Operator: Good morning, and welcome to the Mercantile Bank Corporation 2026 third quarter earnings results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference call over to Nichole Kladder, Chief Marketing Officer of Mercantile Bank. Please go ahead.
Nichole Kladder: Hello, and thank you for joining us. Today, we will cover the company's financial results for the Q3 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. Our agenda will begin with prepared remarks by both Ray and Chuck and will include references to our presentation covering this quarter's results.
Nichole Kladder: You can access a copy of this presentation, as well as the press release sent earlier today by visiting mercbank.com. After our prepared remarks, we will then open the call to your questions. Before we begin, it is my 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.
Nichole Kladder: The company's actual results could differ materially from any forward-looking statements made today due to factors described in the company's latest Securities and Exchange Commission filings. The company assumes no obligation to update any forward-looking statements made during the call. Let's begin. Ray?
Raymond Reitsma: Thank you, Nichole. Our results from Q3 continue to build on the theme of commercial expertise generating a strong return profile. My comments will focus on highlights around the net interest margin, loan and deposit growth, asset quality, non-interest income, and non-interest expense. Chuck will then follow with the specifics of the quarter. The net interest margin improved to 3.73% during Q3 2026, from 3.49% during Q3 2025. This improvement was driven largely by a reduction in the cost of funds resulting from the acquisition of Eastern and the refinement of our deposit base, including a decrease in brokered deposits and the repricing of fixed-rate loans and securities with continued opportunities for asset repricing in 2026 and 2027. In addition, the margin expansion occurred in a dynamic interest rate environment.
Raymond Reitsma: From Q3 2025 to Q1 2026, SOFR declined by 67 basis points, and our net interest margin increased by six basis points. From Q1 2026 to Q3 2026, SOFR was unchanged, and our net interest margin increased by 18 basis points, highlighting the impact of the actions listed above. The chart on page 11 of the investor presentation illustrates these dynamics. Turning to loans, commercial loans, our largest asset class, increased 9% from the prior year-end, quarter-end, and helped drive a 17% increase in revenue compared with Q3 2025. That growth occurred despite elevated paydowns from asset and business sales, excess cash flow, and refinancing to the secondary markets totaling $448 million for the nine months ending 30 September 2026, compared to $306 million during the respective 2025 period.
Raymond Reitsma: At the same time, lending commitments, including unfunded portions of construction loans, stand at a five-quarter high of $589 million at 30 September 2026, compared to $386 million at 30 September 2025. Asset quality continues to be strong, with non-performing assets representing only 14 basis points and 16 basis points of total assets at 30 September 2026, and 30 September 2025, respectively. Past due loans stand at just three basis points of total loans as of 30 September 2026. C&I and owner-occupied commercial real estate remain near our target of 55% of the commercial portfolio with appropriate granularity relative to loan type classifications. These solid metrics reflect continued discipline in underwriting standards, a strong credit culture, and the quality of our client base. On the funding side, our focus on deposits continues to produce results.
Raymond Reitsma: Total deposits increased 17% over the last 12 months ending 30 September 2026, including 22% growth in non-interest-bearing deposits and 15% growth in interest-bearing deposits. This growth principally reflects growth in commercial relationships, development of relationships in the public funds markets, and of course, the acquisition of Eastern Michigan Bank. Importantly, overall deposit growth occurred as certificates of deposit declined by approximately $180 million over the same period. This decline primarily represents brokered CDs and as a result, the overall quality of our funding mix continues to improve while our reliance on higher cost term funding continues to decline.
Raymond Reitsma: Non-interest income, in total, increased 16% during the first nine months of 2026 compared to the respective 2025 period, including a 34% increase in service charges on accounts, a 22% increase in credit and debit card income, and an 11% increase in swap income, in large part reflecting growth in commercial relationships. We have characterized 2026 as a year of investment around people and technology, including a change in our core systems provider, which is reflected in our non-interest expense. Investments in people include additional costs around the company in general, and particularly in Southeast Michigan, as we take the opportunity afforded by disruptions in that market. Chuck Christmas will comment on what our normalized run rate will look like in upcoming quarters.
Raymond Reitsma: We remain excited about our combination with Eastern and the opportunities to add customers and employees to our bank as we capitalize on disruptions to markets in Michigan, particularly Southeast Michigan. That concludes my remarks. I will now turn the call over to Chuck Christmas.
Chuck Christmas: Thanks, Ray Reitsma. Good morning, everyone. This morning, we announced net income of $24.1 million, or $1.39 per diluted share for the third quarter, excuse me, of 2026, compared with net income of $23.8 million, or $1.46 per diluted share for the third quarter of 2025.
Chuck Christmas: Net income during the first nine months of 2026 totaled $72.7 million, or $4.21 per diluted share, compared to $65.9 million, or $4.06 per diluted share during the first nine months of 2025. Growth in net income during both time frames primarily reflected increased net interest income and non-interest income that more than offset higher non-interest expenses and federal income tax expense. Excluding non-reoccurring costs associated with the year-end 2025 acquisition of Eastern Michigan Bank and the ongoing core and digital banking system conversion, and the impacts of smaller one-time items, adjusted net income was $24.5 million, or $1.42 per diluted share for the third quarter of 2026, $24.3 million, or $1.50 per diluted share for the third quarter of 2025, $76.1 million or $4.41 per diluted share for the first nine months of 2026, and $66.4 million or $4.09 per diluted share for the first nine months of 2025.
Chuck Christmas: Adjusted diluted earnings per share decreased $0.08, or approximately 5% in Q3 2026 compared to Q3 2025, and increased $0.32 per diluted share, or approximately 8%, during the first nine months of 2026 compared to the first nine months of 2025. We believe using these non-GAAP measurements reflects our core earnings performance and provides for a more accurate current period versus prior period comparisons. Interest income on loans increased during Q3 and the first nine months of 2026 compared to the prior year periods, primarily reflecting loan growth that was partially offset by a lower yield on loans. Average loans totaled $4.97 billion during Q3 2026, compared to $4.6 billion during Q3 2025, an increase of $300 million.
Chuck Christmas: Mercantile Bank experienced robust commercial loan fundings throughout 2026, but also received significant payoffs and partial pay-downs of certain larger commercial loans, aggregating $448 million. Our yield on loans during Q3 2026 was 23 basis points lower than Q3 2025, primarily reflecting the 75 basis point aggregate decline in the federal funds rate during the last four months of 2025. Interest income on securities increased during Q3 and the first nine months of 2026 compared to the prior year periods, reflecting growth in the securities portfolio and a higher yield. The growth and higher yield reflect the acquisition of Eastern Michigan, along with ongoing portfolio expansion and the reinvestment of mature, lower yielding investments at Mercantile Bank. Average balances were up $284 million, and the average yield increased 53 basis points quarter over quarter.
Chuck Christmas: Interest income on other interest-earning assets, a large portion of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, declined during Q3 2026 compared to Q3 2025, but increased during the first nine months of 2026 compared to the same time period in 2025. The average yield decreased 67 basis points quarter over quarter and 75 basis points year to date over year to date, largely depicting the 75 basis point decrease in the fed funds rate during the last four months of 2025. The average balance was $9 million lower in Q3 2026 compared to Q3 2025, but was $110 million higher during the first nine months of 2026 compared to the first nine months of 2025.
Chuck Christmas: In total, interest income was $4.6 million and $14.5 million higher during Q3 and the first nine months of 2026 compared to the respective prior year period. Interest expense on deposits decreased during Q3 and the first nine months of 2026 compared to the prior year periods, reflecting a lower cost of deposits that more than offset interest-bearing deposit growth. The growth in interest-bearing deposit balances and the lower cost of these funds reflected the acquisition of Eastern Michigan, along with growth and lower deposit costs at Mercantile Bank. Costs of interest-bearing deposits at both banks were positively impacted by the decline in the fed funds rate in the latter part of 2025. Average interest-bearing deposits totaled $4 billion during Q3 2026, compared to $3.61 billion during Q3 2025, an increase of $389 million.
Chuck Christmas: The cost of all deposits was down 51 basis points during Q3 2026 compared to Q3 2025, and down 49 basis points during the first 9 months of 2026 compared to the same time period in 2025. Interest expense on Federal Home Loan Bank of Indianapolis advances declined during Q3 and the first 9 months of 2026 compared to the prior year periods, largely reflecting a lower average balance that more than offset a higher average cost. Interest expense on other borrowed funds increased during Q3 and the first 9 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.
Chuck Christmas: In total, interest expense was $4.3 million and $9.6 million lower during Q3 and the first 9 months of 2026 compared to the prior year periods. Net interest income increased $8.9 million and $24.0 million during Q3 and the first 9 months of 2026 respectively compared to the prior year periods, primarily reflecting growth in earning assets and a higher net interest margin. Average earning assets totaled $6.52 billion during Q3 2026 compared to $5.94 billion during Q3 2025, an increase of $575 million. Average assets increased $664 million during the first 9 months of 2026 compared to the same time period in 2025. The growth in average earning assets during both time periods largely reflects the acquisition of Eastern Michigan at year-end 2025, along with loan and investment growth at Mercantile Bank.
Chuck Christmas: The net interest margin was 3.73% during Q3 2026, compared to 3.49% during Q3 2025, and was 3.62% during the first 9 months of 2026, compared to 3.48% during the first 9 months of 2025. The improvement during both time periods is largely due to the Eastern Michigan acquisition. The yield on earning assets declined 22 basis points and 29 basis points during Q3 and the first 9 months of 2026 respectively, while the cost of funds declined 46 basis points and 43 basis points during the same 2026 time periods. We recorded provisions for credit losses of $0.7 million and -$2.9 million during Q3 and the first 9 months of 2026 respectively.
Chuck Christmas: The Q3 provision expense mainly reflected a net increase of $1.7 million in specific allocations and an increase of $0.6 million associated with net loan growth, which was partially offset by a $1.5 million reduction resulting from faster prepayment speeds on the residential mortgage loan portfolio. The reserve balance increased $1 million during Q3 2026, reflecting the $0.7 million provision expense and net loan recoveries of $0.3 million. The reserve balance equaled 1.14% of total loans as of 30 September 2026. Our sustained strength in loan quality metrics continues to be impactful to our loan loss reserve calculations. The baseline allowance, largely determined from historical net loan charge-off activity, represents only 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 Q3 2026.
Chuck Christmas: Specific reserve allocations totaled just $2.6 million, or about 5% of the reserve balance as of 30 September. Non-interest expenses were $8.8 million and $25.8 million higher during Q3 and the first nine months of 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 that aggregated $0.6 million and $4.4 million during Q3 and the first nine months of 2026 respectively, and $0.6 million during both Q3 and the first nine months of 2025, non-interest expenses increased $8.8 million and $21.9 million compared to the prior year periods. Eastern Michigan Bank's non-interest expenses totaled $4.1 million and $12.1 million during Q3 and the first nine months of 2026 respectively.
Chuck Christmas: The increase in core operating costs largely reflects higher salary and benefit costs, including expenses associated with personnel investments in Southeast Michigan and incentive accruals related to the ongoing core and digital banking system conversion and the integration of Eastern Michigan Bank. The remaining growth generally depicts inflation impacts and a larger balance sheet. Federal income tax expense was $1.2 million and $3.2 million higher during Q3 and the first nine months of 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. The effective tax rate was 16.8% during both Q3 and the first nine months of 2026 compared to 13.4% and 14.9% during the respective time periods in 2025. The 2025 periods had higher levels of transferable energy tax credit activity given carryback opportunities.
Chuck Christmas: 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 historic tax credit activities. Both Mercantile and Eastern Michigan Bank have strong and well-capitalized regulatory capital positions. Mercantile Bank's total risk-based capital ratio was 13.4% at 30 September 200 million above the minimum threshold to be categorized as well-capitalized. Eastern Michigan Bank's total risk-based capital ratio was 23.9% as of 30 September 39 million above the minimum threshold to be categorized as well-capitalized. We did not repurchase shares during Q3 of 2026. We have $6.8 million available in our current repurchase plans.
Chuck Christmas: In regards to Q4, on slide 27 of the investor presentation, we share our latest assumptions on the interest rate environment and key performance metrics for Q4, with the caveat that market conditions remain volatile, making forecasting difficult. The forecast is predicated on no changes in the federal funds rate during the quarter, although we believe our net interest margin will remain relatively stable in a changing interest rate environment. We are projecting net loan growth in a range of 5% to 7% annualized, which encompasses a strong commercial loan pipeline, as well as expected commercial loan payoffs. We are forecasting a higher net interest margin during the quarter as we benefit from commercial loan growth, lower levels of monies at the Federal Reserve Bank of Chicago, and maturing low-yielding fixed rate commercial real estate loans and investments.
Chuck Christmas: We are projecting a federal tax rate of approximately 17%, which encompasses continued growth in net benefits from our low income housing and historic 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. Non-interest expense projections reflect ongoing personnel investments made in Southeast Michigan, as well as to support operational areas as we switch core and digital banking providers to enhance the durability, efficiency, and experience for our customers and employees. Non-recurring costs associated with the core and digital banking system conversions are not included. One-time expenses associated with the recent personnel investments in Southeast Michigan and incentive accruals related to the ongoing core and digital banking system conversion and the integration of Eastern Michigan Bank totaled $2.4 million during Q3 2026.
Chuck Christmas: These costs are projected to aggregate $1.2 million during Q4 2026, and $0.7 million during Q1 2027. Starting 1 April 2027, we project a $0.6 million quarterly reduction in our data processing and statement processing costs. In closing, we are very pleased with our operating results during Q3 and first nine months of 2026 and continued strong financial condition and believe we remain well positioned to continually successfully navigate through the myriad of challenges and uncertainties faced by all financial institutions. That concludes my remarks. I will now turn the call back to Ray.
Raymond Reitsma: Thank you, Chuck. That concludes the prepared comments from management. We will now move to the question and answer portion of the call.
Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then one again. At this time, we will pause momentarily to assemble our roster. Your first question comes from the line of Brendan Nosal with Hovde Group. Your line is open. Please go ahead. A reminder that if you are muted locally to unmute your device. Your next question comes from the line of Nathan Race with Piper Sandler. Your line is open. Please go ahead.
Nathan Race: Hey, guys. Good morning. Thanks for taking the questions.
Chuck Christmas: Hi, Nathan.
Raymond Reitsma: Morning.
Nathan Race: Hey, Chuck. I was hoping to just start on the margin outlook. I appreciate the guide for Q4, but as you look out to next year, I think in your comments, you alluded to 25 basis points of rate cuts to the extent they occur next year. It should be pretty margin neutral. I am just curious, underpinning that, are you expecting pretty similar betas on both loans and deposits, just perhaps given that some of the strong deposit growth you guys have generated over the last several quarters is maybe coming from some clients that maybe demand more around rate hikes? Or just any thoughts on just kind of deposit and loan expectations in the next year?
Chuck Christmas: Yeah. Nathan, great question. I think what we look at is the asset side is pretty easy to model out when you are looking at rate changes. It is obviously the non-maturing deposits which is the tricky part in trying to understand what the betas are going to look like. And quite frankly, I think those change over time, and I think the attitudes change a lot in regards to how aggressive or non-aggressive the Fed is. If they kind of do a drip, say, 25 basis points, these are all examples, each quarter. I do not think the depositors and the markets are as sensitive to changing rates. But if the Fed gets aggressive, maybe 2 changes, 2 increases a quarter, or maybe throwing a 50 basis point out there. I just think it makes more attention, and I do think it has an impact on the betas.
Chuck Christmas: That's one of those things that just is impossible to really model accurately. I think there's really two areas that we've seen most of the deposit growth, and this is obviously excluding the Eastern Michigan deposit portfolio that came over, which is fantastic, both in cost as well as durability. Non-interest-bearing checking accounts, which is primarily related to continued expansion of the commercial loan portfolio including those that maybe get a line of credit but are generally net depositors of the bank. Obviously, we love those. Then the money market accounts. I certainly would agree with the spirit of your question that the rates on money market accounts are probably going to be the most sensitive and certainly the most immediate that we have out there. We do have a product where some of our bigger customers, their rate is actually tied to the Fed funds rate.
Chuck Christmas: Those do immediately reprice. Those are pretty easy to model. But our money market product is tiered based on balance, and obviously different rates for different balances. I will say that at least in the first decrease here in September, the changes that we actually made were a little bit less than what we had beta'd out, so a little bit of a benefit to the margin there. But it's early yet. Everybody's trying to dissect within our markets of what's going on and looking at their own balance sheets. So it's a very dynamic. Hopefully our actual betas are going to be less than what we modeled. But it's way too early to tell, and actually, I think it's subject to ongoing change anyways.
Chuck Christmas: But on an overall basis, the way we model it out, the way that we have managed our balance sheet, it's certainly our goal and our expectation that certainly over several quarters that our margin would remain relatively stable. Maybe a small increase. We do show in our results a model of a slight increase in our margin if rates do go up. But on an overall basis, we're trying to be agnostic to rate changes. We can't control interest rates. Nobody can predict interest rates. So our goal is to make, I won't say bulletproof, but make ourself very durable in any changing interest rate environment and not having to hope, because obviously that is not a good strategy long term in regards to our margin. Hopefully that helps you, Nathan.
Nathan Race: Yeah, absolutely. That's really helpful. Thanks, Chuck. Maybe a larger, broader question for Ray Reitsma. Just thinking about operating leverage for next year. I think the last couple of years, there's been some substantial investments on the personnel side, particularly on deposit gathering, and you've obviously had success kind of getting the loan deposit ratio well below where it's been historically. Just curious, as you think about kind of investments in personnel or additional production hires, do you see additional opportunities on the horizon or do you think 2027 is going to be more of a year of kind of just realizing some of the investments that you've made and just generating overall more positive operating leverage into 2027?
Raymond Reitsma: Yeah, that's a great question as well. We're always trying to balance the investment with the anticipated return. But when there's what you might call a high level of disruption, there's quite a bit of opportunity both to hire people and to add new customers. We have added a number of experienced commercial bankers around the corporation in the last quarter, really outstanding talent from the super regional and national banks that we compete with. We hired our succession leadership person for our treasury management group, and we have a one-year transition where both of those people are on the staff. Lots of support people around the growth including credit and risk management and the like. Your assessment is correct, and we could slow down and reap more than if we continue to invest.
Raymond Reitsma: But for the long haul, if the opportunities are there to add people that we think will really do a great job for us, we'll continue to invest. It remains to be seen a little bit. We're very pleased with the level of success that we've had in adding talent to the bank. When we're convinced of its long-term positive effect, we'll continue to do that.
Nathan Race: Okay, great. Maybe one last one just for Chuck Christmas, just to maybe put a finer point around what we can kind of think about a range for expenses for next year. I appreciate the guide for $600,000 of cost coming out in Q2 of next year. But just overall, just given that there could still be some opportunistic hires, any thoughts on just kind of overall expense growth into next year? Any particular guideposts that you could point us toward?
Chuck Christmas: I guess my general thought is that budgeting for overhead costs is going to be difficult for next year. To be honest, we're just in the initial stages of that. Obviously, working through core and quarter end here. We'll get busy putting a budget together, obviously give guidance in January for 2027. I'm hesitant to give too much out there. Obviously, we have merit increases and promotions and those types of things that will result in increased salary and benefit expense. Obviously, we're a service company. That's one of our biggest expenses on the income statement besides interest expense and federal income tax expense. Kind of echoing what Ray Reitsma was saying is like, we want to continue to be very opportunistic.
Chuck Christmas: Based on what we've seen so far, I would say late last year into this year, and what's going on in the markets, we certainly see an opportunity to be opportunistic, but obviously it's all about the people and finding them. We certainly would be happy to bring them on if it makes sense. I would say from a real estate standpoint, we have been making some investments in real estate and continue to do so, especially in Southeast Michigan as we build out that market. I would say the actual costs are going to be somewhat limited in 2027, maybe in the back half, as whether we do some new construction or maybe buy an existing or lease an existing facility that needs some build-out. That's going to take a few quarters to get done.
Chuck Christmas: You might see some investments on the balance sheet, but I don't think the expenses will be very much, if any, maybe in Q4 of next year. Then just kind of everything else that's in the cost of running a bank. I think, certainly our biggest expense is the one that at this point is somewhat of an unknown, given some opportunities that may be presented between now and the end of next year. But definitely we'll be happy to give guidance in January when we've completed our budget process and gone through that thoughtful considerations.
Nathan Race: For sure. Okay. Got it. I appreciate the color, guys. I'll step back. Thanks.
Chuck Christmas: Thank you.
Raymond Reitsma: Thanks, Brian.
Operator: Your next question
Raymond Reitsma: I am going to get them right.
Operator: comes from the line of Brendan Nosal with Hovde Group. Your line is open. Please go ahead.
Brendan Nosal: Hey, good morning, folks. Can you hear me now?
Raymond Reitsma: Yes, we can.
Brendan Nosal: All right. Sorry about that. Apologies. Chuck Christmas, just to kind of circle back to maybe the balance of liquidity. I think you noted in your prep remarks that part of next quarter's margin expansion would come from holding less cash at the Fed. Can you just help us with kind of where you see the average cash balance coming in the Q4 versus this quarter's level of like $425 million?
Chuck Christmas: Yeah, I think we're hopeful to see that go down, quite frankly, and obviously it will help the margin. I would say it's going to be a little bit lower than that based on what we see and our expectations going forward. But I would say it's probably going to be still in the upper $300 million for the Q4 on an average basis. Trending down during the quarter, but starting from a pretty high point.
Brendan Nosal: Yeah. Okay. That's helpful. Maybe kind of digging into Southeast Michigan a little bit more. Could you just kind of give us more of a full play-by-play on where you started, where you are today, and then what you're still hoping to accomplish down in that market in terms of personnel additions, and then just any thoughts on kind of timelines to get that group additive to the bottom line?
Raymond Reitsma: Yeah, appreciate that question. It's a very difficult thing to predict exactly when we'll be able to make talent acquisitions in the market. But we're very happy with the volume and the quality of the discussions that we have right now to add people to the team, in addition to the ones that we've already added. We had a fairly small number of commercial people in the Southeast Michigan, say 2 years ago, and we've ramped that team up to a good half dozen commercial callers in that market now and expect that number to continue to increase over the next year. The pace of which is almost impossible to predict. But again, we feel very good about the discussions that we have ongoing, the quality of those, and the probability of success. But to quantify that is a nearly impossible task.
Brendan Nosal: Yeah. That's fair. But it's still helpful to kind of hear where you started and where you are now. Okay, great. Thank you for taking my questions.
Raymond Reitsma: You bet.
Operator: Your next question comes from the line of Damon DelMonte with KBW. Your line is open. Please go ahead.
Damon DelMonte: Hey, good morning, guys. Hope you are all doing well. Thanks for taking my questions. First one, just on the outlook for non-interest income. Obviously a step down here from Q3. So I am just wondering if you could give a little bit more granularity on that. Is that kind of reflective of a more challenging mortgage banking backdrop, or is it maybe more from like swap fee income, or just any color on that would be great.
Chuck Christmas: Well, I think you hit both items, but I think from a mortgage standpoint, I think it is more seasonal than anything else. We are actually very pleased with our mortgage group. If you look at our production in a very tough environment, it has actually been going up. So incredible work by the entire team, and as we continue to gain. We look at that as gaining market share in, again, a very tough environment. So I think that there is a decline in expected mortgage banking income, but I know as far as projections go, it has more to do just with the seasonality and the onset of snow starting to fall here relatively soon. I think we had a solid swap quarter in Q3. Would like to duplicate that. I am not sure we are going to get there.
Chuck Christmas: I think as rates have popped up and the market has been pricing in additional rate cuts, it has certainly had a noticeable impact on five, seven-year rates in the swap market. So it appears that our customers are a little more hesitant than they have been, say, typically in the past to get into the swaps. If they want a fixed rate, it is obviously a product that we can offer them that will give them their desired fixed rate. Again, that is one of those things that is also very difficult to predict. Not necessarily any of what is going on in the marketplace, but just from timing as we are making commercial term loans and from quarter to quarter, there is some lumpiness in there. You are spot on. It is those two items that are causing the expected reduction in Q4 versus Q3.
Damon DelMonte: Got it. Okay. With regards to the 5% to 7% loan growth here in Q4, do you guys feel like the bulk of the payoff activity that you have been dealing with is kind of peaked and is subsiding now? I guess, do you have good visibility on that at this point of the quarter?
Raymond Reitsma: This is Ray. To answer that question, I think you have to break down what some of those payoff components are. When there is a sale of a company or an asset, there is really nice visibility to that, and we can predict what is going to happen in a quarter fairly accurately. The one that is very difficult to predict is the paydowns that come from excess cash flow, and those have ramped up quite a bit in the quarter that we just completed. If that continues to be true, that will be the toughest one to nail down. We feel good about our backlog. You can see it is at a five-quarter high. The level of originations we are very comfortable with. The asset sale piece of it is, I would call moderate compared to recent experience.
Raymond Reitsma: The variable that will be toughest to define and will surprise us the most between here and the end of the year is what happens with excess cash flow generation.
Damon DelMonte: Okay. Great color. Thank you. Just one last quick one. Chuck, do you happen to have the spot margin for 30 September?
Chuck Christmas: Oh, the spot margin for 30 September.
Damon DelMonte: You can give me a third.
Chuck Christmas: I can give you what it was in September. How is that?
Damon DelMonte: Okay.
Chuck Christmas: It was.
Damon DelMonte: Fair enough.
Chuck Christmas: It was 3.74.
Damon DelMonte: Okay, great. That is all that I had.
Chuck Christmas: I would make the comment that it would have been higher as of 30 September.
Damon DelMonte: Got it. Okay. Understood. Thanks a lot. Appreciate it.
Operator: Your next question comes from the line of Matthew Breese with Stephens Inc. Your line is open. Please go ahead.
Matthew Breese: Hey, good morning.
Raymond Reitsma: Morning.
Matthew Breese: I hear you loud and clear on some of the loan growth components. I guess where my question is just given the pipeline and payoff dynamics, if you think the projected level of loan growth in Q4 spills into 2027, and whether you expect deposit growth to continue to outpace loan growth near term.
Raymond Reitsma: Yeah, I think those originations will come to rest at some point. I guess the answer of will it spill? I would anticipate that it would. I think deposit growth should roughly parallel loan growth, and that would be the desired outcome.
Chuck Christmas: Yeah, the one caveat there is with the public unit deposits, which obviously is seasonal for all banks. We get some really solid inflows with tax collections here in Michigan in Q3, and we see some of the outflow already took place in September. But that will continue in October, November. But even excluding that, the deposit growth that we've had so far in 2026 is really strong growth in regards to business. And the pipeline on the deposit growth for businesses, to Ray Reitsma's point is, I would say in general, is just as strong as the loan pipeline.
Matthew Breese: Yeah. Okay. And then maybe just touch on securities. Securities portfolio yields are still pretty far off from current market rates. Can you help me out with near-term cash flows on the securities portfolio and when we might see a more significant shrinking of the gap between current yields and yields on the book?
Chuck Christmas: Yeah, I would say on an overall basis, our duration of our portfolio is about 4 years, and we stick, and have always sticked to a laddered maturity approach. Now there's a lot of calls in there, and we definitely have set up the securities portfolio over the last few years to protect us in a significant down rate environment of buying very discounted agency bonds, say between 85 and 95 cents on a dollar. That it would take probably 200 to 300 basis point rate reductions for those to start getting called, which would be a good insurance policy, at least for a limited time, in regards to what we would see in interest income on our commercial loan portfolio. So feel really good about that. So that's the major interest rate risk tool that we do with our securities portfolio.
Chuck Christmas: I would say here in Q4 and into all of next year, we have some really solid repricing opportunities of some solid dollars at low rates. I think on page 11 of the deck, we have that spelled out for you. We have $16 million at an average rate of 1.5% here in Q4, and another $100 million at 2.5% average rate next year. That is added on top of the fixed rate CRE loans that another almost $60 million this quarter and another
Chuck Christmas: Almost $200 million next year with rates that are just under 5%. We have been getting that benefit especially throughout this year. I would even say even last year. But definitely throughout this year. Clearly where rates are today, any bond that is going to be maturing and any loan that is going to be maturing is going to be refinanced or renewed at a higher rate. There is going to continue to be some tailwind there, as long as rates stay where they are now. We will just see from specific to the investment question you had, we will let the laddered maturity approach do what it is supposed to do and improve yields as we go forward.
Matthew Breese: Okay. Last one from me. If I look at the charge-off kind of patterns, the last couple of years have been really solid in the first three quarters of the year, but a little bit of a pickup in Q4. I am curious if there is any strategy or intention to that. A lot of banks will kind of kitchen sink or clean up stuff in Q4, and whether or not that is expected to play out again this year.
Raymond Reitsma: No, that is total coincidence. We work each credit. It seems like we have incredibly strong asset quality, obviously. But like all banks, you are always kind of chasing one or two, I would say, larger sized credits around on the commercial side. It has just been total coincidence as far as when the charge-off has taken place. I think if you go back a quarter or two quarters or three quarters prior to the charge-off, you would have seen us establishing the specific reserve and then obviously going through the collection period. Then when we get to the end of that collection period or towards the back half of the baseball game, we are going to take the charge once things become a little bit more finalized. So total coincidence that they have taken place in Q4.
Matthew Breese: Got it. I appreciate you taking all my questions. I will leave it there. Thank you.
Raymond Reitsma: You bet.
Operator: A reminder that if you would like to ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then one again. Your next question comes from the line of Nicholas Holowko with Raymond James. Your line is open. Please go ahead.
Nicholas Holowko: Hey, good morning. Thanks for taking my questions. Maybe just one follow-up on the lending environment. Obviously, it sounds like you guys are seeing some pretty good growth in your pipeline, which should be encouraging for loan growth going forward. But maybe just in terms of the lay of the land, what you are hearing in terms of overall business confidence from your borrowers and their willingness to invest and expand at this point, especially given the recent rise in interest rates. If you could just give us an updated perspective on that would be great.
Raymond Reitsma: Sure. I do not think confidence has changed materially. There has been a bit of uncertainty in the environment that we have been talking about for a number of years, and I think that persists, but I would not say that there has been a marked decrease in willingness to invest or a decrease in optimism about the future. I think it is just more of the same.
Nicholas Holowko: Okay, great. Thank you. Then, obviously you just kind of touched on credit right before this, but just with the small pickup in non-performing loans this quarter, anything to call out there? Obviously they remain at relatively low levels overall, but if anything to call out there, that would be great. Thank you.
Raymond Reitsma: Yeah. I would just underscore your observation that it is relatively low levels and if we have any activity at all, it shows up as a change to a relatively low level. Every once in a while, a few drops of rain fall from the sky, and that is what happened here. We just continue to have similar experience where there is no systemic issues in the economy or our portfolio. Just from time to time, there is a management failure or a particular company becomes under a unique bit of stress that leads to those kinds of recognitions in our loan quality metrics.
Nicholas Holowko: Makes sense to me. Thank you very much.
Raymond Reitsma: You are welcome.
Operator: This concludes our question and answer session. I would like to turn the conference call over to Ray Reitsma for any closing remarks.
Raymond Reitsma: Just like to thank you for your participation in today's call and for your interest in Mercantile Bank Corporation, and this concludes the call. Thank you.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. This event has now concluded. Thank you for joining Mercantile Bank Corporation Q3 2026 earnings call. The line will disconnect automatically.
