Mercantile Bank Reports Q3 2026 Results in Earnings Call Transcript

Mercantile Bank (NASDAQ: MBWM ) reported third-quarter financial results on Tuesday. The transcript from the company's third-quarter earnings call has been provided below. This transcript is brought to you APIs. For real-time access to our entire catalog, please visit for a consultation.

View the webcast at Summary Mercantile Bank's net interest margin improved to 3.73% from 3.49% year-over-year, driven by a reduction in costs and repricing opportunities. Commercial loans increased by 9%, contributing to a 17% revenue growth despite notable paydowns. Asset quality remains strong with nonperforming assets at 14 basis points of total assets, reflecting disciplined underwriting standards. Total deposits grew by 17%, with a significant increase in noninterest-bearing deposits, enhancing the funding mix quality.

Noninterest income rose by 16%, led by increases in service charges, card income, and swap income, primarily due to commercial relationship growth. The company is investing in people and technology, particularly in Southeast Michigan, to capitalize on market disruptions. Net income for the third quarter was $24.1 million, slightly up from the previous year, driven by increased net interest and noninterest income. Mercantile Bank is projecting stable or slightly increased net interest margins in the future, with a focus on maintaining a durable balance sheet.

The company did not repurchase shares during the quarter and maintains strong regulatory capital positions. Future outlook suggests continued loan and deposit growth, with strategic investments and personnel additions in Southeast Michigan to enhance long-term profitability. Full Transcript OPERATOR Third Quarter Earnings Results Conference Call. All participants will be in a 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 call over to Nichole Kladder, Chief Marketing Officer of Mercantile Bank.

Please go ahead. Nichole Kladder (Chief Marketing Officer) Hello and thank you for joining us today. We will cover the Company's financial results for the third quarter of 2026. The team members joining me this morning include Ray Reitsma, President and Chief Executive Officer, as well as Chuck Christmas, Executive Vice President and Chief Financial Officer.

Our agenda will begin with prepared remarks by both Ray and Chuck and will include references to our presentation covering this quarter's results. You can access a copy of this presentation as well as the press release sent earlier today by visiting mercbank.com. After our prepared remarks, we will then open the call to your questions. Before we begin, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings, and capital structure, as well as statements on the plans and objectives of the Company's business.

The Company's actual results could differ materially from any forward-looking statements made today due to factors described in the Company's latest Securities and Exchange Commission filings. The Company assumes no obligation to update any forward-looking statements made during the call. Let's begin. Ray Reitsma (President & Chief Executive Officer) Thank you, Nicole.

Our results from the third quarter continue to build on the theme of commercial expertise, generating a strong return profile. My comments will focus on highlights around the net interest margin, loan and deposit growth, asset quality, noninterest income, and noninterest expense. Chuck will then follow with the specifics of the quarter. The net interest margin improved to 3.73% during the third quarter of 2026 from 3.49% during the third quarter of 2025.

This improvement was driven largely by a reduction in the cost of funds resulting from the acquisition of Eastern and the refinement of our deposit base, including a decrease in brokered deposits and the repricing of fixed-rate loans and securities, with continued opportunities for asset repricing in 2026 and 2027. In addition, the margin expansion occurred in a dynamic interest rate environment. From the third quarter of 2025 to the first quarter of 2026, SOFR declined by 67 basis points and our net interest margin increased by 6 basis points.

From the first quarter of 2026 to the third quarter of 2026, SOFR was unchanged and our net interest margin increased by 18 basis points, highlighting the impact of the actions listed above. The chart on page 11 of the investor presentation illustrates these dynamics. Turning to loans. Commercial loans, our largest asset class, increased 9% from the prior year-end and helped drive a 17% increase in revenue compared with the third quarter of 2025.

That growth occurred despite elevated paydowns from asset and business sales, excess cash flow, and refinancing to the secondary markets totaling $448 million for the nine months ending September 30, 2026, compared to $306 million during the respective 2025 period. At the same time, lending commitments, including unfunded portions of construction loans, stand at a five-quarter high of $589 million at September 30, 2026, compared to $386 million at September 30, 2025. Asset quality continues to be strong with nonperforming assets representing only 14 basis points and 16 basis points of total assets at September 30, 2026, and September 30, 2025, respectively.

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

Total deposits increased 17% over the last 12 months ending September 30, 2026, including 22% growth in noninterest-bearing deposits and 15% growth in interest-bearing deposits. This growth principally reflects growth in commercial relationships, development of relationships in the public funds markets, and, of course, the acquisition of Eastern Michigan Bank. Importantly, overall deposit growth occurred as certificates of deposit declined by approximately $180 million over the same period.

This decline primarily represents brokered CDs and, as a result, the overall quality of our funding mix continues to improve while our reliance on higher-cost term funding continues to decline. Noninterest income in total increased 16% during the first nine months of 2026 compared to the respective 2025 period, including a 34% increase in service charges on accounts, a 22% increase in credit and debit card income, and an 11% increase in swap income, in large part reflecting growth in commercial relationships.

We have characterized 2026 as a year of investment around people and technology, including a change in our core systems provider, which is reflected in our noninterest expense. Investments in people include additional costs around the Company in general and particularly in Southeast Michigan, as we take the opportunity afforded by disruptions in that market. Chuck will comment on what our normalized run rate will look like in upcoming quarters. We remain excited about our combination with Eastern and the opportunities to add customers and employees to our bank as we capitalize on disruptions to markets in Michigan, particularly Southeast Michigan.

That concludes my remarks. I will now turn the call over to Chuck. Chuck Christmas (Executive Vice President | Chief Financial Officer) Thanks, Ray. Good morning everyone.

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

Growth in net income during both time frames primarily reflected increased net interest income and noninterest income that more than offset higher noninterest expenses and federal income tax expenses, excluding nonrecurring costs associated with the year-end 2025 acquisition of Eastern Michigan and the ongoing core and digital banking system conversion and the impacts of smaller one-time items.

Adjusted net income was $24.5 million, or $1.42 per diluted share for the third quarter of 2026; $24.3 million, or $1.50 per diluted share for the third quarter of 2025; $76.1 million, or $4.41 per diluted share for the first nine months of 2026; and $66.4 million, or $4.09 per diluted share for the first nine months of 2025. Adjusted diluted earnings per share decreased $0.08, or approximately 5%, in the third quarter of 2026 compared to the third quarter of 2025, and increased $0.32 per diluted share, or approximately 8%, during the first nine months of 2026 compared to the first nine months of 2025.

We believe using these non-GAAP measurements reflects our core earnings performance and provides for a more accurate current period versus prior period comparisons. Interest income on loans increased during the third quarter and first nine months of 2026 compared to the prior year periods, primarily reflecting loan growth that was partially offset by a lower yield on loans. Average loans totaled $4.97 billion during the third quarter of 2026 compared to $4.6 billion during the third quarter of 2025, an increase of $300 million.

Mercantile Bank experienced robust commercial loan fundings throughout 2026 but also received significant payoffs and partial paydowns of certain larger commercial loans aggregating $448 million. Our yield on loans during the third quarter of 2026 was 23 basis points lower than the third quarter of 2025, primarily reflecting the 75 basis point aggregate decline in the federal funds rate during the last four months of 2025. Interest income on securities increased during the third quarter and first nine months of 2026 compared to the prior year periods, reflecting growth in the securities portfolio and a higher yield.

The growth in higher yield reflects the acquisition of Eastern Michigan along with ongoing portfolio expansion and the reinvestment of matured lower-yielding investments at Mercantile Bank. Average balances were up $284 million and the average yield increased 53 basis points quarter over quarter. Interest income on other interest-earning assets, a large portion of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, declined during the third quarter of 2026 compared to the third quarter of 2025 but increased during the first nine months of 2026 compared to the same time period in 2025.

The average yield decreased 67 basis points quarter over quarter and 75 basis points year-to-date over year-to-date, largely depicting the 75 basis point decrease in the fed funds rate during the last four months of 2025. The average balance was $9 million lower in the third quarter of 2026 compared to the third quarter of 2025 but was $110 million higher during the first nine months of 2026 compared to the first nine months of 2025. In total, interest income was $4.6 million and $14.5 million higher during the third quarter and first nine months of 2026 compared to the respective prior year period.

Interest expense on deposits decreased during the third quarter and first nine months of 2026 compared to the prior year periods, reflecting a lower cost of deposits that more than offset interest-bearing deposit growth. The growth in interest-bearing deposit balances and the lower cost of these funds reflected the acquisition of Eastern Michigan along with growth and lower deposit costs at Mercantile Bank. Costs of interest-bearing deposits at both banks were positively impacted by the decline in the fed funds rate in the latter part of 2025.

Average interest-bearing deposits totaled $4 billion during the third quarter of 2026 compared to $3.61 billion during the third quarter of 2025, an increase of $389 million. The cost of all deposits was down 51 basis points during the third quarter of 2026 compared to the third quarter of 2025 and down 49 basis points during the first nine months of 2026 compared to the same time period in 2025. Interest expense on Federal Home Loan Bank of Indianapolis advances declined during the third quarter and first nine months of 2026 compared to the prior year periods, largely reflecting a lower average balance that more than offset a higher average cost.

Interest expense on other borrowed funds increased during the third quarter and first nine months of 2026 compared to their prior year periods, largely reflecting the impact of a term loan we obtained in late 2025 to assist in the cash portion of the Eastern Michigan acquisition. In total, interest expense was $4.3 million and $9.6 million lower during the third quarter and first nine months of 2026 compared to the prior year periods.

Net interest income increased $8.9 million and $24.0 million during the third quarter and first nine months of 2026, respectively, compared to the prior year periods, primarily reflecting growth in earning assets and a higher net interest margin. Average earning assets totaled $6.52 billion during the third quarter of 2026 compared to $5.94 billion during the third quarter of 2025, an increase of $575 million. Average assets increased $664 million during the first nine months of 2026 compared to the same time period in 2025.

The growth in average earning assets during both time periods largely reflects the acquisition of Eastern Michigan at year-end 2025 along with loan and investment growth at Mercantile Bank. The net interest margin was 3.73% during the third quarter of 2026 compared to 3.49% during the third quarter of 2025 and was 3.62% during the first nine months of 2026 compared to 3.48% during the first nine months of 2025. The improvement during both time periods is largely due to the Eastern Michigan acquisition.

The yield on earning assets declined 22 basis points and 29 basis points during the third quarter and first nine months of 2026, respectively, while the cost of funds declined 46 basis points and 43 basis points during the same 2026 time periods. We recorded provisions for credit losses of $0.7 million and negative $2.9 million during the third quarter and first nine months of 2026, respectively.

The third quarter provision expense mainly reflected a net increase of $1.7 million in specific allocations and an increase of $0.6 million associated with net loan growth, which was partially offset by a $1.5 million reduction resulting from faster prepayment speeds on the residential mortgage loan portfolio. The reserve balance increased $1 million during the third quarter of 2026, reflecting the $0.7 million provision expense and net loan recoveries of $0.3 million. The reserve balance equaled 1.14% of total loans as of September 30, 2026. Our sustained strength in loan quality metrics continues to be impactful to our loan loss reserve calculations.

The baseline allowance, largely determined from historical net loan charge-off activity, represents only one third of our current reserve balance, reflecting a low level of net loan charge-off activity during our look-back period from the beginning of 2011 through the end of the third quarter of 2026. Specific reserve allocations totaled just $2.6 million, or about 5% of the reserve balance as of September 30th. Noninterest expenses were $8.8 million and $25.8 million higher during the third quarter and first nine 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 $4.4 million during the third quarter and first nine months of 2026, respectively, and $0.6 million during both the third quarter and first nine months of 2025, noninterest expenses increased $8.8 million and $21.9 million compared to the prior year periods. Eastern Michigan Bank's noninterest expenses totaled $4.1 million and $12.1 million during the third quarter and first nine months of 2026, respectively.

The increase in core operating costs largely reflects higher salary and benefit costs, including expenses associated with personnel investments in Southeast Michigan and incentive accruals related to the ongoing core and digital banking system conversion and the integration of Eastern Michigan Bank. The remaining growth generally depicts inflation impacts and a larger balance sheet.

Federal income tax expense was $1.2 million and $3.2 million higher during the third quarter and first nine 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. The effective tax rate was 16.8% during both the third quarter and first nine months of 2026 compared to 13.4% and 14.9% during the respective time periods in 2025. The 2025 periods had higher levels of transferable energy tax credit activity given carryback opportunities.

Additional acquisitions of transferable energy tax credits may be made from time to time subject to our investment policy, tax credit availability, and tax credits derived from our low income housing and historical tax credit activities. Both Mercantile and Eastern Michigan Bank have strong and well-capitalized regulatory capital positions.