Good morning and welcome to the Third Quarter 2017 Earnings Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Houston, Investor Relations Council of Lambert and Edwards. Please go ahead.

Thank you, Rachel. Good morning, everyone and thank you for joining Mercantile Bank Corporation’s conference call and webcast to discuss the company’s financial results for the third quarter 2017. I am Mike Houston with Lambert Edwards, Mercantile’s Investor Relations firm. And joining me are members of the management team, including Bob Kaminski, President and Chief Executive Officer; Chuck Christmas, Executive Vice President and Chief Financial Officer; and Ray Reitsma, President of Mercantile Bank, Michigan. We will begin the call with management’s prepared remarks and then open the call up to questions. However, before we begin today’s call, 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 the important 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. If anyone does not already have a copy of the press release issued by Mercantile this morning, you can access it at the company’s website at www.mercbank.com. At this time, I would like to turn the call over to Mercantile’s President and Chief Executive Officer, Bob Kaminski. Bob?

Thank you, Mike and good morning everyone and thank you all for joining us. On the call today, I will provide an overview of performance for the third quarter, including comments on loan growth, profitability and asset quality and then our CFO, Chuck Christmas will provide details on our financial results followed by Q&A. As Mike said, we are also joined on the call today by Ray Reitsma, Mercantile Bank’s President. I am proud of the consistent performance we have delivered throughout 2017, which continued in the most recent quarter as sustained strength in core profitability, solid loan growth, solid asset quality and controlled overhead costs produced earnings per share of $0.51. Mercantile remains on track to deliver a strong year of financial performance consistent with our guidance, in particular, let me highlight several accomplishments in areas of strategic focus during the quarter. Commercial term loans funded to new and current clients totaled $128 million contributing to an overall annualized loan growth rate of almost 10% over the first three quarters of the year. This is consistent with our outlook of high single-digit growth for the year as a whole. Mercantile continues to benefit from a strong Michigan economy as well as active and successful lending teams in our markets. Our loan pipelines remain solid which gives us confidence in the sustainable opportunities for growth that we see over the remainder of 2017 and into 2018. Mortgage loan production was also on track for the quarter as our residential mortgage loan portfolio grew nearly 7% marking the sixth consecutive quarter of growth in that portfolio segment. During the third quarter, we saw solid performance in core fee generating areas, including the credit and debit card fees, mortgage banking activity income and payroll processing revenue. Although our cost of funds has…

Thanks, Bob and good morning to everybody. This morning, we announced net income of $8.3 million or $0.51 per diluted share for the third quarter of 2017. During the third quarter of 2016, we earned $7.8 million or $0.48 per diluted share. Net income for the first nine months of 2017 totaled $23.3 million or $1.41 per diluted share compared to $23.8 million or $1.46 per diluted share during the first nine months of 2016. Excluding the impacts of certain non-core transactions including a bank owned life insurance death benefit claim during the first quarter of 2017, repurchase of trust preferred securities at a large discount during the first quarter of 2016 and accelerated purchase discount accretion on called U.S. government agency bonds during the first nine months of 2016, diluted earnings per share during the first nine months of 2017 and 2016 equals $1.34 and $1.27 respectively. We remain pleased with our financial condition and earnings performance and believe we are very well-positioned to continue to take advantage of lending and market opportunities by delivering consistent results for our shareholders. Our net interest margin was 3.83% during the third quarter continuing a relatively stable trend. Our loan yield has benefited from the recent rate hikes from the FOMC, with each 25 basis point increase in the federal funds rate equating to about a 9 basis point increase. Although interest rates have increased in recent periods, the overall interest rate environment remains low and when combined with strong competition for loans, there remains some downward pressure on our loan yields. Our cost of funds which had remained very stable for the past few years has increased during the past two quarters in large part reflecting higher time deposit rates, a money market deposit account special and higher reliance on wholesale…

Thank you, Chuck. At this time, we will now take your questions.

[Operator Instructions] The first question comes from Matthew Forgotson with Sandler O’Neill & Partners. Please go ahead.

Hi, good morning all.

Good morning, Matt.

Bob, I was wondering if we can just start high level, if you could just tell us what you are seeing across your markets, it’s not just little more about the loan pipeline and then expectations for growth in the fourth quarter?

Well, as we said, loan pipeline remains very strong. We expect performance continued as compared to our guidance. Very competitive landscape continues to be in all of our markets from a pricing standpoint, from a structure standpoint and our key approach is to remain very disciplined and continue with our relationship banking approach. And as we have seen through the first – for the first three quarters of the year, that’s performed very well for us. And I think our clients know what to expect from us and consistent performance is the key building relationships and all of our markets continues to be our hallmark and we continue to see that through the fourth quarter and into next year. As our pipeline remains nice and strong, we see some good opportunities in all of our markets despite the strong competition.

Okay. And in particular, could you just comment a little bit about the Southeast office, how it’s doing and the traction you are generating in that market?

Yes, they are doing very well. They have continued to – continued building relationships there and introducing the commercial loan and consumer customers to Mercantile Bank in our relationship banking approach as we do in all the rest of our markets and continue to gain good traction in the Southeast Michigan market as well.

Okay. And then Bob just staying with you, I guess you mentioned on last quarter’s call that the M&A environment was relatively quiet. Could you give us just your most recent picking on M&A?

As we have always talked about here at Mercantile Bank, our approach to M&A activity is – culture is extremely important just as it is through all the other things that we do as an organization. And we see opportunities from time-to-time and we look to those opportunities and obviously while the numbers have to make sense certainly, the culture is extremely important to us and that will be the approach that we take going forward as well as we look at it – as we look at M&A opportunities that may come across our desk from time-to-time.

Okay, alright. I guess just lastly and then I will hop out. At this time last year with similar levels of capital and liquidity, you declared a $0.50 special dividend. Just wondering if that’s still on the table or if you are more inclined to keep your powder dry to support growth and maybe even some M&A?

Well, as we positioned it last year when working with our Board decided that, that was an appropriate action to take and we call it a special dividend and it was precisely that. And so the expectation is that, that will continue or not necessarily the case where we continue to evaluate our capital position and the whole gamut of options for us as a company and we will continue to do that going forward, but as far as the dividend last year it was special and that’s how we will continue to treat that.

Thanks for taking my questions.

You bet. Thank you.

The next question comes from Kevin Reevey with D.A. Davidson. Please go ahead.

Good morning.

Good morning.

So, on your commercial loan originations, was there any particular region that contributed to the growth than any other region?

Well, certainly, our major markets were the biggest drivers of the growth as they typically are, because that’s where the biggest opportunities are. But I think the opportunities were sprinkle about all of our markets. We saw some nice opportunities everywhere, but certainly the major metropolitan markets were the lead driving force for the biggest trust of the loan growth which they typically are for us.

And what was the line utilization rate at the end of the third quarter and can you remind us where it was at the end of the second quarter?

Yes, Kevin, this is Chuck. We saw little bit of a drop off quite frankly in some of our line utilization in the third quarter. They have been holding right around 50% if you look at our gross commitment compared to our average balances outstanding. It didn’t drop tremendously, but with some additional lines booked during the quarter and the line usage down, the percentage dropped a little bit. So first time in quite a while we haven’t seen our lines of credit actually increased.

And then – and Chuck, maybe you can help me, I noticed your loan originations were also down, I think it was $128 million this quarter versus $152 million. Was there something unusual in the second quarter that didn’t occur in the third quarter and responsible for the one quarter decline?

Yes, Kevin, I think we always talk about is being heavily commercial loan driven. On a quarter-to-quarter basis, we are going to see some volatility. So, we typically see that. There is really not any seasonality to that. As far as weather, obviously, we would say that in the mortgage area. But it just kind of happenstances as our lenders work with borrowers and putting packages together and going through the approval process where that may fall in with the calendar cycle, just there is really no correlation there except for the fact that we report at the end of each quarter. When you look at the numbers quarter-to-quarter, the $120 million we did this quarter, I think is pretty close to average. Having said that, our second quarter number was probably a little bit on the high side of what we typically do, but again there is really no specific reason for that except just as things are working their way through our processes and approvals and doing our appropriate underwriting.

Great. Thanks, guys. Great quarter.

Thanks, Kevin.

Thank you.

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

Hey, good morning, guys. How is it going today?

Good morning.

Good morning. My first question is relating to the margin, Chuck, could you kind of help frame out the actual – the core margin this quarter versus last quarter, I know you are targeting around 600,000 of accretable yield impacts, but obviously it came in higher. So, if you were to kind of zero that out to a core level what would you put that at for this quarter?

I put it in the mid-370s and again that takes into account the fact that we did record a higher level of purchase accounting stuff, but we also had as I mentioned some pretty high level of overnight funds at the Federal Reserve. So, if you kind of back out – if you back out the excess liquidity and you put the purchase income kind of down to more of our guidance, I think that put us right around 375 give or take a couple of basis points.

Okay. And the excess liquidity was that due to an inflow of shorter term deposits?

Yes, I think it’s a combination of we did put a money market to deposit account special together for some higher balances and new money to the bank. And so we saw an influx of funds from that perspective. And then also as I mentioned – and again, it kind of goes back with my answer to Kevin on loan originations, we really see the same thing on payoffs as well and generally, most of our payoffs happen because we have asked folks to leave the bank or they are selling the collateral, especially on the real estate deals. The payoffs tend to be volatile from quarter-to-quarter as well. And one of the things that we saw in the third quarter while again the loan originations were pretty much on average, we did see a relatively high level of payoffs obviously impacting our net loan growth, but also impacting our liquidity. So, combination of deposit influx as well as not utilizing as much funds on the loan side as we on average do cause the excess overnight funds at the fed. We also traditionally do see a pickup in deposit accounts, especially from our commercial customers in the latter half of the year as they start building reserves for bonus and tax payments as well. So that’s something that we are always mindful of as we are going through and planning our liquidity.

Okay. So the pressure you saw on the funding side for deposits that was more driven by account specials or marketing efforts that you guys have done or is that more attributable to just general pricing pressures across the market?

I would say all of that. I think we are all seeing CD rates rise and I think those are primarily driven by the increase in the fed funds rate, but there is definitely some competition out there. There always is. We are in a highly competitive – all of our markets are highly competitive. So, we try to always be in the top one third when we are looking at what our competitors are doing. We always try to be in the top third closer to the top excluding any some of the crazy stuff credit unions are doing out there. And so we have been very, very consistent with that. And so as market rates have moved up, we definitely have seen some CD rate movements, but again we are like in the top third and there are some say very aggressive campaigns out there from some. So, that’s taken place our trust preferred is kind of 90-day LIBOR. So, those have been re-pricing upwards as well. The money market again we didn’t touch our existing money market rates. We created a couple of high balance tiers for new money and that’s what I was talking about before, but if you look at savings rates, you look at interest bearing check-in and you look at our traditional money market accounts, we have not yet had to touch those and we are right where we want to be in regards to the market and we continue to see some good building in those deposit accounts at the rates that they are at. So I would say for the most part I think it’s just the increase in the market rates, the fed funds rate that’s impacting CD rates and our trust preferreds. And then the special, I don’t want to overplay the special too much. We don’t traditionally do specials here. So, it gets a little bit more play than otherwise it would, but I think as rates have gone up, we are going to – everyone is going to see an increase in cost of deposits, it’s just a matter of magnitude and how a bank’s balance sheet is structured on different types of deposits.

And I think our approach as they do on the lending side is based on relationships and we have been quite pleased with some of that relationships that we have garnered on the deposit side maybe customers who don’t have necessarily borrowing needs right now, but they like our approach to banking and they are moving some deposits over here as well as continuing to work with our existing client base making sure that we have as many of those deposits as we can that they maybe have their loan relationship with us, but maybe there are some personal deposits or other types of corporate deposits that they can bring their way in. Our folks have done a nice job in garnering those types of relationships on the deposit side as well.

Yes. And I will just add to that. We continue to see steady – very, very nice growth in non-interest bearing check-in accounts and that’s really driven by the growth on our loan side as we continue to give some really nice C&I credits into the bank. Obviously, they typically come with some very nice operating accounts, maybe 10% to 20% self-funding. So we are very pleased with that aspect as well.

Those C&I relationships that Chuck referred to are also great opportunities for us on the treasury side, because those folks generally have the need for maybe more sophisticated cash management types of products and services and our treasury folks work with them being able to enhance the relationship with those types of activities as well.

Okay, great. And then you guys noted in the release that unfunded commitments on commercial construction and development loans was $163 million, which is up from $111 million last quarter. As these credits become funded and hit the books, otherwise generally, it’s 12 to 18 month credits that are somewhat temporary and then do they generally go to perm or do they – are they generally financed away after that?

They definitely – there is two ways of doing it. One is, you can do the construction loan and then refinance it at the end of the construction period which on larger construction projects are going to be 18 to 24 months. Sometimes, we do a construction permanent loan at one time at the initiation of construction, but a vast majority of the projects that we financed at construction, we also end up doing the permanent financing as well, whether that’s a combined construction perm loan or do the permanent loan after the construction is completed, but we try not to do too many deals on the construction side if we know we are not going to get the end financing, it’s hard to get an appropriate rate for the risk during the construction period just because of the market that’s out there and certainly we much prefer to have the permanent loan as well.

Okay, great. And then just lastly as you look into the fourth quarter, I would be kind of reiterating the guidance for loan growth. So, we are talking somewhere in the kind of mid single-digit range here for the fourth quarter and then carrying into 2018?

Yes, I think that’s what we are looking for right now yes.

Okay, alright. That’s all I had. Thanks a lot guys. Appreciate it.

You bet.

The next question comes from John Rodis with FIG Partners. Please go ahead.

Good morning.

Good morning.

Bob, maybe just a follow-up to your last comment, because in your commentary you talked about high single-digit loan growth for 2017 and then I think you were just talking about mid single-digit. So, can you clarify that, I just want to make sure I heard that correctly?

Fourth quarter, for the year as a whole will be high single-digits and obviously a lot of moving parts to that as we often talk about. The funding side is probably the most predictable part of it, the less predictable parts of it are what payoffs you might get through customer selling assets or line activity. As Chuck mentioned, we were down a little bit for the third quarter. So that’s what makes that the prediction part a little bit more challenging than just as a pure funding component. From the funding side of it, we are very pleased with the level of the pipeline. The pipeline is as robust as it – there has been and that’s what we are looking for going forward in the wildcards of the obviously the less predictable factors.

So I am sorry, so mid single-digit annualized for the fourth quarter is what you are saying, correct?

Yes.

Okay, that makes sense. Could you guys just maybe talk about the buyback you have still got about $15 million left, you haven’t bought anything in a while and I think last quarter you said you would look to be opportunistic, is that still the right way to think about things?

Yes, John, this is Chuck. That’s exactly what we want to be. We bought back about $20 million worth of our shares a while ago now. The average price was $20, $21 somewhere in that range. So, obviously as we trade today at $35 that played out very, very well for us. We like the price of $35 certainly. Like any company is going to say, they want it to be higher, but when we look at that as a premium over our tangible book, it’s up there from a buyback standpoint. So, we have elected to kind of just stay on the sidelines for now. Obviously, the buyback is not just about price, it’s always about managing our capital and we want to make sure that we have got sufficient dry powder to manage any growth that we do have on our balance sheet and it’s already been said a couple times now that we do have a very, very expensive pipeline, lot of construction loans to fund and there is still a tremendous amount of call activity that’s going on out there. So, we want to make sure that we have an appropriate level of capital to fund that loan growth to make sure that some of the administrative type ratios that we look at concentrations. A lot of that stuff we always put against capital. So, we want to just make sure that we are at where we want to be in regards to our growth, the type of growth and the overall structure of our loan portfolio, especially in relation to our balance sheet and our capital position. So, I think, you are right it’s a longwinded question. Our answer to basically say yes, you are right it’s very opportunistic. We certainly stand ready to go ahead and utilize that established line from our board if in fact it makes sense going forward whether that’s because loan growth expectations or certainly our stock price.

Okay. And then Chuck, maybe just one other question for you and I will be done. Just the increase in non-accrual loans this quarter, I know it’s of low levels, but it went from $6.5 million to $8 million roughly. That, that wasn’t the building, was it?

No, the building went into ORE. The increase in non-accruals is primarily just one relationship, C&I relationship that we have got. And obviously from time-to-time, a bank is going to have some of its credit go sideways and obviously we saw some trouble with that one credit. And as we always do take the conservative route, put it an non-accrual and then start working with the borrower to try to correct the situation.

But big picture, you guys still feel good about credit quality right?

Yes. And I guess that’s why I was going to follow-up on John is, it’s primarily a one-off, it happens from time to time, but it’s really not indicative of anything that systemic. On an overall basis, we continue to be very pleased with the overall quality of our loan portfolio.

Yes. Just to underscore Chuck’s comments, we are very pleased with the quality – the asset quality of the portfolio. And as Chuck also said I think we tend to as we always have take a fairly conservative approach to our treatment of problem loans. And as you can see by the level of recoveries that we typically have, I think it’s reflective of that more conservative approach that we take a charge-off and then some recovery has come in later and we have experienced that again not only in the third quarter, but throughout this whole year.

Yes. I don’t want to get too much into the leads, but if you look at our numbers this year, there was one quarter that we had a particularly high level – relatively high level of charge-offs and we have already received some pretty significant recoveries on net charge-off both in the third quarter which has seen the numbers, but also here early in the fourth quarter we have got some additional recoveries coming back. So, it makes the swings a little bit larger, but that’s just our style of banking when we see a problem, we identify it, we record it properly and we aggressively get on it.

Makes sense. I know you guys are right. I mean, your charge-offs are going to be what probably below 10 basis points again this year. So that speaks for itself. So, okay, guys, thank you.

Thank you.

[Operator Instructions] The next question comes from Daniel Cardenas with Raymond James. Please go ahead.

Hey, good morning guys.

Good morning, Dan.

Hey, Dan.

Just most of my questions have been asked and answered. Just one quick question on the provision expense we saw this quarter, $1 million, what portion of that was related to loan growth and then what portion of that was related to the changing economic conditions that you mentioned in your prepared remarks? And then a follow-up on that just maybe what are the changes in economic conditions that you guys are seeing that are causing you to perhaps set aside some additional provisions?

Yes, the change in economic conditions was about $650,000 and that’s an environment that goes throughout every type of loan that we have got. Sometimes, the environment has only touched certain aspects of our portfolios, but changing economic conditions impacts all of them. So, again, it’s about $650,000, the other $350,000 there is obviously lots of stuff going on there. Certainly, loan growth is going to be part of it, but obviously upgrades, downgrades, those types of things like changes in specific reserves, payments on non-accruals those things are going to make up the other things. It’s interesting because changes in economic conditions, we actually upgraded that allocation earlier this year. I believe it was the first quarter. And obviously, there was a lot of very positive news, very positive optimism. I won’t get in the reasons why everyone have their own opinion for that, but there was no doubt that optimism was up in a lots of different metrics and so we went ahead and changed that one. Again, I think it was the first quarter, but I think we have seen in many aspects that optimism kind of wane-off wane I should say and die off a little bit. So, we are kind of right back to where we were basically 12 months ago. And again, obviously if we look at our environmentals, all of them at the end of each quarter make changes what we think are appropriate and we try not to do them. We have wild swings quarter-to-quarter. We really look for general ongoing trends and make changes at that point in time. But I think that the optimism that we saw at the beginning of the calendar year certainly isn't what it is today and we thought kind of reversing engines on that particular one made sense.

Okay. It sounds like maybe just a more cautious outlook on the overall operating environment, it doesn’t sound like you are perhaps expecting your charge-off levels to bounce off of these low levels that we have seen here over the last several years? And does that – am I reading that correctly?

Yes. And I appreciate the follow-up question. Yes, I want to make sure that we are clear on that, that the downgrade if you will in changing economic conditions is not an indication that we are concerned about the economy overall and how that’s going to impact our borrowers or certainly what we see in the condition of our borrowers. The economic conditions is still positively rated within our allocation paradigm, it’s just not as highly rated as it was prior to that, but again as we mentioned, we are very, very pleased with the loan portfolio and don’t see anything systemic that reflects any type of downturn.

And then just as a further follow-up, I wanted to just clarify too that the change in the environmental effect that Chuck referred to is not reflective of our view of the Michigan economy or the strength of the economies in our local markets that we are seeing. I think it’s more of on a broader scale than that from a national standpoint.

Okay, good. That makes sense. And then just a quick question about the loan growth that we saw in this quarter geographically was that concentrated in any one area and what if possible can you give footings on the Southeast Detroit initiative, what you are seeing in terms of loan balances and deposit balances?

And as we said a little bit earlier, I think our major metropolitan markets certainly contributed the majority of the loan growth that you saw and certainly represent the biggest part of the pipeline that we see although we are seeing some good traction and some good opportunities in all of our markets, including some of the small community rural markets as well. As far as Southeast Michigan, we are very pleased with what their activities and their relationship building that’s going on in that market and they are introducing Mercantile Bank and for both the loan and deposit side and we are very pleased with what they have done so far and what the pipeline shows that they have got projected for, for continuing to build relationships and bringing new clients into the bank in the coming year.

And I would add for the Southeast is they are at a size now that on a monthly basis as we go forward as we speak now, they are pretty much broken even. So, we are very pleased with an office that we created primarily in March is already reached the size that they are breaking even and obviously we expect ongoing growth and ongoing and improved profitability as we go forward.

Okay. And would you guys be looking to expand further into that Southeast Michigan portion of your franchise?

Looking to our approach, I am sorry.

Or is it too soon right now to make that call?

I think our approach that we have taken since we opened the Mercantile Bank here in Grand Rapids as that we are going to be one of small furnace as far as bricks and mortar and through relationship banking. And I think with the one of the new technologies in the ways that clients can interact with the bank, you don’t need to have as big of a physical presence as you certainly did in many years past. And so I think that our approach will service well in Southeast Michigan just as it has in Grand Rapids and Kent County.

Alright, great. Good quarter, guys. Thanks a lot for the time.

Thank you, Dan.

Next is a follow-up question from Kevin Reevey with D.A. Davidson. Please go ahead.

Bob, where are you in terms of your strategic initiatives with respect to your residential mortgage business? Is that pretty much completed or are you still adding lenders in that business?

It’s a good question. I think we continue to build the machine there if you look at the opportunities that we are seeing now as we have a much bigger profile in the residential mortgage area for finding that the residential mortgage lenders, especially in our more major markets, they see us an attractive landing spot. So, we have had some great opportunities to get some high-performing mortgage lending personnel over the last year and we are hopeful that will continue and as the opportunities present themselves, if someone wants to join our team that has a loyal following of experience in their particular market, then we will certainly take a look at that. But I think as far as the revamping of our retooling of our mortgage process, I think that part of it has created great platform for these lenders that are coming on board to be able to service our clients in the very high quality fashion.

And how many lenders do you have as of right now dedicated to residential mortgage lending?

I don’t have the number off the top of my head, perhaps, 18 to 20.

Okay, great. Thank you.

Thank you, Kevin.

This concludes our question-and-answer session. I would like to turn the conference back over to Bob Kaminski, President and CEO for any closing remarks.

Yes, thank you for your interest in our company and we look forward to talking to you again after the fourth quarter. This concludes our call.

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