Mercantile Bank Q1 Earnings Call Highlights

Q1 earnings rose: Mercantile reported net income of $22.7 million ($1.32 per diluted share) and a non‑GAAP result of $25.2 million ($1.46), a roughly 21% year‑over‑year increase driven by higher net interest and non‑interest income and lower provision expense.

Margin held up but outlook cautious: Net interest margin improved to 3.55% despite a 67 bp decline in SOFR over five quarters, but management warned that deposit growth outpacing loans is pushing funds into low‑yield Fed balances and could compress margin by an estimated 2–5 bps if payoffs remain elevated.

Loan, liquidity and credit trends: average loans rose to $4.83 billion mainly from the Eastern Michigan acquisition, payoffs pressured quarter‑to‑quarter loan growth though management expects 5–7% annualized loan growth and a mid‑single‑digit full‑year target; liquidity includes a securities portfolio of ~16% of assets and strong credit metrics (allowance 1.18%, non‑performing assets 11 bps).

Mercantile Bank (NASDAQ:MBWM) reported higher first-quarter 2026 earnings, with management emphasizing margin stability, strong asset quality, and progress integrating Eastern Michigan Financial Corporation, which it acquired at the end of 2025.

First-quarter earnings rise, helped by higher net interest income

Executive Vice President and Chief Financial Officer Chuck Christmas said the company posted net income of $22.7 million, or $1.32 per diluted share, for the first quarter of 2026, up from $19.5 million, or $1.21 per diluted share, in the year-ago period. Christmas attributed the year-over-year improvement to “higher net interest income and non-interest income, combined with lower provision expense,” which “more than offset increased overhead costs.”

On a non-GAAP basis excluding after-tax one-time costs tied to the Eastern Michigan acquisition and a previously announced core and digital banking system conversion, Christmas said net income was $25.2 million, or $1.46 per diluted share. Using that measure, he said earnings increased $0.25 per share, or about 21%, versus the first quarter of 2025.

Margin holds steady despite rate cuts; mix shift affects outlook

President and Chief Executive Officer Raymond Reitsma highlighted what he called a “strong and durable net interest margin,” noting that over the last five quarters the SOFR 90-day average rate declined 67 basis points while Mercantile’s margin increased 8 basis points to 3.55%.

Christmas said the net interest margin was 3.55% in the first quarter of 2026 compared with 3.47% a year earlier, with the improvement “largely due to the Eastern Michigan acquisition.” He added that the yield on earning assets declined 31 basis points while the cost of funds fell 39 basis points year over year.

During the question-and-answer session, management addressed why its margin outlook was tempered even though the company’s forecast assumes no further changes in the federal funds rate during the remainder of 2026. Christmas said the change was driven by balance sheet mix: deposit growth outpaced loan growth in the quarter due to elevated payoffs, pushing more funds into a lower-yielding balance at the Federal Reserve Bank of Chicago. “More deposits, same level of loans,” he said, “those more deposit balances are going into the lower yielding account at the Federal Reserve.”

Asked about acquisition-related accretion, Christmas said the impact from fair value marks on loans and deposits was about “a one basis point impact” to the reported margin, though he noted the fair-valued securities portfolio from Eastern Michigan enhanced securities yields going forward.

Loan growth impacted by elevated payoffs; pipeline cited as support

Reitsma said loan growth in the first quarter was affected by higher-than-normal payoffs, including borrower asset sales that were “over $40 million above” the elevated quarterly average experienced in 2025, and planned refinancings of multifamily projects into secondary markets that were “nearly five times the quarterly average amount in 2025” (about $40 million). Despite that, he pointed to five-quarter highs in March 31, 2026 commitments: $289 million to make new commercial loans and $272 million to fund existing commercial and residential construction loans.

Christmas said average loans were $4.83 billion in the first quarter of 2026 versus $4.63 billion a year earlier, an increase of $199 million that “largely reflects the acquisition of Eastern Michigan.” He added that Mercantile’s “robust commercial loan fundings” were “largely mitigated” by significant payoffs and partial paydowns of some larger commercial credits.

Management reiterated its expectation that payoffs should moderate. Reitsma said the company expects 2026 loan growth to fall within previously communicated “mid-single digit percentages.” Christmas, discussing the company’s outlook, said it is projecting loan growth of 5% to 7% annualized during each quarter, reflecting a strong commercial pipeline and expectations for fewer commercial payoffs during the rest of the year.

In response to analyst questions, Christmas said the unusually high payoffs in recent quarters were “entirely” from legacy Mercantile loans, not from Eastern Michigan loans that the company did not want to keep. He added that if payoffs remain elevated, the downside would likely show up as higher Fed balances and some margin compression, estimating a potential “2–5 basis points” below guidance depending on magnitude.

Deposit growth and liquidity improve; securities targeted at ~16% of assets

Reitsma said the loan-to-deposit ratio improved to 89% at March 31, 2026, from 91% at December 31, 2025, and from 98% at December 31, 2024. He said deposit mix included 25% non-interest bearing deposits and 25% “lower cost deposits,” unchanged from year-end 2025 but up from 20% at the end of the third quarter of 2025. Reitsma said first-quarter 2026 deposits were up 15.8% compared with the first quarter of 2025, with growth “roughly proportional” between non-interest-bearing and interest-bearing accounts.

On liquidity deployment, Christmas said the securities portfolio is “right around 16% of total assets now,” and “the plan is to keep it there.” He said the company expects to keep a higher level of cash at the Federal Reserve than historical norms, but lower than the current elevated level as loan growth accelerates. He indicated a historical norm might be $80 million to $100 million, and said he would expect the balance to be “well over $200 million” at year-end 2026.

Credit quality remains strong; expenses rise with growth and integration

Reitsma emphasized asset quality, saying non-performing assets were 11 basis points of total assets as of March 31, 2026. He said the allowance for credit losses was 1.18% of total loans, providing what he described as “very strong coverage” relative to past due and non-performing loan levels.

Christmas said the company recorded a negative provision expense of $1.8 million in the first quarter, versus a positive $2.1 million in the year-ago quarter. He attributed the negative provision primarily to improved economic forecasts, loan mix changes, a reduction in the residential mortgage portfolio, a decline in specific allocations, and limited net commercial loan growth due to payoffs and paydowns. In discussing the outlook, Christmas said that with expected loan growth, the company would “certainly…expect a positive provision expense going forward,” assuming no major changes in economic forecasts under CECL.

On expenses, Christmas said non-interest expenses rose $11 million year over year. Excluding $3.2 million of one-time costs tied to the acquisition and system conversion, he said non-interest expenses increased $7.8 million, largely due to higher salaries and benefits. He also cited a $1.2 million increase in allocations to the reserve for unfunded loan commitments, reflecting a higher level of commercial commitments accepted by customers, and noted Eastern Michigan Bank’s noninterest expenses totaled $4 million in the quarter.

Reitsma also pointed to growth in fee income categories, including a 35% increase in service charges on accounts, 17.6% growth in credit and debit card offerings, and 12.4% growth in mortgage banking income compared with the first quarter of 2025.

Christmas said Mercantile’s effective tax rate was 16.9% in the quarter, reflecting benefits from transferable energy credits and low-income housing and historical tax credit activities, along with tax-exempt municipal bonds and bank-owned life insurance. He said the company is projecting a federal tax rate of 17% for the remainder of 2026.

On capital and buybacks, Christmas said Mercantile Bank’s total risk-based capital ratio was 13.8% at March 31, 2026, while Eastern Michigan Bank’s was 20.5%. He said the company did not repurchase shares in the quarter and has $6.8 million remaining under its current repurchase plan, adding that buybacks remain “always on the table,” with capital needs, valuation, and potential regulatory capital changes among the considerations.

Reitsma said integration work following the Eastern Michigan transaction is “well underway,” and that “the cultures have meshed very well” early in the process. He also said the company is adding commercial banking talent in Southeast Michigan and plans to continue building that team, while maintaining its longstanding criteria for any future M&A opportunities.

About Mercantile Bank (NASDAQ:MBWM)

Mercantile Bank Corporation (NASDAQ: MBWM) is the bank holding company for Mercantile Bank of Michigan, a full-service commercial bank headquartered in Grand Rapids, Michigan. Through its state-chartered subsidiary, the company provides a broad range of financial products and services to small and mid-sized businesses, professionals and consumers across West and Central Michigan.

The bank's core offerings include deposit products such as checking, savings and money market accounts, alongside commercial and consumer loan portfolios.