Mercantile Bank (MBWM) 2026年第三季度业绩电话会议：净息差升至3.73%

核心要点

• Mercantile Bank Corporation公布2026年第三季度净利润为2410万美元，即摊薄后每股收益1.39美元；而2025年第三季度净利润为2380万美元，即摊薄后每股收益1.46美元。
• 受资金成本下降、收购Eastern Michigan Bank以及固定利率贷款与证券重新定价的支撑，净息差同比扩大24个基点至3.73%。
• 尽管2026年前九个月商业贷款还清和部分偿还额达4.48亿美元，但商业贷款较2025年底仍增长了9%。放贷承诺达到5.89亿美元，创五个季度新高。
• 存款总额同比增长17%，其中无息存款增长22%。大额存单（CD）减少约1.8亿美元，主要原因是经纪CD减少。
• 资产质量保持强劲。截至2026年9月30日，不良资产占总资产的14个基点，而逾期贷款占总贷款的3个基点。
• 对于2026年第四季度，管理层预计年化净贷款增长率为5%至7%，净息差将提高，有效联邦税率约为17%。

核心财务数据

2026年前九个月，净利润总计7270万美元，即摊薄后每股收益4.21美元；而上年同期为6590万美元，即摊薄后每股收益4.06美元。调整后净利润为7610万美元，即摊薄后每股收益4.41美元，高于上年同期的6640万美元（即每股4.09美元）。

业务与经营业绩

商业贷款仍是主要增长动力。商业贷款较2025年底增长9%，而包括未发放建筑贷款部分在内的贷款承诺从一年前的3.86亿美元升至5.89亿美元。管理层表示，尽管资产出售、再融资和过剩现金流产生了大量还款，但新发放贷款储备依然强劲。

存款增长改善了资金结构。在截至2026年9月30日的12个月里，存款总额增长了17%。无息存款增长22%，而有息存款增长15%。管理层将增长归因于商业客户关系、公共资金以及收购Eastern Michigan Bank。大额存单减少约1.8亿美元，降低了对高成本定期资金的依赖。

2026年前九个月，非利息收入增长16%。账户服务费增长34%，信用卡和借记卡收入增长22%，互换收入增长11%，这主要反映了商业关系的拓展。

第三季度非利息费用同比增长880万美元，前九个月增长2580万美元。Eastern Michigan Bank贡献了第三季度410万美元的非利息费用。其他推动因素包括薪酬福利增加、密歇根州东南部人员招聘、技术投资以及与核心及数字银行系统转换相关的成本。

管理层业绩指引

管理层对2026年第四季度的假设建立在联邦基金利率维持不变的基础上，同时也承认市场状况依然波动。

• 考虑到强劲的商业贷款储备和预期还款，预计年化净贷款增长率为5%至7%。
• 受商业贷款增长、芝加哥联邦储备银行现金余额减少以及低收益固定利率商业地产贷款和证券重新定价的支撑，预计净息差将有所提升。
• 预计有效联邦税率约为17%。
• 与密歇根州东南部人员投资、系统转换激励措施以及Eastern Michigan整合相关的一次性费用预计在2026年第四季度为120万美元，在2027年第一季度为70万美元。
• 管理层预计，自2027年4月1日起，数据处理和对账单处理成本每季度将减少60万美元。

管理层预计，在利率变动的环境中，净息差将在未来几个季度保持相对稳定，并有可能略有增加。存款定价行为，尤其是货币市场账户的定价行为，依然难以建模。

风险与关注领域

2026年前九个月，商业贷款偿还额共计4.48亿美元，高于2025年同期的3.06亿美元。管理层指出，利用过剩现金流进行的还款是未来贷款增长中最难以预测的部分。

公共资金存款具有季节性，在密歇根州第三季度强劲的税收征收之后，预计将在10月和11月进一步下降。

管理层还提到了无到期日存款Beta系数、未来人员投资以及2027年费用增长的不确定性。预计第四季度抵押贷款银行业务收入将呈季节性下滑，而由于客户在中期利率变动背景下变得更加犹豫，互换业务收入可能会有所放缓。

分析师问答环节要点

• 息差敏感性：管理层表示，资产重新定价的建模相对简单，但无到期日存款行为的预测性较差。货币市场账户预计将是对利率最敏感的存款类别。
• 密歇根州东南部业务扩张：Mercantile已从两年前较小的商业银行业务规模扩大到拥有约六名商业客户经理。管理层预计将进一步招聘，但无法预测具体时间。
• 流动性配置：第三季度在美联储存放的平均现金约为4.25亿美元。管理层预计第四季度的平均值将下降至3亿多美元的高位区间（接近4亿美元），这应有助于支撑息差扩大。
• 面向2027年的贷款增长：管理层预计目前的部分新发放贷款将延续至2027年，并希望存款增长与贷款增长大致匹配。据描述，企业存款储备的强劲程度与贷款储备大致相当。
• 证券重新定价：证券投资组合的平均存续期约为四年，并采取梯形到期策略。平均收益率为1.5%的约1600万美元证券计划于第四季度到期，随后在2027年还将有平均收益率为2.5%的1亿美元证券到期。
• 信贷质量：管理层表示，不良贷款的适度增加并不表明经济或投资组合存在系统性问题。管理层还将近期第四季度核销的状况归因于巧合，而非刻意的清理策略。

业绩电话会议完整文字记录

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完整财报电话会议逐字稿

管理层陈述

Operator

Good morning, and welcome to the Mercantile Bank Corporation 2026 Third Quarter Earnings Results Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference call over to Nichole Kladder, Chief Marketing Officer of Mercantile Bank. Please go ahead.

Nichole Kladder

Hello, and thank you for joining us. Today, we will cover the company's financial results for the third quarter of 2026. 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. 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. The company's actual results could differ materially from any forward-looking statements made today due to factors described in the company's latest Securities and Exchange Commission's filings. The company assumes no obligation to update any forward-looking statements made during the call.

Let's begin.

Ray?

Raymond Reitsma

Thank you, Nichole. Our results from the third quarter continue to build on the theme of commercial expertise generating a strong return profile. My comments will focus on highlights around the net interest margin, loan and deposit growth, asset quality, noninterest income and noninterest expense. Chuck will then follow with the specifics of the quarter.

The net interest margin improved to 3.73% during the third quarter of 2026 from 3.49% during the third quarter of 2025. This improvement was driven largely by a reduction in the cost of funds resulting from the acquisition of Eastern and the refinement of our deposit base, including a decrease in broker deposits and the repricing 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. From the third quarter of 2025 to the first quarter of 2026, SOFR declined by 67 basis points and our net interest margin increased by 6 basis points. From the first quarter of 2026 to the third quarter of 2026, SOFR was unchanged and our net interest margin increased by 18 basis points, highlighting the impact of the in -- 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 the third quarter of 2025. That growth occurred despite elevated pay downs from asset and business sales, excess cash flow and refinancing to the secondary markets totaling $448 million for the 9 months ending 9/30/2026 compared to $306 million during the respective 2025 period.

At the same time, lending commitments, including unfunded portions of construction loans, stand at a 5-quarter high of $589 million at September 30, 2026, compared to $386 million at 9/30/2025. Asset quality continues to be strong with nonperforming assets representing only 14 basis points and 16 basis points of total assets at September 30, 2026 and September 30, 2025, respectively.

Past due loans stand at just 3 basis points of total loans as of September 30, 2026. C&I and owner-occupied commercial real estate remain near our target of 55% of the commercial portfolio with appropriate granularity relative to loan type classifications. These solid metrics reflect continued discipline in underwriting standards, a strong credit culture and the quality of our client base.

On the funding side, our focus on deposits continues to produce results. Total deposits increased 17% over the last 12 months ending September 30, 2026, including 22% growth in noninterest-bearing deposits and 15% growth in interest-bearing deposits. This growth principally reflects growth in commercial relationships, the 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.

Noninterest income in total increased 16% during the first 9 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 noninterest 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 will comment on what our normalized run rate will look like in upcoming quarters. We remain excited about our combination with Eastern and the opportunities to add customers and employees to our bank as we capitalize on disruptions to markets in Michigan, particularly Southeast Michigan. That concludes my remarks.

I will now turn the call over to Chuck.

Charles Christmas

Thanks, Ray. Good morning, everyone. This morning, we announced net income of $24.1 million or $1.39 per diluted share for the third quarter of 2026 compared with net income of $23.8 million or $1.46 per diluted share for the third quarter of 2025. Net income during the first 9 months of 2026 totaled $72.7 million or $4.21 per diluted share compared to $65.9 million or $4.06 per diluted share during the first 9 months of 2025.

Growth in net income during both time frames primarily reflected increased net interest income and noninterest income that more than offset higher noninterest expenses and federal income tax expense. Excluding nonrecurring costs associated with the year-end 2025 acquisition of Eastern Michigan and the ongoing core and digital banking system conversion and the impacts of smaller onetime items, adjusted net income was $24.5 million or $1.42 per diluted share for the third quarter of 2026, $24.3 million or $1.50 per diluted share for the third quarter of 2025, $76.1 million or $4.41 per diluted share for the first 9 months of 2026 and $66.4 million or $4.09 per diluted share for the first 9 months of 2025.

Adjusted diluted earnings per share decreased $0.08 or approximately 5% in the third quarter of 2026 compared to the third quarter of 2025 and increased $0.32 per diluted share or approximately 8% during the first 9 months of 2026 compared to the first 9 months of 2025. We believe using these non-GAAP measurements reflects our core earnings performance and provides for a more accurate current period versus prior period comparisons.

Interest income on loans increased during the third quarter and first 9 months of 2026 compared to the prior year periods, primarily reflecting loan growth that was partially offset by a lower yield on loans. Average loans totaled $4.97 billion during the third quarter of 2026 compared to $4.6 billion during the third quarter of 2025, an increase of $300 million. Mercantile Bank experienced robust commercial loan fundings throughout 2026, but also received significant payoffs and partial paydowns of certain larger commercial loans aggregating $448 million.

Our yield on loans during the third quarter of 2026 was 23 basis points lower than the third quarter of 2025, primarily reflecting the 75 basis point aggregate decline in the federal funds rate during the last 4 months of 2025. Interest income on securities increased during the third quarter and first 9 months of 2026 compared to the prior year periods, reflecting growth in the securities portfolio and a higher yield. The growth in higher yield reflect the acquisition of Eastern Michigan, along with ongoing portfolio expansion and the reinvestment of matured lower-yielding investments at Mercantile Bank. Average balances were up $284 million and the average yield increased 53 basis points quarter-over-quarter.

Interest income on other interest-earning assets, a large portion of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, declined during the third quarter of 2026 compared to the third quarter of 2025, but increased during the first 9 months of 2026 compared to the same time period in 2025. The average yield decreased 67 basis points quarter-over-quarter and 75 basis points year-to-date over year-to-date, largely depicting the 75 basis point decrease in the Fed funds rate during the last 4 months of 2025. The average balance was $9 million lower in the third quarter of 2026 compared to the third quarter of 2025, but was $110 million higher during the first 9 months of 2026 compared to the first 9 months of 2025.

In total, interest income was $4.6 million and $14.5 million higher during the third quarter and first 9 months of 2026 compared to the respective prior year period. Interest expense on deposits decreased during the third quarter and first 9 months of 2026 compared to the prior year periods, reflecting a lower cost of deposits that more than offset interest-bearing deposit growth. The growth in interest-bearing deposit balances and the lower cost of these funds reflected the acquisition of Eastern Michigan, along with growth and lower deposit costs at Mercantile Bank. Cost of interest-bearing deposits at both banks were positively impacted by the decline in the Fed funds rate in the latter part of 2025.

Average interest-bearing deposits totaled $4 billion during the third quarter of 2026 compared to $3.61 billion during the third quarter of 2025, an increase of $389 million. The cost of all deposits was down 51 basis points during the third quarter of 2026 compared to the third quarter of 2025 and down 49 basis points during the first 9 months of 2026 compared to the same time period in 2025.

Interest expense on Federal Home Loan Bank of Indianapolis advances declined during the third quarter and 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 the third quarter and 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. In total, interest expense was $4.3 million and $9.6 million lower during the third quarter and first 9 months of 2026 compared to the prior year periods.

Net interest income increased $8.9 million and $24.0 million during the third quarter and first 9 months of 2026, respectively, compared to the prior year periods, primarily reflecting growth in earning assets and a higher net interest margin. Average earning assets totaled $6.52 billion during the third quarter of 2026, compared to $5.94 billion during the third quarter of 2025, an increase of $575 million. Average assets increased $664 million during the first 9 months of 2026 compared to the same time period in 2025. The growth in average earning assets during both time periods largely reflects the acquisition of Eastern Michigan at year-end 2025, along with loan and investment growth at Mercantile Bank.

The net interest margin was 3.73% during the third quarter of 2026 compared to 3.49% during the third quarter of 2025 and was 3.62% during the first 9 months of 2026 compared to 3.48% during the first 9 months of 2025. The improvement during both time periods is largely due to the Eastern Michigan acquisition. The yield on earning assets declined 22 basis points and 29 basis points during the third quarter and first 9 months of 2026, respectively, while the cost of funds declined 46 basis points and 43 basis points during the same 2026 time periods.

We recorded provisions for credit losses of $0.7 million and negative $2.9 million during the third quarter and first 9 months of 2026, respectively. The third quarter provision expense mainly reflected a net increase of $1.7 million in specific allocations and an increase of $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 the third quarter of 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 September 30, 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 1/3 of our current reserve balance, reflecting a low level of net loan charge-off activity during our look-back period from the beginning of 2011 through the end of the third quarter of 2026.

Specific reserve allocations totaled just $2.6 million or about 5% of the reserve balance as of September 30. Noninterest expenses were $8.8 million and $25.8 million higher during the third quarter and first 9 months of 2026, respectively, compared to the prior year periods. Excluding onetime costs associated with the ongoing core and digital banking system conversion and year-end 2025 acquisition of Eastern Michigan that aggregated $0.6 million and $4.4 million during the third quarter and first 9 months of 2026, respectively, and $0.6 million during both the third quarter and first 9 months of 2025, noninterest expenses increased $8.8 million and $21.9 million compared to the prior year periods.

Eastern Michigan Bank's noninterest expenses totaled $4.1 million and $12.1 million during the third quarter and first 9 months of 2026, respectively. The increase in core operating costs largely reflects higher salary and benefit costs, including expenses associated with personnel investments in Southeast Michigan and incentive accruals related to the ongoing core and digital banking system conversion and the integration of Eastern Michigan Bank. The remaining growth generally depicts inflation impacts and a larger balance sheet.

Federal income tax expense was $1.2 million and $3.2 million higher during the third quarter and first 9 months of 2026, respectively, compared to the prior year periods, largely reflecting a higher level of pretax net income and a lower level of net benefits from transferable energy tax credits. The effective tax rate was 16.8% during both the third quarter and first 9 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.

Additional acquisitions of transferable energy tax credits may be made from time to time, subject to our investment policy, tax credit availability and tax credits derived from our low-income housing and historical tax credit activities. Both Mercantile and Eastern Michigan Bank have strong and well-capitalized regulatory capital positions. Mercantile Bank's total risk-based capital ratio was 13.4% at September 30, $200 million above the minimum threshold to be categorized as well capitalized. Eastern Michigan Bank's total risk-based capital ratio was 23.9% as of September 30, $39 million above the minimum threshold to be categorized as well capitalized.

We did not repurchase shares during the third quarter of 2026. We have $6.8 million available in our current repurchase plans. In regard to the fourth quarter, on Slide 27 of the investor presentation, we share our latest assumptions on the interest rate environment and key performance metrics for the fourth quarter with the caveat that market conditions remain volatile, making forecasting difficult. The forecast is predicated on no changes -- in the federal funds rate during the quarter, although we believe our net interest margin will remain relatively stable in a changing interest rate environment.

We are projecting net loan growth in a range of 5% to 7% annualized, which encompasses a strong commercial loan pipeline as well as expected commercial loan payoffs. We are forecasting a higher net interest margin during the quarter as we benefit from commercial loan growth, lower levels of moneys at the Federal Reserve Bank of Chicago and maturing low-yielding fixed rate commercial real estate loans and investments. We are projecting a federal tax rate of approximately 17%, which encompasses continued growth in net benefits from our low-income housing and historical tax credit activities, along with additional transferable energy tax credit investments.

Expected quarterly results for noninterest income and noninterest expense are also provided for your reference. Noninterest expense projections reflect ongoing personnel investments made in Southeast Michigan as well as to support operational areas as we switch core and digital banking providers to enhance the durability, efficiency and experience for our customers and employees. Nonrecurring costs associated with the core and digital banking system conversions are not included.

Onetime expenses associated with the recent personnel investments in Southeast Michigan and incentive accruals related to the ongoing core and digital banking system conversion and the integration of Eastern Michigan Bank totaled $2.4 million during the third quarter of 2026. These costs are projected to aggregate $1.2 million during the fourth quarter of 2026 and $0.7 million during the first quarter of 2027.

Starting April 1, 2027, we project a $0.6 million quarterly reduction in our data processing and statement processing costs. In closing, we are very well -- very pleased with our operating results during the third quarter and first 9 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'll 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

[Operator Instructions] Your first question comes from the line of Brendan Nosal with Hovde Group. [Operator Instructions]

Your next question comes from the line of Nathan Race with Piper Sandler.

分析师问答

Nathan Race

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

Charles Christmas

Yes. Nathan, great question. I think what we look at is the asset side is pretty easy to model out when you're looking at rate changes. It's obviously the nonmaturing deposits, which is the tricky part in trying to understand what the betas are going to look like. And I think those -- quite frankly, I think those change over time. And I think the attitudes change a lot in regards to how aggressive or nonaggressive the Fed is. If they kind of do a drip, drip, say, 25 basis points, these are all examples, each quarter.

I don't 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. So 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.

Noninterest-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. The bank, obviously, we love those. And then the money market accounts. I would 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 are actually -- their rate is actually tied to the Fed funds rate. So those do immediately reprice. So those are pretty easy to model.

But our money market product is tiered based on balance and obviously, different rates for different balances. I will say that the -- at least in the first increase here in September, 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 is trying to dissect within our markets of what's going on and looking at their own balance sheet. So it's a very dynamic. Hopefully, we can -- our betas -- 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.

But on an overall basis, the way we model it out, the way that we balance -- have managed our balance sheet, it is 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 ourselves very durable in any changing interest rate environment and not having to hope because obviously, that is not a good strategy for long term in regards to our margin. Hopefully, that helps you, Nathan.

Nathan Race

Yes, absolutely. That's really helpful. And maybe a larger broader question for Ray. Just thinking about operating leverage for next year. I think over 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. So 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

Yes. That's a great question as well. And 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. So we have added a number of experienced commercial bankers around the corporation in the last quarter, really outstanding talent from the super regional and national banks that we compete with. We hired our succession leadership person for our treasury management group, and we have a 1-year transition where both of those people are on the staff, lots of support people around the growth, including credit and risk management and the like.

So your assessment is correct. And we could slow down and reap more than if we continue to invest. But for the long haul, if the opportunities are there to add people that we think will really do a great job for us, we'll continue to invest. So 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. And when we're convinced of its long-term positive effect, we'll continue to do that.

Nathan Race

Okay. Great. And maybe one last one just for Chuck, just to maybe put a finer point around what we can kind of think about a range for expenses for next year. I appreciate the guide for $600,000 of costs coming out in 2Q of next year. But just overall, just given that there could still be some opportunistic hires, kind of any thoughts on just kind of overall expense growth into next year? Any particular guideposts that you could point us toward?

Charles Christmas

I guess my general thought is that budgeting for overhead cost is going to be difficult for next year. And 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 the 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 our -- one of our biggest expenses on the income statement besides interest expense and federal income tax expense. Kind of echoing what Ray was saying is like we want to continue to be very opportunistic -- 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 and certainly would be happy to bring them on if it makes sense.

I would say from a real estate standpoint, we are making -- 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. So you might see some investments on the balance sheet, but I don't think the expenses will be very much, if any, maybe in the fourth quarter of next year.

And then just kind of everything else that's in the cost of running a bank. But 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.

Operator

Your next question is from the line of Brendan Nosal with Hovde Group.

Brendan Nosal

Can you hear me now?

Charles Christmas

Yes, we can.

Brendan Nosal

All right. Sorry about that. Apologies. Chuck, 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, in the fourth quarter versus this quarter's level of like $425 million?

Charles Christmas

Yes. 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 $300s for the fourth quarter on an average basis, trending down during the quarter, but starting from a pretty high point.

Brendan Nosal

Yes. Okay. That's helpful. Maybe kind of digging into Southeast Michigan a little bit more. Could you just kind of give us more of like kind 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?

Charles Christmas

Yes. I 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

Yes, that's fair, but it's still helpful to kind of hear where you started and where you are now.

Operator

Your next question comes from the line of Damon DelMonte with KBW.

Damon Del Monte

So first one, just on the outlook for noninterest income, obviously, a step down here from the third quarter. So 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.

Charles Christmas

Well, I think you hit both items. But I think from a mortgage standpoint, I think it's more seasonal than anything else. We're actually very pleased with our mortgage group. If you look at our production in a very tough environment, it's actually been going up. And 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 think it has more to -- I know it has -- as far as projections go, it has more to do just with the seasonality and the set on of snow starting to fall here relatively soon.

And I think we had a solid swap quarter in the third quarter. We would like to duplicate that. I'm not sure we're going to get there. 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 5, 7-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. But if they want a fixed rate, it's obviously a product that we can offer them that will give them their desired fixed rate.

But again, that's one of those things that's also very difficult to predict not understanding what's going on in the marketplace, but just from timing as we're making commercial term loans and from quarter-to-quarter, there's some lumpiness in there. But it's -- you're spot on. It's those two items that are causing the expected reduction in the fourth quarter versus the third quarter.

Damon Del Monte

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

Raymond Reitsma

So 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's 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. So 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's at a 5-quarter high. And so the level of originations we are very comfortable with. The asset sale, piece of it is, I would call, moderate compared to recent experience. So the variable that will be toughest to define and will surprise us the most between here and the end of the year is what happens with excess cash flow generation.

Damon Del Monte

Okay. That's great color. And then just one last quick one. Chuck, do you happen to have the spot margin for September 30?

Charles Christmas

The spot margin for September 30. I can give you what it was in September. How is that?

Damon Del Monte

Okay. Fair enough.

Charles Christmas

It was 3.74% -- but I would make the comment that it would have been higher as of September 30.

Operator

Your next question comes from the line of Matthew Breese with Stephens Inc.

Matthew Breese

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

Raymond Reitsma

Yes. I think those originations will come to rest at some point. So I guess the answer of will it spill? I would anticipate that it would. I think deposit growth should roughly parallel loan growth, and that would be the desired outcome.

Charles Christmas

Yes. 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 the third quarter, 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's point is, I would say, in general, it is just as strong as the loan pipeline.

Matthew Breese

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

Charles Christmas

Yes. I would say on an overall basis, our duration of our portfolio is about 4 years, and we stick and have always stick 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, excuse me, in a significant down rate environment of buying very discounted agency bonds, say, between $0.85 and $0.95 on the 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 we feel really good about that. So that's the major interest rate risk tool that we do with our securities portfolio. I would say here in the fourth quarter and into of next year, we've got some really solid repricing opportunities, some solid dollars at low rates. And I think on Page 11 of the deck, we have that spelled out for you. We've got $16 million at an average rate of 1.5% here in the fourth quarter and then another $100 million at 2.5% average rate next year. And that's added on top of the fixed rate CRE loans that another almost $60 million this quarter and another almost $200 million next year with rates that are just under 5%.

So we've been getting that benefit, especially throughout this year, I would say even last year, but definitely throughout this year. Clearly, where rates are today, any bond that's going to be maturing and any loan that's going to be maturing is going to be refinanced or renewed at a higher rate. So there's going to continue to be some head or some tails -- tailwind there as long as rates stay where they are now. And we'll just see up from specifically to the investment question you had, we'll let the laddered maturity approach do what it's supposed to do and improve yields as we go forward.

Matthew Breese

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

Charles Christmas

No, that is total coincidence. I mean we work each credit. It seems like we have incredibly strong asset quality, obviously. But like all banks, you're always kind of chasing 1 or 2, I would say, larger-sized credits around on the commercial side. And it's just been total coincidence as far as when the charge-off has taken place. I think if you go back a quarter or 2 quarters or 3 quarters prior to the charge-off, you would have seen us establishing the specific reserve and then obviously going through the collection period.

And then when we get to the end of that collection period or towards the back half of the game, of the baseball game, we're going to take the charge once things become a little bit more finalized. So total coincidence that they've taken place in the fourth quarter.

Operator

[Operator Instructions] your next question comes from the line of Nicholas Holowko with Raymond James.

Nicholas Holowko

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're hearing in terms of overall business confidence from your borrowers and their willingness to invest and expand at this point, especially given the recent rise in interest rates. If you could just give us an updated perspective on that, that would be great.

Raymond Reitsma

Sure. I don't think confidence has changed materially. There's been a bit of uncertainty in the environment that we've been talking about for a number of years. And I think that persists, but I wouldn't say that there's been a marked decrease in willingness to invest or a decrease in optimism about the future. So I think it's just more of the same.

Nicholas Holowko

Okay. Great. And then obviously, you just kind of touched on credit right before this. But just with the small pickup in nonperforming 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.

Raymond Reitsma

Yes. I'd just underscore your observation that it's relatively low levels. And if we have any activity at all, it shows up as a change to a relatively low level. And so every once in a while, a few drops of rain fall from the sky, and that's what happened here. So -- we just continue to have similar experience where there's no systemic issues in the economy or our portfolio. Just from time to time, there's 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.

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

I'd 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.