Mercantile Bank Corp 2026 Q3 Earnings Call

Please go ahead. Hello, and thank you for joining us.

Today we will cover the company's financial results for the third quarter of 2026. The team members joining me this morning include Ray Reitsma, President and Chief Executive Officer, as well as Chuck Christmas, Executive Vice President and Chief Financial Officer. Our agenda will begin with prepared remarks by both Ray and Chuck and will include references to our presentation covering this quarter's results. You can access a copy of this presentation, as well as the press release sent earlier today, by visiting mercbank.com. After our prepared remarks, we will then open the call to your questions. Before we begin, it is my responsibility to inform you that this call may involve certain forward-looking statements, such as projections of revenue, earnings, and capital structure, as well as statements on the plans and objectives of the company's business.

The company's actual results could differ materially from any forward-looking statements made today due to factors described in the company's latest Securities and Exchange Commission's filings. The company assumes no obligation to update any forward-looking statements made during the call. Let's begin. Ray? 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, non-interest income, and non-interest 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 quarter 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 9 months ending 9/30/2026, compared to $306 million during the respective 2025 period.

At the same time, lending commitments, including unfunded portions of construction loans, stand at a five-quarter high of $589 million at September 30, 2026, compared to $386 million at 9/30/2025. Asset quality continues to be strong, with non-performing 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 non-interest-bearing deposits and 15% growth in interest-bearing deposits. This growth principally reflects growth in commercial relationships, the development of relationships in the public funds markets, and of course, the acquisition of Eastern Michigan Bank. Importantly, overall deposit growth occurred as certificates of deposit declined by approximately $180 million over the same period. This decline primarily represents brokered CDs, and as a result, the overall quality of our funding mix continues to improve while our reliance on higher-cost term funding continues to decline.

Non-interest income in total increased 16% during the first 9 months of 2026 compared to the respective 2025 period, including a 34% increase in service charges on accounts, a 22% increase in credit and debit card income, and an 11% increase in swap income, in large part reflecting growth in commercial relationships. We have characterized 2026 as a year of investment around people and technology, including a change in our core systems provider, which is reflected in our non-interest 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 Christmas 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.

Thanks, Ray. Good morning, everyone. This morning, we announced net income of $24.1 million, or $1.39 per diluted share for the third quarter of 2026, compared with net income of $23.8 million, or $1.46 per diluted share for the third quarter of 2025. Net income during the first 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 non-interest income that more than offset higher non-interest expenses and federal income tax expense.

Excluding non-recurring 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 pay-downs 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 fed 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 and higher yield reflect the acquisition of Eastern Michigan, along with ongoing portfolio expansion and the reinvestment of mature 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.