Mercantile Bank Q2 2026 Earnings Report

Mercantile Bank EPS Results

• Actual EPS: $1.53
• Consensus EPS: $1.32
• Beat/Miss: Beat by +$0.21
• One Year Ago EPS: N/A

Mercantile Bank Revenue Results

• Actual Revenue: $68.76 million
• Expected Revenue: $68.81 million
• Beat/Miss: Missed by -$51.00 thousand
• YoY Revenue Growth: N/A

Mercantile Bank Announcement Details

• Quarter: Q2 2026
• Date: 7/21/2026
• Time: Before Market Opens
• Conference Call Date: Tuesday, July 21, 2026
• 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 Q2 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Mercantile Bank delivered solid second-quarter results, with net income of $25.9 million and diluted EPS of $1.50, up from $1.39 a year ago. Management also highlighted 10% adjusted EPS growth and strong returns, including a 1.52% ROA and 14% ROE.
• Positive Sentiment: The company said its net interest margin rose to 3.59%, even as rates fell, reflecting disciplined balance sheet management and the benefits of the Eastern Michigan acquisition. Management expects the margin to stay relatively stable and potentially improve further in the back half of 2026.
• Positive Sentiment: Credit quality remained very strong, with non-performing assets at just 9 basis points of total assets and the allowance for credit losses at 1.13% of total loans. The quarter included a negative provision for credit losses due to a specific reserve release tied to a resolved problem loan.
• Positive Sentiment: Loan and deposit trends were favorable, led by $115 million of commercial loan growth in the quarter and 12.4% deposit growth over the last 12 months. Management also pointed to a better deposit mix, including more non-interest-bearing and lower-cost deposits, which supported funding stability.
• Neutral Sentiment: Expenses rose as the bank invested in Southeast Michigan expansion and a core/digital banking conversion, with management saying those costs are intentional and tied to future growth. The bank also said it has nearly exited the brokered CD market and may consider actions around its callable subordinated debt, but no decision has been made.

Presentation

[Operator]

Good morning, welcome to the Mercantile Bank Corporation 2026 second 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, thank you for joining us. Today, we will cover the company's financial results for the second quarter of 2026. The team members joining me this morning include Ray Reitsma, President and Chief Executive Officer, as well as Chuck Christmas, Executive Vice President and Chief Financial Officer. 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 the presentation, as well as the press release sent earlier today by visiting mercbank.com. After our prepared remarks, we will 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]

Thank you, Nichole. Our results for the second quarter of 2026 continue to build on the theme of commercial expertise generating a strong return profile. The consummation of the purchase of Eastern Michigan on December 31, 2025, represents execution of our strategic objectives around deposit growth, loan growth, and margin stability, paired with strong asset quality and overall financial performance. We continue to demonstrate top-quartile ROA performance relative to our peers, built around the following traits. A strong and durable net interest margin. Over the last five quarters, the SOFR 90-day average rate has dropped 71 basis points, while our margin increased by 11 basis points to 3.59%.

[Ray Reitsma, President and CEO at Mercantile Bank]

This illustrates effective execution of our strategic objective to maintain a steady margin via match funding of our assets and liabilities and refutes the notion that we have an asset-sensitive balance sheet despite the relatively large portion of floating rate assets. Very strong asset quality. Non-performing assets to total assets remain at the low levels typical of our company at nine basis points of total assets as of June 30, 2026. Non-performing loans to total loans over the last six and a half years averaged 12 basis points. The allowance for credit losses stands at 1.13% of total loans as of June 30, 2026, and on a dollar volume basis was nearly 10x the level of non-performing loans, providing a very strong coverage relative to past due non-performing loan levels. These numbers demonstrate our long-standing commitment to excellence in loan underwriting and administration.

[Ray Reitsma, President and CEO at Mercantile Bank]

Improved on balance sheet liquidity and loans and deposit ratio. At the end of the second quarter of 2026, our loans and deposit ratio stood at 93% compared to 100% at June 30, 2025, and 91% on December 31, 2025, 98% on December 31, 2024, and 110% on December 31, 2023. As of June 30, 2026, our deposit mix included 27% non-interest-bearing deposits and 24% lower cost deposits, up from 25% and 20% respectively at the end of the second quarter of 2025, which has contributed to the stability of our net interest margin. Our acquisition of Eastern Michigan contributed positively to these measures. Deposit growth during the 12 months ended June 30, 2026, was 12.4%, with growth in the non-interest-bearing accounts outpacing the growth in interest-bearing accounts during that period.

[Ray Reitsma, President and CEO at Mercantile Bank]

Our recent focus on deposit growth is not new to our bank. In fact, the last five year-end periods demonstrate a deposit compounded annual growth rate of 9.2%. Strong commercial loan growth. Commercial loan growth in the second quarter of 2026 was $115 million, an annualized growth rate of 11.7%. As foreshadowed in the prior quarter's commentary, loan payoffs did moderate from the prior four quarters' experience, reducing by $60 million compared to the prior quarter. June 30, 2026, commitments to make new commercial loans total $224 million, and commitments to fund existing commercial and residential construction loans total $283 million, with each amount at or near five quarter highs. We expect that loan growth for 2026 will fall within the range of previously defined expectations of mid-single digit percentages.

[Ray Reitsma, President and CEO at Mercantile Bank]

Continued strong growth in key fee income categories. Growth in commercial deposit relationships has supported growth in treasury management services, resulting in a 35% increase in service charges on accounts during the second quarter of 2026 compared to the second quarter of 2025. Our credit and debit card offerings report growth of 21% in the first six months of 2026 compared to the respective 2025 period. Well-managed expenses. Net revenue, defined as net interest income plus non-interest income, grew 15.3% to $136.3 million during the first six months of 2026 from $118.2 million in the respective 2025 period. Efficiency costs plus data processing costs were virtually unchanged as a percentage of net revenue, and salaries and benefits increased from 34%-35% of net revenue, primarily reflecting our investment in the Southeast Michigan market.

[Ray Reitsma, President and CEO at Mercantile Bank]

In sum, these traits have allowed us to report a quarter-over-quarter EPS growth of 10% in the second quarter of 2026 compared to the prior year second quarter, a 1.52% return on average assets, and a 14% return on average equity in the second quarter of 2026, and an annualized 11.6% increase in the tangible book value per share in the current year second quarter compared to the first quarter of 2026. Additionally, our five-year tangible book value per share compounded annual growth rate of 9% and five-year earnings per share compounded annual growth rate of 15.1% historically place us in the top tier of our proxy group. We remain excited about the recently completed combination with Eastern Michigan. The integration of operations is well underway and the cultures have meshed very well. That concludes my remarks. 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 $25.9 million or $1.50 per diluted share for the second quarter of 2026, compared with net income of $22.6 million or $1.39 per diluted share for the second quarter of 2025. Net income during the first six months of 2026 totaled $48.6 million or $2.82 per diluted share, compared to $42.2 million or $2.60 per diluted share during the first six months of 2025. Growth in net income during both time frames primarily reflected increased net interest income and lower provision expense that more than offset higher non-interest expense costs and federal income tax expense.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Interest income on securities increased during the second quarter and first six months of 2026 compared to the prior year periods, reflecting growth in the securities portfolio and a higher yield. The growth and higher yield reflect the acquisition of Eastern Michigan, along with ongoing portfolio growth and reinvestment of mature lower yielding investments at Mercantile Bank. Average balances were up $325 million, and the average yield increased 54 basis points quarter-over-quarter. Interest income on other earning assets, a large portion of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, increased during the second quarter and first six months of 2026 compared to the prior year periods, reflecting a higher average balance that more than offset a lower average yield.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

The average balance was up $178 million, while the average yield declined 87 basis points quarter-over-quarter, the latter of which largely depicts the aggregate 75 basis point decrease the federal funds rate during the last four months of 2025. In total, interest income was $4.7 million and $9.8 million higher during the second quarter and first six months of 2026 compared to the respective prior year periods. Interest expense on deposits decreased during the second quarter and first six months of 2026 compared to the prior year periods, reflecting a lower cost of deposits that more than offset interest-bearing deposit growth. The growth in interest-bearing deposit balances and the lower cost of these funds reflect the acquisition of Eastern Michigan, along with growth and lower deposit costs at Mercantile Bank.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Costs of interest-bearing deposits at both banks were positively impacted by the aforementioned decline in the Fed funds rate in the latter part of 2025. Average interest-bearing deposits totaled $3.96 billion during the second quarter of 2026, compared to $3.46 billion during the second quarter of 2025, an increase of $493 million. The cost of all deposits was down 50 basis points during the second quarter of 2026 compared to the second quarter of 2025. Interest expense on Federal Home Loan Bank of Indianapolis advances declined during the second quarter and first six months of 2026 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 increased during the second quarter and first six months of 2026 compared to the prior year periods, largely reflecting the impact of a term loan we obtained in late 2025 to assist in the cash portion of the Eastern Michigan acquisition. In total, interest expense was $3.0 million and $5.3 million lower during the second quarter and first six months of 2026 compared to the prior year periods. Net interest income increased $7.8 million and $15.1 million during the second quarter and first six months of 2026, respectively, compared to the prior year periods, primarily reflecting growth in earning assets and a higher net interest margin.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

A large portion of deposit growth was in higher cost in money market and time deposit products while the purchased securities provided a lower yield than loan products. Despite that strategic initiative and declines in the federal funds rate during the latter parts of 2025 and 2024, our quarterly net interest margin has remained relatively stable. Over the past eight quarters, our net interest margin has averaged 3.49%, with a high of 3.59% and a low of 3.41%. We remain committed to managing our balance sheet in a manner that minimizes the impact of changing interest rates environment on our net interest margin. Basic funds management practices such as match funding, combined with scheduled maturities of lower yielding fixed rate commercial loans and securities and higher rate time deposits, along with scheduled rate adjustments on residential mortgage loans, should provide for a relatively stable net interest margin in future periods.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

The effective tax rate was 16.9% during the second quarter and first six months of 2026, compared to 12.9% and 15.7% during the respective time periods in 2025. The 2025 periods had higher levels of transferable energy tax credit activity, given 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 Bank and Eastern Michigan Bank have strong and well-capitalized regulatory capital positions. Mercantile Bank's total risk-based capital ratio was 13.5% as of June 30, 2026, $205 million above the minimum threshold to be categorized as well-capitalized. Eastern Michigan Bank's total risk-based capital ratio was 23.1% as of June 30, 2026, $36 million above the minimum threshold to be categorized as well-capitalized.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

We are forecasting a higher net interest margin during the last six months of 2026 compared to the first six months of 2026, as we benefit from commercial loan growth, lower levels of monies at the Federal Reserve Bank of Chicago, and maturing low-yielding fixed rate commercial real estate loans and investments. We are projecting a Federal tax rate of 17%, which encompasses continued growth in net benefits from our low-income housing and historical tax credit activities, along with additional transferable energy tax credit investments. Expected quarterly results for non-interest income and non-interest expense are also provided for your reference.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Non-interest expense projections reflect personnel investments that were made in the latter part of 2025 and first six months of 2026, expected during the remainder of 2026 to support expansion in Southeast Michigan, as well as to support operational areas as we switch core and digital banking providers to enhance the durability, efficiency, and experience for our customers and employees. Costs associated with the core and digital banking system conversion are not included. In closing, we are very pleased with our operating results during the second quarter and first six months of 2026 and continued strong financial condition. We believe we remain well-positioned to successfully navigate through the myriad of challenges and uncertainties faced by all financial institutions. That concludes my prepared remarks. I'll now turn the call back over to Ray.

[Ray Reitsma, President and CEO at Mercantile Bank]

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

[Operator]

We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then one. At this time, we will pause momentarily to assemble our roster.

[Operator]

The first question comes from Daniel Tamayo with Raymond James. Your line is now open.

[Daniel Tamayo, Analyst at Raymond James]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Daniel Tamayo, Analyst at Raymond James]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

There's a lot of moving parts that make it very difficult to say, "This is going to be our cost going forward." It'll be a while before we get to that point.

[Daniel Tamayo, Analyst at Raymond James]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

If we did enter into a period of stress, our reserve, like all banks reserves, are designed to reflect that with increased reserve level requirements, which would lead to obviously bigger or potential sizable positive provision expenses. Overall, we feel very solid. We feel very good about the quality of our loan portfolio. It's been very consistent at its relative current level now, and we don't see anything in the near term, at least, that is going to change that. We don't have a lot of charge-offs, we generally don't have a lot of recoveries.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

We do try to recover every dollar that we do charge off and have expectations that while on the accounting side, we've had to eliminate it, the borrower still owes us money, and we're going to work through any channels that we can, that we have available to us to maximize those recoveries.

[Daniel Tamayo, Analyst at Raymond James]

All right. Terrific. Well, thanks for the color, sir. I appreciate it.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

You're welcome, Daniel.

[Operator]

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

[Brendan Nosal, Analyst at Hovde Group]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Hey, Brendan. Good morning.

[Brendan Nosal, Analyst at Hovde Group]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Brendan Nosal, Analyst at Hovde Group]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

I think a big part of that clearly is our stock price. We're very pleased with the run that we've had, where we think that we're finally getting close to where we think we should be valued. We've been frustratingly low below some of the benchmarks that we look at, so we're obviously pleased with what we've seen over the last few months there. I think the other thing that we're looking at, making sure we have capital to take advantage of those opportunities again, we do have our subordinated notes that do flip to a floating rate and become callable in January. We're obviously looking at that. That is on our radar. We've made no decisions whatsoever in regards to that. Quite frankly, we would love to earn our way out of that position that we've got there.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

I think we're definitely going in the right direction from that potential opportunity there. I think the other thing that we had very favorable pricing. While we're not going to keep the 3.25% fixed rate that we have come January, our spread over 90-day LIBOR, I'll say, is only 212 basis points. Which if you did the math today, that's a rate that's still under 6%, which I think is very favorable compared to if we wanted to refinance that with a new sub-note. Not saying we will or won't. We're not at that point yet. If we do start looking at the capital haircut, doing some calculations, every year, losing 20% of the balance, that's about 30 basis points off our total risk-based capital ratio.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Looking at those numbers, looking at the environment today, all the forecasting that we're doing, we're comfortable with at least one year of letting that float, if not even a year after that or who knows more, as we look at our capital stack each quarter end and certainly at each year end. That's kind of our thoughts on capital is obviously we want to continue to augment it with a strong net income, pay a competitive and growing cash dividend, making sure that we've got lots and lots of capital to take advantage of the opportunities and continue to grow the company, which obviously is the foundation for additional net income growth.

[Brendan Nosal, Analyst at Hovde Group]

Awesome. Thanks for taking my questions, Chuck.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

You're welcome.

[Operator]

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

[Nathan Race, Analyst at Piper Sandler]

Hey, guys. Good morning. Thanks for taking the questions.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

You bet.

[Ray Reitsma, President and CEO at Mercantile Bank]

Yes.

[Nathan Race, Analyst at Piper Sandler]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Nathan Race, Analyst at Piper Sandler]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Nathan Race, Analyst at Piper Sandler]

Gotcha. Then if I could just ask one more on deposit growth expectations going forward. I appreciate the commentary earlier on some of the seasonality that impacted 2Q around tax payments and so forth. Any visibility into the core deposit gathering pipeline? I know you guys have some excess liquidity you can use to fund loan growth, just any thoughts on how deposit gathering can trend over the next few quarters as well?

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Nathan Race, Analyst at Piper Sandler]

Got it. Appreciate all the color. Thank you.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

You're welcome.

[Operator]

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

[Damon DelMonte, Analyst at KBW]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Damon DelMonte, Analyst at KBW]

Got it. Okay. That's helpful. Thanks.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

You're welcome.

[Damon DelMonte, Analyst at KBW]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Damon DelMonte, Analyst at KBW]

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

[Ray Reitsma, President and CEO at Mercantile Bank]

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

[Damon DelMonte, Analyst at KBW]

Okay, great. Thanks, Ray. I appreciate that. Okay, that's all that I had. Thanks a lot, guys.

[Chuck Christmas, EVP and CFO at Mercantile Bank]

Okay, Damon.

[Operator]

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

[Matthew Breese, Analyst at Stephens Inc]

Hey, good morning.

[Ray Reitsma, President and CEO at Mercantile Bank]

Morning.

[Matthew Breese, Analyst at Stephens Inc]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Matthew Breese, Analyst at Stephens Inc]

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

[Ray Reitsma, President and CEO at Mercantile Bank]

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

[Matthew Breese, Analyst at Stephens Inc]

Okay. Just last one. You've spoken a couple of times about kind of the mix shift of cash into loans and how that's accretive to NIM. Just curious what your definition is of excess cash. From where we sit today at about 5% cash to assets, how much of that do you think is excess?

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Matthew Breese, Analyst at Stephens Inc]

Do you have a time frame expectation to kind of mix shift that?

[Chuck Christmas, EVP and CFO at Mercantile Bank]

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

[Matthew Breese, Analyst at Stephens Inc]

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

[Chuck Christmas, EVP and CFO at Mercantile Bank]

You betcha.

[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]

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

[Operator]

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

Participants

Executives

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

Analysts

• Daniel Tamayo, Analyst at Raymond James
• Brendan Nosal, Analyst at Hovde Group
• Nathan Race, Analyst at Piper Sandler
• Damon DelMonte, Analyst at KBW
• Matthew Breese, Analyst at Stephens Inc