Mercantile Bank Q3 Earnings Call Highlights

Key Points

• Third-quarter net income rose slightly to $24.1 million, or $1.39 per diluted share, while first-nine-month net income increased to $72.7 million. Higher net interest and non-interest income offset increased operating and tax expenses, though adjusted quarterly EPS declined year over year.
• Net interest margin expanded to 3.73% from 3.49% a year earlier, helped by lower funding costs, fewer brokered deposits and repricing of loans and securities. Commercial loans grew 9% from the prior year-end, deposits rose 17% year over year, and management expects fourth-quarter annualized loan growth of 5% to 7%.
• Asset quality remained strong, with nonperforming assets declining to 14 basis points of total assets and past-due loans at 3 basis points. Expenses increased due to the Eastern Michigan Bank acquisition, Southeast Michigan hiring and banking-system conversion, but management expects related one-time costs to moderate through early 2027.

Mercantile Bank NASDAQ: MBWM reported third-quarter 2026 net income of $24.1 million, or $1.39 per diluted share, compared with $23.8 million, or $1.46 per diluted share, in the third quarter of 2025. For the first nine months of 2026, net income rose to $72.7 million, or $4.21 per diluted share, from $65.9 million, or $4.06 per diluted share, a year earlier.

Chief Financial Officer Chuck Christmas said the year-over-year growth in net income primarily reflected higher net interest income and non-interest income, which more than offset higher operating expenses and federal income tax expense.

Excluding costs tied to Mercantile’s acquisition of Eastern Michigan Bank, its core and digital banking conversion, and other smaller one-time items, adjusted third-quarter net income was $24.5 million, or $1.42 per diluted share. That compared with adjusted net income of $24.3 million, or $1.50 per diluted share, a year earlier. Adjusted earnings per share declined about 5% year over year for the quarter but increased about 8% for the first nine months of 2026.

Margin expands as funding costs fall

President and CEO Ray Reitsma said the company’s third-quarter results continued to reflect its commercial banking focus and a stronger return profile. Net interest margin increased to 3.73% in the third quarter from 3.49% in the prior-year period and was 3.62% for the first nine months of 2026, compared with 3.48% a year earlier.

Reitsma attributed the margin improvement largely to lower funding costs following the Eastern Michigan Bank acquisition, a refinement of the deposit base, lower brokered deposits, and the repricing of fixed-rate loans and securities. He said Mercantile continues to see opportunities for asset repricing in 2026 and 2027.

Net interest income increased $8.9 million year over year in the third quarter and rose $24 million over the first nine months. Average earning assets increased by $575 million to $6.52 billion in the quarter, driven primarily by the Eastern Michigan acquisition, loan growth and investment growth.

Interest expense declined $4.3 million from the prior-year quarter. The cost of all deposits was down 51 basis points year over year, while average interest-bearing deposits increased $389 million to $4 billion.

During the question-and-answer session, Christmas said the bank expects its margin to remain relatively stable over several quarters in a changing-rate environment, with the potential for a modest increase. He noted that deposit pricing, particularly on money market accounts, remains the more difficult factor to model.

Commercial loans and deposits grow

Commercial loans, Mercantile’s largest asset category, increased 9% from the prior year-end quarter. The growth contributed to a 17% increase in revenue from the third quarter of 2025, Reitsma said.

The bank experienced elevated paydowns, however, totaling $448 million for the first nine months of 2026 from asset and business sales, excess cash flow and refinancings into secondary markets. That compared with $306 million in paydowns during the same 2025 period. Lending commitments, including unfunded construction loan commitments, reached a five-quarter high of $589 million at Sept. 30, up from $386 million a year earlier.

For the fourth quarter, Mercantile projected net loan growth of 5% to 7% on an annualized basis, supported by a strong commercial pipeline but tempered by expected commercial loan payoffs. Reitsma said paydowns tied to asset sales are relatively visible, while repayment from borrowers’ excess cash flow is harder to forecast.

Total deposits increased 17% over the 12 months ended Sept. 30, including 22% growth in non-interest-bearing deposits and 15% growth in interest-bearing deposits. Management cited commercial relationship growth, public-funds relationships and the Eastern Michigan acquisition. Certificates of deposit declined by about $180 million over the period, primarily because of lower brokered CDs.

Christmas said public-unit deposits are seasonal and expected to experience outflows during October and November, but added that the bank’s business deposit pipeline remained strong.

Asset quality remains low

Mercantile reported nonperforming assets equal to 14 basis points of total assets at Sept. 30, compared with 16 basis points a year earlier. Past-due loans were 3 basis points of total loans.

The company recorded a $700,000 provision for credit losses in the third quarter, after recording a negative $2.9 million provision for the first nine months. The quarterly provision included a $1.7 million increase in specific allocations and a $600,000 increase related to net loan growth, partially offset by a $1.5 million reduction linked to faster prepayments in the residential mortgage portfolio.

The allowance for credit losses equaled 1.14% of total loans at Sept. 30. Christmas said specific reserve allocations totaled $2.6 million, or about 5% of the reserve balance. Reitsma characterized the modest change in nonperforming loans as isolated borrower-specific situations rather than evidence of systemic portfolio or economic issues.

Expenses rise amid investments and integration

Non-interest income increased 16% for the first nine months of 2026. Service charges on accounts rose 34%, credit and debit card income increased 22%, and swap income grew 11%, with management citing growth in commercial relationships.

Non-interest expenses increased $8.8 million in the third quarter and $25.8 million in the first nine months from a year earlier. Eastern Michigan Bank accounted for $4.1 million of third-quarter expenses and $12.1 million through nine months. The company also cited salary and benefit costs, personnel investments in Southeast Michigan, inflation, integration work and its core and digital banking conversion.

Management said one-time expenses related to Southeast Michigan personnel investments, conversion incentives and Eastern Michigan integration totaled $2.4 million in the third quarter. It expects those costs to be $1.2 million in the fourth quarter and $700,000 in the first quarter of 2027. Beginning April 1, 2027, Mercantile projects a quarterly $600,000 reduction in data-processing and statement-processing costs.

Reitsma said the bank had expanded its Southeast Michigan commercial banking staff to about a half dozen commercial callers, up from a relatively small team two years earlier. He said Mercantile would continue to evaluate hiring opportunities created by market disruption, particularly when it identifies talent that could provide a long-term benefit.

Mercantile did not repurchase shares during the third quarter and had $6.8 million remaining under its current repurchase authorization. The company said both Mercantile and Eastern Michigan Bank remained well capitalized, reporting total risk-based capital ratios of 13.4% and 23.9%, respectively, at Sept. 30.

About Mercantile Bank (NASDAQ:MBWM)

Mercantile Bank Corporation is a bank holding company headquartered in Grand Rapids, Michigan. Through its subsidiary, Mercantile Bank, the company provides commercial and retail banking services to businesses, professionals and individuals. The bank primarily serves communities across Michigan, with a focus on relationship-based banking and locally oriented financial services.

Mercantile Bank offers a range of deposit products, including checking, savings, money market and certificate of deposit accounts.

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