the hirings in Southeast Michigan and what's related to the core conversion and as much as you could help us find the settling point after the costs come out post-core conversion, that would be helpful.

Speaker #2: Costs associated with the core and digital banking system conversion are not included. In closing, we are very pleased with our operating results during the second quarter and first six months of 2026, and with our continued strong financial condition.

Chuck Christmas: Costs associated with the core and digital banking system conversion are not included. In closing, we are very pleased with our operating results during Q2 and H1 2026, and 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 prepared remarks. I'll now turn the call back over to Ray.

Speaker #4: Thanks.

Speaker #5: Yeah. Good morning, Daniel. This is Chuck. I'm glad to answer your questions. There's definitely a lot going on that impacts our overhead costs. The costs associated with our core conversion we want to make sure that it's a big lift for our team, and we want to make sure that we do it effectively.

Speaker #2: And we believe we remain well-positioned to successfully navigate the myriad of challenges and uncertainties faced by all financial institutions. That concludes my prepared remarks.

Speaker #2: I'll now turn the call back over to Ray.

Speaker #5: And accurately. So we made the determination early on is to make sure that we are I would say more than fully staffed, especially in certain operational areas.

Speaker #1: Thank you, Chuck. That concludes the prepared remarks from management, and we will now move to the question-and-answer portion of the call.

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

Operator: 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 then one. At this time, we will pause momentarily to assemble our roster. The first question comes from Daniel Tamayo with Raymond James. Your line is now open.

Speaker #5: To help with not only the core conversion, but especially the training. Clearly, there's going to be a time period where we have to make sure that all of our employees are trained on their respective areas of the new system both the core and the digital system.

Speaker #3: To withdraw your question, please press star then 1. At this time, we will pause momentarily to assemble our roster. The first question comes from Daniel Tomeo with Raymond James.

Speaker #5: And so we have been very aggressive in hiring in those areas to make sure that we're fully staffed at least. We're very excited about our expansion into Southeast Michigan.

Speaker #5: That started quite a few years ago. But really, within the last, I would say, 12 months, has really taken off. We've hired exceptional personnel, both on the commercial side as well as the treasury side, in that market.

Speaker #3: Your line is now open.

Speaker #1: All right. Thanks,

Daniel Tamayo: All right. Thanks, guys. Morning. Maybe we can just start on the expense increase and the guidance there. I hear what you were saying there, Chuck, in the commentary about the increased personnel investments and the expansion in Michigan. Maybe you could just parse out what's related to the hirings in Southeast Michigan and what's related to the core conversion, and as much as you could help us find the settling point after the costs come out post core conversion, that would be helpful. Thanks.

Speaker #4: Guys, good morning. Maybe we can just start on the expense increase and the guidance there. I hear what you were saying there, Chuck, in the commentary about the increased personnel investments and the expansion in Michigan.

Speaker #5: And we continue to talk to additional folks to join our team. And we expect as Ray has said on several occasions, Southeast Michigan is one-third of Michigan.

Speaker #5: And we are but a tiny blip there, given the size of that market and where we're at now. We've made huge strides already over the last 12 months.

Speaker #4: Maybe you could just parse out what's related to the hirings in Southeast Michigan and what's related to the core conversion. As much as you could help us find the settling point, after the costs come out post-core conversion, that would be helpful.

Speaker #5: If you look at our net loan growth, obviously, Southeast Michigan doesn't have much in the way of payoffs. But when you look at their growth, that equals about our net growth.

Speaker #5: Obviously, we've had a lot of payoffs here, notwithstanding the strong fundings we've had in this market. So I can't give you a number specifically as we go forward in regards to the Southeast Michigan market.

Speaker #4: Thanks.

Speaker #2: Yeah. Good morning, Daniel. This is Chuck. I'm glad to answer your questions. There's definitely a lot going on that impacts our overhead costs. The costs associated with our core conversion we want to make sure that it's a big lift for our team, and we want to make sure that we do it effectively.

[Company Representative] (Mercantile Bank): Yeah. Good morning, Dan. This is Chuck. I'm glad to answer your questions. There's definitely a lot going on that impacts our overhead costs. The costs associated with our core conversion, we want to make sure that it's a big lift for our team, and we want to make sure that we do it effectively and accurately. We made the determination early on, is to make sure that we are, I would say, more than fully staffed, especially in certain operational areas, to help with not only the core conversion, but especially the training. Clearly, there's going to be a time period where we have to make sure that all of our employees are trained on their respective areas of the new system, both the core and the digital system.

Chuck Christmas: Yeah. Good morning, Dan. This is Chuck. I'm glad to answer your questions. There's definitely a lot going on that impacts our overhead costs. The costs associated with our core conversion, we want to make sure that it's a big lift for our team, and we want to make sure that we do it effectively and accurately.

Speaker #5: We think it's a strong market for us. And we expect to continue to build that market out as we have over the last 12 months in the future period.

Speaker #5: So that's where most of that additional expense is coming from. Obviously, we want to continue to build out our company in all of our markets as the opportunities present themselves.

Speaker #2: And accurately. So we made the determination early on is to make sure that we are I would say more than fully staffed, especially in certain operational areas.

Chuck Christmas: We made the determination early on, is to make sure that we are, I would say, more than fully staffed, especially in certain operational areas, to help with not only the core conversion, but especially the training. Clearly, there's going to be a time period where we have to make sure that all of our employees are trained on their respective areas of the new system, both the core and the digital system.

Speaker #5: We're very pleased with the markets. I think when we look at the loan growth, all of our markets are showing growth. And we want to continue to support that with additional people's at all levels and all positions throughout the company.

Speaker #2: To help with not only the core conversion, but especially the training. Clearly, there's going to be a time period where we have to make sure that all of our employees are trained on their respective areas of the new system—both the core and the digital system.

Speaker #4: Thanks, Chuck. And then just in terms of post-core conversion, the savings still kind of on pace for what you guys were talking about before.

Speaker #2: And so, we have been very aggressive in hiring in those areas to make sure that we're fully staffed, at least. We're very excited about our expansion into Southeast Michigan.

[Company Representative] (Mercantile Bank): We have been very aggressive in hiring in those areas to make sure that we're fully staffed at least. We're very excited about our expansion into Southeast Michigan. That started quite a few years ago, but really within the last, I would say, 12 months has really taken off. We've hired exceptional personnel, both on the commercial side as well as the treasury side in that market, and we continue to talk to additional folks to join our team. As Ray has said on several occasions, Southeast Michigan is one-third of Michigan, and we are but a tiny blip there given the size of that market and where we're at now. We've made huge strides already over the last 12 months. If you look at our net loan growth, obviously Southeast Michigan doesn't have much in the way of payoffs.

Chuck Christmas: We have been very aggressive in hiring in those areas to make sure that we're fully staffed at least. We're very excited about our expansion into Southeast Michigan. That started quite a few years ago, but really within the last, I would say, 12 months has really taken off. We've hired exceptional personnel, both on the commercial side as well as the treasury side in that market, and we continue to talk to additional folks to join our team.

Speaker #4: Maybe just remind us where what type of expenses you expect to recoup.

Speaker #2: That started quite a few years ago, but really, within the last, I would say, 12 months, it has really taken off. We've hired exceptional personnel, both on the commercial side as well as the treasury side, in that market.

Speaker #5: Yeah. The expenses are yeah, Daniel. The expenses are the savings are really going to start in the second quarter of next year. When we do flip the switch in February, and we get through all the testing and validations and exit our current providers in both those areas, it's kind of hard to put a specific number on the savings.

Speaker #2: And we continue to talk to additional folks to join our team. And we expect, as Ray has said on several occasions, Southeast Michigan is one-third of Michigan.

Chuck Christmas: As Ray has said on several occasions, Southeast Michigan is one-third of Michigan, and we are but a tiny blip there given the size of that market and where we're at now. We've made huge strides already over the last 12 months. If you look at our net loan growth, obviously Southeast Michigan doesn't have much in the way of payoffs.

Speaker #2: And we are but a tiny blip there, given the size of that market and where we're at now. We've made huge strides already over the last 12 months.

Speaker #5: I mean, we can look at different contracts, but obviously, there's growth in volume that has impacts. And we are switching providers on both digital and core, which are different platforms.

Speaker #2: If you look at our net loan growth, obviously Southeast Michigan doesn’t have much in the way of payoffs. But when you look at their growth, that equals about our net growth.

Speaker #5: And as we look to our teams and make sure that we are set up and our framework is designed to best fit those that new framework, we've been making changes there as well.

[Company Representative] (Mercantile Bank): When you look at their growth, that equals about our net growth. Obviously, we've had a lot of payoffs here, notwithstanding the strong fundings we've had in this market. I can't give you a number specifically as we go forward in regards to the Southeast Michigan market. We think it's a strong market for us, and we expect to continue to build that market out as we have over the last 12 months in the future periods. That's where most of that additional expense is coming from. Obviously, we want to continue to build out our company in all of our markets as the opportunities present themselves. We're very pleased with the markets. I think when we look at the loan growth, all of our markets are showing growth.

Chuck Christmas: When you look at their growth, that equals about our net growth. Obviously, we've had a lot of payoffs here, notwithstanding the strong fundings we've had in this market. I can't give you a number specifically as we go forward in regards to the Southeast Michigan market. We think it's a strong market for us, and we expect to continue to build that market out as we have over the last 12 months in the future periods. That's where most of that additional expense is coming from.

Speaker #2: Obviously, we've had a lot of payoffs here, notwithstanding the strong fundings we've had in this market. So I can't give you a number specifically as we go forward in regards to the Southeast Michigan market.

Speaker #5: We do know that the savings on the core itself, just on the contract, is pretty significant. But there's a lot of moving parts that make it very difficult to say, "This is going to be our costs going forward." And it will be a while before we get to that point.

Speaker #2: We think it's a strong market for us, and we expect to continue to build that market out as we have over the last 12 months, in the future period.

Speaker #2: So that's where most of that additional expense is coming from. Obviously, we want to continue to build out our company in all of our markets as the opportunities present themselves.

Speaker #4: Okay. Fair enough. On the credit side, so obviously, really nice story. You talked about kind of the puts and takes within the reserves. And it sounds like you're getting down towards the end of the specific reserves, or at least those are much more modest at this point.

Chuck Christmas: Obviously, we want to continue to build out our company in all of our markets as the opportunities present themselves. We're very pleased with the markets. I think when we look at the loan growth, all of our markets are showing growth.

Speaker #2: We're very pleased with the markets. I think when we look at the loan growth, all of our markets are showing growth. And we want to continue to support that with additional people at all levels and all positions throughout the company.

[Company Representative] (Mercantile Bank): We want to continue to support that with additional people at all levels and all positions throughout the company.

Chuck Christmas: We want to continue to support that with additional people at all levels and all positions throughout the company.

Speaker #4: But you still have net recoveries. I guess if you have any thoughts on where you think reserves could stabilize or if when you think the loan loss provision might turn positive or any guidance on that number would be helpful.

Speaker #4: Thanks, Chuck. And then, just in terms of post-core conversion, are the savings still kind of on pace with what you guys were talking about before?

Daniel Tamayo: Thanks, Chuck. Then just in terms of post-core conversion, the savings still kind of on pace for what you guys were talking about before. Maybe just remind us what type of expenses you expect to recoup early next year.

Speaker #4: Maybe just remind us what type of expenses you expect to recoup.

Speaker #5: Yeah. I mean, certainly, we enjoy negative provisions, especially when they're because of recoveries and the resolution of loan situations that as we like to remind everybody, we did have provision expense associated with building up those specific reserves, as we felt appropriate.

Speaker #2: Yeah, the expenses are—yeah, Daniel—the expenses are... the savings are really going to start in the second quarter of next year. When we do flip the switch in February, and we get through all the testing and validations and exit our current providers in both those areas, it's kind of hard to put a specific number on the savings.

[Company Representative] (Mercantile Bank): Yeah, Danny, the savings are really going to start in Q2 of next year when we do flip the switch in February and we get through all the testing and validations and exit our current providers in both those areas. It is kind of hard to put a specific number on the savings. We can look at different contracts, but obviously there is growth in volume that has impacts. We are switching providers on both digital and core, which are different platforms. As we look to our teams and make sure that we are set up and our framework is designed to best fit that new framework, we have been making changes there as well. We do know that the savings on the core itself, just on the contract is pretty significant.

Chuck Christmas: Yeah, Danny, the savings are really going to start in Q2 of next year when we do flip the switch in February and we get through all the testing and validations and exit our current providers in both those areas. It is kind of hard to put a specific number on the savings. We can look at different contracts, but obviously there is growth in volume that has impacts.

Speaker #5: I think the relatively low level of specific reserves on not performing loans that we have right now is really a reflection of two things.

Speaker #5: One, and foremost, is not very much at all in just gross dollars of non-performing loans that we have on the books. But I think it's also reflective of the way that we underwrite loans.

Speaker #2: I mean, we can look at different contracts, but obviously there's growth in volume that has impacts. And we are switching providers on both digital and core, which are different platforms.

Chuck Christmas: We are switching providers on both digital and core, which are different platforms. As we look to our teams and make sure that we are set up and our framework is designed to best fit that new framework, we have been making changes there as well. We do know that the savings on the core itself, just on the contract is pretty significant.

Speaker #5: That when we there's always a risk of loss. But when we have a loan go sideways, that we go into collection mode we've got quite a bit of collateral.

Speaker #2: And as we look to our teams and make sure that we are set up and our framework is designed to best fit that new framework, we've been making changes there as well.

Speaker #5: We've got guarantees that we can rely on, which obviously then minimize the specific reserves that we need to that we need to establish. But overall, it's a reflection of the fact that we just don't have a lot of loans on not performing.

Speaker #2: We do know that the savings on the core itself—just on the contract—are pretty significant. But there are a lot of moving parts that make it very difficult to say, "This is going to be our cost going forward." And it will be a while before we get to that point.

[Company Representative] (Mercantile Bank): There is a lot of moving parts that make it very difficult to say, This is going to be our cost going forward. It will be a while before we get to that point.

Chuck Christmas: There is a lot of moving parts that make it very difficult to say, This is going to be our cost going forward. It will be a while before we get to that point.

Speaker #5: And we haven't had for quite a while now certainly past most of our look-back period, which basically means that we have to rely on the qualitative factors to support what we believe is an adequate level of the loan loss reserve.

Speaker #4: Okay, fair enough. On the credit side, obviously, really nice story. You talked about the puts and takes within the reserves, and it sounds like you're getting down towards the end of the specific reserves, or at least those are much more modest at this point.

Daniel Tamayo: Okay. Fair enough. On the credit side, obviously really nice story. You talked about kind of the puts and takes within the reserves. Sounds like you're getting down towards the end of the specific reserves, or at least those are much more modest at this point. You still have net recoveries. I guess if you have any thoughts on where you think reserves could stabilize or when you think the loan loss provision might turn positive, or any guidance on that number would be helpful.

Speaker #5: At 1.13%, I think if you look at us, we kind of been between where we are now and probably the low 120s. For quite some time.

Speaker #5: And now, and I would expect notwithstanding any significant change in the economy, that we would stay somewhere within that range. Clearly, the economy has the biggest impact on the overall quality of our loan portfolio at any given time.

Speaker #4: But you still have net recoveries. I guess if you have any thoughts on where you think reserves could stabilize, or if or when you think the loan loss provision might turn positive, or any guidance on that number would be helpful.

Speaker #5: So if we did enter into a period of stress, our reserve, like all banks' reserves, are designed to reflect that with increased reserve level requirements, which would lead to obviously bigger or potential sizable positive provision expenses.

Speaker #2: Yeah. I mean, certainly, we enjoy negative provisions, especially when they're due to recoveries and the resolution of loan situations that, as we like to remind everybody, we did have provision expense associated with building up those specific reserves as we felt appropriate.

[Company Representative] (Mercantile Bank): Yeah. Certainly we enjoy negative provisions, especially when they're because of recoveries and the resolution of loan situations that as we like to remind everybody, we did have provision expense associated with building up those specific reserves as we felt appropriate. I think the relatively low level of specific reserves on non-performing loans that we have right now is really a reflection of two things. One and foremost is not very much at all in just gross dollars of non-performing loans that we have on the books. I think it's also reflective of the way that we underwrite loans. That there's always a risk of loss. When we have a loan go sideways that we go into collection mode. We've got quite a bit of collateral, we've got guarantees that we can rely on, which obviously then minimize the specific reserves that we need to establish.

Chuck Christmas: Yeah. Certainly we enjoy negative provisions, especially when they're because of recoveries and the resolution of loan situations that as we like to remind everybody, we did have provision expense associated with building up those specific reserves as we felt appropriate. I think the relatively low level of specific reserves on non-performing loans that we have right now is really a reflection of two things. One and foremost is not very much at all in just gross dollars of non-performing loans that we have on the books.

Speaker #5: So overall, we feel very solid. We feel very good about the quality of our loan portfolio. It's been very consistent at its relative current level now.

Speaker #2: I think the relatively low level of specific reserves on non-performing loans that we have right now is really a reflection of two things. One, and foremost, is that there are not very many, in just gross dollars, of non-performing loans that we have on the books.

Speaker #5: And we don't see anything in the near term, at least, that is going to change that. We don't have a lot of charge off, so we generally don't have a lot of recoveries.

Speaker #2: But I think it's also reflective of the way that we underwrite loans. That when we there's always a risk of loss. But when we have a loan go sideways that we go into collection mode, we've got quite a bit of collateral.

Chuck Christmas: I think it's also reflective of the way that we underwrite loans. That there's always a risk of loss. When we have a loan go sideways that we go into collection mode. We've got quite a bit of collateral, we've got guarantees that we can rely on, which obviously then minimize the specific reserves that we need to establish.

Speaker #5: But we do try to recover every dollar that we do charge off and have expectations that while on the accounting side, we've had the eliminated, the borrower still owes us money.

Speaker #5: And we're going to work through any channels that we can that we have available to us to maximize those recoveries.

Speaker #2: We've got guarantees that we can rely on, which obviously then minimize the specific reserves that we need to establish. But overall, it's a reflection of the fact that we just don't have a lot of loans that are non-performing.

Speaker #4: All right. Terrific. Well, thanks for the color, Chuck. Appreciate it.

[Company Representative] (Mercantile Bank): Overall, it's a reflection of the fact that we just don't have a lot of loans on non-performing. We haven't had for quite a while now, certainly past most of our look-back period. Which basically means that we have to rely on the qualitative factors to support what we believe is an adequate level of the loan loss reserve. We're at 1.13%. I think if you look at us, we kind of been between where we are now and probably the low 120s for quite some time now. I would expect notwithstanding any significant change in the economy, that we would stay somewhere within that range. Clearly, the economy has the biggest impact on the overall quality of our loan portfolio at any given time.

Chuck Christmas: Overall, it's a reflection of the fact that we just don't have a lot of loans on non-performing. We haven't had for quite a while now, certainly past most of our look-back period. Which basically means that we have to rely on the qualitative factors to support what we believe is an adequate level of the loan loss reserve. We're at 1.13%.

Speaker #5: You're welcome, Daniel.

Speaker #2: And we haven't had, for quite a while now—certainly past most of our look-back period—which basically means that we have to rely on the qualitative factors to support what we believe is an adequate level of the loan loss reserve.

Speaker #2: The next question comes from Brendan Nosal with HUVD Group. Your line is now open.

Speaker #6: Hey. Good morning, guys. Hope you're doing well.

Speaker #5: Hey, Brendan.

Speaker #6: Morning. Let me just start off here on kind of funding and the kind of the environment. Can you just update us on the competitive landscape for core funding and how that has evolved across your footprint over the past couple of months?

Speaker #2: At 1.13%, I think if you look at us, we've kind of been between where we are now and probably the low 120s for quite some time.

Chuck Christmas: I think if you look at us, we kind of been between where we are now and probably the low 120s for quite some time now. I would expect notwithstanding any significant change in the economy, that we would stay somewhere within that range. Clearly, the economy has the biggest impact on the overall quality of our loan portfolio at any given time.

Speaker #2: And now, and I would expect, notwithstanding any significant change in the economy, that we would stay somewhere within that range. Clearly, the economy has the biggest impact on the overall quality of our loan portfolio at any given time.

Speaker #5: Yeah. I would say that this is Chuck again. I would say it's been pretty consistent we really haven't seen much in the way of deposit rates changing.

Speaker #5: We always have the credit union issue to deal with, especially on the CD side, of things. But our CD portfolio has stayed pretty steady.

Speaker #2: So if we did enter into a period of stress, our reserve—like all banks' reserves—is designed to reflect that with increased reserve level requirements, which would lead to, obviously, bigger or potentially sizable positive provision expenses.

[Company Representative] (Mercantile Bank): If we did enter into a period of stress, our reserve, like all banks' reserves, are designed to reflect that with increased reserve level requirements, which would lead to obviously bigger or potential sizable positive provision expenses. Overall, we feel very solid, feel very good about the quality of our loan portfolio. It's been very consistent at its relative current level now, and we don't see anything in the near term at least that is going to change that. We don't have a lot of charge-offs, we generally don't have a lot of recoveries, but we do try to recover every dollar that we do charge off and have expectations that while on the accounting side, we've had to eliminate it, the borrower still owes us money.

Chuck Christmas: If we did enter into a period of stress, our reserve, like all banks' reserves, are designed to reflect that with increased reserve level requirements, which would lead to obviously bigger or potential sizable positive provision expenses.

Speaker #5: We've had really solid growth. We grew very significantly on a net basis during the first quarter. And I think we did see some deposit reductions in the second quarter on the local basis, but that was really seasonality.

Speaker #2: So, overall, we feel very solid. We feel very good about the quality of our loan portfolio. It's been very consistent at its current relative level now.

Chuck Christmas: Overall, we feel very solid, feel very good about the quality of our loan portfolio. It's been very consistent at its relative current level now, and we don't see anything in the near term at least that is going to change that. We don't have a lot of charge-offs, we generally don't have a lot of recoveries, but we do try to recover every dollar that we do charge off and have expectations that while on the accounting side, we've had to eliminate it, the borrower still owes us money.

Speaker #5: Especially on the public unit side, as well as obviously April 15th with tax payments being due with our primarily our business, but also some consumer customers as well.

Speaker #2: And we don't see anything in the near term, at least, that is going to change that. We don't have a lot of charge off, so we generally don't have a lot of recoveries.

Speaker #5: The third quarter is usually pretty good, mostly because of the public units when they start getting their taxes in on the property tax side of things here in Michigan.

Speaker #2: But we do try to recover every dollar that we do charge off, and have expectations that, while on the accounting side we've had to eliminate it, the borrower still owes us money.

Speaker #5: So we do expect some very solid local deposit growth here in the third quarter. From that. But we've also seen very significant growth in rate kind of touch on some of the numbers on our checking account products, especially our non-interest bearing which is really a direct reflection of the very strong CNI loan growth that we've experienced so far this year.

Speaker #2: And we're going to work through any channels that we can, that we have available to us, to maximize those recoveries.

[Company Representative] (Mercantile Bank): We're going to work through any channels that we can, that we have available to us to maximize those recoveries.

Chuck Christmas: We're going to work through any channels that we can, that we have available to us to maximize those recoveries.

Speaker #4: All right. Terrific. Well, thanks for the color, Chuck. Appreciate it.

Daniel Tamayo: All right. Terrific. Well, thanks for the color, Chuck. I appreciate it.

[Company Representative] (Mercantile Bank): You're welcome, Danny.

Chuck Christmas: You're welcome, Danny.

Speaker #2: You're welcome, Daniel.

Speaker #5: There's lots of reasons why we like CNI, but certainly one of them is the deposit balances that they bring and then the myriad of different cash management, treasury management products that we have.

Speaker #1: The next question comes from Brendan Nozel with HUVD Group. Your line is now open.

Operator: The next question comes from Brendan Nosal with Hovde Group. Your line is now open.

Speaker #5: And you can see from the improvement or the growth, I should say, on service charges where that treasury management income gets recorded on our income statement, the solid growth there is really a reflection of the growth on the commercial side with those loan balances coming over with the associated deposits.

Speaker #3: Hey, good morning, guys. Hope you're doing well.

Brendan Nosal: Hey, good morning, guys. Hope you're doing well.

Speaker #2: Hey, Brendan. Morning.

[Company Representative] (Mercantile Bank): Hey, Brendan. Morning.

Chuck Christmas: Hey, Brendan. Morning.

Speaker #3: Let me just start starting off here on kind of funding and the kind of the environment. Can you just update us on the competitive landscape for core funding and how that has evolved across your footprint over the past couple of months?

Brendan Nosal: Let me just start off here on funding and the environment. Can you just update us on the competitive landscape for core funding and how that has evolved across your footprint over the past couple of months?

Speaker #5: But also the expanded use as we continue to market our ever-growing suite of products to our existing customers as well. So on an overall basis, the deposits are growth we're very pleased about that.

Speaker #2: Yeah, I would say—this is Chuck again—I would say it's been pretty consistent. We really haven't seen much in the way of deposit rates changing.

[Company Representative] (Mercantile Bank): Yeah. This is Chuck again. I would say it's been pretty consistent. We really haven't seen much in the way of deposit rates changing. We always have the credit union issue to deal with, especially on the CD side of things. Our CD portfolio has stayed pretty steady. We've had really solid growth. We grew very significantly on a net basis during Q1. I think we did see some deposit reductions in Q2 on a local basis, but that was really seasonality, especially on the public unit side, as well as obviously 15 April with tax payments being due with primarily our business, but also some consumer customers as well. Q3 is usually pretty good, mostly because of the public units, when they start getting their taxes in on the property tax side of things here in Michigan.

Chuck Christmas: Yeah. This is Chuck again. I would say it's been pretty consistent. We really haven't seen much in the way of deposit rates changing. We always have the credit union issue to deal with, especially on the CD side of things. Our CD portfolio has stayed pretty steady. We've had really solid growth. We grew very significantly on a net basis during Q1.

Speaker #2: We always have the credit union issue to deal with, especially on the CD side of things. But our CD portfolio has stayed pretty steady.

Speaker #5: I think that deposit growth along with bringing Eastern Michigan on board is letting us get out of the brokered CD market. We had significant levels of maturities here in the second quarter to the degree that we're down to only about 20 million dollars left.

Speaker #2: We've had really solid growth. We grew very significantly on a net basis during the first quarter. And I think we did see some deposit reductions in the second quarter on a local basis, but that was really seasonality.

Chuck Christmas: I think we did see some deposit reductions in Q2 on a local basis, but that was really seasonality, especially on the public unit side, as well as obviously 15 April with tax payments being due with primarily our business, but also some consumer customers as well. Q3 is usually pretty good, mostly because of the public units, when they start getting their taxes in on the property tax side of things here in Michigan.

Speaker #5: There's two CDs there that both mature in December. So we're hopeful that we will be out of the brokered CD market by the end of this year.

Speaker #2: Especially on the public unit side, as well as, obviously, April 15th with tax payments being due with primarily our business, but also some consumer customers as well.

Speaker #5: And again, that's really strongly attributed to the local deposit growth that we've been experiencing. And expect to continue to have.

Speaker #2: The third quarter is usually pretty good, mostly because of the public units when they start getting their taxes in on the property tax side of things here in Michigan.

Speaker #6: Okay. All right. Thanks for the color, Chuck. One more from me, just turning to capital. Ratios continue to build nicely this quarter, even with kind of a return and more robust loan growth.

Speaker #2: So we do expect some very solid local deposit growth here in the third quarter from that. But we've also seen very significant growth in rate. Kind of to touch on some of the numbers on our checking account products, especially our non-interest-bearing, which is really a direct reflection of the very strong C&I loan growth that we've experienced so far this year.

[Company Representative] (Mercantile Bank): We do expect some very solid local deposit growth here in Q3 from that. We have also seen very significant growth, and Ray kind of touched on some of the numbers on our checking account products, especially our non-interest bearing, which is really a direct reflection of the very strong C&I loan growth that we have experienced so far this year. There are lots of reasons why we like C&I, but certainly one of them is the deposit balances that they bring, and then the myriad of different cash management, treasury management products that we have. You can see from the improvement or the growth, I should say, on service charges where that treasury management income gets recorded on our income statement.

Chuck Christmas: We do expect some very solid local deposit growth here in Q3 from that. We have also seen very significant growth, and Ray kind of touched on some of the numbers on our checking account products, especially our non-interest bearing, which is really a direct reflection of the very strong C&I loan growth that we have experienced so far this year.

Speaker #6: Is there a point at which kind of the capital bill becomes something you want to more actively manage and kind of talk about the path through which you would do that and then kind of whether shared purchase is something you would be interested in if we continue to see ratios build?

Speaker #5: Yeah. Appreciate your noticing our capital ratios. Obviously, we're very pleased with that. Notwithstanding the strong growth that we do have on the asset side, we're able to grow our overall capital ratios and it makes us feel good to have strong capital ratios.

Speaker #2: There are lots of reasons why we like CNI, but certainly one of them is the deposit balances that they bring and then the myriad of different cash management, treasury management products that we have. You can see from the improvement—or the growth, I should say—in service charges, where that treasury management income gets recorded on our income statement. The solid growth there is really a reflection of the growth on the commercial side, with those loan balances coming over with the associated deposits.

Chuck Christmas: There are lots of reasons why we like C&I, but certainly one of them is the deposit balances that they bring, and then the myriad of different cash management, treasury management products that we have. You can see from the improvement or the growth, I should say, on service charges where that treasury management income gets recorded on our income statement.

Speaker #5: You never know what's going to happen. From an economic standpoint, but it allows you to take advantage of the opportunities that come, whether it's acquisitions, loan growth, expansions in the markets, all those things.

[Company Representative] (Mercantile Bank): The solid growth there is really a reflection of the growth on the commercial side with those loan balances coming over with the associated deposits, but also the expanded use as we continue to market our ever-growing suite of products to our existing customers as well. On an overall basis, the deposits growth, we are very pleased about that. I think that deposit growth, along with bringing Eastern Michigan on board, is letting us get out of the brokered CD market. We had significant levels of maturities here in Q2 to the degree that we are down to only about $20 million left. There are two CDs there that both mature in December, so we are hopeful that we will be out of the brokered CD market by the end of this year.

Chuck Christmas: The solid growth there is really a reflection of the growth on the commercial side with those loan balances coming over with the associated deposits, but also the expanded use as we continue to market our ever-growing suite of products to our existing customers as well. On an overall basis, the deposits growth, we are very pleased about that.

Speaker #5: A ability to take care of the or take advantage of those opportunities as they come about. I think from a buyback standpoint, clearly, it's been quite a while since we bought back any shares.

Speaker #2: But also the expanded use as we continue to market our ever-growing suite of products to our existing customers as well. So on an overall basis, the deposits are growth we're very pleased about that.

Speaker #5: We do have a plan in place. Our board has always been supportive of management recommendations. With this buyback plans, I think a big part of that clearly is our stock price and we're very pleased with the run that we've had.

Speaker #2: I think that deposit growth, along with bringing Eastern Michigan on board, is letting us get out of the brokered CD market. We had significant levels of maturities here in the second quarter, to the degree that we're down to only about $20 million left.

Chuck Christmas: I think that deposit growth, along with bringing Eastern Michigan on board, is letting us get out of the brokered CD market. We had significant levels of maturities here in Q2 to the degree that we are down to only about $20 million left. There are two CDs there that both mature in December, so we are hopeful that we will be out of the brokered CD market by the end of this year.

Speaker #5: Where we think that we're finally getting close to where we think we should be valued. We've been frustratingly low below some of the benchmarks that we look at.

Speaker #2: There's two CDs there that both mature in December. So we're hopeful that we will be out of the brokered CD market by the end of this year.

Speaker #5: So we're obviously pleased with what we've seen over the last few months there. I think the other thing that we're looking at, making sure we have capital to take advantage of those opportunities again, we do have our subordinated notes that do flip to a floating rate.

Speaker #2: And again, that's really strongly attributed to the local deposit growth that we've been experiencing, and expect to continue to have.

[Company Representative] (Mercantile Bank): Again, that's really strongly attributed to the local deposit growth that we have been experiencing and expect to continue to have.

Chuck Christmas: Again, that's really strongly attributed to the local deposit growth that we have been experiencing and expect to continue to have.

Speaker #3: Okay, all right. Thanks for the color, Chuck. One more from me—just turning to capital. Ratios continue to build nicely this quarter, even with a return to more robust loan growth.

Brendan Nosal: Okay. All right. Thanks for the color, Chuck. One more from me, just turning to capital. Ratios continued to build nicely this quarter, even with the return of more robust loan growth. Is there a point at which the capital build becomes something you want to more actively manage? Talk about the path through which you would do that, and then whether share repurchase is something you would be interested in if we continue to see ratios build.

Speaker #5: And become callable in January. We're obviously looking at that. That is on our radar. We've made no decisions whatsoever in regards to that. Quite frankly, we would love to earn our way out of that position that we've got there.

Speaker #3: Is there a point at which the capital build becomes something you want to more actively manage, and could you talk about the path through which you would do that? And then, would share repurchase be something you would be interested in if we continue to see ratios build?

Speaker #5: And I think we're definitely going in the right direction from that potential opportunity there. I think the other thing that we've got we had very favorable pricing while we're not going to keep the 3.25% fixed rate that we have.

Speaker #2: Yeah, appreciate your noticing our cap operations. Obviously, we're very pleased with that. Notwithstanding the strong growth that we do have on the asset side, we're able to grow our overall capital ratios, and it makes us feel good to have strong cap ratios.

[Company Representative] (Mercantile Bank): Yeah. Appreciate you noticing our capital ratios. Obviously, we're very pleased with that. Notwithstanding the strong growth that we do have on the asset side, we're able to grow our overall capital ratios. It makes us feel good to have strong capital ratios. You never know what's going to happen from an economic standpoint, but it allows you to take advantage of the opportunities that come, whether it's acquisitions, loan growth, expansions of the markets, all those things. A position of strong capital gives you the ability to take advantage of those opportunities as they come about. I think from a buyback standpoint, clearly, it's been quite a while since we bought back any shares. We do have a plan in place. Our board has always been supportive of management's recommendations with its buyback plans. I think a big part of that clearly is our stock price.

Chuck Christmas: Yeah. Appreciate you noticing our capital ratios. Obviously, we're very pleased with that. Notwithstanding the strong growth that we do have on the asset side, we're able to grow our overall capital ratios. It makes us feel good to have strong capital ratios. You never know what's going to happen from an economic standpoint, but it allows you to take advantage of the opportunities that come, whether it's acquisitions, loan growth, expansions of the markets, all those things.

Speaker #5: Come January, our spread over 90-day LIBOR, I'll say, is only 212 basis points. Which if you did the math today, that's a rate that's still under 6%, which I think is very favorable compared to if we wanted to refinance that with a new subnote.

Speaker #2: You never know what's going to happen. From an economic standpoint, but it allows you to take advantage of the opportunities that come, whether it's acquisitions, loan growth, expansions in the markets, all those things.

Speaker #5: Not saying we will or won't. We're not at that point yet. But if we do start looking at the capital haircut, doing some calculations, that's about 30 basis.

Chuck Christmas: A position of strong capital gives you the ability to take advantage of those opportunities as they come about. I think from a buyback standpoint, clearly, it's been quite a while since we bought back any shares. We do have a plan in place. Our board has always been supportive of management's recommendations with its buyback plans. I think a big part of that clearly is our stock price.

Speaker #2: A position of strong capital gives you the ability to take care of—or take advantage of—those opportunities as they come about. I think from a buyback standpoint, clearly, it's been quite a while since we bought back any shares.

Speaker #5: Every year, losing 20% of the balance, that's about 30 basis points off our total risk-based capital ratios. So looking at those numbers, looking at the environment today, all the forecasting that we're doing, we're comfortable with at least one year of letting that float.

Speaker #2: We do have a plan in place. Our board has always been supportive of management recommendations with these buyback plans. I think a big part of that, clearly, is our stock price, and we're very pleased with the run that we've had.

Speaker #5: It's not even a year after that or who knows more. As we look at our capital stack each quarter end and certainly at each year end.

[Company Representative] (Mercantile Bank): We're very pleased with the run that we've had, where we think that we're finally getting close to where we think we should be valued. We've been frustratingly below some of the benchmarks that we look at, we're obviously pleased with what we've seen over the last few months there. I think the other thing that we're looking at, making sure we have capital to take advantage of those opportunities again. We do have our subordinated notes that do flip to a floating rate and become callable in January. We're obviously looking at that. That is on our radar. We've made no decisions whatsoever in regards to that. Quite frankly, we would love to earn our way out of that position that we've got there. I think we're definitely going in the right direction from that potential opportunity there.

Chuck Christmas: We're very pleased with the run that we've had, where we think that we're finally getting close to where we think we should be valued. We've been frustratingly below some of the benchmarks that we look at, we're obviously pleased with what we've seen over the last few months there. I think the other thing that we're looking at, making sure we have capital to take advantage of those opportunities again.

Speaker #5: So that's kind of our thoughts on capital is obviously we want to continue to augment it with a strong net income. Pay a competitive and growing cash dividend.

Speaker #2: Where we think that we're finally getting close to where we think we should be valued. We've been frustratingly low below some of the benchmarks that we look at.

Speaker #5: Making sure that we've got lots and lots of capital to take advantage of the opportunities and continue to grow the company. Which obviously is the foundation for additional net income growth.

Speaker #2: So, we're obviously pleased with what we've seen over the last few months there. I think the other thing that we're looking at is making sure we have capital to take advantage of those opportunities. Again, we do have our subordinated notes that do flip to a floating rate and become callable in January.

Speaker #6: Awesome. Thanks for taking my questions, Chuck.

Speaker #5: You're welcome.

Chuck Christmas: We do have our subordinated notes that do flip to a floating rate and become callable in January. We're obviously looking at that. That is on our radar. We've made no decisions whatsoever in regards to that. Quite frankly, we would love to earn our way out of that position that we've got there. I think we're definitely going in the right direction from that potential opportunity there.

Speaker #1: The next question comes from Nathan Race with Piper Sandler. You're line is now open.

Speaker #2: We're obviously looking at that. That is on our radar. We've made no decisions whatsoever in regard to that. Quite frankly, we would love to earn our way out of that position that we've got there.

Speaker #7: Hey, guys. Good morning. Thanks for taking the questions.

Speaker #5: You bet.

Speaker #2: And I think we're definitely going in the right direction from that potential opportunity there. I think the other thing that we've got—we had very favorable pricing. While we're not going to keep the 3.25% fixed rate that we have...

Speaker #7: Chuck, I was wondering if you can unpack some of the specific margin drivers for the expansion that you alluded to over the next couple of quarters.

[Company Representative] (Mercantile Bank): I think the other thing that we had very favorable pricing. While we're not going to keep the 3.25% fixed rate that we have come January, our spread over 90-day LIBOR, I'll say, is only 212 basis points. Which if you did the math today, that's a rate that's still under 6%, which I think is very favorable compared to if we wanted to refinance that with a new sub-note. Not saying we will or won't, we're not at that point yet. If we do start looking at the capital haircut, doing some calculations, every year, losing 20% of the balance, that's about 30 basis points off our total risk-based capital ratio. Looking at those numbers, looking at the environment today, all the forecasting that we're doing, we're comfortable with at least one year of letting that float.

Chuck Christmas: I think the other thing that we had very favorable pricing. While we're not going to keep the 3.25% fixed rate that we have come January, our spread over 90-day LIBOR, I'll say, is only 212 basis points. Which if you did the math today, that's a rate that's still under 6%, which I think is very favorable compared to if we wanted to refinance that with a new sub-note.

Speaker #7: Specifically around what amount of loans you have repricing upwards. That are currently fixed. And also just in terms of securities cash flow coming off and kind of what that repricing looks like as well.

Speaker #2: Come January, our spread over 90-day LIBOR, I'll say, is only 212 basis points. Which, if you did the math today, that's a rate that's still under 6%, which I think is very favorable compared to if you wanted to refinance that with a new subnote.

Speaker #7: I mean, that's reinvested.

Speaker #5: Yeah. I know I gave one of the slides in there has the amount oh, it's on slide nine. So yeah, there's definitely a few things that are going on that are having a positive impact.

Speaker #5: And our net interest margin on slide nine, we give the volume of fixed rate CRE as well as our agency bonds that are scheduled not only to mature the rest of this year, but also into 2027.

Speaker #2: Not saying we will or won't. We're not at that point yet. But if we do start looking at the capital haircut, doing some calculations, that's about 30 basis points every year, losing 20% of the balance.

Chuck Christmas: Not saying we will or won't, we're not at that point yet. If we do start looking at the capital haircut, doing some calculations, every year, losing 20% of the balance, that's about 30 basis points off our total risk-based capital ratio. Looking at those numbers, looking at the environment today, all the forecasting that we're doing, we're comfortable with at least one year of letting that float.

Speaker #5: So a lot of opportunity for continued yield enhancement from that activity. The other thing that happened and it was it started really doing having a bigger impact in the back half of the second quarter than the first half of the second quarter.

Speaker #2: That's about 30 basis points off our total risk-based capital ratios. So, looking at those numbers and considering the environment today, along with all the forecasting that we're doing, we're comfortable with at least one year of letting that float—if not even a year after that, or who knows, maybe more.

[Company Representative] (Mercantile Bank): If not even a year after that, or who knows more, as we look at our capital stack each quarter end, and certainly at each year end. That's kind of our thoughts on capital, is obviously we want to continue to augment it with a strong net income, pay a competitive and growing cash dividend. Making sure that we've got lots and lots of capital to take advantage of the opportunities and continue to grow the company, which obviously is the foundation for additional net income growth.

Chuck Christmas: If not even a year after that, or who knows more, as we look at our capital stack each quarter end, and certainly at each year end. That's kind of our thoughts on capital, is obviously we want to continue to augment it with a strong net income, pay a competitive and growing cash dividend.

Speaker #2: As we look at our capital stack at each quarter end, and certainly at each year end, that's kind of our thoughts on capital. Obviously, we want to continue to augment it with strong net income.

Speaker #5: Was our level of the posits at the Federal Reserve coming down. And that's really a strong reflection of the net loan growth. So obviously, we've been dealing with some pretty sizable payoffs.

Speaker #2: Pay a competitive and growing cash dividend, making sure that we've got lots and lots of capital to take advantage of the opportunities and continue to grow the company.

Chuck Christmas: Making sure that we've got lots and lots of capital to take advantage of the opportunities and continue to grow the company, which obviously is the foundation for additional net income growth.

Speaker #5: Quite frankly, we had some sizable payoffs again in the second quarter, especially with some line pay downs that came in with borrowers having excess cash in their operations.

Speaker #2: Which, obviously, is the foundation for additional net income growth.

Brendan Nosal: Awesome. Thanks for taking my questions, Chuck.

Speaker #5: But as we continue to grow our loan portfolio, especially on the commercial side, we'll be able to use our existing excess funds that we've got at the Federal Reserve to fund that.

Speaker #3: Chuck.

Speaker #2: You're welcome.

[Company Representative] (Mercantile Bank): You're welcome.

Chuck Christmas: You're welcome.

Speaker #1: The next question comes from Nathan Race with Piper Sandler. Your line is now open.

Operator: The next question comes from Nathan Race with Piper Sandler. Your line is now open.

Speaker #5: So going from a 3.65% that we get on our funds at the Federal Reserve to something probably in the sixes, somewhere. On the loan side.

Speaker #4: Hey, guys. Good morning. Thanks for taking the questions.

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

Speaker #2: You bet.

[Company Representative] (Mercantile Bank): You bet.

Chuck Christmas: You bet.

Ray Reitsma: Yes.

Speaker #4: Chuck, I was wondering if you can unpack some of the specific margin drivers for the expansion that you alluded to over the next couple of quarters?

Nathan Race: Chuck, I was wondering if you can unpack some of the specific margin drivers to the expansion that you alluded to over the next couple of quarters. Specifically around what amount of loans you have repricing upwards that are currently fixed. Also just in terms of securities cash flow coming off, and kind of what that repricing looks like as well, given that it's reinvested.

Speaker #5: So as we continue to forecast that transition happening, that's certainly buoys the net interest margin along with the repricing that we talked about. I would say those are the main drivers for the expected improvement in the margin.

Speaker #4: Specifically, around what amount of loans do you have repricing upwards that are currently fixed? And also, just in terms of securities cash flow coming off, what does that repricing look like as well?

Speaker #7: And Chucky. Could you just help us in terms of kind of what that upward repricing looks like on the 100 million or so of loans that are expected to mature in the back half of this year?

Speaker #4: Assuming that's reinvested.

Speaker #2: Yeah. I know I gave—one of the slides in there has the amount. Oh, it's on slide nine. So yeah, there are definitely a few things that are going on that are having a positive impact.

[Company Representative] (Mercantile Bank): Yeah. One of the slides in there has the amount. Oh, it's on slide nine. Yeah, there's definitely a few things that are going on that are having a positive impact on our net interest margin. On slide nine, we give the volume of fixed rate CRE, as well as our agency bonds that are scheduled not only to mature the rest of this year, but also into 2027. A lot of opportunity for some continued yield enhancement from that activity. The other thing that happened, and it started really having a bigger impact in the back half of the second quarter than the first half of the second quarter, was our level of deposits at the Federal Reserve coming down. That's really a strong reflection of the net loan growth. Obviously we've been dealing with some pretty sizable payoffs.

Chuck Christmas: Yeah. One of the slides in there has the amount. Oh, it's on slide nine. Yeah, there's definitely a few things that are going on that are having a positive impact on our net interest margin. On slide nine, we give the volume of fixed rate CRE, as well as our agency bonds that are scheduled not only to mature the rest of this year, but also into 2027.

Speaker #7: Are we talking about something north of 6% kind of where the blended rate on new loans are coming on the portfolio at? Or just any thoughts on kind of what the blended rate of new loan production is these days?

Speaker #2: And our net interest margin—on slide nine, we give the volume of fixed-rate CRE as well as our agency bonds that are scheduled not only to mature the rest of this year, but also into 2027.

Speaker #5: Yeah. I'd say we would probably be looking at about 200 basis point, give or take, obviously, improvement on the existing average rate of about 4.6%.

Speaker #2: So, a lot of opportunity for continued yield enhancement from that activity. The other thing that happened—and it really started having a bigger impact in the back half of the second quarter than in the first half of the second quarter.

Chuck Christmas: A lot of opportunity for some continued yield enhancement from that activity. The other thing that happened, and it started really having a bigger impact in the back half of the second quarter than the first half of the second quarter, was our level of deposits at the Federal Reserve coming down. That's really a strong reflection of the net loan growth. Obviously we've been dealing with some pretty sizable payoffs.

Speaker #5: So somewhere in the mid-sixes, is where we would think that we would reprice. On an average basis. And then we've got 38 million dollars in agency notes.

Speaker #5: Agency bonds at just a little over 1%. And we're based on our strategy right now, buying that yield is a little over 4%. So we'll pick up about 300 basis points on those dollars for the rest of the year.

Speaker #2: Was our level of deposits at the Federal Reserve coming down. And that's really a strong reflection of the net loan growth. So, obviously, we've been dealing with some pretty sizable payoffs.

Speaker #7: Gotcha. And then if I could just ask one more on kind of deposit growth expectations going forward. And I appreciate the commentary earlier on some of the seasonality that impacted Q2 around tax payments and so forth.

Speaker #2: Quite frankly, we had some sizable payoffs again in the second quarter, especially with some line paydowns that came in with borrowers having excess cash in their operations.

[Company Representative] (Mercantile Bank): Quite frankly, we had some sizable payoffs again in Q2, especially with some line pay-downs that came in with borrowers having excess cash in their operations. As we continue to grow our loan portfolio, especially on the commercial side, we'll be able to use our existing excess funds that we've got at the Federal Reserve to fund that. Going from a 3.65% that we get on our funds at the Federal Reserve, to something probably in the sixes somewhere on the loan side. As we continue to forecast that transition happening, that certainly buoys the net interest margin, along with the repricing that we talked about. I would say those are the main drivers for the expected improvement in the margin.

Chuck Christmas: Quite frankly, we had some sizable payoffs again in Q2, especially with some line pay-downs that came in with borrowers having excess cash in their operations. As we continue to grow our loan portfolio, especially on the commercial side, we'll be able to use our existing excess funds that we've got at the Federal Reserve to fund that. Going from a 3.65% that we get on our funds at the Federal Reserve, to something probably in the sixes somewhere on the loan side.

Speaker #7: But any visibility into kind of the core deposit gathering pipeline and I know you guys have some excess liquidity you can use to fund loan growth.

Speaker #2: But as we continue to grow our loan portfolio, especially on the commercial side, we'll be able to use our existing excess funds that we've got at the Federal Reserve to fund that.

Speaker #7: But just any thoughts on kind of how deposit gathering can trend over the next few quarters as well?

Speaker #2: So, going from a 3.65% that we get on our funds at the Federal Reserve to something probably in the sixes, somewhere on the loan side.

Speaker #5: Yeah. Like I mentioned, we'll definitely see some seasonality as we did in the second quarter. When you get to the end of the second quarter, and I'm speaking for all banks basically, the public funds, especially here in Michigan, public units in Michigan collect most of their taxes during the summertime, July and August and September.

Speaker #2: So, as we continue to forecast that transition happening, that certainly buoys the net interest margin, along with the repricing that we talked about. I would say those are the main drivers for the expected improvement in the margin.

Chuck Christmas: As we continue to forecast that transition happening, that certainly buoys the net interest margin, along with the repricing that we talked about. I would say those are the main drivers for the expected improvement in the margin.

Speaker #5: So you kind of get to the end of June and it's kind of at the low point with deposit balances. And then you kind of get to September and it's kind of the high point.

Speaker #4: And Chucky, could you just help us in terms of kind of what that upward repricing looks like on the $100 million or so of loans that are expected to mature in the back half of this year?

Nathan Race: Chuck, could you just help us in terms of kind of what that upward repricing looks like on the 100 million or so of loans that are expected to mature in the back half of this year? Are we talking about something north of 6%, kind of where the blended rate on new loans are coming on the portfolio at? Or just any thoughts on kind of what the blended rate of new loan production is these days?

Speaker #5: And then obviously, it goes up and down from there. I would say on a core basis, on an average basis, if you will, like I said, June 30th is a low point.

Speaker #4: Are we talking about something north of 6%, kind of where the blended rate on new loans is coming onto the portfolio at? Or just any thoughts on what the blended rate of new loan production is these days?

Speaker #5: So we would expect higher average balances from our public unit customers. In the future quarters, just from the seasonality. Again, we continue to get very strong local deposit growth.

Speaker #2: Yeah, I'd say we would probably be looking at about a 200-basis-point, give or take, obviously, improvement on the existing average rate of about 4.6%.

[Company Representative] (Mercantile Bank): Yeah. I'd say we would probably be looking at about a 200 basis point, give or take obviously, improvement on the existing average rate of about 4.6%. Somewhere in the mid-sixes is where we would think that we would reprice on an average basis. Then we've got $38 million in agency notes, agency bonds at just a little over 1%. Based on our strategy right now of buying, that yield is a little over 4%. We'll pick up about 300 basis points on those dollars for the rest of the year.

Chuck Christmas: Yeah. I'd say we would probably be looking at about a 200 basis point, give or take obviously, improvement on the existing average rate of about 4.6%. Somewhere in the mid-sixes is where we would think that we would reprice on an average basis. Then we've got $38 million in agency notes, agency bonds at just a little over 1%. Based on our strategy right now of buying, that yield is a little over 4%. We'll pick up about 300 basis points on those dollars for the rest of the year.

Speaker #5: Certainly, especially on the non-interest bearing checking, that's coming from our commercial activities, our commercial lending activities. Especially on the CNI side, and as we talked about, that was really the leader of the growth.

Speaker #2: So, somewhere in the mid-sixes is where we would think that we would reprice, on an average basis. And then we've got $38 million in agency notes.

Speaker #5: On the commercial lending side, so looking at borrowers paying anywhere from funding 10 to 20% of their own loans. With their deposit balances. So getting those obviously helps the cost of deposits, but also again, allows us to cross sell the Treasury management.

Speaker #2: Agency bonds are at just a little over 1%. Based on our strategy right now, what we're buying yields a little over 4%. So, we'll pick up about 300 basis points on those dollars for the rest of the year.

Speaker #5: Products that we have, which helps the fee income side as well. We're also doing a really good job of just bringing in finding deposit only customers.

Speaker #4: Gotcha. And then if I could just ask one more on deposit growth expectations going forward. I appreciate the commentary earlier on some of the seasonality that impacted Q2, around tax payments and so forth.

Nathan Race: Gotcha. Then if I could just ask one more on kind of deposit growth expectations going forward. I appreciate the commentary earlier on some of the seasonality that impacted Q2 around tax payments and so forth. Any visibility into kind of the core deposit gathering pipeline? I know you guys have some excess liquidity you can use to fund loan growth, but just any thoughts on kind of how deposit gathering can trend over the next few quarters as well?

Speaker #5: And making sure that we've got as we believe we do, a complete suite of products that is attractive to those types of customers as well.

Speaker #4: But any visibility into the core deposit-gathering pipeline? And I know you guys have some excess liquidity you can use to fund loan growth.

Speaker #4: But just any thoughts on kind of how deposit gathering can trend over the next few quarters as well?

Speaker #5: So a lot of us just blocking and tackling, doing what Mercantile does with a community bank does every day. Is out there selling our products and services and our values.

Speaker #2: Yeah, like I mentioned, we'll definitely see some seasonality, as we did in the second quarter. When you get to the end of the second quarter—and I'm speaking for all banks, basically—the public funds, especially here in Michigan, public units in Michigan collect most of their taxes during the summertime: July, August, and September.

[Company Representative] (Mercantile Bank): Yeah. Like I mentioned, we'll definitely see some seasonality as we did in Q2. When you get to the end of Q2, I'm speaking for all banks basically. The public funds, especially here in Michigan, public units in Michigan collect most of their taxes during the summertime, July, August, and September. You kind of get to the end of June, and it's kind of at the low point with deposit balances. Then you kind of get to September, and it's kind of the high point. Then obviously, it goes up and down from there. I would say on a core basis, on an average basis if you will, like I said, 30 June is a low point. We would expect higher average balances from our public unit customers in the future quarters just from the seasonality.

Chuck Christmas: Yeah. Like I mentioned, we'll definitely see some seasonality as we did in Q2. When you get to the end of Q2, I'm speaking for all banks basically. The public funds, especially here in Michigan, public units in Michigan collect most of their taxes during the summertime, July, August, and September. You kind of get to the end of June, and it's kind of at the low point with deposit balances.

Speaker #5: Driving relationships. We are a relationship bank on everything that we do. And so when we have a customer, we want the whole ball of wax.

Speaker #5: And deposits has to be a big part of that. And so that's we don't have any secret sauce, magic bullets or anything like that.

Speaker #2: So, you kind of get to the end of June and it's kind of at the low point with deposit balances. Then, you get to September and it's kind of the high point.

Chuck Christmas: Then you kind of get to September, and it's kind of the high point. Then obviously, it goes up and down from there. I would say on a core basis, on an average basis if you will, like I said, 30 June is a low point. We would expect higher average balances from our public unit customers in the future quarters just from the seasonality.

Speaker #5: We just do basic banking and making sure that we're getting the entire relationship. And when the customers come in, making sure that we're taking really good care of them.

Speaker #2: And then, obviously, it goes up and down from there. I would say, on a core basis—on an average basis, if you will—like I said, June 30th is a low point.

Speaker #7: Got it. I appreciate all the color. Thank you.

Speaker #2: So, we would expect higher average balances from our public unit customers in future quarters, just from the seasonality. Again, we continue to get very strong local deposit growth.

Speaker #1: The next question comes from Damon DelMonte, with KBW. Your line is now open.

[Company Representative] (Mercantile Bank): We continue to get very strong local deposit growth, especially on the non-interest-bearing checking. That's coming from our commercial activities, our commercial lending activities, especially on the C&I side, and as we talked about, that was really the leader of the growth on the commercial lending side. Looking at borrowers funding 10% to 20% of their own loans with their deposit balances. Getting those obviously helps the cost of deposits, but also, again, allows us to cross-sell the treasury management products that we have, which helps the fee income side as well. We're also doing a really good job of just finding deposit-only customers and making sure that we've got, as we believe we do, a complete suite of products that is attractive to those types of customers as well. A lot of it's just blocking and tackling.

Chuck Christmas: We continue to get very strong local deposit growth, especially on the non-interest-bearing checking. That's coming from our commercial activities, our commercial lending activities, especially on the C&I side, and as we talked about, that was really the leader of the growth on the commercial lending side. Looking at borrowers funding 10% to 20% of their own loans with their deposit balances.

Speaker #6: Hey. Good morning, guys. Hope everybody's doing well today. So most of my questions have been asked and answered. But just a few quick ones here.

Speaker #2: Certainly, especially on the non-interest bearing checking, that's coming from our commercial activities—our commercial lending activities—especially on the C&I side. And as we talked about, that was really the leader of the growth.

Speaker #6: Chuck, appreciate the color and the outlook there for the margin. If we were to see a rate hike in 2027, how would you expect the margin to respond to that?

Speaker #2: On the commercial lending side, we're looking at borrowers paying anywhere from funding 10% to 20% of their own loans with their deposit balances. So getting those obviously helps the cost of deposits, but also, again, allows us to cross-sell the Treasury management products that we have, which helps the fee income side as well.

Speaker #5: I think overall, we think that we're pretty well stable on our net interest margin. We work very hard to make ourselves agnostic, we use that term all the time, to interest rate changes.

Chuck Christmas: Getting those obviously helps the cost of deposits, but also, again, allows us to cross-sell the treasury management products that we have, which helps the fee income side as well. We're also doing a really good job of just finding deposit-only customers and making sure that we've got, as we believe we do, a complete suite of products that is attractive to those types of customers as well. A lot of it's just blocking and tackling.

Speaker #5: We specifically manage the structure of our balance sheet. That when rates go up, we see yields go up, we see costs go up. When rates go down, we see the opposite happening.

Speaker #2: We're also doing a really good job of just bringing in and finding deposit-only customers, and making sure that we've got, as we believe we do, a complete suite of products that is attractive to those types of customers as well.

Speaker #5: And it's basic, again, basic banking. It's match funding and looking at the structure of your loan portfolio, looking at your deposit base, and then using your investment portfolio to kind of bridge any gaps you might have in there from a repricing perspective.

Speaker #2: So, a lot of us are just blocking and tackling—doing what Mercantile does, what a community bank does every day: is out there selling our products and services, and our values.

[Company Representative] (Mercantile Bank): Doing what Mercantile does, what a community bank does every day, is out there selling our products and services and our values, driving relationships. We are a relationship bank on everything that we do, and so when we have a customer, we want the whole ball of wax. Deposits has to be a big part of that. We don't have any secret sauce, magic bullets, or anything like that. We just do basic banking and making sure that we're getting the entire relationship, and when the customers come in, making sure that we're taking really good care of them.

Chuck Christmas: Doing what Mercantile does, what a community bank does every day, is out there selling our products and services and our values, driving relationships. We are a relationship bank on everything that we do, and so when we have a customer, we want the whole ball of wax. Deposits has to be a big part of that. We don't have any secret sauce, magic bullets, or anything like that. We just do basic banking and making sure that we're getting the entire relationship, and when the customers come in, making sure that we're taking really good care of them.

Speaker #5: I think if we have super aggressive cuts or increases, there'll be a little more change there. Just as some things have to catch up.

Speaker #2: Driving relationships. We are a relationship bank in everything that we do. And so, when we have a customer, we want the whole ball of wax.

Speaker #5: But if we're looking at 25 basis points a quarter, 50 basis points a quarter, my expectation and our modeling supports the fact that we would expect our margin to stay relatively stable.

Speaker #2: And deposits have to be a big part of that. So, we don't have any secret sauce, magic bullets, or anything like that.

Speaker #6: Got it. Okay. That's helpful. Thanks. And then in your commentary around the kind of like the loan loss reserve outlook going forward, did you say that in the last couple of years, you've been kind of in the 120 basis point range or down to 113?

Speaker #2: We just do basic banking and make sure that we're getting the entire relationship. And when the customers come in, we make sure that we're taking really good care of them.

Speaker #4: Yeah, I appreciate all the color. Thank you.

Nathan Race: I appreciate all the color. Thank you.

Speaker #6: So you'd expect it to kind of stay in that range? So I mean, would we expect a little bit of builds towards the 120?

[Company Representative] (Mercantile Bank): You're welcome.

Chuck Christmas: You're welcome.

Speaker #1: The next question comes from Damon Del Monte with KBW. Your line is now open.

Operator: The next question comes from Damon DelMonte with KBW. Your line is now open.

Speaker #6: Or do you think kind of in the mid-110s is probably acceptable?

Speaker #5: I would say that given the factors that we have on commercial loan growth, compared to our mortgage factors, our reserve factors for commercial loans is a little bit under 1%.

Speaker #5: Hey, good morning, guys. Hope everybody's doing well today. Most of my questions have been asked and answered, but I have just a few quick ones here.

Damon DelMonte: Hey, good morning, guys. Hope everybody's doing well today. Most of my questions have been asked and answered, but just a few quick ones here. Chuck, appreciate the color and the outlook there for the margin. If we were to see a rate hike in 2027, how would you expect the margin to respond to that?

Speaker #5: Chuck, appreciate the color and the outlook there for the margin. If we were to see a rate hike in 2027, how would you expect the margin to respond to that?

Speaker #5: While on residential mortgage loans, it's a little over 2%. Which it really reflects well, it reflects a lot of things, but one of the things it definitely reflects is duration.

Speaker #2: You know, I think overall we believe that we're pretty stable on our net interest margin. We work very hard to make ourselves agnostic—we use that term all the time—to interest rate changes.

[Company Representative] (Mercantile Bank): Overall, we think that we're pretty well stable on our net interest margin. We work very hard to make ourselves agnostic, we use that term all the time, to interest rate changes. We specifically manage the structure of our balance sheet that when rates go up, yields go up, we see costs go up. When rates go down, we see the opposite happening. It's, again, basic banking. It's match funding and looking at the structure of your loan portfolio, looking at your deposit base, and then using your investment portfolio to kind of bridge any gaps you might have in there from a repricing perspective. I think if we have super aggressive cuts or increases, there'll be a little more change there, just as some things have to catch up.

Chuck Christmas: Overall, we think that we're pretty well stable on our net interest margin. We work very hard to make ourselves agnostic, we use that term all the time, to interest rate changes. We specifically manage the structure of our balance sheet that when rates go up, yields go up, we see costs go up. When rates go down, we see the opposite happening. It's, again, basic banking.

Speaker #5: I won't get on my soapbox this morning, but Cecil's a duration-based model and we're a commercial lender. And commercial loans are short-term, and we're not allowed well, we have to take into account prepayments and we definitely do that on the mortgage side.

Speaker #2: We specifically manage the structure of our balance sheet, so that when rates go up, we see yields go up and costs go up. When rates go down, we see the opposite happening.

Speaker #5: We're not allowed to look at ourselves as a relationship bank and make the assumption that we're going to renew loans. We're going to renew lines of credit when they mature in a year.

Speaker #2: And it's basic, again, basic banking. It's match funding and looking at the structure of your loan portfolio, looking at your deposit base, and then using your investment portfolio to kind of bridge any gaps you might have in there from a repricing perspective.

Speaker #5: We're not allowed to do that. So that's the biggest hindrance that we have when we're trying to build a reserve. Under the Cecil framework is this duration expectation.

Chuck Christmas: It's match funding and looking at the structure of your loan portfolio, looking at your deposit base, and then using your investment portfolio to kind of bridge any gaps you might have in there from a repricing perspective. I think if we have super aggressive cuts or increases, there'll be a little more change there, just as some things have to catch up.

Speaker #5: And when your biggest asset has a duration of maybe two years, it's difficult to build a reserve. But we do. We got the different allocations and different environmental things that we can work off of.

Speaker #2: I think if we have super-aggressive cuts or increases, there'll be a little more change there, just as some things have to catch up.

Speaker #5: I would say any significant growth in the reserve because I'm not expecting the allocations and our calculations to differ much, going forward. The biggest thing is going to be the economy.

Speaker #2: But if we're looking at 25 basis points a quarter, 50 basis points a quarter, my expectation—and our modeling supports this—is that we would expect our margin to stay relatively stable.

[Company Representative] (Mercantile Bank): If we're looking at 25 basis points a quarter, 50 basis points a quarter, my expectation, our modeling supports the fact that we would expect our margin to stay relatively stable.

Chuck Christmas: If we're looking at 25 basis points a quarter, 50 basis points a quarter, my expectation, our modeling supports the fact that we would expect our margin to stay relatively stable.

Speaker #5: So if we get our independent third-party economic forecast that showed deterioration, that would drive a reserve build. And certainly, if any of that downplay in the economy starts impacting specific customers, and we have to start putting having some loans go out a higher volume and not accruals and starting to do specific reserves, things like that.

Speaker #5: Got it. Okay, that's helpful, thanks. And then, in your commentary around the loan loss reserve outlook going forward, did you say that in the last couple of years, you've been kind of in the 120 basis point range, or down to 113?

Damon DelMonte: Got it. Okay. That's helpful. Thanks.

[Company Representative] (Mercantile Bank): Yeah.

Chuck Christmas: Yeah.

Damon DelMonte: In your commentary around the loan loss reserve outlook going forward, did you say that in the last couple years you've been kind of in the 120 basis point range or down to 113, you'd expect it to kind of stay in that range? Would we expect a little bit of builds towards the 120, or do you think kind of in the mid one teens is probably acceptable?

Speaker #5: So you'd expect it to kind of stay in that range? So, I mean, would we expect a little bit of builds towards the 120?

Speaker #5: Would obviously result in a reserve build as well. I think all things being equal with a steady economy, our non-performers staying relatively stable, which they have.

Speaker #5: Or do you think kind of in the mid-110s is probably acceptable?

Speaker #2: I would say that, given the factors that we have on commercial loan growth compared to our mortgage factors, our reserve factors for commercial loans is a little bit under 1%.

[Company Representative] (Mercantile Bank): I would say that given the factors that we have on commercial loan growth compared to our mortgage factors, our reserve factors for commercial loans is a little bit under 1%, while on residential mortgage loans is a little over 2%, which it really reflects a lot of things, but one of the things it definitely reflects is duration. I won't get on my soapbox this morning, CECL's a duration-based model, and we're a commercial lender. Commercial loans are short-term, and while we have to take into account prepayments, we definitely do that on the mortgage side, we're not allowed to look at ourselves as a relationship bank and make the assumption that we're going to renew loans. We're going to renew lines of credit when they mature in a year. We're not allowed to do that.

Chuck Christmas: I would say that given the factors that we have on commercial loan growth compared to our mortgage factors, our reserve factors for commercial loans is a little bit under 1%, while on residential mortgage loans is a little over 2%, which it really reflects a lot of things, but one of the things it definitely reflects is duration. I won't get on my soapbox this morning, CECL's a duration-based model, and we're a commercial lender.

Speaker #5: I would expect using your question, probably mid-teens. On a coverage ratio.

Speaker #6: Got it. Got it. Okay. That's helpful. Thanks for that color. And then I guess just lastly, when you think about the investments that you made in Southeast Michigan and you think about the outlook for growth, is that becoming a more key component of the overall driver of the portfolio growth?

Speaker #2: Well, on residential mortgage loans, it's a little over 2%. Which really reflects—well, it reflects a lot of things, but one of the things it definitely reflects is duration.

Speaker #2: I won't get on my soapbox this morning, but CECL's a duration-based model and we're a commercial lender. Commercial loans are short-term, and we're not allowed—well, we have to take into account prepayments, and we definitely do that on the mortgage side.

Speaker #6: Or are you still seeing good looks in the greater Grand Rapids area and other parts of your footprint as well?

Chuck Christmas: Commercial loans are short-term, and while we have to take into account prepayments, we definitely do that on the mortgage side, we're not allowed to look at ourselves as a relationship bank and make the assumption that we're going to renew loans. We're going to renew lines of credit when they mature in a year. We're not allowed to do that.

Speaker #7: Well, the answer is all of the above. The outlook in Southeast Michigan is good. We have a really strong team there. And they're early in their timeframe with us.

Speaker #2: We're not allowed to look at ourselves as a relationship bank and make the assumption that we're going to renew loans or renew lines of credit when they mature in a year.

Speaker #2: We're not allowed to do that. So that's the biggest hindrance that we have when we're trying to build a reserve under the CECL framework—this duration expectation.

[Company Representative] (Mercantile Bank): That's the biggest hindrance that we have when we're trying to build a reserve under the CECL framework is this duration expectation. When your biggest asset has a duration of maybe 2 years, it's difficult to build a reserve. We do. We got the different allocations and different environmental things that we can work off of. I would say any significant growth in the reserve, because I'm not expecting the allocations and our calculations to differ much going forward. The biggest thing is going to be the economy. If we get our independent third-party economic forecast that show deterioration, that would drive a reserve build.

Chuck Christmas: That's the biggest hindrance that we have when we're trying to build a reserve under the CECL framework is this duration expectation. When your biggest asset has a duration of maybe 2 years, it's difficult to build a reserve. We do. We got the different allocations and different environmental things that we can work off of.

Speaker #7: So bringing over lots of customers and they've been very successful at it. It's a huge market with lots of potential. And yet in markets like Grand Rapids and the rest of West Michigan, Central Michigan, Northern Michigan, we're more mature in those markets, but there's plenty of opportunity there.

Speaker #2: And when your biggest asset has a duration of maybe two years, it's difficult to build a reserve. But we do. We've got the different allocations and different environmental things that we can work off of.

Speaker #7: So the originations are fairly well spread out across our footprint on an even basis.

Speaker #2: I would say any significant growth in the reserve, because I'm not expecting the allocations and our calculations to differ much going forward. The biggest thing is going to be the economy.

Chuck Christmas: I would say any significant growth in the reserve, because I'm not expecting the allocations and our calculations to differ much going forward. The biggest thing is going to be the economy. If we get our independent third-party economic forecast that show deterioration, that would drive a reserve build.

Speaker #6: Okay. Great. Thanks, Ray. Appreciate that. Okay. That's all that I had. Thanks a lot, guys.

Speaker #2: So if we get our independent third-party economic forecast that showed deterioration, that would drive a reserve build. And certainly, if any of that downplay in the economy starts impacting specific customers, and we have to start putting having some loans go out higher volume and non-accruals and starting to do specific reserves, things like that.

Speaker #5: Hey, Damon.

Speaker #1: Reminder, if you have a question, please press star, then one, to be added to the queue. That's star, then one, if you have a question.

[Company Representative] (Mercantile Bank): Certainly, if any of that downplay in the economy starts impacting specific customers and we have to start having some loans go at a higher volume on non-accruals and starting to do specific reserves, things like that, would obviously result in a reserve build as well. I think all things being equal with a steady economy, our non-performers staying relatively stable, which they have. I would expect, using your question, probably mid-teens on a coverage ratio.

Chuck Christmas: Certainly, if any of that downplay in the economy starts impacting specific customers and we have to start having some loans go at a higher volume on non-accruals and starting to do specific reserves, things like that, would obviously result in a reserve build as well. I think all things being equal with a steady economy, our non-performers staying relatively stable, which they have. I would expect, using your question, probably mid-teens on a coverage ratio.

Speaker #1: Our next question comes from Matthew Breese, with Stevens, Inc. Your line is now open.

Speaker #8: Hey, good morning.

Speaker #7: Morning.

Speaker #2: That would obviously result in a reserve build as well. I think, all things being equal with a steady economy and our non-performers staying relatively stable—which they have—I would expect, using your question, probably mid-teens.

Speaker #8: I'm curious, what was the spot cost of deposits and the spot name at the end of the quarter? And just curious how you feel about your ability to either maintain or further lower deposit costs from here?

Speaker #5: You know, man, I would say that when you look at our yields for the quarter, I think that's really reflective of our deposit rates.

Speaker #2: On a coverage ratio.

Speaker #5: Got it. Got it. Okay, that's helpful. Thanks for that color. And then, I guess just lastly, when you think about the investments that you've made in Southeast Michigan and you think about the outlook for growth, is that becoming a more key component of the overall driver of the portfolio growth?

Damon DelMonte: Got it. Okay. That's helpful. Thanks for that color. Then I guess just lastly, when you think about the investments that you made in Southeast Michigan and you think about the outlook for growth, is that becoming a more key component of the overall driver of the portfolio growth, or are you still seeing good looks in the greater Grand Rapids area and other parts of your footprint as well?

Speaker #5: We didn't change deposit rates. I don't think at all during the quarter. There's some opportunity for some repricing on the CD side, but it's not a huge component.

Speaker #5: And I don't think the repricing is overly significant. So I think if you look at the yields on our deposits for the quarter, I think that's reflective of where our rates are even today.

Speaker #5: Or are you still seeing good looks in the greater Grand Rapids area and other parts of your footprint as well?

Speaker #8: Okay. And then on commercial real estate, you'd mentioned you expect some slowdown in payoff, prepayment activity. What gives you that confidence in what is expectation for commercial real estate growth in the coming quarters?

Speaker #4: No, the answer is all of the above. The outlook in Southeast Michigan is good. We have a really strong team there, and they're early in their timeframe with us.

Ray Reitsma: The answer is all of the above. The outlook in Southeast Michigan is good. We have a really strong team there, and they're early in their timeframe with us. Bringing over lots of customers, and they've been very successful at it. It's a huge market with lots of potential. Yet in markets like Grand Rapids and the rest of West Michigan, Central Michigan, Northern Michigan, we're more mature in those markets, but there's plenty of opportunity there. The originations are fairly well spread out across our footprint on an even basis.

Speaker #4: So, bringing over lots of customers, and they've been very successful at it. It's a huge market with lots of potential. And yet, in markets like Grand Rapids and the rest of West Michigan, Central Michigan, and Northern Michigan, we're more mature in those markets, but there's plenty of opportunity there.

Speaker #7: The confidence comes from communication with our borrowers and we stay in close contact. And in the prior spate of payoffs that we had over the previous four quarters, they told us what was coming and largely delivered on that.

Speaker #4: So, the originations are fairly well spread out across our footprint on an even basis.

Speaker #7: They're telling us that those will slow. Of course, they reserve the right to change their mind. So who knows exactly what the future will bring?

Speaker #5: Okay, great. Thanks, Ray. Appreciate that. Okay, that's all that I had. Thanks a lot, guys.

Damon DelMonte: Okay, great. Thanks, Ray. Appreciate that. Okay. That's all that I had. Thanks a lot, guys.

Speaker #2: Hey, Darren.

[Company Representative] (Mercantile Bank): See you.

Chuck Christmas: See you.

Speaker #7: But the communication has been that those should continue to moderate.

Speaker #1: Reminder: If you have a question, please press star, then one, to be added to the queue. That's star, then one, if you have a question.

Operator: Reminder, if you have a question, please press star then one to be added to the queue. That's star then one if you have a question. Our next question comes from Matthew Breese with Stephens Inc. Your line is now open.

Speaker #8: Okay. And then just last one. You spoke on a couple of times about kind of the mix shift out of cash into loans and how that's accrued to the NIM.

Speaker #1: Our next question comes from Matthew Breeze with Stevens Inc. Your line is now open.

Speaker #8: Just curious what your definition is of excess cash. Tends to move around a little bit with seasonal deposits, but from where we sit today, at about a 5% cash to assets, how much of that do you think is excess?

Speaker #6: Hey, good morning.

Matthew Breese: Hey, good morning.

Speaker #4: Morning.

Ray Reitsma: Morning.

Speaker #6: I'm curious: what was the spot cost of deposits and the spot rate at the end of the quarter? And just curious how you feel about your ability to either maintain or further lower deposit costs from here?

Matthew Breese: Curious, what was the spot cost of deposits and the spot NIM at the end of the quarter? Just curious how you feel about your ability to either maintain or further lower deposit costs from here.

Speaker #5: Yeah, if you looked at our balance sheet, I don't have right in front of me. I think if you looked at interest earning assets that we have, that we mark on our balance sheet, that number would be somewhere between 100 and 125 million.

Speaker #2: You know, man, I would say that when you look at our yields for the quarter, I think that's really reflective of our deposit rates.

[Company Representative] (Mercantile Bank): Matt, I would say that when you look at our yields for the quarter, I think that's real reflective of our deposit rates. We didn't change deposit rates, I don't think, at all during the quarter. There's some opportunity for some repricing on the CD side, but it's not a huge component. I don't think the repricing is overly significant. I think if you look at the yields on our deposits for the quarter, I think that's reflective of where our rates are even today.

Chuck Christmas: Matt, I would say that when you look at our yields for the quarter, I think that's real reflective of our deposit rates. We didn't change deposit rates, I don't think, at all during the quarter. There's some opportunity for some repricing on the CD side, but it's not a huge component. I don't think the repricing is overly significant. I think if you look at the yields on our deposits for the quarter, I think that's reflective of where our rates are even today.

Speaker #2: We didn't change deposit rates—I don't think at all—during the quarter. There's some opportunity for some repricing on the CD side, but it's not a huge component.

Speaker #5: Which is primarily.

Speaker #8: Your timeframe expectation to kind of mix shift that?

Speaker #5: We love to be able to do it by the end of this year. Of course, that's really net commercial loan growth is going to drive that based on our fundings and any of the payoffs that we do get.

Speaker #2: And I don't think the repricing is overly significant. So, I think if you look at the yields on our deposits for the quarter, I think that's reflective of where our rates are, even today.

Speaker #5: But I would think that by early next year, we would be able to get there. If not by the end of this year.

Speaker #6: Okay. And then on commercial real estate, you mentioned you expect some slowdown in payoff and prepayment activity. What gives you that confidence, and what is your expectation for commercial real estate growth in the coming quarters?

Matthew Breese: Okay. On commercial real estate, you'd mentioned you expect some slowdown in payoff prepayment activity. What gives you that confidence and what is expectation for commercial real estate growth in the coming quarters?

Speaker #8: Okay. Great. I'll leave it there. I appreciate all the answers.

Speaker #5: You betcha.

Speaker #1: This concludes our question and answer session. I would like to turn the conference back over to Ray Breitsma for any closing remarks.

Speaker #4: The confidence comes from communication with our borrowers, and we stay in close contact. In the prior spate of payoffs that we had over the previous four quarters, they told us what was coming and largely delivered on that.

Ray Reitsma: The confidence comes from communication with our borrowers and we stay in close contact. In the prior spate of payoffs that we had over the previous four quarters, they told us what was coming and largely delivered on that. They're telling us that those will slow. Of course, they reserve the right to change their minds. Who knows exactly what the future will bring, but the communication has been that those should continue to moderate.

Speaker #7: Just want to thank you for your participation in today's call and for your interest in Mercantile Bank Corporation. And that concludes today's call.

Speaker #4: They're telling us that those will slow. Of course, they reserve the right to change their mind, so who knows exactly what the future will bring?

Speaker #4: But the communication has been that those should continue to moderate.

Speaker #6: Okay. And then just one last one—you spoke a couple of times about the movement out of cash into loans and how that's accrued to the NIM.

Matthew Breese: Okay. Just last one. You've spoken a couple of times about the mix shift out of cash into loans and how that's accretive to the NIM. Just curious what your definition is of excess cash. Tends to move around a little bit with seasonal deposits, but from where we sit today at about 5% cash to assets, how much of that do you think is excess?

Speaker #6: Just curious what your definition is of excess cash. It tends to move around a little bit with seasonal deposits, but from where we sit today at about a 5% cash-to-assets ratio, how much of that do you think is excess?

Speaker #2: Yeah, if you look at our balance sheet—I don't have it right in front of me—I think if you looked at interest-earning assets that we have, that we mark on our balance sheet, that number would be somewhere between $100 million and $125 million.

[Company Representative] (Mercantile Bank): Yeah. If you looked at our balance sheet, I don't have it right in front of me. I think if you looked at interest-earning assets that we have that we mark on our balance sheet, that number would be somewhere between $100 to 125 million. Which is primarily-

Chuck Christmas: Yeah. If you looked at our balance sheet, I don't have it right in front of me. I think if you looked at interest-earning assets that we have that we mark on our balance sheet, that number would be somewhere between $100 to 125 million. Which is primarily-

Speaker #2: Which is primarily.

Speaker #6: In your timeframe, do you expect to kind of makeshift that?

Matthew Breese: Your time frame expectation to mix shift that?

Speaker #2: We love to be able to do it by the end of this year. Of course, that's really net commercial loan growth is going to drive that based on our fundings and any of the payoffs that we do get.

[Company Representative] (Mercantile Bank): We'd love to be able to do it by the end of this year. Of course, net commercial loan growth's going to drive that based on our fundings and any of the payoffs that we do get. I would think that by early next year, we would be able to get there, if not by the end of this year.

Chuck Christmas: We'd love to be able to do it by the end of this year. Of course, net commercial loan growth's going to drive that based on our fundings and any of the payoffs that we do get. I would think that by early next year, we would be able to get there, if not by the end of this year.

Speaker #2: But I would think that by early next year, we would be able to get there, if not by the end of this year.

Speaker #6: Okay, great. I'll leave it there. I appreciate all the answers.

Matthew Breese: Okay, great. I'll leave it there. I appreciate all the answers.

Speaker #2: You betcha.

[Company Representative] (Mercantile Bank): You betcha.

Chuck Christmas: You betcha.

Speaker #1: This concludes our question-and-answer session. I would like to turn the conference back over to Ray Brightman for any closing remarks.

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

Speaker #4: I just want to thank you for your participation in today's call and for your interest in Mercantile Bank Corporation. That concludes today's call.

Ray Reitsma: Just want to thank you for your participation in today's call and for your interest in Mercantile Bank Corporation. That concludes today's call.

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

Q2 2026 Mercantile Bank Corp Earnings Call

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