U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No.
MERCANTILE BANK CORPORATION
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | Accelerated filer ☐ |
| Non-accelerated filer ☐ | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes ☐ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
At April 24, 2026, there were
INDEX
PART I --- FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
| (Unaudited) | |||||||||
| March 31, | December 31, | ||||||||
| (Dollars in thousands) | 2026 | 2025 | |||||||
| ASSETS | |||||||||
| Cash and due from banks | $ | $ | |||||||
| Interest-earning deposits and Federal Funds sold | |||||||||
| Total cash and cash equivalents | |||||||||
| Securities available for sale | |||||||||
| Mortgage loans held for sale | |||||||||
| Loans | |||||||||
| Allowance for credit losses | ( | ) | ( | ) | |||||
| Loans, net | |||||||||
| Premises and equipment, net | |||||||||
| Bank owned life insurance | |||||||||
| Goodwill | |||||||||
| Core deposit intangible | |||||||||
| Other assets | |||||||||
| Total assets | $ | $ | |||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||
| Deposits | |||||||||
| Noninterest-bearing | $ | $ | |||||||
| Interest-bearing | |||||||||
| Total deposits | |||||||||
| Securities sold under agreements to repurchase | |||||||||
| Federal Home Loan Bank advances | |||||||||
| Subordinated debentures | |||||||||
| Subordinated notes | |||||||||
| Term note | |||||||||
| Accrued interest and other liabilities | |||||||||
| Total liabilities | |||||||||
| Commitments and contingent liabilities (Note 9) | |||||||||
| Shareholders' equity | |||||||||
| Preferred stock, par value; shares authorized; issued | |||||||||
| Common stock, par value; shares authorized; shares issued and outstanding at March 31, 2026 and shares issued and outstanding at December 31, 2025 | |||||||||
| Retained earnings | |||||||||
| Accumulated other comprehensive income (loss) | ( | ) | ( | ) | |||||
| Total shareholders’ equity | |||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Three Months | Three Months | |||||||
| Ended | Ended | |||||||
| (Dollars in thousands except per share amounts) | March 31, 2026 | March 31, 2025 | ||||||
| Interest income | ||||||||
| Loans, including fees | $ | $ | ||||||
| Securities, taxable | ||||||||
| Securities, tax-exempt | ||||||||
| Other interest-earning assets | ||||||||
| Total interest income | ||||||||
| Interest expense | ||||||||
| Deposits | ||||||||
| Short-term borrowings | ||||||||
| Federal Home Loan Bank advances | ||||||||
| Subordinated debt and other borrowings | ||||||||
| Total interest expense | ||||||||
| Net interest income | ||||||||
| Provision for credit losses | ( | ) | ||||||
| Net interest income after provision for credit losses | ||||||||
| Noninterest income | ||||||||
| Service charges on deposit and sweep accounts | ||||||||
| Mortgage banking income | ||||||||
| Credit and debit card income | ||||||||
| Interest rate swap fees | ||||||||
| Payroll services income | ||||||||
| Earnings on bank owned life insurance | ||||||||
| Other income | ||||||||
| Total noninterest income | ||||||||
| Noninterest expense | ||||||||
| Salaries and benefits | ||||||||
| Occupancy | ||||||||
| Furniture and equipment depreciation, rent and maintenance | ||||||||
| Data processing costs | ||||||||
| Core conversion costs | ||||||||
| Acquisition costs | ||||||||
| Core deposit intangible amortization | ||||||||
| Other expense | ||||||||
| Total noninterest expense | ||||||||
| Income before federal income tax expense | ||||||||
| Federal income tax expense | ||||||||
| Net income | $ | $ | ||||||
| Basic earnings per share | $ | $ | ||||||
| Diluted earnings per share | $ | $ | ||||||
| Average basic shares outstanding | ||||||||
| Average diluted shares outstanding | ||||||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| Three Months | Three Months | |||||||
| Ended | Ended | |||||||
| (Dollars in thousands) | March 31, 2026 | March 31, 2025 | ||||||
| Net income | $ | $ | ||||||
| Other comprehensive income (loss): | ||||||||
| Unrealized holding gains (losses) on securities available for sale | ( | ) | ||||||
| Tax effect of unrealized holding gains (losses) on securities available for sale | ( | ) | ||||||
| Other comprehensive income (loss), net of tax | ( | ) | ||||||
| Comprehensive income (loss) | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
| Accumulated | ||||||||||||||||||||
| Other | Total | |||||||||||||||||||
| Preferred | Common | Retained | Comprehensive | Shareholders’ | ||||||||||||||||
| (Dollars in thousands except per share amounts) | Stock | Stock | Earnings | Income (Loss) | Equity | |||||||||||||||
| Balances, January 1, 2026 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Employee stock purchase plan ( shares) | ||||||||||||||||||||
| Dividend reinvestment plan ( shares) | ||||||||||||||||||||
| Stock grants to directors for retainer fees ( shares) | ||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Cash dividends ($ per common share) | ( | ) | ( | ) | ||||||||||||||||
| Net income for the three months ended March 31, 2026 | ||||||||||||||||||||
| Change in net unrealized holding gain (loss) on securities available for sale, net of tax effect | ( | ) | ( | ) | ||||||||||||||||
| Balances, March 31, 2026 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
See accompanying notes to consolidated financial statements.
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
(Unaudited)
| Accumulated | ||||||||||||||||||||
| Other | Total | |||||||||||||||||||
| Preferred | Common | Retained | Comprehensive | Shareholders’ | ||||||||||||||||
| (Dollars in thousands except per share amounts) | Stock | Stock | Earnings | Income (Loss) | Equity | |||||||||||||||
| Balances, January 1, 2025 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Employee stock purchase plan ( shares) | ||||||||||||||||||||
| Dividend reinvestment plan ( shares) | ||||||||||||||||||||
| Stock grants to directors for retainer fees ( shares) | ||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Cash dividends ($ per common share) | ( | ) | ( | ) | ||||||||||||||||
| Net income for the three months ended March 31, 2025 | ||||||||||||||||||||
| Change in net unrealized holding gain (loss) on securities available for sale, net of tax effect | ||||||||||||||||||||
| Balances, March 31, 2025 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months | Three Months | |||||||
| Ended | Ended | |||||||
| (Dollars in thousands) | March 31, 2026 | March 31, 2025 | ||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash from operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Accretion of acquired loans | ( | ) | ||||||
| Provision for credit losses | ( | ) | ||||||
| Stock-based compensation expense | ||||||||
| Stock grants to directors for retainer fees | ||||||||
| Proceeds from sales of mortgage loans held for sale | ||||||||
| Origination of mortgage loans held for sale | ( | ) | ( | ) | ||||
| Net gain from sales of mortgage loans held for sale | ( | ) | ( | ) | ||||
| Earnings on bank owned life insurance | ( | ) | ( | ) | ||||
| Net loss from sales and disposals of premises and equipment | ||||||||
| Net loss (gain) on instruments designated at fair value and related derivatives | ( | ) | ||||||
| Net change in: | ||||||||
| Accrued interest receivable | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ||||||
| Accrued interest payable and other liabilities | ( | ) | ( | ) | ||||
| Net cash from (for) operating activities | ( | ) | ||||||
| Cash flows from investing activities | ||||||||
| Loan originations and payments, net | ( | ) | ||||||
| Purchases of securities available for sale | ( | ) | ( | ) | ||||
| Purchases of federal reserve stock | ( | ) | ||||||
| Proceeds from maturities, calls and repayments of securities available for sale | ||||||||
| Proceeds from bank owned life insurance claims | ||||||||
| Net purchases of premises and equipment and lease activity | ( | ) | ( | ) | ||||
| Net cash for investing activities | ( | ) | ( | ) | ||||
See accompanying notes to consolidated financial statements.
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
| Three Months | Three Months | |||||||
| Ended | Ended | |||||||
| (Dollars in thousands) | March 31, 2026 | March 31, 2025 | ||||||
| Cash flows from financing activities | ||||||||
| Net increase (decrease) in time deposits | ( | ) | ||||||
| Net increase (decrease) in all other deposits | ( | ) | ||||||
| Net increase (decrease) in securities sold under agreements to repurchase | ( | ) | ||||||
| Payments on term note | ( | ) | ||||||
| Payoffs and paydowns of Federal Home Loan Bank advances | ( | ) | ( | ) | ||||
| Proceeds from Federal Home Loan Bank advances | ||||||||
| Employee stock purchase plan | ||||||||
| Dividend reinvestment plan | ||||||||
| Payment of cash dividends to common shareholders | ( | ) | ( | ) | ||||
| Net cash from financing activities | ||||||||
| Net change in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosures of cash flows information | ||||||||
| Cash paid (received) during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Federal income tax | ( | ) | ||||||
See accompanying notes to consolidated financial statements.
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The unaudited financial statements for the three months ended March 31, 2026, include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries (unless text clearly suggests otherwise, collectively, "we," "us," "our," "the Company," and "Mercantile"). These subsidiaries include Mercantile Bank and Eastern Michigan Bank (collectively "our banks"), Mercantile Community Partners LLC ("MCP"), and Mercantile Insurance Center, Inc. ("our insurance company"), a subsidiary of Mercantile Bank. These consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Item 303(b) of Regulation S-K and do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for a complete presentation of our financial condition and results of operations. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair presentation of the results of operations for such periods. The results for the period ended March 31, 2026, should not be considered as indicative of results for a full year. For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form 10-K for the year ended December 31, 2025.
We have
Recent Events: On December 31, 2025, Mercantile completed the merger of Eastern Michigan Financial Corporation and its wholly owned banking subsidiary, Eastern Michigan Bank, with approximately $
Earnings Per Share: Basic earnings per share is based on the weighted average number of common shares and participating securities outstanding during the period. Diluted earnings per share include the dilutive effect of additional potential common shares issuable under our stock-based compensation plans and are determined using the treasury stock method. Our unvested restricted shares, which contain non-forfeitable rights to dividends whether paid or accrued (i.e., participating securities), are included in the number of shares outstanding for both basic and diluted earnings per share calculations. In the event of a net loss, our unvested restricted shares are excluded from the calculation of both basic and diluted earnings per share.
Approximately
Debt Securities: Debt securities classified as held to maturity are carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities available for sale consist of bonds which might be sold prior to maturity due to a number of factors, including changes in interest rates, prepayment risks, yield, availability of alternative investments or liquidity needs. Debt securities classified as available for sale are reported at their fair value. For available for sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the debt security’s amortized cost basis is written down to fair value through income with the establishment of an allowance. For debt securities available for sale that do not meet the aforementioned criteria, we evaluate whether any decline in fair value is due to credit loss factors. In making this assessment, we consider any changes to the rating of the security by a rating agency and adverse conditions specifically related to the issuer of the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance is recognized in other comprehensive income (loss).
Changes in the allowance are recorded as provisions for (or reversals of) credit losses. Losses are charged against the allowance when the collectability of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2026, and December 31, 2025, there was
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums on debt securities are amortized to the initial call date, if applicable, or to the maturity date, on the level-yield method. Discounts on debt securities are accreted to the maturity date on the level-yield method. Premiums and discounts on mortgage-backed securities are amortized or accreted based on anticipated prepayments on the level-yield method. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
(Continued)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans: Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Net unamortized deferred loan costs amounted to $
Interest income on commercial loans and mortgage loans is discontinued at the time the loan is
Accrued interest is included in other assets in the Consolidated Balance Sheets. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. As of March 31, 2026, and December 31, 2025, we determined that the fair value of our mortgage loans held for sale totaled $
Mortgage loans held for sale are generally sold with servicing rights retained. Gains and losses on sales of mortgage loans are based on the difference between the selling price, which includes a gain or loss on the interest rate commitment coverage position, and the carrying value of the related loan sold, which is reduced by the cost allocated to the servicing right. Market rate risk on interest rate commitments with borrowers prior to loan closings is mitigated through forward commitments referred to as to-be-announced mortgage-backed securities. These mortgage banking activities are not designated as hedges and are carried at fair value. The net gain or loss on mortgage banking derivatives, which is generally nominal in dollar amount, is included in the gain on sale of loans and recorded as part of mortgage banking income.
Allowance for Credit Losses (“allowance”): The allowance is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The allowance is increased by a provision for credit losses and decreased by charge-offs, net of recoveries of amounts previously charged-off. Loans are charged-off against the allowance when we believe the uncollectability of a loan balance is confirmed. The allowance is measured on a collective pool basis when similar risk characteristics exist and on an individual basis when a loan exhibits unique risk characteristics which differentiate the loan from other loans within the loan segments. Loan segments are further discussed in Note 3 - Loans and Allowance for Credit Losses.
The “remaining life methodology” is utilized for substantially all loan pools. This non-discounted cash flow approach projects an estimated future amortized cost basis based on current loan balance and repayment terms. Our historical loss rate is then applied to future loan balances at the instrument level based on remaining contractual life adjusted for amortization, prepayment and default to develop a baseline lifetime loss. The baseline lifetime loss is adjusted for changes in macroeconomic conditions over the reasonable and supportable forecast and reversion periods via a series of macroeconomic forecast inputs, such as gross domestic product, unemployment rates, interest rates, credit spreads, stock market volatility and property price indices, to quantify the impact of current and forecasted economic conditions on expected loan performance.
Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses. The forecast period represents the time frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental factors that are expected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult or may not be possible in later periods. The contractual term generally excludes potential extensions, renewals and modifications. Subsequent to the end of the forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in relation to then current economic conditions as well as any developing loan loss activity and resulting historical data. We are not required to develop and use our own economic forecast model, and we elect to utilize economic forecasts from third-party providers that analyze and develop forecasts of the economy for the entire United States at least quarterly.
(Continued)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
During each reporting period, we also consider the need to adjust the historical loss rates as determined to reflect the extent to which we expect current conditions and reasonable and supportable economic forecasts to differ from the conditions that existed for the period over which the historical loss information was determined. These qualitative adjustments may increase or decrease our estimate of expected future credit losses. Our qualitative factors include:
o Changes in lending policies and procedures
o Changes in the nature and volume of the loan portfolio and in the terms of loans
o Changes in the experience, ability and depth of lending management and other relevant staff
o Changes in the volume and severity of past due loans, nonaccrual loans and adversely classified loans
o Changes in the quality of the loan review program
o Changes in the value of underlying collateral dependent loans
o Existence and effect of any concentrations of credit and any changes in such
o Effect of other factors such as competition and legal and regulatory requirements
o Local or regional conditions that depart from the conditions and forecasts for the entire country
The estimation of future credit losses should reflect consideration of all significant factors that affect the collectability of the loan portfolio at each evaluation date. While our methodology considers both the historical loss rates as well as the traditional qualitative factors, there may be instances or situations where additional qualitative factors need to be considered. Due to the relatively low level of loan losses during the look-back period, we have established a historical loss information factor that has been included in the qualitative factors that are included in the estimation of future credit losses in the periods presented.
Purchased loans are recorded at fair value at the time of acquisition and distinguished between purchased seasoned loans ("PSL"), purchased credit deteriorated loans ("PCD loans"), and non-seasoned new acquisitions. PSL are loans purchased at least 90 days after its original origination date and without significant credit deterioration. PCD loans are acquired loans that have experienced a more-than-insignificant decline in credit quality since their origination. We considered all loans that were currently 60 days or more past due, ever on nonaccrual status, or that had ever been past due three or more times, consumer loans with borrower credit scores below 600, and commercial loans rated monitor, special mention, substandard or doubtful to be PCD loans.
PSL and PCD loans are accounted for using the gross-up approach prescribed in Accounting Standards Codification 326, Financial Instruments - Credit Losses. The gross-up approach requires recognition of an allowance for the estimate of credit losses at the acquisition date. The allowance is recorded with an offsetting gross-up adjustment to the purchase price of the acquired financial asset.
We recorded a provision for credit losses of negative $
Accrued interest receivable on loans totaling $
(Continued)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
For individually analyzed loans which are deemed to be collateral dependent loans, we adopted the practical expedient to measure the allowance based on the fair value of collateral. The allowance is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral and the recorded principal balance. If the fair value of the collateral exceeds the recorded principal balance, no allowance is required. Fair value estimates of collateral on individually analyzed loans, as well as on foreclosed and repossessed assets, are reviewed periodically. We also have a process in place to monitor whether value estimates at each quarter-end are reflective of current market conditions. Our credit policies establish criteria for obtaining appraisals and determining internal value estimates. We may also adjust outside and internal valuations based on identifiable trends within our markets, such as recent sales of similar properties or assets, listing prices and offers received. In addition, we may discount certain appraised and internal value estimates to address distressed market conditions.
We are also required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheets and is increased or decreased via other noninterest expense on our Consolidated Statements of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.
Mortgage Banking Activities: Mortgage loans serviced for others totaled $
Servicing fee income is recorded for fees earned for servicing mortgage loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. Amortization of mortgage loan servicing rights is netted against mortgage loan servicing income and recorded in mortgage banking activities in the Consolidated Statements of Income.
Derivatives: Derivative financial instruments are recognized as assets or liabilities at fair value. The accounting for changes in the fair value of derivatives depends on the use of the derivatives and whether the derivatives qualify for hedge accounting. Used as part of our asset and liability management strategies to help manage interest rate risk, our derivatives have generally consisted of interest rate swap agreements that qualified for hedge accounting. We do not use derivatives for trading purposes.
Changes in the fair value of derivatives that are designated, for accounting purposes, as a hedge of the variability of cash flows to be received on various assets and liabilities and are effective are reported in other comprehensive income (loss). They are later reclassified into earnings in the same periods during which the hedged transaction affects earnings and are included in the line item in which the hedged cash flows are recorded. If hedge accounting does not apply, changes in the fair value of derivatives are recognized immediately in current earnings as interest income or expense. We had no derivative instruments designated as hedges as of March 31, 2026, and December 31, 2025.
Goodwill: The acquisition method of accounting requires that assets and liabilities acquired in a business combination be recorded at fair value as of the acquisition date. The valuation of assets and liabilities often involves estimates based on third-party valuations or internal valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective. This typically results in goodwill, the amount by which the cost of net assets acquired in a business combination exceeds their fair value, which is subject to impairment testing at least annually. We review goodwill for impairment on an annual basis as of October 1 during the fourth quarter or more often if events or circumstances indicate that it is more-likely-than-not that the fair value of a reporting unit is below its carrying value. Based on our annual impairment analysis of goodwill as of October 1 during the fourth quarter, it was determined that the fair value was in excess of its respective carrying value as of October 1, 2025; therefore, goodwill is considered not impaired. Subsequent to the analysis of goodwill, on December 31, 2025, we acquired Eastern Michigan Financial Corporation, resulting in the recognition of $
(Continued)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue from Contracts with Customers: We record revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, we must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) we satisfy a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.
Our primary sources of revenue are derived from interest and dividends earned on loans, securities and other financial instruments that are not within the scope of Topic 606. We have evaluated the nature of our contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary.
We generally satisfy our performance obligations on contracts with customers as services are rendered, and the transaction prices are typically fixed and charged either on a periodic basis (generally monthly) or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.
The following table depicts our sources of noninterest income presented in the Consolidated Statements of Income that are scoped within Topic 606:
| Three Months | Three Months | |||||||
| Ended | Ended | |||||||
| (Dollars in thousands) | March 31, 2026 | March 31, 2025 | ||||||
| Service charges on deposit and sweep accounts | $ | $ | ||||||
| Credit and debit card income | ||||||||
| Interest rate swap fees | ||||||||
| Payroll services income | ||||||||
| Customer service fees | ||||||||
Service Charges on Deposit and Sweep Accounts: We earn fees from deposit and sweep customers for account maintenance, transaction-based and overdraft services. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month reflecting the period over which we satisfy the performance obligation. Transaction-based fees, which include services such as stop payment and returned item charges, are recognized at the time the transaction is executed as that is the point in time we fulfill the customer request. Service charges on deposit and sweep accounts are withdrawn from the customer account balance.
Credit and Debit Card Income: We earn interchange income on our cardholder debit and credit card usage. Interchange income is primarily comprised of fees whenever our debit and credit cards are processed through card payment networks such as Visa. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.
Interest Rate Swap Fees: We offer a loan swap program to certain commercial loan customers. Through this program, we originate a variable rate loan with the customer. We and the swap customer will then enter into a fixed interest rate swap. Separately, an identical offsetting swap is entered into by the Company with a counterparty. These “back-to-back” swap arrangements are intended to offset each other and allow us to book a variable rate loan, while providing the customer with a contract for fixed interest payments. Through this program, we receive an upfront, non-refundable fee from the counterparty, dependent upon the pricing, which is recognized upon receipt from the counterparty.
Payroll Services Income: We earn fees from providing payroll processing services for our commercial clients. Fees are assessed for processing weekly or bi-weekly payroll files, reports and documents, as well as year-end tax-related files, reports and documents. Fees are recognized and collected as payroll processing services are completed for each payroll run and year-end processing activities.
Customer Service Fees: We earn fees by providing a variety of other services to our customers, such as wire transfers, check ordering, sales of cashier checks, and rentals of safe deposit boxes. Generally, fees are recognized and collected daily, concurrently with the point in time we fulfill the customer request. Safe deposit box rentals are on annual contracts, with fees generally earned at the time of the contract signing or renewal. Customer service fees are recorded as other noninterest income on our Consolidated Statements of Income.
(Continued)
2. SECURITIES
The amortized cost and fair value of available for sale securities and the related pre-tax gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) are as follows:
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| (Dollars in thousands) | Cost | Gains | Losses | Value | ||||||||||||
| March 31, 2026 | ||||||||||||||||
| U.S. Treasury notes and bonds | $ | $ | $ | ( | ) | $ | ||||||||||
| U.S. Government agency debt obligations | ( | ) | ||||||||||||||
| Mortgage-backed securities | ( | ) | ||||||||||||||
| Municipal general obligation bonds | ( | ) | ||||||||||||||
| Municipal revenue bonds | ( | ) | ||||||||||||||
| Other investments | ( | ) | ||||||||||||||
| $ | $ | $ | ( | ) | $ | |||||||||||
| December 31, 2025 | ||||||||||||||||
| U.S. Treasury notes and bonds | $ | $ | $ | $ | ||||||||||||
| U.S. Government agency debt obligations | ( | ) | ||||||||||||||
| Mortgage-backed securities | ( | ) | ||||||||||||||
| Municipal general obligation bonds | ( | ) | ||||||||||||||
| Municipal revenue bonds | ( | ) | ||||||||||||||
| Other investments | ||||||||||||||||
| $ | $ | $ | ( | ) | $ | |||||||||||
Securities with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| (Dollars in thousands) | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
| March 31, 2026 | ||||||||||||||||||||||||
| U.S. Treasury notes and bonds | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| U.S. Government agency debt obligations | ||||||||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||||||
| Municipal general obligation bonds | ||||||||||||||||||||||||
| Municipal revenue bonds | ||||||||||||||||||||||||
| Other investments | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| December 31, 2025 | ||||||||||||||||||||||||
| U.S. Treasury notes and bonds | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| U.S. Government agency debt obligations | ||||||||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||||||
| Municipal general obligation bonds | ||||||||||||||||||||||||
| Municipal revenue bonds | ||||||||||||||||||||||||
| Other investments | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
(Continued)
2. SECURITIES (Continued)
We evaluate securities in an unrealized loss position at least quarterly. Consideration is given to the financial condition of the issuer and the intent and ability we have to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. For those debt securities whose fair value is less than their amortized cost basis, we also consider our intent to sell the security, whether it is more likely than not that we will be required to sell the security before recovery and if we do not expect to recover the entire amortized cost basis of the security. In analyzing an issuer’s financial condition, we may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition.
At March 31, 2026,
The amortized cost and fair value of debt securities as of March 31, 2026, by maturity, are shown in the following table. The contractual maturity is utilized for U.S. Government agency debt obligations and municipal bonds. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.
| Amortized | Fair | |||||||
| (Dollars in thousands) | Cost | Value | ||||||
| Due in 2026 | $ | $ | ||||||
| Due in 2027 through 2031 | ||||||||
| Due in 2032 through 2036 | ||||||||
| Due in 2037 and beyond | ||||||||
| Mortgage-backed securities | ||||||||
| Other investments | ||||||||
| $ | $ | |||||||
No securities were sold during the first three months of 2026 or the full-year 2025.
Securities issued by the State of Michigan and all its political subdivisions had combined amortized costs of $
The carrying value of U.S. Government agency debt obligation securities that are pledged to secure repurchase agreements was $
(Continued)
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Commercial loans are divided among five segments based primarily on collateral type, risk characteristics, and primary and secondary sources of repayment. These segments are then further stratified based on the commercial loan grade that is assigned using our standard loan grading paradigm. Retail loans are divided into one of two groups based on risk characteristics and source of repayment. Our allowance for credit loss pools are consistent with those used for loan note disclosure purposes.
Our loan portfolio segments as of both March 31, 2026, and December 31, 2025, were as follows:
| o | Commercial Loans |
| ■ | Commercial and Industrial: Risks to this loan category include industry concentration and the practical limitations associated with monitoring the condition of the collateral which often consists of inventory, accounts receivable, and other non-real estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. |
| ■ | Owner Occupied Commercial Real Estate: Risks to this loan category include industry concentration and the inability to monitor the condition of the collateral. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Also, declines in real estate values and lack of suitable alternative uses for the properties are risks for loans in this category. |
| ■ | Non-Owner Occupied Commercial Real Estate: Loans in this category are susceptible to declines in occupancy rates, business failure, and general economic conditions. Also, declines in real estate values and lack of suitable alternative uses for the properties are risks for loans in this category. |
| ■ | Multi-Family and Residential Rental: Risks to this loan category include industry concentration and the inability to monitor the condition of the collateral. Loans in this category are susceptible to weakening general economic conditions and increases in unemployment rates, as well as market demand and supply of similar property and the resulting impact on occupancy rates, market rents, cash flow, and income-based real estate values. Also, the lack of suitable alternative uses for the properties is a risk for loans in this category. |
| ■ | Vacant Land, Land Development and Residential Construction: Risks common to commercial construction loans are cost overruns, changes in market demand for property, inadequate long-term financing arrangements, and declines in real estate values. Residential construction loans are susceptible to those same risks as well as those associated with residential mortgage loans. Changes in market demand for property could lead to longer marketing times resulting in higher carrying costs, declining values, and higher interest rates. |
| o | Retail Loans |
| ■ | 1-4 Family Mortgages: Residential mortgage loans are susceptible to weakening general economic conditions and increases in unemployment rates and declining real estate values. |
| ■ | Other Consumer Loans: Risks common to these loans include regulatory risks, unemployment, and changes in local economic conditions as well as the inability to monitor collateral consisting of personal property. |
(Continued)
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Our total loans at March 31, 2026, were $
| Percent | ||||||||||||||||||||
| March 31, 2026 | December 31, 2025 | Increase | ||||||||||||||||||
| (Dollars in thousands) | Balance | % | Balance | % | (Decrease) | |||||||||||||||
| Commercial: | ||||||||||||||||||||
| Commercial and industrial | $ | % | $ | % | % | |||||||||||||||
| Vacant land, land development, and residential construction | ||||||||||||||||||||
| Real estate – owner occupied | ||||||||||||||||||||
| Real estate – non-owner occupied | ( | ) | ||||||||||||||||||
| Real estate – multi-family and residential rental | ( | ) | ||||||||||||||||||
| Total commercial | ||||||||||||||||||||
| Retail: | ||||||||||||||||||||
| 1-4 family mortgages | ( | ) | ||||||||||||||||||
| Other consumer loans | ||||||||||||||||||||
| Total retail | ( | ) | ||||||||||||||||||
| Total loans | $ | % | $ | % | ( | )% | ||||||||||||||
(Continued)
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Age analyses of past due loans were as follows:
| Recorded | ||||||||||||||||||||||||||||
| Greater | Balance | |||||||||||||||||||||||||||
| 30 – 59 | 60 – 89 | Than 89 | > 89 | |||||||||||||||||||||||||
| Days | Days | Days | Total | Total | Days and | |||||||||||||||||||||||
| (Dollars in thousands) | Past Due | Past Due | Past Due | Past Due | Current | Loans | Accruing | |||||||||||||||||||||
| March 31, 2026 | ||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Vacant land, land development, and residential construction | ||||||||||||||||||||||||||||
| Real estate – owner occupied | ||||||||||||||||||||||||||||
| Real estate – non- owner occupied | ||||||||||||||||||||||||||||
| Real estate – multi-family and residential rental | ||||||||||||||||||||||||||||
| Total commercial | ||||||||||||||||||||||||||||
| Retail: | ||||||||||||||||||||||||||||
| 1-4 family mortgages | ||||||||||||||||||||||||||||
| Other consumer loans | ||||||||||||||||||||||||||||
| Total retail | ||||||||||||||||||||||||||||
| Total past due loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| December 31, 2025 | ||||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Vacant land, land development, and residential construction | ||||||||||||||||||||||||||||
| Real estate – owner occupied | ||||||||||||||||||||||||||||
| Real estate – non-owner occupied | ||||||||||||||||||||||||||||
| Real estate – multi-family and residential rental | ||||||||||||||||||||||||||||
| Total commercial | ||||||||||||||||||||||||||||
| Retail: | ||||||||||||||||||||||||||||
| 1-4 family mortgages | ||||||||||||||||||||||||||||
| Other consumer loans | ||||||||||||||||||||||||||||
| Total retail | ||||||||||||||||||||||||||||
| Total past due loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
(Continued)
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Nonaccrual loans were as follows:
| March 31, 2026 | December 31, 2025 | |||||||||||||||
| Recorded | Recorded | |||||||||||||||
| Principal | Related | Principal | Related | |||||||||||||
| (Dollars in thousands) | Balance | Allowance | Balance | Allowance | ||||||||||||
| With no allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial and industrial | $ | $ | 0 | $ | $ | 0 | ||||||||||
| Vacant land, land development and residential construction | 0 | 0 | ||||||||||||||
| Real estate – owner occupied | 0 | 0 | ||||||||||||||
| Real estate – non-owner occupied | 0 | 0 | ||||||||||||||
| Real estate – multi-family and residential rental | 0 | 0 | ||||||||||||||
| Total commercial | 0 | 0 | ||||||||||||||
| Retail: | ||||||||||||||||
| 1-4 family mortgages | 0 | 0 | ||||||||||||||
| Other consumer loans | 0 | 0 | ||||||||||||||
| Total retail | 0 | 0 | ||||||||||||||
| Total with no allowance recorded | $ | $ | 0 | $ | $ | 0 | ||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | ||||||||||||
| Vacant land, land development and residential construction | ||||||||||||||||
| Real estate – owner occupied | ||||||||||||||||
| Real estate – non-owner occupied | ||||||||||||||||
| Real estate – multi-family and residential rental | ||||||||||||||||
| Total commercial | ||||||||||||||||
| Retail: | ||||||||||||||||
| 1-4 family mortgages | ||||||||||||||||
| Other consumer loans | ||||||||||||||||
| Total retail | ||||||||||||||||
| Total with an allowance recorded | $ | $ | $ | $ | ||||||||||||
| Total nonaccrual loans: | ||||||||||||||||
| Commercial | $ | $ | $ | $ | ||||||||||||
| Retail | ||||||||||||||||
| Total nonaccrual loans | $ | $ | $ | $ | ||||||||||||
Nonaccrual loans represent the entire balance of collateral dependent loans. As of March 31, 2026 and December 31, 2025, all collateral dependent loans were secured by real estate, with the exception of those classified as commercial and industrial, which were secured by accounts receivable, inventory, and equipment. Interest income recognized on nonaccrual loans totaled $
(Continued)
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Credit Quality Indicators. We utilize a comprehensive grading system for our commercial loans. All commercial loans are graded on a ten grade rating system. The rating system utilizes standardized grade paradigms that analyze several critical factors such as cash flow, operating performance, financial condition, collateral, industry condition and management. All commercial loans are graded at inception and reviewed and, if appropriate, re-graded at various intervals thereafter. The primary risk elements with respect to commercial loans are the financial condition of the borrower, sufficiency of collateral, and timeliness of scheduled payments. We have a policy of requesting and reviewing periodic financial statements from commercial loan customers and employ a disciplined and formalized review of the existence of collateral and its value. All commercial loans are graded using the following criteria:
| Grade 1. | “Exceptional” Loans with this rating contain very little, if any, risk. |
| Grade 2. | “Outstanding” Loans with this rating have excellent and stable sources of repayment and conform to bank policy and regulatory requirements. |
| Grade 3. | “Very Good” Loans with this rating have strong sources of repayment and conform to bank policy and regulatory requirements. These are loans for which repayment risks are acceptable. |
| Grade 4. | “Good” Loans with this rating have solid sources of repayment and conform to bank policy and regulatory requirements. These are loans for which repayment risks are modest. |
| Grade 5. | “Acceptable” Loans with this rating exhibit acceptable sources of repayment and conform with most bank policies and all regulatory requirements. These are loans for which repayment risks are satisfactory. |
| Grade 6. | “Monitor” Loans with this rating are considered to have emerging weaknesses which may include negative current cash flow, high leverage, or operating losses. Generally, if further deterioration is observed, these credits will be downgraded to the criticized asset report. |
| Grade 7. | “Special Mention” Loans with this rating have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at some future date. |
| Grade 8. | “Substandard” Loans with this rating are inadequately protected by current sound net worth, paying capacity of the obligor, or of the pledged collateral, if any. A Substandard loan normally has one or more well-defined weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility of loss if the deficiencies are not corrected. |
| Grade 9. | “Doubtful” Loans with this rating exhibit all the weaknesses inherent in the Substandard classification and where collection or liquidation in full is highly questionable and improbable. |
| Grade 10. | “Loss” Loans with this rating are considered uncollectable, and of such little value that continuance as an active asset is not warranted. |
| The primary risk element with respect to each residential real estate loan and consumer loan is the timeliness of scheduled payments. We have a reporting system that monitors past due loans and have adopted policies to pursue creditors’ rights in order to preserve our collateral position. Retail loans that reach 90 days or more past due are generally placed into nonaccrual status and are categorized as nonperforming. |
(Continued)
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table reflects amortized cost basis of loans as of March 31, 2026, and loan charge-offs during the three months ended March 31, 2026, based on year of origination:
Revolving
Grand
(Dollars in thousands)
Commercial:
Commercial and Industrial:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Year-to-date gross write offs
Vacant Land, Land Development and Residential Construction:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Year-to-date gross write offs
Real Estate – Owner Occupied:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Year-to-date gross write offs
Real Estate – Non-Owner Occupied:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Year-to-date gross write offs
Real Estate – Multi-Family and Residential Rental:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Year-to-date gross write offs
Total Commercial
Total Commercial year-to-date gross write offs
Retail:
1-4 Family Mortgages:
Performing
Nonperforming
Total
Year-to-date gross write offs
Other Consumer Loans:
Performing
Nonperforming
Total
Year-to-date gross write offs
Total Retail
Total Retail year-to-date gross write offs
Total
Total year-to-date gross write offs
There were lines of credit with principal balances of $
(Continued)
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table reflects amortized cost basis of loans as of December 31, 2025, and loan charge-offs during the three months ended March 31, 2025, based on year of origination:
Revolving
Grand
(Dollars in thousands)
Commercial:
Commercial and Industrial:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Year-to-date gross write offs
Vacant Land, Land Development and Residential Construction:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Year-to-date gross write offs
Real Estate – Owner Occupied:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Year-to-date gross write offs
Real Estate – Non-Owner Occupied:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Year-to-date gross write offs
Real Estate – Multi-Family and Residential Rental:
Grades 1 – 4
Grades 5 – 7
Grades 8 – 9
Total
Year-to-date gross write offs
Total Commercial
Total Commercial year-to-date gross write offs
Retail:
1-4 Family Mortgages:
Performing
Nonperforming
Total
Year-to-date gross write offs
Other Consumer Loans:
Performing
Nonperforming
Total
Year-to-date gross write offs
Total Retail
Total Retail year-to-date gross write offs
Total
Total year-to-date gross write offs
There were lines of credit with principal balances of $
(Continued)
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
We use a migration to loss methodology to determine historical loss rates for commercial loans given the comprehensive loan grading process employed by Mercantile for over two decades, while an open pool approach is best suited for retail loans given the smaller dollar size of the segments. A baseline loss rate is produced at each reporting date for each loan portfolio segment using bank-specific loan charge-off and recovery data over a defined historical look-back period. The look-back period represents the number of data periods that will be used to calculate a baseline loss rate for each loan portfolio segment. We determined that the look-back period commencing on January 1, 2011 through the current reporting date was reasonable and appropriate, which was used in the calculation of both the March 31, 2026, and December 31, 2025, allowance for credit losses.
Our historical loss rate is then applied to future loan balances at the instrument level based on remaining contractual life adjusted for amortization, prepayment and default to develop a baseline lifetime loss. Our prepayment speed assumptions are developed at the loan segment level based upon the consideration of all relevant data which we believe could impact anticipated customer behavior, including changes in interest rates, economic conditions, and underlying property valuations. For the commercial portfolio segments, we assumed a
During each reporting period, we also consider the need to adjust the historical loss rates as determined to reflect the extent to which we expect current conditions and reasonable and supportable economic forecasts to differ from the conditions that existed for the period over which the historical loss information was determined. These qualitative adjustments may increase or decrease our estimate of expected future credit losses. As of March 31, 2026, and December 31, 2025, we used a one-year reasonable and supportable economic forecast period, with a six-month straight-line reversion period for all loan segments. The economic forecasts used for our March 31, 2026, allowance calculation reflected a $
The allowance for PSL and PCD loans acquired from the acquisition of Eastern Michigan Financial Corporation and its wholly owned banking subsidiary, Eastern Michigan Bank, was measured at the loan segment level using proxy expected lifetime loss rates adjusted for qualitative risk factors, including lending management experience, loan review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in underlying collateral, external factors, and economic conditions not already captured.
Individual loans exhibiting unique risk characteristics, which differentiated the loans from other loans within the loan segments and were evaluated for expected credit losses on an individual basis, totaled $
Activity in the allowance for credit losses during the three months ended March 31, 2026 and 2025 were as follows:
| (Dollars in thousands) | Commercial and industrial | Commercial vacant land, land development and residential construction | Commercial real estate – owner occupied | Commercial real estate – non-owner occupied | Commercial real estate – multi-family and residential rental | 1-4 family mortgages | Other consumer loans | Unallocated | Total | |||||||||||||||||||||||||||
| Balance at 12-31-2025 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Provision for credit losses | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Balance at 3-31-2026 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Balance at 12-31-2024 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Provision for credit losses | ( | ) | ||||||||||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Balance at 3-31-2025 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
(Continued)
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table presents the period-end amortized cost basis of modifications to borrowers experiencing financial difficulty by type of modification made during the three months ended March 31, 2026:
| Interest Rate | Principal | |||||||||||
| (Dollars in thousands) | Reduction | Term Extension | Forgiveness | |||||||||
| Commercial: | ||||||||||||
| Commercial and industrial | $ | $ | $ | |||||||||
| Vacant land, land development and residential construction | ||||||||||||
| Real estate – owner occupied | ||||||||||||
| Real estate – non-owner occupied | ||||||||||||
| Real estate – multi-family and residential rental | ||||||||||||
| Total commercial | $ | $ | $ | |||||||||
| Retail: | ||||||||||||
| 1-4 family mortgages | ||||||||||||
| Other consumer loans | ||||||||||||
| Total retail | $ | $ | $ | |||||||||
| Total loans | $ | $ | $ | |||||||||
Loans listed under Term Extension were generally granted a series of short-term maturity extensions as part of the workout process and associated forbearance agreements. There were no modifications to borrowers experiencing financial difficulty during the three months ended March 31, 2025.
The following table presents the amortized cost basis of loans that have been modified in the past twelve months to borrowers experiencing financial difficulty by payment status and loan segment as of March 31, 2026:
| 30 – 89 Days | 90 + Days | |||||||||||||||
| (Dollars in thousands) | Current | Past Due | Past Due | Total | ||||||||||||
| Commercial: | ||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | ||||||||||||
| Vacant land, land development and residential construction | ||||||||||||||||
| Real estate – owner occupied | ||||||||||||||||
| Real estate – non-owner occupied | ||||||||||||||||
| Real estate – multi-family and residential rental | ||||||||||||||||
| Total commercial | $ | $ | $ | $ | ||||||||||||
| Retail: | ||||||||||||||||
| 1-4 family mortgages | ||||||||||||||||
| Other consumer loans | ||||||||||||||||
| Total retail | $ | $ | $ | $ | ||||||||||||
| Total loans | $ | $ | $ | $ | ||||||||||||
(Continued)
4. PREMISES AND EQUIPMENT, NET
Premises and equipment are comprised of the following:
| March 31, | December 31, | |||||||
| (Dollars in thousands) | 2026 | 2025 | ||||||
| Land and improvements | $ | $ | ||||||
| Buildings | ||||||||
| Furniture and equipment | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Premises and equipment, net | $ | $ | ||||||
Depreciation expense totaled $
We enter into facility leases in the normal course of business. As of March 31, 2026, we were under lease contracts for eleven of our banking facilities. The leases have maturity dates ranging from August, 2026 through May, 2048, with a weighted average life of
Leases are classified as either operating or finance leases at the lease commencement date, with all of our current leases determined to be operating leases. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent our right to use underlying assets for the lease terms, while lease liabilities represent our obligation to make lease payments arising from the leases. Right-of-use assets and lease liabilities are recognized at the lease commencement date at the estimated present value of lease payments over the lease term. We use our incremental borrowing rate, on a collateralized basis, at lease commencement to calculate the present value of lease payments. The weighted average discount rate for leases was
The right-of-use assets, included in premises and equipment, net on our Consolidated Balance Sheets, and the lease liabilities, included in other liabilities on our Consolidated Balance Sheets, totaled $
Future lease payments were as follows as of March 31, 2026:
| (Dollars in thousands) | ||||
| 2026 | $ | |||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 2030 | ||||
| Thereafter | ||||
| Total undiscounted lease payments | ||||
| Less effect of discounting | ( | ) | ||
| Present value of future lease payments (lease liability) | $ |
(Continued)
5. DEPOSITS
Our total deposits at March 31, 2026, were $
| Percent | ||||||||||||||||||||
| March 31, 2026 | December 31, 2025 | Increase | ||||||||||||||||||
| (Dollars in thousands) | Balance | % | Balance | % | (Decrease) | |||||||||||||||
| Noninterest-bearing checking | $ | % | $ | % | ( | )% | ||||||||||||||
| Interest-bearing checking | ||||||||||||||||||||
| Money market | ||||||||||||||||||||
| Savings | ||||||||||||||||||||
| Time Deposits | ||||||||||||||||||||
| Total local deposits | ||||||||||||||||||||
| Out-of-area time, $100,000 and over | ( | ) | ||||||||||||||||||
| Total deposits | $ | % | $ | % | % | |||||||||||||||
6. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase (“repurchase agreements”) are offered principally to certain large deposit customers. Information relating to our repurchase agreements is as follows:
| Three Months Ended | Twelve Months Ended | |||||||
| (Dollars in thousands) | March 31, 2026 | December 31, 2025 | ||||||
| Outstanding balance at end of period | $ | $ | ||||||
| Average interest rate at end of period | % | % | ||||||
| Average daily balance during the period | $ | $ | ||||||
| Average interest rate during the period | % | % | ||||||
| Maximum daily balance during the period | $ | $ | ||||||
Repurchase agreements have maturities of business day. Repurchase agreements are treated as financings, and the obligations to repurchase securities sold are reflected as liabilities on our Consolidated Balance Sheets. Repurchase agreements are secured by U.S. Government agency securities with an aggregate fair value equal to the aggregate outstanding balance of the repurchase agreements. The securities, which are included in securities available for sale on our Consolidated Balance Sheets, are held in safekeeping by a correspondent bank.
(Continued)
7. OTHER BORROWINGS
FHLBI bullet advances totaled $
Maturities of FHLBI bullet advances as of March 31, 2026, were as follows:
| (Dollars in thousands) | ||||
| 2026 | $ | |||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 2030 | ||||
| Thereafter |
FHLBI amortizing advances totaled $
Scheduled principal payments on FHLBI amortizing advances as of March 31, 2026, were as follows:
| (Dollars in thousands) | ||||
| 2026 | $ | |||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 2030 | ||||
| Thereafter |
Each advance is payable at its maturity date and subject to a prepayment fee if paid prior to the maturity date. The advances are collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on commercial real estate property loans, and substantially all other assets of Mercantile Bank under a blanket lien arrangement. Our borrowing line of credit as of March 31, 2026, totaled $
On December 15, 2021, we entered into Subordinated Note Purchase Agreements with certain institutional accredited investors pursuant to which we issued and sold $
On January 14, 2022, we issued an additional $
On December 24, 2025, we entered into a credit agreement with U.S. Bank National Association for a $
(Continued)
8. STOCK-BASED COMPENSATION
A summary of restricted stock activity during the three months ended March 31, 2026, is as follows:
| Weighted | ||||||||
| Average | ||||||||
| Shares | Fair Value | |||||||
| Nonvested at beginning of the period | $ | |||||||
| Grants | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Nonvested at end of the period | $ | |||||||
Of the restricted stock shares granted during the three months ended March 31, 2026,
We periodically grant shares of common stock to our Corporate and Bank Board Directors for retainer payments with the related expense being recorded over the period of the Directors' service, as summarized below:
| Total Cost | |||||||||
| Grant Year | Shares Granted | (in thousands) | Covered Period | ||||||
| 2024 | June 1, 2024 - May 31, 2025 | ||||||||
| 2025 | June 1, 2025 - May 31, 2026 | ||||||||
| 2026 | Jan 1, 2026 - May 31, 2026 | ||||||||
In March 2025, the Company adopted the 2025 Employee Stock Purchase Plan ("ESPP"), offering a
(Continued)
9. COMMITMENTS AND OFF-BALANCE SHEET RISK
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued by our banks to guarantee the performance of a customer to a third party. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized, if any, in the balance sheet. Our maximum exposure to loan loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Collateral, such as accounts receivable, securities, inventory, and property and equipment, is generally obtained based on management’s credit assessment of the borrower.
We are required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheets and is increased or decreased via other noninterest expense on our Consolidated Statements of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.
For commercial lines of credit, retail lines of credit and credit card average outstanding balances, we determined allowance requirements by calculating the difference between the average percent outstanding of the funded commitments over the past several years to actual percent outstanding at the end of the period and applying the respective expected loss allocation factors to the difference as this difference represents the average of unfunded commitments we expect to eventually be drawn upon. For commitments to make loans, we determine an allowance by applying the expected loss allocation factor to the amount expected to be funded. The calculated allowance aggregated $
At March 31, 2026, and December 31, 2025, the rates on existing off-balance sheet instruments were substantially equivalent to current market rates, considering the underlying credit standing of the counterparties.
A summary of the contractual amounts of our financial instruments with off-balance sheet risk at March 31, 2026, and December 31, 2025, is as follows:
| March 31, | December 31, | |||||||
| (Dollars in thousands) | 2026 | 2025 | ||||||
| Commercial unused lines of credit | $ | $ | ||||||
| Unused lines of credit secured by 1–4 family residential properties | ||||||||
| Credit card unused lines of credit | ||||||||
| Other consumer unused lines of credit | ||||||||
| Commitments to make loans | ||||||||
| Standby letters of credit | ||||||||
| $ | $ | |||||||
(Continued)
10. DERIVATIVES AND HEDGING ACTIVITIES
We are exposed to certain risks arising from both business operations and economic conditions. We principally manage the exposure to a wide variety of operational risks through core business activities. Economic risks, including interest rate, liquidity and credit risk, are primarily administered via the amount, sources and duration of assets and liabilities. Derivative financial instruments may also be used to assist in managing economic risks.
Derivatives not designated as hedges are not speculative and result from a service provided to certain commercial loan borrowers. We execute interest rate swaps with commercial banking customers desiring longer-term fixed rate loans, while simultaneously entering into interest rate swaps with correspondent banks to offset the impact of the interest rate swaps with the commercial banking customers. The net result is the desired floating rate loans and a minimization of the risk exposure of the interest rate swap transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the commercial banking customer interest rate swaps and the offsetting interest rate swaps with the correspondent banks are recognized directly to earnings. Fees paid to us by the correspondent banks are recognized as noninterest income on our Consolidated Statements of Income on the settlement dates.
The fair values of derivative instruments are reflected in the following table.
| Balance Sheet | |||||||||
| (Dollars in thousands) | Notional Amount | Location | Fair Value | ||||||
| March 31, 2026 | |||||||||
| Derivative Assets | |||||||||
| Interest rate swaps | $ | Other Assets | $ | ||||||
| Derivative Liabilities | |||||||||
| Interest rate swaps | Other Liabilities | ||||||||
| December 31, 2025 | |||||||||
| Derivative Assets | |||||||||
| Interest rate swaps | $ | Other Assets | $ | ||||||
| Derivative Liabilities | |||||||||
| Interest rate swaps | Other Liabilities | ||||||||
The effect of interest rate swaps that are not designated as hedging instruments resulted in income of less than $
| Gross Amounts Not Offset on the Consolidated Balance Sheet | ||||||||||||||||
| (Dollars in thousands) | Net Amounts Recognized | Financial Instruments | Cash Collateral Received or Posted | Net Amount | ||||||||||||
| March 31, 2026 | ||||||||||||||||
| Derivative Assets | ||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | ||||||||||||
| Derivative Liabilities | ||||||||||||||||
| Interest rate swaps | ||||||||||||||||
| December 31, 2025 | ||||||||||||||||
| Derivative Assets | ||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | ||||||||||||
| Derivative Liabilities | ||||||||||||||||
| Interest rate swaps | ||||||||||||||||
(Continued)
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts, estimated fair values and level within the fair value hierarchy of financial instruments were as follows:
| Level in | March 31, 2026 | December 31, 2025 | |||||||||||||||||
| Fair | |||||||||||||||||||
| Value | Carrying | Fair | Carrying | Fair | |||||||||||||||
| (Dollars in thousands) | Hierarchy | Values | Values | Values | Values | ||||||||||||||
| Financial assets: | |||||||||||||||||||
| Cash and cash equivalents | Level 1 | $ | $ | $ | $ | ||||||||||||||
| Securities available for sale | (1) | ||||||||||||||||||
| FHLBI stock | (2) | ||||||||||||||||||
| Loans, net | Level 3 | ||||||||||||||||||
| Mortgage loans held for sale | Level 2 | ||||||||||||||||||
| Accrued interest receivable | Level 2 | ||||||||||||||||||
| Interest rate swaps | Level 2 | ||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||
| Deposits | Level 2 | ||||||||||||||||||
| Securities sold under agreements to repurchase | Level 2 | ||||||||||||||||||
| FHLBI advances | Level 2 | ||||||||||||||||||
| Subordinated debentures | Level 2 | ||||||||||||||||||
| Subordinated notes | Level 2 | ||||||||||||||||||
| Term note | Level 2 | ||||||||||||||||||
| Accrued interest payable | Level 2 | ||||||||||||||||||
| Interest rate swaps | Level 2 | ||||||||||||||||||
| (1) | See Note 12 for a description of the fair value hierarchy as well as a disclosure of levels for classes of financial assets and liabilities. |
| (2) | It is not practical to determine the fair value of FHLBI stock due to transferability restrictions; therefore, fair value is estimated at carrying amount. |
Carrying amount is the estimated fair value for cash and cash equivalents, FHLBI stock, accrued interest receivable and payable, noninterest-bearing checking accounts and securities sold under agreements to repurchase. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. Fair value for loans is based on an exit price model as required by ASU 2016-01, taking into account inputs such as discounted cash flows, probability of default and loss given default assumptions. The fair value for deposit accounts other than noninterest-bearing checking accounts is based on discounted cash flows using current market rates applied to the estimated life. The fair values of subordinated debentures, subordinated notes, and FHLBI advances are based on current rates for similar financing. The fair values of interest rate swaps are based on discounted cash flows using forecasted yield curves, along with insignificant unobservable inputs, such as borrower credit spreads. The fair value of other off-balance sheet items is estimated to be nominal.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability, or in the absence of a principal market, the most advantageous market for the asset or liability. The price of the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
(Continued)
12. FAIR VALUES
We are required to use valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources, or unobservable, meaning those that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. In that regard, we utilize a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that we have the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be derived from or corroborated by observable market data by correlation or other means.
Level 3: Significant unobservable inputs that reflect our own conclusions about the assumptions that market participants would use in pricing an asset or liability.
The following is a description of our valuation methodologies used to measure and disclose the fair values of our financial assets and liabilities that are recorded at fair value on a recurring or nonrecurring basis:
Securities available for sale. Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based on quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models. Level 2 securities include U.S. Government agency debt obligations, mortgage-backed securities issued or guaranteed by U.S. Government agencies, and municipal general obligation and revenue bonds. Level 3 securities include bonds issued by certain relatively small municipalities located within our markets that have very limited marketability due to their size and lack of ratings from a recognized rating service. We carry these bonds at historical cost, which we believe approximates fair value, unless our periodic financial analysis or other information that becomes known to us necessitates an impairment. There was
Derivatives. We measure fair value utilizing models that use primarily market observable inputs, such as forecasted yield curves. Insignificant unobservable inputs, such as borrower credit spreads, are also utilized.
Mortgage loans held for sale. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors, and are measured on a nonrecurring basis. Fair value is based on independent quoted market prices, where applicable, or the prices for other mortgage whole loans with similar characteristics. As of March 31, 2026 and December 31, 2025, we determined the fair value of our mortgage loans held for sale to be $
Loans. We do not record loans at fair value on a recurring basis. However, from time to time, we record nonrecurring fair value adjustments to collateral dependent loans to reflect partial write-downs or specific reserves that are based on the observable market price or current estimated value of the collateral. These loans are reported in the nonrecurring table below at initial recognition of significant borrower distress and on an ongoing basis until recovery or charge-off. The fair values of distressed loans are determined using either the sales comparison approach or income approach; respective unobservable inputs for the approaches consist of adjustments for differences between comparable sales and the utilization of appropriate capitalization rates.
Foreclosed Assets. At time of foreclosure or repossession, foreclosed and repossessed assets are adjusted to fair value less costs to sell upon transfer of the loans to foreclosed and repossessed assets, establishing a new cost basis. We subsequently adjust estimated fair value of foreclosed assets on a nonrecurring basis to reflect write-downs based on revised fair value estimates. The fair values of parcels of other real estate owned are determined using either the sales comparison approach or income approach; respective unobservable inputs for the approaches consist of adjustments for differences between comparable sales and the utilization of appropriate capitalization rates.
(Continued)
12. FAIR VALUES (Continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The balances of assets and liabilities measured at fair value on a recurring basis are as follows:
| Quoted | ||||||||||||||||
| Prices in | ||||||||||||||||
| Active | ||||||||||||||||
| Markets | Significant | |||||||||||||||
| for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| (Dollars in thousands) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| March 31, 2026 | ||||||||||||||||
| Available for sale securities | ||||||||||||||||
| U.S. Treasury notes and bonds | $ | $ | $ | $ | ||||||||||||
| U.S. Government agency debt obligations | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Municipal general obligation bonds | ||||||||||||||||
| Municipal revenue bonds | ||||||||||||||||
| Other investments | ||||||||||||||||
| Interest rate swaps | ||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| Interest rate swaps | ||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||
| December 31, 2025 | ||||||||||||||||
| Available for sale securities | ||||||||||||||||
| U.S. Treasury notes and bonds | $ | $ | $ | $ | ||||||||||||
| U.S. Government agency debt obligations | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Municipal general obligation bonds | ||||||||||||||||
| Municipal revenue bonds | ||||||||||||||||
| Other investments | ||||||||||||||||
| Interest rate swaps | ||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| Interest rate swaps | ||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||
There were no sales, purchases or transfers in or out of Level 3 during the three months ended March 31, 2026 and 2025.
(Continued)
12. FAIR VALUES (Continued)
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The balances of assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2026, and December 31, 2025, are as follows:
| Quoted | ||||||||||||||||
| Prices in | ||||||||||||||||
| Active | Significant | |||||||||||||||
| Markets for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| (Dollars in thousands) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| March 31, 2026 | ||||||||||||||||
| Collateral dependent loans | $ | $ | $ | $ | ||||||||||||
| December 31, 2025 | ||||||||||||||||
| Collateral dependent loans | $ | $ | $ | $ | ||||||||||||
The carrying values are based on the estimated value of the property or other assets. Fair value estimates of collateral on nonperforming loans and foreclosed assets are reviewed periodically. Our credit policies establish criteria for obtaining appraisals and determining internal value estimates. We may also adjust outside appraisals and internal evaluations based on identifiable trends within our markets, such as sales of similar properties or assets, listing prices and offers received. In addition, we may discount certain appraised and internal value estimates to address current distressed market conditions. We generally assign a discount factor range of
13. BUSINESS COMBINATIONS
On December 31, 2025, Mercantile completed its acquisition of Eastern Michigan Financial Corporation and its wholly owned banking subsidiary, Eastern Michigan Bank, in accordance with the Agreement and Plan of Merger, as amended (the "Merger Agreement") by and between Mercantile, Eastern Michigan Financial Corporation, and Shamrock Merger Sub LLC, a wholly owned special purpose subsidiary of Mercantile (“Merger Sub”), entered into on July 22, 2025. Pursuant to the Merger Agreement, Eastern Michigan Financial Corporation merged with and into Merger Sub, with Merger Sub continuing as the surviving entity (the “Merger”). Immediately following the Merger, and also effective as of December 31, 2025, Merger Sub merged with and into Mercantile, with Mercantile continuing as the surviving entity. The newly acquired Eastern Michigan Bank will operate alongside Mercantile Bank until the first quarter of 2027, at which time Mercantile plans to consolidate Eastern Michigan Bank into Mercantile Bank.
(Continued)
13. BUSINESS COMBINATIONS (continued)
Mercantile accounted for the Eastern Michigan Financial Corporation acquisition as a business combination using the acquisition method of accounting in accordance with ASC 805, Business Combinations ("ASC 805"). ASC 805 requires assets purchased and liabilities assumed to be recorded at their respective fair values as of the date of acquisition. Mercantile determined the fair value of loans, core deposit intangibles, mortgage servicing rights, time deposits, and real property with the assistance of third-party valuations and appraisals. During the first quarter of 2026, purchase accounting adjustments were made to decrease the core deposit intangible asset by $
| (Dollars in thousands, except per share data) | ||||
| Consideration: | ||||
| Cash | $ | |||
| Common stock ( shares issued at $ per share) | ||||
| Total consideration | $ | |||
| Identifiable assets acquired | ||||
| Cash and due from banks | $ | |||
| Interest-earning deposits | ||||
| Securities available for sale | ||||
| Loans, net | ||||
| Premises and equipment | ||||
| Core deposit intangible | ||||
| Other assets | ||||
| Total identifiable assets acquired | ||||
| Identifiable liabilities assumed | ||||
| Deposits | $ | |||
| Other liabilities | ||||
| Total identifiable liabilities acquired | ||||
| Net identifiable assets acquired | $ | |||
| Goodwill | $ |
The following table presents supplemental pro-forma information as if the acquisition had occurred at the beginning of 2024. The unaudited pro forma information includes adjustments for interest income on loans acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed dates.
| Three Months Ended March 31, | ||||||||
| (Dollars in thousands, except per share data) | 2026 | 2025 | ||||||
| Net interest income | $ | $ | ||||||
| Provision for credit losses | ( | ) | ||||||
| Noninterest income | ||||||||
| Noninterest expense | ||||||||
| Income before income taxes | ||||||||
| Income tax expense | ||||||||
| Net income | $ | $ | ||||||
| Earnings per share | $ | $ | ||||||
(Continued)
14. REGULATORY MATTERS
We are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If an institution is not well capitalized, regulatory approval is required to accept brokered deposits. Subject to limited exceptions, no institution may make a capital distribution if, after making the distribution, it would be undercapitalized. If an institution is undercapitalized, it is subject to close monitoring by its principal federal regulator, its asset growth and expansion are restricted, and plans for capital restoration are required. In addition, further specific types of restrictions may be imposed on the institution at the discretion of the federal regulator. As of March 31, 2026, and December 31, 2025, our banks were in the well capitalized category under the regulatory framework for prompt corrective action. There are no conditions or events since March 31, 2026, that we believe have changed our banks' categorizations.
Our actual capital levels and the minimum levels required to be categorized as adequately and well capitalized were:
| Minimum Required | ||||||||||||||||||||||||
| to be Well | ||||||||||||||||||||||||
| Minimum Required | Capitalized Under | |||||||||||||||||||||||
| for Capital | Prompt Corrective | |||||||||||||||||||||||
| Actual | Adequacy Purposes | Action Regulations | ||||||||||||||||||||||
| (Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
| March 31, 2026 | ||||||||||||||||||||||||
| Total capital (to risk weighted assets) | ||||||||||||||||||||||||
| Consolidated | $ | % | $ | % | $ NA | NA% | ||||||||||||||||||
| Mercantile Bank | ||||||||||||||||||||||||
| Eastern Michigan Bank | ||||||||||||||||||||||||
| Tier 1 capital (to risk weighted assets) | ||||||||||||||||||||||||
| Consolidated | NA | NA | ||||||||||||||||||||||
| Mercantile Bank | ||||||||||||||||||||||||
| Eastern Michigan Bank | ||||||||||||||||||||||||
| Common equity tier 1 (to risk weighted assets) | ||||||||||||||||||||||||
| Consolidated | NA | NA | ||||||||||||||||||||||
| Mercantile Bank | ||||||||||||||||||||||||
| Eastern Michigan Bank | ||||||||||||||||||||||||
| Tier 1 capital (to average assets) | ||||||||||||||||||||||||
| Consolidated | NA | NA | ||||||||||||||||||||||
| Mercantile Bank | ||||||||||||||||||||||||
| Eastern Michigan Bank | ||||||||||||||||||||||||
| December 31, 2025 | ||||||||||||||||||||||||
| Total capital (to risk weighted assets) | ||||||||||||||||||||||||
| Consolidated | $ | % | $ | % | $ NA | NA% | ||||||||||||||||||
| Mercantile Bank | ||||||||||||||||||||||||
| Eastern Michigan Bank | ||||||||||||||||||||||||
| Tier 1 capital (to risk weighted assets) | ||||||||||||||||||||||||
| Consolidated | NA | NA | ||||||||||||||||||||||
| Mercantile Bank | ||||||||||||||||||||||||
| Eastern Michigan Bank | ||||||||||||||||||||||||
| Common equity tier 1 (to risk weighted assets) | ||||||||||||||||||||||||
| Consolidated | NA | NA | ||||||||||||||||||||||
| Mercantile Bank | ||||||||||||||||||||||||
| Eastern Michigan Bank | ||||||||||||||||||||||||
| Tier 1 capital (to average assets) | ||||||||||||||||||||||||
| Consolidated | NA | NA | ||||||||||||||||||||||
| Mercantile Bank | ||||||||||||||||||||||||
| Eastern Michigan Bank | ||||||||||||||||||||||||
(Continued)
14. REGULATORY MATTERS (Continued)
Our consolidated capital levels as of March 31, 2026, and December 31, 2025, include $
Under the final BASEL III capital rules that became effective on January 1, 2015, there is a requirement for a common equity Tier 1 capital conservation buffer of
Our and our banks' ability to pay cash and stock dividends is subject to limitations under various laws and regulations and to prudent and sound banking practices. On , our Board of Directors declared a cash dividend on our common stock in the amount of $
As of March 31, 2026, we had the ability to repurchase up to $
15. BUSINESS SEGMENT INFORMATION
Pursuant to Financial Accounting Standards Codification 280, Segment Reporting, operating segments represent components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision makers in determining how to allocate resources and assessing performance.
Prior to our acquisition of Eastern Michigan Financial Corporation on December 31, 2025, our chief operating decision makers, which include our Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer, evaluated interest and noninterest income streams and credit losses from our various products and services, while expense activities, including interest expense and noninterest expense, were managed, and financial performance was evaluated, on a Company-wide basis. As a result, detailed profitability information for each interest and noninterest income stream was not used by our chief operating decision makers to allocate resources or in assessing performance. Rather, our chief operating decision makers used consolidated net income to assess performance by comparing it to and monitoring against budgeted and prior-year results. This information was used to manage resources to drive business and net income growth, including investment in key strategic priorities, as well as determine our ability to return capital to shareholders.
Subsequent to our acquisition of Eastern Michigan Financial Corporation on December 31, 2025, our chief operating decision makers now evaluate interest and noninterest income streams, credit losses, expense activities, and financial performance through our
(Continued)
15. BUSINESS SEGMENT INFORMATION (continued)
Selected financial information on our business segments is presented as follows as of and for the three months ended March 31, 2026:
| (Dollars in thousands) | Mercantile Bank | Eastern Michigan Bank | All Other | Intercompany Eliminations | Consolidated Total | |||||||||||||||
| Interest income | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Interest expense | ( | ) | ||||||||||||||||||
| Net interest income | ( | ) | ( | ) | ||||||||||||||||
| Provision for credit losses | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net interest income after provision for credit losses | ( | ) | ( | ) | ||||||||||||||||
| Noninterest income | ( | ) | ||||||||||||||||||
| Noninterest expense | ||||||||||||||||||||
| Income before federal income tax expense | ( | ) | ||||||||||||||||||
| Federal income tax expense | ( | ) | ||||||||||||||||||
| Net income | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Goodwill | $ | $ | $ | $ | $ | |||||||||||||||
| Core deposit intangible, net | ||||||||||||||||||||
| Total assets | ( | ) | ||||||||||||||||||
16. SUBSEQUENT EVENTS
On April 16, 2026, our Board of Directors declared a cash dividend on our common stock in the amount of $
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This report contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and the Company. Words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects,” “indicates,” “strategy,” “future,” “likely,” “may,” “should,” “will,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence (“Future Factors”). Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. We undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise.
Future Factors include, among others, our ability to successfully integrate the business of Eastern Michigan Financial Corporation; our ability to successfully consolidate Eastern Michigan Bank into Mercantile Bank; our ability to successfully convert our core processing system; our ability to maintain adequate levels of allowance for credit losses; adverse changes in interest rates and interest rate relationships; increasing rates of inflation and slower growth rates or recession; significant declines in the value of commercial real estate; market volatility; demand for products and services; climate impacts; labor markets; the degree of competition by traditional and non-traditional financial services companies; changes in banking regulation or actions by bank regulators; changes in tax laws and other laws and regulations applicable to us; changes in prices, levies, and assessments; the impact of technological advances; potential cyber-attacks, information security breaches, and other criminal activities; litigation liabilities; governmental and regulatory policy changes; the outcomes of existing or future contingencies; trends in customer behavior as well as their ability to repay loans; changes in local real estate values; damage to our reputation resulting from adverse publicity, regulatory actions, litigation, operational failures, and the failure to meet client expectations and other facts; changes in the national and local economies; unstable political and economic environments; disease outbreaks, such as the Covid-19 pandemic or similar public health threats, and measures implemented to combat them; and other risk factors, including those described in our annual report on Form 10-K for the year ended December 31, 2025. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a forward-looking statement.
Reconciliation of U.S. GAAP to Non-GAAP Financial Measures
This report contains certain non-GAAP financial measures, including adjusted net income, adjusted noninterest expense, and adjusted diluted earnings per share, each of which excludes after-tax costs associated with (i) Mercantile’s acquisition of Eastern Michigan Financial Corporation that was completed during the fourth quarter of 2025 ($0.2 million), and (ii) the previously announced core and digital banking system conversion ($2.3 million). These non-GAAP financial measures are identified in this report where they appear. We believe that presenting these non-GAAP financial measures provides investors, analysts, and other interested parties with meaningful supplementary information to assess Mecantile’s underlying operational performance by removing the effect of costs we consider to be non-recurring in nature and not reflective of Mercantile’s core operating results. These non-GAAP financial measures are used by management to evaluate Mercantile’s ongoing operations, for internal planning and forecasting purposes, and to assess period-over-period comparability. Management believes it is useful for the reader to review these non-GAAP adjusted measures alongside the GAAP measures. Our definition of these adjusted financial measures may differ from similarly named measures used by others. These non-GAAP measures have limitations as an analytical tool and should not be considered in isolation or as a substitute for our GAAP measures.
Introduction
The following discussion compares the financial condition of Mercantile Bank Corporation and its consolidated subsidiaries, including Mercantile Bank, Eastern Michigan Bank (collectively “our banks”), Mercantile Community Partners, LLC ("MCP"), and Mercantile Insurance Center, Inc., a subsidiary of Mercantile Bank, at March 31, 2026, and December 31, 2025, and the results of operations for the three months ended March 31, 2026 and 2025. This discussion should be read in conjunction with the interim consolidated financial statements and footnotes included in this report. Unless the text clearly suggests otherwise, references in this report to “us,” “we,” “our” or “the Company” include Mercantile Bank Corporation and its consolidated subsidiaries referred to above.
Critical Accounting Policies
Accounting principles generally accepted in the United States of America (“GAAP”) are complex and require us to apply significant judgment to various accounting, reporting and disclosure matters. We must use assumptions and estimates to apply these principles where actual measurements are not possible or practical. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited financial statements included in this report. For a discussion of our significant accounting estimates, see Note 1 of the Notes to our Consolidated Financial Statements included in our Form 10-K for the fiscal year ended December 31, 2025 (Commission file number 000-26719). Our critical accounting policies are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements, and actual results may differ from those estimates. We have reviewed the application of these policies with the Audit Committee of our Board of Directors.
Allowance for Credit Losses (“allowance”): The allowance is maintained at a level we believe is adequate to absorb estimated credit losses identified and expected in the loan portfolio. Our evaluation of the adequacy of the allowance is an estimate based on historical credit loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, guidance from bank regulatory agencies, and assessments of the impact of current and anticipated economic conditions on the loan portfolio. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off. Credit losses are charged against the allowance when we believe the uncollectability of a loan is likely. The balance of the allowance represents our best estimate, but significant downturns in circumstances relating to loan quality or economic conditions could result in a requirement for an increased allowance in the future. Likewise, an upturn in loan quality or improved economic conditions may result in a decline in the required allowance in the future. In either instance, unanticipated changes could have a significant impact on the allowance and operating results. The allowance is increased through a provision charged to operating expense. Uncollectable loans are charged-off through the allowance, while recoveries of loans previously charged-off are added to the allowance.
See Note 1- Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the allowance. See also Note 3 – Loans and Allowance for Credit Losses in this Quarterly Report on Form 10-Q for further information regarding our loan portfolio and allowance.
Mortgage Servicing Rights: Mortgage servicing rights are recognized as assets based on the allocated fair value of retained servicing rights on loans sold. Servicing rights are carried at the lower of amortized cost or fair value and are expensed in proportion to, and over the period of, estimated net servicing income. We utilize a discounted cash flow model to determine the value of our servicing rights. The valuation model utilizes mortgage loan prepayment speeds, the remaining life of the mortgage loan pool, delinquency rates, our cost to service loans, and other factors to determine the cash flow that we will receive from servicing each grouping of loans. These cash flows are then discounted based on current interest rate assumptions to arrive at the fair value of the right to service those loans. Impairment is evaluated quarterly based on the fair value of the servicing rights, using groupings of the underlying loans classified by interest rates. Any impairment of a grouping is reported as a valuation allowance.
Core Deposit Intangible: In whole bank or bank branch acquisitions, the primary identifiable intangible asset recorded is the value of core deposit intangibles, representing the estimated value of long-term deposit relationships acquired. The determination involves assumptions and estimates, typically determined through discounted cash flow analysis, considering customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. Amortization of core deposit intangibles occurs over estimated useful lives reviewed periodically for reasonableness. These estimated useful lives, typically ranging from seven to 10 years with an accelerated rate of amortization, are periodically reviewed for reasonableness. Identifiable intangible assets, including core deposit intangibles, are assessed for impairment when events or changes suggest the carrying value may not be recoverable. Our policy dictates recognition of an impairment loss equal to the difference between the asset’s carrying amount and fair value if the expected undiscounted future cash flows are less than the carrying amount. Estimating future cash flows involves multiple estimates and assumptions, as previously mentioned.
Goodwill: Accounting rules require us to determine the fair value of all the assets and liabilities of an acquired entity, and to record their fair value on the date of acquisition. We employ a variety of means in determining fair value, including the use of discounted cash flow analysis, market comparisons and projected future revenue streams. For those items for which we conclude that we have the appropriate expertise to determine fair value, we may choose to use our own calculation of fair value. In other cases, where the fair value is not readily determined, consultation with outside parties is used to determine fair value. Once valuations have been determined, the net difference between the price paid for the acquired entity and the fair value of the balance sheet is recorded as goodwill. Goodwill is assessed at least annually for impairment, with any such impairment recognized in the period identified. A more frequent assessment is performed if there are material changes in the market place or within the organizational structure.
Financial Overview
On December 31, 2025, we consummated the acquisition of Eastern Michigan Financial Corporation and its wholly-owned banking subsidiary, Eastern Michigan Bank, headquartered in Crosswell, Michigan. Eastern Michigan Bank will operate alongside Mercantile Bank until the first quarter of 2027, at which time we plan to consolidate Eastern Michigan Bank into Mercantile Bank in conjunction with the completion of the conversion of our core operating system to a new provider. The first quarter of 2026 represented the initial period of financial performance that included Eastern Michigan Bank’s operating results.
We reported net income of $22.7 million, or $1.32 per diluted share, for the first quarter of 2026, compared with net income of $19.5 million, or $1.21 per diluted share, during the first quarter of 2025. Higher net interest income and noninterest income combined with lower provision expense more than offset increased noninterest costs.
Commercial loans increased $16.7 million during the first three months of 2026, providing for an annualized growth rate of about 2%. As had been the case during most of 2025, commercial loan growth during the first quarter of 2026 was negatively impacted by a higher than typical level of payoffs and line of credit paydowns. Commercial loan payoffs, largely reflecting business sales, sales of assets and secondary market refinancings, and line of credit paydowns on larger commercial loan relationships totaled $180 million during the first three months of 2026, after aggregating $363 million, or an average of $91 million per quarter, in 2025. Our typical level of such payoffs and line paydowns average around $50 million per quarter. As a percentage of total commercial loans, commercial and industrial and owner-occupied commercial real estate (“CRE”) loans equaled 56.6% as of March 31, 2026, compared to 55.0% as of December 31, 2025. The commercial loan pipeline remains strong, and as of March 31, 2026, we had $240 million in unfunded loan commitments on commercial construction and development loans that are in the construction phase.
Residential mortgage loans decreased $22.6 million during the first three months of 2026, as aggregate payoffs and scheduled monthly payments exceeded new loans added to the portfolio during the quarter. Residential mortgage loan originations totaled $128 million during the first quarter of 2026, reflecting an increase of over 27% compared to the first three months of 2025. Approximately 83% of the residential mortgage loans originated during the first quarter of 2026 were with the intent to sell, compared to about 80% during the first three months of 2025. Combined with increased prepayment speeds of our residential mortgage loan portfolio during the past two years, the increased percentage of loans sold has resulted in a declining portfolio balance. The increased volume of residential mortgage loans originated and percentage of loans sold has had a positive impact on mortgage banking income.
The overall quality of our loan portfolio remains strong, with nonperforming loans totaling $7.5 million, or 0.16% of total loans, as of March 31, 2026. Accruing loans past due 30 to 89 days remain very low with no foreclosed properties at quarter-end. Gross loan charge-offs were nominal during the first three months of 2026, while recoveries of prior period loan charge-offs aggregated $0.4 million, providing for a net loan recovery of $0.3 million.
Interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, averaged $423 million during the first three months of 2026, compared to $267 million during the first three months of 2025. The higher average balance primarily reflects strong deposit growth during the first quarter of 2026 and our strategy to reduce the loan-to-deposit ratio via local deposit growth exceeding loan and investment growth.
Total deposits increased $135 million during the first three months of 2026. Aggregate net growth in almost all interest-bearing deposit types more than offset a decline of $50.4 million in out-of-area deposits and reductions in most business transaction deposit products from customers’ customary tax and bonus payments and partnership distributions during the early part of each first quarter. Securities sold under agreements to repurchase (“sweep accounts”) decreased $12.8 million and Federal Home Loan Bank of Indianapolis (“FHLBI”) advances declined $10.9 million during the first three months of 2026. Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $395 million, or about 7% of total funds, as of March 31, 2026, compared to $457 million, or approximately 8% of total funds, as of December 31, 2025.
Net interest income grew $7.4 million during the first three months of 2026 compared to the first quarter of 2025, reflecting the combined impact of a $5.1 million increase in interest income and a $2.3 million decrease in interest expense. Our net interest margin during the first quarter of 2026 was 8 basis points higher than during the first quarter of 2025, with our yield on earning assets declining 31 basis points and our cost of funds decreasing 39 basis points during that time period. The lower yield on earning assets largely reflected the aggregate 75 basis point reduction in the federal funds rate during the last four months of 2025, with the lower cost of funds being primarily attributed to the decline in the interest rate environment and the onboarding of Eastern Michigan Bank’s relatively low-cost deposit base. Also contributing to higher net interest income was growth in earning assets. Average earning assets during the first quarter of 2026 totaled $6.42 billion, compared to $5.70 billion during the first quarter of 2025.
We recorded a negative provision for credit losses of $1.8 million during the first three months of 2026, compared to a positive provision for credit losses of $2.1 million during the first quarter of 2025. The negative provision expense mainly reflected improvements to the economic forecast, changes in loan mix, a lower residential mortgage loan portfolio balance and a decline in specific allocations.
Noninterest income totaled $11.7 million during the first three months of 2026, compared to $8.7 million during the first quarter of 2025. We recorded improvements in virtually all noninterest income categories, including solid growth in treasury management fees, mortgage banking income, card income, interest rate swap income and payroll service fees. We also recorded $0.4 million in interest from the Internal Revenue Service on federal income tax payments made during 2024 that were subsequently refunded due to offsetting purchased energy tax credits.
Noninterest expense totaled $42.1 million during the first quarter of 2026, compared to $31.1 million during the first quarter of 2025. Excluding one-time costs aggregating $2.9 million related to the core and digital banking system conversion and $0.3 million associated with the acquisition of Eastern Michigan Financial Corporation, noninterest expense increased $7.8 million, or 25.0%, during the first three months of 2026 compared to the respective 2025 period using this non-GAAP measurement. The increase in noninterest expense mainly resulted from higher salary and benefit costs. A $1.2 million increase in allocations to the reserve for unfunded loan commitments, largely reflecting a significantly higher level of commercial loan commitments that have been accepted by customers, also contributed to the increase in noninterest expense. The remaining increase in noninterest expense largely reflects cost inflation and the increased cost of a larger balance sheet and branch network. Eastern Michigan Bank’s noninterest expense totaled $4.0 million during the first three months of 2026, including salary and benefit costs of $1.7 million, core deposit intangible asset amortization of $0.9 million, and data processing costs of $0.4 million.
Federal income tax expense was $4.6 million during the first three months of 2026, compared to $4.5 million during the first quarter of 2025. Federal income tax expense rose $0.1 million, while income before federal income tax expense increased $3.2 million. The acquisition of transferable energy tax credits and the benefits from low-income housing and historic tax credits provided for aggregate tax benefits of $0.8 million and $0.3 million during the first three months of 2026 and 2025, respectively. The effective tax rate was 16.9% and 18.8% during the first quarter of 2026 and 2025, respectively.
Financial Condition
Total assets increased $110 million during the first three months of 2026, totaling $6.95 billion as of March 31, 2026. Interest-earning deposits increased $111 million and securities available for sale grew $23.2 million, while total loans declined $5.2 million during the first quarter of 2026. Deposits increased $135 million, while sweep accounts declined $12.8 million and FHLBI advances were down $10.9 million during the first three months of 2026.
Our loan portfolio has historically been primarily comprised of commercial loans. Commercial loans totaled $3.94 billion, or 81.7% of total loans, as of March 31, 2026. Commercial loans increased $16.7 million during the first three months of 2026, providing for an annualized growth rate of about 2%. As had been the case during most of 2025, commercial loan growth during the first quarter of 2026 was negatively impacted by a higher than typical level of payoffs and line of credit paydowns. Commercial loan payoffs, largely reflecting business sales, sales of assets and secondary market refinancings, and line of credit paydowns on larger commercial loan relationships totaled $180 million during the first three months of 2026, after aggregating $363 million, or an average of $91 million per quarter, in 2025. Our typical level of such payoffs and line paydowns average around $50 million per quarter.
During the first quarter of 2026, commercial and industrial loans increased $55.3 million, owner-occupied CRE loans were up $20.2 million and land development and construction loans expanded by $2.2 million, while multi-family and residential rental property loans declined $52.0 million and non-owner occupied CRE loans were down $8.9 million. As a percentage of total commercial loans, commercial and industrial and owner-occupied CRE loans equaled 56.6% as of March 31, 2026, compared to 55.0% as of December 31, 2025.
Availability on commercial construction and development loans that are in the construction phase totaled $240 million as of March 31, 2026, with most of the funds expected to be drawn over the next 12 to 18 months. Our current pipeline reports indicate continued strong commercial loan funding opportunities in future periods, including $289 million in committed and accepted new lending commitments, a majority of which we expect to be accepted and funded over the next 12 to 18 months. Our commercial bankers also report additional opportunities they are currently discussing with existing borrowers and potential new customers. We remain committed to prudent underwriting standards that provide for an appropriate yield and risk relationship, as well as concentration limits, we have established within our commercial loan portfolio. Usage of existing commercial lines of credit averaged about 40% during the first three months of 2026, compared to approximately 44% during all of 2025.
Residential mortgage loans totaled $768 million, or 15.9% of total loans, as of March 31, 2026. Residential mortgage loans decreased $22.6 million during the first three months of 2026, as aggregate payoffs and scheduled monthly payments exceeded new loans added to the portfolio during the quarter. Residential mortgage loan originations totaled $128 million during the first quarter of 2026, reflecting an increase of over 27% compared to the first three months of 2025. Approximately 83% of the residential mortgage loans originated during the first quarter of 2026 were with the intent to sell, compared to about 80% during the first three months of 2026. Combined with increased prepayment speeds of our residential mortgage loan portfolio during the past two years, the increased percentage of loans sold has resulted in a declining portfolio balance. The increased volume of residential mortgage loans originated and percentage of loans sold has had a positive impact on mortgage banking income.
Other consumer-related loans totaled $113 million, or 2.4% of total loans, as of March 31, 2026. Home equity lines of credit comprised approximately 76% of that total balance. We expect this loan portfolio segment to remain relatively stable in dollar amount but decline as a percentage of total loans in future periods as the commercial loan segment grows.
Our credit policies establish guidelines to manage credit risk and asset quality. These guidelines include loan review and early identification of problem loans to provide effective loan portfolio administration. The credit policies and procedures are designed to minimize the risk and uncertainties inherent in lending. In following these policies and procedures, we rely on estimates, appraisals and evaluations of loans and the possibility that changes in these could occur quickly because of changing economic conditions or other factors. Identified problem loans, which exhibit characteristics (financial or otherwise) that could cause the loans to become nonperforming or require modification in the future, are included on an internal watch list. Senior management and the Board of Directors review this list regularly. Market value estimates of collateral on nonperforming loans, as well as on foreclosed and repossessed assets, are reviewed periodically. We also have a process in place to monitor whether value estimates at each quarter end are reflective of current market conditions. Our credit policies establish criteria for obtaining appraisals and determining internal value estimates. We may also adjust outside and internal valuations based on identifiable trends within our markets, such as recent sales of similar properties or assets, listing prices and offers received. In addition, we may discount certain appraised and internal value estimates to address distressed market conditions.
The overall quality of our loan portfolio remains strong, with nonperforming loans totaling $7.5 million, or 0.2% of total loans, as of March 31, 2026. The volume of nonperforming loans has remained under 0.3% of total loans since year-end 2015 and has averaged 0.1% over the past seven years. Accruing loans past due 30 to 89 days remain very low with no foreclosed properties at quarter end. Given the low levels of nonperforming and delinquent loans, combined with what we believe are strong credit administration practices, we are pleased with the overall quality of the loan portfolio. Gross loan charge-offs were nominal during the first three months of 2026, while recoveries of prior period loan charge-offs aggregated $0.4 million, providing for a net loan recovery of $0.3 million. We continue our collection efforts on charged-off loans and expect to record recoveries in future periods; however, given the nature of these efforts, it is not practical to forecast the dollar amount and timing of the recoveries.
The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of collateral, and timeliness of scheduled payments. We have a policy of requesting and reviewing periodic financial statements from commercial loan customers, and we have a disciplined and formalized review of the existence of collateral and its value. The primary risk element with respect to each residential mortgage loan and consumer loan is the timeliness of scheduled payments. We have a reporting system that monitors past due loans and have adopted policies to pursue creditors’ rights in order to preserve our collateral position.
See Note 1- Significant Accounting Policies in this Quarterly Report on Form 10-Q for further detailed descriptions of our estimation process and methodology related to the allowance. See also Note 3 – Loans and Allowance for Credit Losses in this Quarterly Report on Form 10-Q for further information regarding our loan portfolio and allowance.
The allowance equaled $56.7 million, or 1.18% of total loans and 752% of nonperforming loans, as of March 31, 2026. The allowance was comprised of $52.9 million in general reserves relating to performing loans and $3.8 million in specific reserves on other loans, primarily nonperforming loans, as of March 31, 2026. Loans with an aggregate carrying value of $3.4 million as of March 31, 2026, had been subject to previous partial charge-offs aggregating $3.1 million over the past several years.
Although we believe the allowance is adequate to absorb loan losses in our loan portfolio as they arise, there can be no assurance that we will not sustain loan losses in any given period that could be substantial in relation to, or greater than, the size of the allowance.
The following table reflects the composition of our allowance for credit losses, nonaccrual loans, and net charge-offs as of and for the three months ended March 31, 2026.
| (Dollars in thousands) |
Allowance for Credit Losses | Total Loans |
Allowance for Credit Losses to Total Loans | Nonaccrual Loans | Nonaccrual Loans to Total Loans | Allowance for Credit Losses to Nonaccrual Loans | Net Charge-Offs | Annualized Net Charge-Offs to Average Loans | ||||||||||||||||||||||||
| Commercial: |
||||||||||||||||||||||||||||||||
| Commercial and industrial |
$ | 12,824 | $ | 1,429,831 | 0.90 | % | $ | 1,122 | 0.08 | % | 1,142.96 | % | $ | (156 | ) | (0.05 | )% | |||||||||||||||
| Vacant land, land development and residential construction |
545 | 119,560 | 0.46 | 0 | 0 | NA | (36 | ) | (0.18 | ) | ||||||||||||||||||||||
| Real estate – owner occupied |
7,845 | 799,065 | 0.98 | 494 | 0.06 | 1,588.06 | (10 | ) | (0.01 | ) | ||||||||||||||||||||||
| Real estate – non-owner occupied |
14,661 | 1,101,758 | 1.33 | 2,732 | 0.25 | 536.64 | 0 | 0.00 | ||||||||||||||||||||||||
| Real estate – multi-family and residential rental |
4,685 | 485,175 | 0.97 | 0 | 0 | NA |
(4 | ) | (0.01 | ) | ||||||||||||||||||||||
| Total commercial |
40,560 | 3,935,389 | 1.03 | 4,348 | 0.11 | 932.84 | (206 | ) | (0.02 | ) | ||||||||||||||||||||||
| Retail: |
||||||||||||||||||||||||||||||||
| 1-4 family mortgages |
13,464 | 768,237 | 1.75 | 3,114 | 0.41 | 432.37 | (130 | ) | (0.07 | ) | ||||||||||||||||||||||
| Other consumer |
2,689 | 113,067 | 2.38 | 81 | 0.07 | 3,319.75 | (9 | ) | (0.04 | ) | ||||||||||||||||||||||
| Total retail |
16,153 | 881,304 | 1.83 | 3,195 | 0.36 | 505.57 | (139 | ) | (0.07 | ) | ||||||||||||||||||||||
| Unallocated |
23 | NA | NA | NA | NA | NA | NA | NA | ||||||||||||||||||||||||
| Total |
$ | 56,736 | $ | 4,816,693 | 1.18 | % | $ | 7,543 | 0.16 | % | 752.17 | % | $ | (345 | ) | (0.03 | )% | |||||||||||||||
Securities available for sale increased $23.2 million during the first three months of 2026, totaling $1.13 billion as of March 31, 2026. Purchases of U.S. Government agency bonds during the first three months of 2026 aggregated $38.5 million, while proceeds from maturities totaled $10.0 million. There were no purchases of U.S. Government agency guaranteed mortgage-backed securities during the first three months of 2026, while proceeds from principal paydowns aggregated $4.3 million. Purchases of municipal bonds totaled $4.4 million during the first three months of 2026; there were no maturities or calls. As of March 31, 2026, the portfolio was primarily comprised of U.S. Treasury and U.S. Government agency bonds (64%), municipal bonds (25%), U.S. Government agency guaranteed mortgage-backed securities (7%) and domestic bonds (4%). All of our securities are currently designated as available for sale, and are therefore stated at fair value. The fair value of securities designated as available for sale as of March 31, 2026, totaled $1.13 billion, including a net unrealized loss of $37.0 million. The net unrealized loss equaled $30.4 million as of December 31, 2025. After we considered whether the securities were issued by the federal government or its agencies and whether downgrades by bond rating agencies had occurred, we determined that the unrealized losses were due to changing interest rate environments. We maintain the securities portfolio at levels to provide adequate pledging and secondary liquidity for our daily operations. In addition, the securities portfolio serves a primary interest rate risk management function. We expect any upcoming purchases to generally consist of U.S. Government agency bonds and municipal bonds, with the securities portfolio maintained at the current level of approximately 16% of total assets.
Market values on our U.S. Government agency bonds, mortgage-backed securities issued or guaranteed by U.S. Government agencies and municipal bonds are generally determined on a monthly basis with the assistance of a third-party vendor. Evaluated pricing models that vary by type of security and incorporate available market data are utilized. Standard inputs include issuer and type of security, benchmark yields, reported trades, broker/dealer quotes and issuer spreads. The market value of certain non-rated securities issued by relatively small municipalities generally located within our markets is estimated at carrying value. We believe our valuation methodology provides for a reasonable estimation of market value, and that it is consistent with the requirements of accounting guidelines.
FHLBI stock totaled $22.1 million as of March 31, 2026, unchanged from December 31, 2025. Our investment in FHLBI stock is necessary to engage in the FHLBI’s advance and other financing programs. We have regularly received quarterly cash dividends, and we expect a cash dividend will continue to be paid in future quarterly periods.
Interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, averaged $423 million during the first three months of 2026, compared to $267 million during the first three months of 2025. The higher average balance primarily reflects strong deposit growth during the first quarter of 2026 and our strategy to reduce the loan-to-deposit ratio via local deposit growth exceeding loan and investment growth.
Net premises and equipment equaled $61.9 million as of March 31, 2026, compared to $62.5 million as of December 31, 2025. Depreciation expense totaled $1.5 million during the first three months of 2026, while investments associated with renovations of existing facilities and equipment purchases aggregated $0.9 million.
Total deposits increased $135 million during the first three months of 2026, totaling $5.42 billion as of March 31, 2026. Aggregate net growth in almost all interest-bearing deposit types more than offset a decline of $50.4 million in out-of-area deposits and reductions in most business transaction deposit products from customers’ customary tax and bonus payments and partnership distributions during the early part of each first quarter. Money market deposit accounts increased by $109 million, interest checking accounts were up $56.9 million, local time deposits grew $16.7 million, and savings deposits increased $10.3 million, while noninterest-bearing checking accounts declined $7.7 million during the first three months of 2026. The deposit balance increases reflect new deposit account relationships and additional funds from existing deposit customers, largely from business and public units.
Uninsured deposits totaled approximately $2.8 billion, or about 52% of total deposits, as of March 31, 2026, compared to approximately $2.9 billion, or about 54% of total deposits, as of December 31, 2025. The uninsured amounts are estimates based on the methodologies and assumptions we use for regulatory reporting requirements. Our level of uninsured deposits, which has remained relatively steady as a percentage of total deposits, is generally higher than banking industry averages given our commercial lending focus.
Sweep accounts decreased $12.8 million during the first quarter of 2026, totaling $220 million as of March 31, 2026. The aggregate balance of this funding type can be subject to relatively large daily fluctuations given the nature of the customers utilizing this product and the sizable balances that several of the customers maintain. The average balance of sweep accounts equaled $222 million during the first three months of 2026, with a high daily balance of $243 million and a low daily balance of $211 million. Our sweep account program entails transferring collected funds from certain business noninterest-bearing checking accounts and savings deposits into overnight interest-bearing repurchase agreements. Such sweep accounts are not deposit accounts and are not afforded federal deposit insurance. All of our repurchase agreements are accounted for as secured borrowings.
FHLBI advances declined $10.9 million during the first three months of 2026, totaling $315 million as of March 31, 2026. Bullet advances aggregating $20.0 million were obtained during the first quarter of 2026, while bullet advance maturities aggregated $30.0 million. Payments on amortizing FHLBI advances totaled $0.9 million. Bullet FHLBI advances are generally obtained to provide funds for loan growth and are used to assist in managing interest rate risk, while amortizing FHLBI advances are generally acquired to match-fund specific longer-term fixed rate commercial loans, with the dollar amount and amortization structure of the underlying advances reflective of the associated commercial loans. FHLBI advances are collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on commercial real estate property loans, and substantially all other assets of Mercantile Bank, under a blanket lien arrangement. Our borrowing line of credit totaled $1.16 billion, with remaining availability based on collateral equaling $837 million, as of March 31, 2026.
Shareholders’ equity increased $12.1 million during the first three months of 2026, equaling $737 million as of March 31, 2026. Positively impacting shareholders’ equity during the first three months of 2026 was net income of $22.7 million, which was partially offset by the payment of cash dividends totaling $6.6 million. Activity relating to the issuance and sale of common stock through various stock-based compensation programs and our dividend reinvestment plan positively impacted shareholders’ equity by $1.2 million. A $5.2 million after-tax decrease in the market value of our available for sale securities portfolio, generally reflecting an increase in market interest rates, negatively impacted shareholders’ equity during the first three months of 2026.
Liquidity
Liquidity is measured by our ability to raise funds through deposits, borrowed funds, and capital, or cash flow from the repayment of loans and securities. These funds are used to fund loans, meet deposit withdrawals, and operate the Company. Liquidity is primarily achieved through local and out-of-area deposits and liquid assets such as securities available for sale, matured and called securities, federal funds sold and interest-earning deposits. Asset and liability management is the process of managing our balance sheet to achieve a mix of earning assets and liabilities that maximize profitability, while providing adequate liquidity.
To assist in providing needed funds and managing interest rate risk, we periodically obtain monies from wholesale funding sources. Wholesale funds, comprised of out-of-area deposits and FHLBI advances, totaled $395 million, or about 7% of total funds, as of March 31, 2026, compared to $457 million, or approximately 8% of total funds, as of December 31, 2025.
Sweep accounts decreased $12.8 million during the first quarter of 2026, totaling $220 million as of March 31, 2026. The aggregate balance of this funding type can be subject to relatively large daily fluctuations given the nature of the customers utilizing this product and the sizable balances that several of the customers maintain. The average balance of sweep accounts equaled $222 million during the first three months of 2026, with a high daily balance of $243 million and a low daily balance of $211 million. Our sweep account program entails transferring collected funds from certain business noninterest-bearing checking accounts and savings deposits into overnight interest-bearing repurchase agreements. Such sweep accounts are not deposit accounts and are not afforded federal deposit insurance. All of our repurchase agreements are accounted for as secured borrowings.
Information regarding our repurchase agreements as of March 31, 2026, and during the first three months of 2026 is as follows:
| (Dollars in thousands) |
||||
| Outstanding balance at March 31, 2026 |
$ | 219,513 | ||
| Weighted average interest rate at March 31, 2026 |
2.68 | % | ||
| Maximum daily balance three months ended March 31, 2026 |
$ | 243,395 | ||
| Average daily balance for three months ended March 31, 2026 |
$ | 221,994 | ||
| Weighted average interest rate for three months ended March 31, 2026 |
2.70 | % |
FHLBI advances declined $10.9 million during the first three months of 2026, totaling $315 million as of March 31, 2026. Bullet advances aggregating $20.0 million were obtained during the first quarter of 2026, while bullet advance maturities aggregated $30.0 million. Payments on amortizing FHLBI advances totaled $0.9 million. Bullet FHLBI advances are generally obtained to provide funds for loan growth and are used to assist in managing interest rate risk, while amortizing FHLBI advances are generally acquired to match-fund specific longer-term fixed rate commercial loans, with the dollar amount and amortization structure of the underlying advances reflective of the associated commercial loans. FHLBI advances are collateralized by residential mortgage loans, first mortgage liens on multi-family residential property loans, first mortgage liens on commercial real estate property loans, and substantially all other assets of Mercantile Bank, under a blanket lien arrangement. Our borrowing line of credit totaled $1.16 billion, with remaining availability based on collateral equaling $837 million, as of March 31, 2026.
We also have the ability to borrow up to $50.0 million on a daily basis through a correspondent bank using an unsecured federal funds purchased line of credit. We did not access this line of credit during the first three months of 2026. In contrast, our interest-earning deposit balance with the Federal Reserve Bank of Chicago averaged $400 million during the first three months of 2026. We also have a line of credit through the Discount Window of the Federal Reserve Bank of Chicago. Using certain municipal bonds as collateral, we could have borrowed up to $153 million as of March 31, 2026. We did not utilize this line of credit during the first three months of 2026 or at any time during the previous 17 fiscal years, and do not plan to access this line of credit in future periods.
The following table reflects, as of March 31, 2026, significant fixed and determinable contractual obligations to third parties by payment date, excluding accrued interest:
| One Year |
One to |
Three to |
Over |
|||||||||||||||||
| (Dollars in thousands) |
or Less | Three Years | Five Years | Five Years | Total | |||||||||||||||
| Deposits without a stated maturity |
$ | 4,473,805 | $ | 0 | $ | 0 | $ | 0 | $ | 4,473,805 | ||||||||||
| Time deposits |
886,862 | 47,420 | 11,431 | 0 | 945,713 | |||||||||||||||
| Short-term borrowings |
219,513 | 0 | 0 | 0 | 219,513 | |||||||||||||||
| Federal Home Loan Bank advances |
90,938 | 162,000 | 42,177 | 20,207 | 315,322 | |||||||||||||||
| Subordinated debentures |
0 | 0 | 0 | 51,186 | 51,186 | |||||||||||||||
| Subordinated notes |
0 | 0 | 0 | 89,743 | 89,743 | |||||||||||||||
| Term note |
10,000 | 17,500 | 0 | 0 | 27,500 | |||||||||||||||
| Other borrowed money |
0 | 0 | 0 | 1,588 | 1,588 | |||||||||||||||
| Premises and equipment leases |
1,187 | 1,988 | 606 | 1,124 | 4,905 | |||||||||||||||
The balance of certificates of deposit exceeding the FDIC insured limit and their maturity profile as of March 31, 2026, and December 31, 2025, were as follows:
| (Dollars in thousands) |
March 31, 2026 |
December 31, 2025 |
||||||
| Up to three months |
$ | 106,268 | $ | 88,138 | ||||
| Three months to six months |
145,632 | 103,213 | ||||||
| Six months to twelve months |
112,717 | 108,745 | ||||||
| Over twelve months |
8,695 | 74,395 | ||||||
| Total certificates of deposit |
$ | 373,312 | $ | 374,491 | ||||
In addition to normal loan funding and deposit flow, we must maintain liquidity to meet the demands of certain unfunded loan commitments and standby letters of credit. As of March 31, 2026, we had a total of $2.47 billion in unfunded loan commitments and $30.9 million in unfunded standby letters of credit. Of the total unfunded loan commitments, $2.18 billion were commitments available as lines of credit to be drawn at any time as customers’ cash needs vary, and $289 million were for loan commitments generally expected to close and become funded within the next 12 to 18 months. We regularly monitor fluctuations in loan balances and commitment levels and include such data in our overall liquidity management.
We monitor our liquidity position and funding strategies on an ongoing basis, but recognize that unexpected events, changes in economic or market conditions, a reduction in earnings performance, declining capital levels or situations beyond our control could cause liquidity challenges. We have developed contingency funding plans that provide a framework for meeting liquidity disruptions.
Capital Resources
Shareholders’ equity increased $12.1 million during the first three months of 2026, equaling $737 million as of March 31, 2026. Positively impacting shareholders’ equity during the first three months of 2026 was net income of $22.7 million, which was partially offset by the payment of cash dividends totaling $6.6 million. Activity relating to the issuance and sale of common stock through various stock-based compensation programs and our dividend reinvestment plan positively impacted shareholders’ equity by $1.2 million. A $5.2 million after-tax decrease in the market value of our available for sale securities portfolio, generally reflecting an increase in market interest rates, negatively impacted shareholders’ equity during the first three months of 2026.
We and our banks are subject to regulatory capital requirements administered by state and federal banking agencies. Failure to meet the various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. Mercantile Bank’s total risk-based capital ratio was 13.8% as of both March 31, 2026, and December 31, 2025. Mercantile Bank’s total regulatory capital increased $3.5 million during the first three months of 2026, in large part reflecting net income totaling $23.8 million, which was partially offset by cash dividends paid to us aggregating $19.5 million. As of March 31, 2026, Mercantile Bank’s total regulatory capital equaled $779 million, or $215 million in excess of the 10.0% minimum that is among the requirements to be categorized as “well capitalized.” Eastern Michigan Bank’s total risk-based capital ratio was 21.6% as of March 31, 2026, compared to 20.2% as of December 31, 2025. Eastern Michigan Bank’s total regulatory capital increased $2.6 million during the first three months of 2026, partially reflecting net income totaling $2.0 million and a $0.9 million reduction in the ineligible core deposit intangible balance due to amortization during the first quarter. As of March 31, 2026, Eastern Michigan Bank’s total regulatory capital equaled $61.5 million, or $33.0 million in excess of the 10.0% minimum that is among the requirements to be categorized as “well capitalized.”
Our and our banks’ capital ratios as of March 31, 2026, and December 31, 2025, are disclosed in Note 14 of the Notes to Consolidated Financial Statements.
Results of Operations
We recorded net income of $22.7 million, or $1.32 per basic and diluted share, for the first quarter of 2026, compared with net income of $19.5 million, or $1.21 per basic and diluted share, for the first quarter of 2025. Excluding after-tax one-time costs associated with the year-end 2025 acquisition of Eastern Michigan Financial Corporation and previously announced core and digital banking system conversion (a non-GAAP measurement), net income improved to $25.2 million, or $1.46 per diluted share, for the first quarter of 2026. Diluted earnings per share increased $0.25, or approximately 21%, in the first quarter of 2026 compared to the first quarter of 2025 using this non-GAAP measure. The first quarter of 2026 represented the initial period of financial performance that included Eastern Michigan Bank’s operating results.
The increase in net income during the first three months of 2026 compared to the respective prior-year period reflected growth in net interest income and noninterest income and a lower provision for credit losses, which more than offset a higher level of noninterest expense. Net interest income increased as earning asset expansion and a decrease in the cost of funds outweighed a lower yield on earning assets and growth in interest-bearing liabilities. The increase in noninterest income mainly reflected higher levels of treasury management fees, interest rate swap income, and mortgage banking income. The negative provision for credit losses recorded during the first quarter of 2026 primarily reflected improvements to the economic forecast, changes in loan mix, decreases to the residential mortgage loan portfolio, and a decline in specific allocations. Excluding the previously mentioned one-time core and digital banking system conversion and acquisition costs, the increase in noninterest expense during the first three months of 2026 mainly reflected higher levels of salary and benefit and data processing costs and allocations to the reserve for unfunded loan commitments.
Interest income during the first quarter of 2026 was $85.4 million, an increase of $5.1 million, or 6.3%, from the $80.3 million earned during the first quarter of 2025. The increase resulted from growth in average earning assets, which more than offset a lower yield on average earning assets. Average earning assets equaled $6.42 billion during the first three months of 2026, up $719 million, or 12.6%, from the level of $5.70 billion during the respective 2025 period; average loans were up $199 million, average securities increased $357 million, and average other interest-earning assets grew $163 million. The yield on average earning assets was 5.42% during the first three months of 2026, a decrease from 5.73% during the first three months of 2025. The lower yield mainly stemmed from a reduced yield on loans and a change in earning asset mix, which more than offset an improved yield on securities resulting from the reinvestment of relatively low-yielding bonds and portfolio expansion activities, along with the positive impact resulting from the addition of Eastern Michigan Bank’s securities portfolio. The yield on loans was 6.04% during the first quarter of 2026, down from 6.28% during the first quarter of 2025, primarily due to reduced interest rates on variable-rate commercial loans resulting from the Federal Open Market Committee (“FOMC”) lowering the targeted federal funds rate. The FOMC decreased the targeted federal funds rate by 25 basis points in each of September, October, and December of 2025, during which time average variable-rate commercial loans represented approximately 77% of average total commercial loans. Denoting the success of a strategic initiative to lower the loan-to-deposit ratio and increase on-balance sheet liquidity and reflecting the impact of Eastern Michigan Bank’s liquid balance sheet, higher-yielding loans represented a decreased percentage of earning assets and lower-yielding securities accounted for an increased percentage of earning assets in the first quarter of 2026 compared to the first quarter of 2025. The yield on securities equaled 3.27% during the first quarter of 2026, up from 2.73% during the prior-year first quarter. The yield on other interest-earning assets, largely consisting of funds on deposit with the Federal Reserve Bank of Chicago, declined from 4.80% during the first three months of 2025 to 4.00% during the respective 2026 period, reflecting the decreased interest rate environment.
Interest expense during the first quarter of 2026 was $29.5 million, a decrease of $2.3 million, or 7.1%, from the $31.8 million expensed during the first quarter of 2025. The lower level of interest expense resulted from a decrease in the weighted average cost of average interest-bearing liabilities, which more than offset growth in these funds. The average weighted cost of interest-bearing liabilities declined from 3.08% during the first quarter of 2025 to 2.54% during the first quarter of 2026 mainly due to lower rates paid on money market accounts and time deposits, reflecting the decreased interest rate environment. An increase in low-cost deposit products as a percentage of total funding sources, primarily stemming from the onboarding of Eastern Michigan Bank’s deposit base, also contributed to the reduced weighted average cost of average interest-bearing liabilities. During the first three months of 2026, average interest-bearing liabilities totaled $4.71 billion, up $529 million, or 12.6%, from $4.18 billion during the respective 2025 period.
Net interest income during the first quarter of 2026 was $55.9 million, an increase of $7.4 million, or 15.1%, from the $48.5 million earned during the first quarter of 2025. The increase reflected growth in earning assets, along with a higher net interest margin. The net interest margin was 3.55% in the current-year first quarter, up from 3.47% in the first quarter of 2025 due to a decreased cost of funds, which more than offset a lower yield on average earning assets. The cost of funds equaled 1.87% in the first quarter of 2026, down from 2.26% in the prior-year first quarter mainly due to lower costs of money market accounts and time deposits, largely reflecting the decreased interest rate environment, and a higher level of low-cost deposit products primarily stemming from the addition of Eastern Michigan Bank’s deposit base.
The following table sets forth certain information relating to our consolidated average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the first quarters of 2026 and 2025. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the period presented. Tax-exempt securities interest income and yield for the first three months of 2026 and 2025 have been computed on a tax equivalent basis using a marginal tax rate of 21.0%. Securities interest income was increased by $300,000 and $255,000 in the first quarters of 2026 and 2025, respectively, for this non-GAAP, but industry standard, adjustment. These adjustments equated to increases in our net interest margin of approximately two basis points for the first quarters of 2026 and 2025.
| Quarters ended March 31, |
||||||||||||||||||||||||
| 2026 |
2025 |
|||||||||||||||||||||||
| Average |
Average |
Average |
Average |
|||||||||||||||||||||
| Balance |
Interest |
Rate |
Balance |
Interest |
Rate |
|||||||||||||||||||
| (dollars in thousands) |
||||||||||||||||||||||||
| ASSETS |
||||||||||||||||||||||||
| Loans |
$ | 4,828,031 | $ | 71,896 | 6.04 | % | $ | 4,629,098 | $ | 71,730 | 6.28 | % | ||||||||||||
| Investment securities |
1,119,988 | 9,149 | 3.27 | 763,095 | 5,212 | 2.73 | ||||||||||||||||||
| Other interest-earning assets |
467,991 | 4,681 | 4.00 | 304,325 | 3,651 | 4.80 | ||||||||||||||||||
| Total interest - earning assets |
6,416,010 | 85,726 | 5.42 | 5,696,518 | 80,593 | 5.73 | ||||||||||||||||||
| Allowance for credit losses |
(58,773 | ) | (55,657 | ) | ||||||||||||||||||||
| Other assets |
480,002 | 377,297 | ||||||||||||||||||||||
| Total assets |
$ | 6,837,239 | $ | 6,018,158 | ||||||||||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||||||||||||||||
| Interest-bearing deposits |
$ | 3,999,140 | $ | 23,247 | 2.36 | % | $ | 3,443,770 | $ | 25,192 | 2.97 | % | ||||||||||||
| Short-term borrowings |
221,994 | 1,479 | 2.70 | 221,288 | 1,763 | 3.23 | ||||||||||||||||||
| Federal Home Loan Bank advances |
318,332 | 2,556 | 3.21 | 376,211 | 2,898 | 3.08 | ||||||||||||||||||
| Other borrowings |
171,913 | 2,243 | 5.22 | 141,129 | 1,937 | 5.49 | ||||||||||||||||||
| Total interest-bearing liabilities |
4,711,379 | 29,525 | 2.54 | 4,182,398 | 31,790 | 3.08 | ||||||||||||||||||
| Noninterest-bearing deposits |
1,318,537 | 1,144,781 | ||||||||||||||||||||||
| Other liabilities |
73,957 | 96,834 | ||||||||||||||||||||||
| Shareholders’ equity |
733,366 | 594,145 | ||||||||||||||||||||||
| Total liabilities and shareholders’ equity |
$ | 6,837,239 | $ | 6,018,158 | ||||||||||||||||||||
| Net interest income |
$ | 56,201 | $ | 48,803 | ||||||||||||||||||||
| Net interest rate spread |
2.88 | % | 2.65 | % | ||||||||||||||||||||
| Net interest spread on average assets |
3.33 | % | 3.29 | % | ||||||||||||||||||||
| Net interest margin on earning assets |
3.55 | % | 3.47 | % | ||||||||||||||||||||
We recorded a negative provision for credit losses of $1.8 million during the first quarter of 2026, compared to a positive provision for credit losses of $2.1 million during the first quarter of 2025. The negative provision expense recorded during the current-year first quarter mainly reflected improvements to the economic forecast, changes in loan mix, decreases to the residential mortgage loan portfolio, and a decline in specific allocations, which reduced the calculated allowance for credit losses by $0.6 million, $0.4 million, $0.2 million, and $0.2 million, respectively.
Noninterest income totaled $11.7 million during the first quarter of 2026, up $3.0 million, or 34.3%, from $8.7 million during the prior-year first quarter. The increase mainly reflected higher levels of treasury management fees, interest rate swap income, mortgage banking income, bank owned life insurance income, and payroll services fees. The increases in treasury management and payroll services fees primarily resulted from new commercial client acquisitions and effective marketing endeavors leading to customers’ amplified use of products and services, as well as a modified fee schedule. The growth in interest rate swap income mainly reflected a higher volume of new swap transactions, while the increase in mortgage banking income largely resulted from higher production and an increased percentage of loans originated with the intent to sell. Noninterest income during the first three months of 2026 included $0.4 million in interest from the Internal Revenue Service on federal income tax payments made during 2024 that were subsequently refunded due to offsetting purchased energy tax credits.
Noninterest expense totaled $42.1 million during the first quarter of 2026, compared to $31.1 million during the first quarter of 2025. Excluding one-time costs aggregating $2.9 million related to the core and digital banking system conversion and $0.3 million associated with the acquisition of Eastern Michigan Financial Corporation, noninterest expense increased $7.8 million, or 25.0%, during the first three months of 2026 compared to the respective 2025 period using this non-GAAP measurement. The increase in noninterest expense mainly resulted from higher salary and benefit costs, largely reflecting annual merit pay increases, market adjustments, a larger bonus accrual, increased health insurance costs, higher payroll taxes, larger residential mortgage lender commissions and incentives, lower residential mortgage loan deferred salary costs, and increased stock-based compensation costs. A $1.2 million increase in allocations to the reserve for unfunded loan commitments, largely reflecting a significantly higher level of commercial loan commitments that have been accepted by customers, also contributed to the increase in noninterest expense. The remaining increase in noninterest expense during the first three months of 2026 primarily reflected cost inflation and the increased cost of a larger balance sheet and branch network. Eastern Michigan Bank’s noninterest expense totaled $4.0 million during the first quarter of 2026, including salary and benefit costs of $1.7 million, core deposit intangible asset amortization of $0.9 million, and data processing costs of $0.4 million.
During the first quarter of 2026, we recorded income before federal income tax of $27.3 million and federal income tax expense of $4.6 million. During the first quarter of 2025, we recorded income before federal income tax of $24.0 million and federal income tax expense of $4.5 million. The $0.1 million increase in federal income tax expense primarily resulted from a higher level of income before federal income tax. The acquisition of transferable energy tax credits and the net benefits from low-income housing and historic tax credit investments provided for aggregate tax benefits of $0.8 million and $0.3 million during the first three months of 2026 and 2025, respectively. The recording of the tax benefits positively impacted our effective tax rate, which equaled 16.9% during the first quarter of 2026, down from 18.8% during the prior-year first quarter.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. All of our transactions are denominated in U.S. dollars with no specific foreign exchange exposure. We have only limited agricultural-related loan assets and therefore have no significant exposure to changes in commodity prices. Any impact that changes in foreign exchange rates and commodity prices would have on interest rates is assumed to be insignificant. Interest rate risk is the exposure of our financial condition to adverse movements in interest rates. We derive our income primarily from the excess of interest collected on our interest-earning assets over the interest paid on our interest-bearing liabilities. The rates of interest we earn on our assets and owe on our liabilities generally are established contractually for a period of time. Since market interest rates change over time, we are exposed to lower profitability if we cannot adapt to interest rate changes. Accepting interest rate risk can be an important source of profitability and shareholder value; however, excessive levels of interest rate risk could pose a significant threat to our earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to our safety and soundness.
Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control interest rate risk and the quantitative level of exposure. Our interest rate risk management process seeks to ensure that appropriate policies, procedures, management information systems and internal control procedures are in place to maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest rate risk, we assess the existing and potential future effects of changes in interest rates on our financial condition, including capital adequacy, earnings, liquidity and asset quality.
We use two interest rate risk measurement techniques. The first, which is commonly referred to as GAP analysis, measures the difference between the dollar amounts of interest sensitive assets and liabilities that will be refinanced or repriced during a given time period. A significant repricing gap could result in a negative impact to our net interest margin during periods of changing market interest rates.
The following table depicts our GAP position as of March 31, 2026:
| Within |
Three to |
One to |
After |
|||||||||||||||||
| Three |
Twelve |
Five |
Five |
|||||||||||||||||
| (Dollars in thousands) |
Months | Months | Years | Years | Total | |||||||||||||||
| Assets: |
||||||||||||||||||||
| Loans (1) |
$ | 3,145,244 | $ | 225,994 | $ | 1,043,903 | $ | 401,552 | $ | 4,816,693 | ||||||||||
| Securities available for sale (2) |
31,901 | 97,907 | 578,347 | 417,278 | 1,125,433 | |||||||||||||||
| Other interest-earning assets |
572,612 | 1,257 | 3,750 | 0 | 577,619 | |||||||||||||||
| Allowance for credit losses |
0 | 0 | 0 | 0 | (56,736 | ) | ||||||||||||||
| Other assets |
0 | 0 | 0 | 0 | 482,026 | |||||||||||||||
| Total assets |
$ | 3,749,757 | $ | 325,158 | $ | 1,626,000 | $ | 818,830 | $ | 6,945,035 | ||||||||||
| Liabilities: |
||||||||||||||||||||
| Interest-bearing deposits |
3,438,488 | 590,232 | 58,851 | 0 | 4,087,571 | |||||||||||||||
| Short-term borrowings |
219,513 | 0 | 0 | 0 | 219,513 | |||||||||||||||
| Federal Home Loan Bank advances |
20,000 | 70,938 | 204,177 | 20,207 | 315,322 | |||||||||||||||
| Other borrowed money |
62,774 | 17,500 | 89,743 | 0 | 170,017 | |||||||||||||||
| Noninterest-bearing checking |
0 | 0 | 0 | 0 | 1,331,947 | |||||||||||||||
| Other liabilities |
0 | 0 | 0 | 0 | 83,718 | |||||||||||||||
| Total liabilities |
3,740,775 | 678,670 | 352,771 | 20,207 | 6,208,088 | |||||||||||||||
| Shareholders' equity |
0 | 0 | 0 | 0 | 736,947 | |||||||||||||||
| Total liabilities & shareholders' equity |
$ | 3,740,775 | $ | 678,670 | $ | 352,771 | $ | 20,207 | $ | 6,945,035 | ||||||||||
| Net asset (liability) GAP |
$ | 8,982 | $ | (353,512 | ) | $ | 1,273,229 | $ | 798,623 | |||||||||||
| Cumulative GAP |
$ | 8,982 | $ | (344,530 | ) | $ | 928,699 | $ | 1,727,322 | |||||||||||
| Percent of cumulative GAP to total assets |
0.1 | % | (5.0 | )% | 13.4 | % | 24.9 | % | ||||||||||||
| (1) |
Floating rate loans that are currently at interest rate floors are treated as fixed rate loans and are reflected using maturity date and not repricing frequency. |
| (2) | Mortgage-backed securities are categorized by expected maturities based upon prepayment trends as of March 31, 2026. |
The second interest rate risk measurement we use is commonly referred to as net interest income simulation analysis. We believe that this methodology provides a more accurate measurement of interest rate risk than the GAP analysis, and therefore, it serves as our primary interest rate risk measurement technique. The simulation model assesses the direction and magnitude of variations in net interest income resulting from potential changes in market interest rates.
Key assumptions in the model include prepayment speeds on various loan and investment assets; cash flows and maturities of interest sensitive assets and liabilities; and changes in market conditions impacting loan and deposit volume and pricing. These assumptions are inherently uncertain, subject to fluctuation and revision in a dynamic environment; therefore, the model cannot precisely estimate net interest income or exactly predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes and changes in market conditions and our strategies, among other factors.
We conducted multiple simulations as of March 31, 2026, in which it was assumed that changes in market interest rates occurred ranging from up 300 basis points to down 400 basis points in equal quarterly instalments over the next twelve months. The following table reflects the suggested dollar and percentage changes in net interest income over the next twelve months in comparison to the $239 million in net interest income projected using our balance sheet amounts and anticipated replacement rates as of March 31, 2026. The resulting estimates are generally within our policy parameters established to manage and monitor interest rate risk.
| (Dollars in thousands) |
Dollar Change | Percent Change | ||||||
| In Net |
In Net |
|||||||
| Interest Rate Scenario |
Interest Income |
Interest Income |
||||||
| Interest rates down 400 basis points |
$ | 13,500 | 5.6 | % | ||||
| Interest rates down 300 basis points |
16,000 | 6.7 | ||||||
| Interest rates down 200 basis points |
(8,300 | ) | (3.5 | ) | ||||
| Interest rates down 100 basis points |
(7,000 | ) | (2.9 | ) | ||||
| Interest rates up 100 basis points |
5,600 | 2.3 | ||||||
| Interest rates up 200 basis points |
11,500 | 4.8 | ||||||
| Interest rates up 300 basis points |
17,400 | 7.3 | ||||||
The resulting estimates have been significantly impacted by the current interest rate and economic environments, as adjustments have been made to critical model inputs with regards to traditional interest rate relationships. This is especially important as it relates to floating rate commercial loans, which comprise a sizable portion of our balance sheet.
In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including: the growth, composition and absolute levels of loans, deposits, and other earning assets and interest-bearing liabilities; level of nonperforming assets; economic and competitive conditions; potential changes in lending, investing, and deposit gathering strategies; client preferences; and other factors.
Item 4. Controls and Procedures
As of March 31, 2026, an evaluation was performed under the supervision of and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of March 31, 2026.
There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2026 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we may be involved in various legal proceedings that are incidental to our business. In our opinion, we are not a party to any current legal proceedings that are material to our financial condition, either individually or in the aggregate.
There have been no material changes in our risk factors from those previously disclosed in our annual report on Form 10-K for the year ended December 31, 2025.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
We made no unregistered sales of equity securities during the quarter ended March 31, 2026.
Issuer Purchases of Equity Securities
On May 27, 2021, we announced that our Board of Directors had authorized a program to repurchase up to $20.0 million of our common stock from time to time in open market transactions at prevailing market prices or by other means in accordance with applicable regulations. The actual timing, number and value of shares repurchased under the program will be determined by management in its discretion and will depend on a number of factors, including the market price of our stock, general market and economic conditions, our capital position, financial performance and alternative uses of capital, and applicable legal requirements. The program may be discontinued at any time. No shares were repurchased during the first three months of 2026. Historically, stock repurchases have been funded from cash dividends paid to us from Mercantile Bank. Additional repurchases may be made in future periods under the authorized plan or a new plan, which would also likely be funded from cash dividends paid to us from our banks. As of March 31, 2026, repurchases aggregating $6.8 million were available to be made under the current repurchase program.
Repurchases made during the first quarter of 2026 are detailed in the table below.
| Maximum Number |
||||||||||||||||
| of Shares or |
||||||||||||||||
| Approximate Dollar | ||||||||||||||||
| Total Number of |
Value that May Yet |
|||||||||||||||
| Total |
Shares Purchased as |
Be |
||||||||||||||
| Number of |
Average |
Part of Publicly |
Purchased Under the |
|||||||||||||
| Shares |
Price Paid Per |
Announced Plans or |
Plans or Programs |
|||||||||||||
| Period |
Purchased |
Share |
Programs |
(Dollars in thousands) |
||||||||||||
| January 1 – 31 |
0 | $ | 0 | 0 | $ | 6,818 | ||||||||||
| February 1 – 28 |
0 | 0 | 0 | 6,818 | ||||||||||||
| March 1 – 31 |
0 | 0 | 0 | 6,818 | ||||||||||||
| Total |
0 | $ | 0 | 0 | $ | 6,818 | ||||||||||
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
applicable.
* Filed herewith.
** Furnished herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 1, 2026.
| MERCANTILE BANK CORPORATION |
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| By: /s/ Raymond E. Reitsma |
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| Raymond E. Reitsma |
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| President and Chief Executive Officer (Principal Executive Officer) |
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| By: /s/ Charles E. Christmas |
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| Charles E. Christmas |
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| Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
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