Mercantile Bank Q3 2025 Earnings Report

Mercantile Bank EPS Results

• Actual EPS: $1.46
• Consensus EPS: $1.38
• Beat/Miss: Beat by +$0.08
• One Year Ago EPS: N/A

Mercantile Bank Revenue Results

• Actual Revenue: $62.39 million
• Expected Revenue: $61.33 million
• Beat/Miss: Beat by +$1.06 million
• YoY Revenue Growth: N/A

Mercantile Bank Announcement Details

• Quarter: Q3 2025
• Date: 10/21/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, October 21, 2025
• Conference Call Time: 10:00AM ET

Mercantile Bank (NASDAQ:MBWM) is a bank holding company headquartered in Grand Rapids, Michigan. Through its principal subsidiary, Mercantile Bank, the company provides banking and financial services to businesses, individuals and organizations.

The bank’s offerings include commercial and industrial lending, commercial real estate financing, construction loans, residential mortgage loans and consumer credit. It also provides deposit accounts, treasury and cash-management services, online and mobile banking, and other financial services designed to support business and personal banking needs.

Founded in 1997, Mercantile Bank has developed a community-oriented banking model focused primarily on commercial relationships and local markets. The company operates through a network of full-service banking offices serving communities across Michigan and select markets in Ohio.

Mercantile Bank Q3 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Management reported strong results — Q3 net income $23.8M ($1.46/share) and YTD $65.9M ($4.06/share), with EPS up ~20% quarter‑over‑quarter, a 1.5% ROA, 14.7% ROE and tangible book value per share up ~13% year‑to‑date.
• Positive Sentiment: Asset quality remains very strong — past‑due loans at 16 bps, NPLs averaging 13 bps, and an allowance for credit losses of 1.28% of loans, with historical net recoveries and a budgeted normalized net charge‑off range of 5–10 bps.
• Positive Sentiment: Liquidity and deposit trends improved — loan‑to‑deposit ratio fell to 96%, average deposits grew ~11% year‑over‑year and management deployed surplus funds into securities while preserving a significant non‑interest bearing deposit base.
• Neutral Sentiment: The announced acquisition of Eastern Michigan is expected to be financially accretive (double‑digit earnings accretion) with mid‑single‑digit TBV dilution and a ~three‑year earn‑back, but cost‑savings are delayed until the Feb 2027 core conversion and there are near‑term transaction costs (~$1M).
• Positive Sentiment: Net interest margin outlook is resilient — NIM has held around 3.4–3.5% despite SOFR declines and management highlights ~$90M of low‑yield securities and ~$160M of CRE maturing next year that create repricing upside to support a stable margin.

Presentation

[Operator]

Good morning and welcome to the Mercantile Bank Corporation 2025 third quarter earnings results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Nichole Kladder, Chief Marketing Officer of Mercantile Bank. Please go ahead.

[Nichole Kladder, CMO at Mercantile Bank]

Hello and thank you for joining us today. Today we will cover the company's financial results for the third quarter of 2025. The team members joining me this morning include Ray Reitsma, President and Chief Executive Officer, as well as Chuck Christmas, Executive Vice President and Chief Financial Officer. Our agenda will begin with prepared remarks by both Ray and Chuck, and we'll include references to our presentation covering this quarter's results. You can access a copy of the presentation as well as the press release sent earlier today by visiting MercBank.com. After our prepared remarks, we will then open the call to your questions. Before we begin, it is my responsibility to inform you that this call may involve certain forward-looking statements, such as projections of revenue, earnings, and capital structure, as well as statements on the plans and objectives of the company's business.

[Nichole Kladder, CMO at Mercantile Bank]

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?

[Ray Reitsma, President and CEO at Mercantile Bank]

Thanks, Nichole. Our results for the third quarter of 2025 build on the theme of commercial expertise generating a strong return profile. We continue to demonstrate top quartile ROA performance relative to our peers, built upon the following traits. Trait number one, a strong and stable net interest margin. Over the last five quarters, the SOFR 90-day average rate has dropped 96 basis points, while our margin has dropped by a mere two basis points to 3.5%. This illustrates effective execution of our strategic objective to maintain a steady margin via matched funding of our assets and liabilities and refutes the notion that we have an asset-sensitive balance sheet despite the relatively large portion of floating rate assets. Trait number two, very strong asset quality. Past due loans remain at the low levels typical of our company at 16 basis points of total loans.

[Ray Reitsma, President and CEO at Mercantile Bank]

Non-performing loans to loans over the last five years, plus the year-to-date period, average 13 basis points. The allowance for credit losses stands at 1.28% of total loans as of September 30, 2025, providing very strong coverage relative to past due and non-performing loan levels. These numbers demonstrate our longstanding commitment to excellence in underwriting and loan administration. Trait number three, improved on-balance sheet liquidity and loan-to-deposit ratio. Our loan-to-deposit ratio stands at 96% compared to 102% on September 30, 2024, and 110% on December 31, 2023. Our deposit mix includes 25% non-interest-bearing deposits and 20% lower-cost deposits, which have contributed to the stability of our net interest margin. Our previously announced planned acquisition of Eastern Michigan Financial Corporation will contribute positively to each of these measures. Trait number four, strong deposit and loan compounded annual growth rates. For the third quarter of 2025, annualized deposit growth was 9%.

[Ray Reitsma, President and CEO at Mercantile Bank]

Our recent focus on deposit growth is not new to our bank. In fact, the last six year-end periods demonstrate a deposit compounded annual growth rate of 11.8%. Over the same time period, total loans demonstrate a compounded annual growth rate of 10%. From a third quarter 2025 perspective, loans contracted an annualized 7% as loan paydowns anticipated in the second half of the year were concentrated in the third quarter. We believe this contraction is a one-quarter anomaly as the September 30, 2025 commitments to make loans total $307 million, an all-time high which exceeds the average of the prior four quarters by 32%. We expect that loan growth for 2025 in total will fall within the range of previously defined expectations of mid-single digits. Trait number five, continued strong growth in key fee income categories.

[Ray Reitsma, President and CEO at Mercantile Bank]

Growth in commercial deposit relationships has supported growth in treasury management services, resulting in an 18% increase in service charges on accounts during the first nine months of 2025. Our payroll service offerings continue to report very consistent growth, and the current year nine-month growth of 15% is consistent with prior periods. Our mortgage team continues to build market share and generate a high portion of saleable loans, contributing to 12% growth in mortgage banking income during the first nine months compared to the respective 2024 period. Trait number six, stability in commercial loan portfolio mix. We have maintained discipline in our approach to commercial loan growth, maintaining a 55-45 split between C&I and owner-occupied CRE loans combined and all other commercial loan segments and prudent concentrations in categories such as office, retail, assisted living, hotel, and automotive exposures.

[Ray Reitsma, President and CEO at Mercantile Bank]

In sum, these traits have allowed us to report a 20% quarter-over-quarter earnings per share growth, a 1.5% return on average assets, and a 14.7% return on average equity for the third quarter of 2025, and a 13% increase in tangible book value per share over the last four quarters. Additionally, our five-year tangible book value per share compounded annual growth rate of 8.4% and five-year earnings per share compounded annual growth rate of 10.4% each place us in the top two of our proxy peer group. We remain excited about the upcoming combination with Eastern Michigan Financial Corporation, which has financially attractive traits, including double-digit earnings accretion, mid-single-digit tangible book value dilution, and a mid-three-year earn-back period. That concludes my remarks. I'll now turn the call over to Chuck.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Thanks, Ray. This morning we announced net income of $23.8 million or $1.46 per diluted share for the third quarter of 2025, compared with net income of $19.6 million or $1.22 per diluted share for the third quarter of 2024. Net income during the first nine months of 2025 totals $65.9 million or $4.06 per diluted share, compared with $60 million or $3.72 per diluted share for the respective prior year period. Growth in net income during both timeframes largely reflected increased net interest income and non-interest income, lower provision expense, and reduced federal income tax expense, which more than offset increased overhead costs. Interest income on loans was similar during the third quarter and first nine months of 2025 compared to the prior year periods, reflecting loan growth that was mitigated by a lower yield on loans.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Average loans totaled $4.6 billion during the third quarter of 2025 compared to $4.47 billion during the third quarter of 2024, an increase of $201 million, which equates to a growth rate of over 4%. Our yield on loans during the third quarter of 2025 was 31 basis points lower than the third quarter of 2024, largely reflecting the aggregate 100 basis point decline in the federal funds rate during the last four months of 2024 and the additional 25 basis point decrease during late third quarter 2025. Interest income on securities increased during the third quarter and first nine months of 2025 compared to the prior year periods, reflecting growth in the securities portfolio and the reinvestment of lower-yielding investments in a higher interest rate environment.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Interest income on interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, increased during the third quarter and first nine months of 2025 compared to the respective prior year periods, reflecting higher average balances that were partially offset by lower yields. In total, interest income was $2.2 million and $8.9 million higher during the third quarter and first nine months of 2025 compared to the respective prior year periods. Interest expense on deposits decreased during the third quarter of 2025 compared to the prior year period, in large part due to a lower average cost of deposits, reflecting the aforementioned decline in the federal funds rate that more than offset growth in average deposits.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Average deposits totaled $4.83 billion during the third quarter of 2025 compared to $4.34 billion during the third quarter of 2024, an increase of $489 million, which equates to a growth rate of over 11%. The cost of deposits was down 32 basis points during the third quarter of 2025 compared to the third quarter of 2024. Conversely, interest expense on deposits increased during the first nine months of 2025 compared to the prior year period. Although the cost of deposits declined 18 basis points, growth in average deposits between the two periods of $544 million, equating to a growth rate of over 13%, resulted in a net increase in interest expense on deposits. Interest expense on Federal Home Loan Bank advances declined during the third quarter and first nine months of 2025 compared to the prior year periods, largely reflecting a lower average balance.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Interest expense on other borrowed funds declined during the third quarter and first nine months of 2025 compared to the prior year periods, largely reflecting lower rates on our trust-preferred securities due to the lower interest rate environment. In total, interest expense was $1.5 million lower during the third quarter of 2025 and $1.6 million higher during the first nine months of 2025 compared to the respective prior year periods. Net interest income increased $3.7 million and $7.3 million during the third quarter and first nine months of 2025 compared to the respective prior year periods. Impacting our net interest margin over the past couple of years has been our strategic initiative to lower the loan-to-deposit ratio, which generally entails deposit growth exceeding loan growth and using the additional monies to purchase securities.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

A large portion of deposit growth has been in the higher-costing money market and time deposit products, while the purchased securities provide a lower yield than loan products. Despite that strategic initiative and the aforementioned decline in the federal funds rate, our quarterly net interest margin has been relatively steady over the past five quarters, ranging from a high of 3.52% to a low of 3.41%, averaging 3.48%. Our net interest margin forecast for the fourth quarter of 2025 reflects similar results. We remain committed to managing our balance sheet in a manner that minimizes the impact of changing interest rate environments on our net interest margin.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Basic funds management practices such as match funding, combined with scheduled maturities of lower fixed-rate commercial loans and securities and higher-rate time deposits, along with scheduled rate adjustments on residential mortgage loans, should provide for a relatively stable net interest margin in future periods. Our net interest margin declined two basis points during the third quarter of 2025 compared to the third quarter of 2024. Our yield on earning assets declined 33 basis points during that time period, largely reflecting the aggregate 100 basis point decline in the Fed funds rate during the last four months of 2024 and the additional 25 basis point decrease during late third quarter of 2025, while our cost of funds declined 31 basis points, primarily reflecting lower rates paid on money markets and time deposits, which more than offset an increased mix of higher-costing money market and time deposits.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

While average loans increased $201 million, or almost 5%, for the third quarter of 2024 to the third quarter of 2025, average deposits grew $489 million, or over 11% during the same time period, providing a net surplus of funds totaling $288 million. We used that net surplus of funds to grow our average securities portfolio by $163 million and reduce our average Federal Home Loan Bank of Indianapolis advances portfolio by $64 million. In addition, our average balance at the Federal Reserve Bank of Chicago increased $95 million. We recorded a provision expense of $0.2 million and $3.9 million during the third quarter and first nine months of 2025, respectively, compared to $1.1 million and $5.9 million during the respective 2024 periods.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

The reserve balance increased $0.8 million during the third quarter of 2025, reflecting the $0.2 million provision expense and net loan recoveries of $0.6 million, with the reserve balance increasing $4.7 million during the first nine months of 2025, reflecting the $3.9 million provision expense and net loan recoveries of $0.8 million. The reserve balance equaled 1.28% of total loans as of September 30, 2025, compared to 1.18% at year-end 2024. The third quarter provision expense was primarily comprised of a $2.9 million increase in specific reserve allocations and a $0.9 million net increase in qualitative factor allocations, which were largely mitigated by a $2.3 million reduction associated with higher residential mortgage and consumer loan prepayments that shortened the average lives of those portfolio segments and a $0.9 million decline from a reduction in total loans.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Non-interest expenses were $2.4 million and $7.3 million higher during the third quarter and first nine months of 2025 compared to the respective prior year time periods. The increase largely reflects higher salary and benefit costs, including annual merit pay increases and market adjustments. Higher data processing costs also comprise a notable portion of the increased non-interest expense levels, primarily reflecting higher transaction volumes and software support costs, along with the introduction of new cash management products and services. Despite increased pre-tax income during the third quarter and the first nine months of 2025 compared to the respective prior year periods, we were able to reduce our federal income tax expense by $1.3 million and $3.6 million, respectively.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

The reductions largely reflect the acquisition of transferable energy tax credits during the second and third quarters of 2025, providing for reductions in federal income tax expense of $1 million and $2.6 million during the third quarter and first nine months of 2025, respectively. Our federal income tax expense was further reduced by benefits associated with our low-income housing and historical tax credit activities, which totaled $0.7 million and $1.2 million during the third quarter and first nine months of 2025, respectively. The recording of these tax benefits resulted in third quarter and year-to-date 2025 effective tax rates of 13% and 15%, respectively. We are scheduled to close on another transferable energy tax credit by the end of October, which will reduce our federal income tax expense by about $950,000.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Additional acquisitions of transferable energy credits may be made from time to time, subject to our investment policy, tax credit availability, and tax credits derived from our low-income housing and historical tax credit activities. We remain in a strong and well-capitalized regulatory capital position. Our bank's total risk-based capital ratio was 14.3% as of September 30, 2025, about $236 million above the minimum threshold to be categorized as well-capitalized. We did not repurchase shares during the first nine months of 2025. We have $6.8 million available in our current repurchase plan. Our tangible book value per common share continues to grow, up $4.27, or almost 13%, during the first nine months of 2025. The improvement primarily reflects retained earnings growth of $48 million and a decline of $21 million in after-tax unrealized losses on securities.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

On slide 25 of the presentation, we share our latest assumptions on the interest rate environment and key performance metrics for the remainder of 2025, with the caveat that market conditions remain volatile, making forecasting difficult. This forecast is predicated on a 25 basis point reduction to the federal funds rate on October 29. We are projecting loan growth in a range of 5% to 7% annualized during the fourth quarter. Despite the expected federal funds rate reduction, we are forecasting our net interest margin to remain relatively steady and within the range over the past five quarters. We are projecting a federal tax rate of 15% for the quarter. Expected quarterly results in non-interest income and non-interest expense are also provided for your reference, noting that non-interest expense projections include the assumption that the acquisition of Eastern Michigan will be concluded by the end of this year.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

In closing, we are very pleased with our operating results and financial condition during the first nine months of 2025 and believe we remain well-positioned to continue to successfully navigate through the myriad of challenges and uncertainties faced by all financial institutions. That concludes my prepared remarks. I'll now turn the call back over to Ray.

[Ray Reitsma, President and CEO at Mercantile Bank]

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

[Operator]

We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star and then two. Our first question comes from Brendan Nosal with Hovde Group. Please go ahead.

[Brendan Nosal, Director of Equity Research at Hovde Group]

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

[Ray Reitsma, President and CEO at Mercantile Bank]

Morning.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Morning.

[Brendan Nosal, Director of Equity Research at Hovde Group]

Maybe just starting off here on credit quality. I think you had net recoveries in seven of the past eight quarters. I'm just kind of curious, where are you finding recoveries at this point in a cycle? Just given how clean the book has been for the past couple of years, what do you think of as a normalized charge-off ratio given your credit box and portfolio mix at this point?

[Ray Reitsma, President and CEO at Mercantile Bank]

As it relates to where they come from, you know we've taken a pretty conservative stance over our company's history on what we charge off, and we're fairly relentless about recovering those once we do charge them off. Some of those go back aways, and we just kind of never say die as it relates to a charge-off. As it relates to a normalized level, I'll let Chuck answer that.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Yeah, I'll make one comment specifically on third quarter. Part of that recovery was on a loan that we charged off in the fourth quarter of last year, and that credit remains in active recovery status. We typically budget between 5% and 10% in net charge-offs. I think from a historical perspective, obviously excluding the Great Recession, that makes sense to us.

[Brendan Nosal, Director of Equity Research at Hovde Group]

Okay. That's helpful color. Maybe turning to the net interest margin, just kind of thinking, you know, conceptually about the margin a little bit beyond the fourth quarter. I guess on the one hand, you know, rate cuts are maybe a modest headwind for the margin, but you're going to be putting all that liquidity from Eastern Michigan to work across next year. How do those things balance out in the direction the margin takes over the next couple of quarters?

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Yeah, I think you're spot on. Obviously, the acquisition will be beneficial to the net interest margin. That was clearly something that we saw and look forward to benefiting from. I think part, as I mentioned in my prepared remarks, we do have the lower-rate loans and securities that will continue to reprice quite a bit. Even if the market rates continue to come down, there's still quite a bit of significant opportunity there to gain some interest income. We do have time deposits that are at higher rates than current market even today. Everything we just talked about will be very strong tailwinds. The one headwind is the reduction of the Fed funds rate. Part of the answer to your question is just how aggressive the Fed gets.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

We believe on an overall basis that regardless of what the Fed does, our net interest margin will remain relatively steady because of all those things.

[Brendan Nosal, Director of Equity Research at Hovde Group]

Okay. Just as a follow-up on that lower-rate loan and security repricing, can you size up that opportunity over the next 12 months? How much backbook, low-rate stuff do you have coming down and at what rates?

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Yeah, I would say probably, I'm going to go by memory here. We have about $90 million in securities that have an average yield of about 1%. We're getting about 3.75% to maybe 4% currently on that. We have about $160 million in commercial real estate loans that will mature next year. Those, I think, are at an average rate of about 4.5%. We also have some portfolio adjustable-rate mortgage loans. I don't know off the top of my head, but there's some that are coming up for initial repricing. There's definitely some solid tailwind in those as well.

[Brendan Nosal, Director of Equity Research at Hovde Group]

All right. Thank you all for taking my questions. I appreciate it.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

You bet.

[Ray Reitsma, President and CEO at Mercantile Bank]

You bet.

[Operator]

The next question comes from Daniel Tamayo with Raymond James. Please go ahead.

[Daniel Tamayo, VP at Raymond James]

Thank you. Good morning, guys.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Morning.

[Daniel Tamayo, VP at Raymond James]

I guess first on just on the paydowns, you talked a lot about it in the prepared remarks. Did I hear this right that it was basically the paydowns that you were expecting for the back half of the year you recognized in the third quarter? If that's the case, how should we think about that 5% to 7% loan growth guidance? I mean, that's about where, it's basically where you guys have been historically. Is there a chance that's elevated in the fourth quarter and then back to normal next year? What's the thinking around that number and how paydowns play into that?

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Yeah, Dan, this is Chuck, and I'll take a first stab at it. One of the things about paydowns is some of them are coming. Generally, we get the paydowns from the sale of the assets, the underlying assets, or the refinance of the loan to the secondary market. That's especially true for multifamily. You kind of get an idea that they're coming, but clearly, we don't have any control over that. The timing becomes relatively suspect. Sitting towards the end of the second quarter, the ones that we got in the third quarter, we knew they were coming. It was just a matter of at what month and in which quarter that was going to take place. We're always getting some level of paydowns from quarter to quarter because of the activity of our borrowers. That's not going to change.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

I think we just kind of, like our commercial loan funding, sometimes quarter to quarter, it gets a little bit bigger. It's a little more lumpy as you go quarter to quarter. The same thing happens with fundings. The same thing happens with payoffs as well. As Ray mentioned, we got a very, very strong pipeline right now. The big question in regards to the fourth quarter is when does all of that close? We definitely have some expected closings here in the first half of the quarter, but we also have some fundings that are expected to close towards year-end. Whether that happens in December or whether that happens in January, that's just difficult to tell. That's just relative to our lumpiness. Sometimes we get quarter to quarters that are a little bit more abnormally lumpy, if I can say that.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

I think in regards to the future, we're looking at continued mid-single digits of loan growth. We tried to peg that. I tried to peg that at 5% to 7% for the fourth quarter, knowing what I was just talking about, that there, you know, that could be a little bit off. If it's going to be off, it's probably more likely that the loan growth will be higher than that, with a lot of that coming right at the quarter end. As we start to prepare our budget, we really haven't started doing a lot with that yet. Again, the higher end of maybe 5% to 7%, maybe 6% to 8% is kind of what we're thinking about for next year.

[Daniel Tamayo, VP at Raymond James]

Okay. Very helpful. Thank you. I guess, you know, taking a look at the expenses, they're a little bit higher in the third quarter than I was looking for, and the guidance takes a step up from that. Just curious if there's anything unexpected or unusual in the expense base, you know, or if that's a relatively clean number, putting aside the acquisition, to look at going into the fourth quarter. I mean, 2026. Sorry.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Yeah, Danny, I would say the third quarter, except for the ones that we highlighted, the acquisition costs and the contribution to our foundation, I think those are good run rates if you make those two adjustments. I will say in the guidance that we gave for the fourth quarter, that includes about $1 million in acquisition costs. That makes the assumption that the acquisition is closed by the end of this quarter.

[Daniel Tamayo, VP at Raymond James]

Okay. That includes $1 million of acquisition. All right, that's helpful. That brings things back to kind of where we thought they were. Okay, I appreciate it. I was going to, so there's nothing on the tax line that is factoring in with the credits that flows through expenses now, right? That doesn't impact that?

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Yeah. The tax things that we talk about are just the impact on the federal income tax line item. They don't impact overhead.

[Daniel Tamayo, VP at Raymond James]

Okay. Great. I'll step back. Thanks, guys.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Thank you.

[Operator]

The next question comes from Damon DelMonte with KBW. Please go ahead.

[Damon DelMonte, Managing Director at KBW]

Hey, good morning, guys. Hope you're all doing well. Just to follow up on the expense question, can you just remind us, Chuck, the timing or the cadence of when you expect to realize the cost saves as far as the systems conversion and where you can really see some of that leverage from the cost savings from the Eastern deal?

[Ray Reitsma, President and CEO at Mercantile Bank]

Yeah. There are obviously two big things going on there. There will be some cost saves next year relative to the Eastern acquisition, although quite frankly, most of the cost saves are going to start taking place in 2027. We're planning on the core conversion in February of 2027. Until that time, we'll actually be a two-bank holding company with Mercantile and Eastern both continuing to run as they are today. From a day-to-day operations standpoint, the cost saves are really a 2027 event. With the merger itself of the parent companies, there will definitely be some cost saves, some overhead cost saves there. As we talked about with the announcement, the cost saves are going to be a little bit longer than typical because of the delay in the merging of the two banks together themselves.

[Ray Reitsma, President and CEO at Mercantile Bank]

The core conversion is set for February of 2027. There will be some costs that we'll expense in 2026 relative to the preparation for that. We'll definitely highlight that in the income statement as it comes through. Once the conversion takes place, there will be some pretty significant savings as we go forward from that. There is going to be a little bit of a mistiming there as we prepare for the core conversion already started, but definitely through next year. There will be some upfront costs, but the savings thereafter will be significantly higher than those upfront costs.

[Damon DelMonte, Managing Director at KBW]

Got it. Great. Appreciate that color. With regards to the tax rate, how do you think about 2026 if you don't have any more purchased transferable energy tax credits? Do you expect there to be some in 2026 that would impact that number?

[Ray Reitsma, President and CEO at Mercantile Bank]

Yeah. Damon, as I mentioned, we're just starting to get into the tax rate. I think if you said, you know, you're not going to do any energy tax credits, that's probably going to be somewhere around 18%, maybe 17.5%, somewhere in there. Don't quote me on that. We are planning on doing some additional energy tax credits. Right now, we're closing one, I think, later this week or next week. They're still available. Obviously, there's a lot of due diligence that needs to go through that process. We do have capacity to do them next year. We are planning on doing that next year. We'll even budget for that. If we're able to maximize what we can do from a tax perspective, our tax rate will probably be closer to 16%.

[Damon DelMonte, Managing Director at KBW]

Got it. Okay. Great. Lastly, obviously, credit trends are pretty positive here. As we think about the provision and growth kind of coming back online here in the fourth quarter, do we kind of use the first and second quarter as a good barometer for what we could look for for a quarterly provision in the fourth quarter?

[Ray Reitsma, President and CEO at Mercantile Bank]

Yeah, I think that's pretty good. Obviously, the credit quality remains very strong. We're always chasing some credits, even good times and bad times. We continue to do that and establish specific reserves when we think that's appropriate to do. The prepayment speeds on the mortgage loans, which obviously had an impact on the third quarter, that's an annual event for us for the most part. We look at it at each quarter, but in general, we look at it comprehensively once a year. If rates change dramatically and we see some significant changes in prepayments from quarter to quarter, we'll definitely address it. I would say on an overall basis, taking into account our asset quality and our growth expectations, I think your comment is accurate.

[Damon DelMonte, Managing Director at KBW]

Great. Okay. That's all that I had. Thank you very much.

[Ray Reitsma, President and CEO at Mercantile Bank]

Yep.

[Operator]

The next question comes from Nathan Race with Piper Sandler. Please go ahead.

[Nathan Race, Senior Research Analyst at Piper Sandler]

Hey, guys. Good morning. Thank you for taking the questions. Going back to the margin discussion, curious how aggressive you guys can be in terms of reducing deposit rates on the $3.8 billion in funding that you call out on slide 18. If you could mention, Chuck, maybe what the spot rate of deposits were at the end of the quarter relative to the 2.20% all-in cost in 3Q.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Yeah, a lot of numbers there. I think one of the things that we have done, and we've done this as part of bringing in money market accounts, which obviously we've seen a lot of growth in, is we've told the depositors that we change rates in that product relative to the change in rates in the Fed funds market, in the Fed funds rate. There's been no surprises there. As a matter of fact, some of those deposit accounts actually legally are tied to the Fed funds rate. That's how we manage all of the products within the money market account. We've been, and we would continue to either increase them basis point for basis point or reduce them basis point for basis point, at least into the near future, based on changes in the Fed funds rate. That's immediate.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

It matches up well with any changes, with the changes that would happen on our commercial loans relative to any changes that take place with the Fed funds rate. Some solid matching there. Time deposits, a vast majority of our time deposits mature within one year. I would say based on rates today, that's about 50 basis points on average of a reduction in time deposits. That would take into account the expected of next week's cut. Most of the rest of the benefit is on the asset side.

[Nathan Race, Senior Research Analyst at Piper Sandler]

Okay. Great. There's a notable M&A transaction involving two large competitors in your home state there. Just curious, bigger picture, where you may see opportunities either to maybe add production talent or just add some high-quality commercial clients over the next couple of years as that integration unfolds. Yeah.

[Ray Reitsma, President and CEO at Mercantile Bank]

Historically, combinations of those types have been fertile ground for us in terms of developing business and attracting more talent. You know how this one plays out remains to be seen, but that has been the historical pattern.

[Nathan Race, Senior Research Analyst at Piper Sandler]

Okay. Understood. One last one, I think you called out a $3 million specific allocation on the commercial credit that moved to non-performing in 2Q. Just curious, expectations on potential loss there and timing as well, just given that specific allocation.

[Ray Reitsma, President and CEO at Mercantile Bank]

Yeah, it's really too early to tell. It's a process we're working through, and it has our full attention. As we get further into it, we'll make the decisions on those scores that are appropriate.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

We have been very aggressive in putting specific allocations against that credit.

[Ray Reitsma, President and CEO at Mercantile Bank]

Yeah.

[Nathan Race, Senior Research Analyst at Piper Sandler]

Understood. I appreciate all the color. Thanks, guys.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

You bet.

[Ray Reitsma, President and CEO at Mercantile Bank]

You bet.

[Operator]

Again, if you have a question, please press star and then one. Our next question comes from Brendan Nosal with Hovde Group. Please go ahead.

[Brendan Nosal, Director of Equity Research at Hovde Group]

Hey, just one or two follow-ups here. Hate to beat the dead horse on the expense number for next quarter. I just want to make sure I get the pieces. Does that number for the fourth quarter that you're providing include a partial quarter of run rate expenses from Eastern, or is it just the merger charges?

[Ray Reitsma, President and CEO at Mercantile Bank]

No, just the merger charges. We're basically planning for a year-end consummation, so there would be no income statement from Eastern on our numbers. The only thing would be there is about $1 million, anticipated $1 million or so, basically closing costs.

[Brendan Nosal, Director of Equity Research at Hovde Group]

Okay. Perfect. Just one on fee income, just because it hasn't been asked about yet. The debit and credit card income line was up like 30%, both, you know, linked quarter and year over year. Just kind of curious if there's anything funky going on in that line item this quarter and kind of where you expect that particular number to come in versus this quarter's $3.1 million.

[Ray Reitsma, President and CEO at Mercantile Bank]

Yeah, those numbers sound a little high to us as far as the increases go. I would say just in general, on the commercial card program, it continues to grow quite well. You know, it's designed primarily for our commercial customers. It's a product that's well received and, most importantly, well used. That line item is very much a volume-driven line item. The more that we can sell, but also ensuring that it's a solid product and one that our customers can and want to use, that's also very important because, again, it is a transaction-driven line that's been doing very well for us. As we continue to get penetration of those programs into our existing base, and of course, with the new growth, especially on the C&I side, there are plenty of opportunities to continue to grow that line item.

[Brendan Nosal, Director of Equity Research at Hovde Group]

Okay. All right. Thanks for taking the follow-ups. I appreciate it.

[Ray Reitsma, President and CEO at Mercantile Bank]

You bet.

[Operator]

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

[Ray Reitsma, President and CEO at Mercantile Bank]

We want to thank you for your participation in today's call and for your interest in Mercantile Bank. That concludes the call. Thank you.

[Operator]

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

Participants

Executives

• Ray Reitsma, President and CEO
• Nichole Kladder, CMO
• Chuck Christmas, EVP and CFO

Analysts

• Nathan Race, Senior Research Analyst at Piper Sandler
• Damon DelMonte, Managing Director at KBW
• Brendan Nosal, Director of Equity Research at Hovde Group
• Daniel Tamayo, VP at Raymond James