Strong commercial loan and local deposit growth, notable increase in noninterest income, and ongoing strength in asset quality metrics highlight the year
Mercantile Bank Corporation (NASDAQ: MBWM) (“Mercantile”) reported net income of $19.6 million, or $1.22 per diluted share, for the fourth quarter of 2024, compared with net income of $20.0 million, or $1.25 per diluted share, for the respective prior-year period. For the full-year 2024, Mercantile reported net income of $79.6 million, or $4.93 per diluted share, compared with net income of $82.2 million, or $5.13 per diluted share, for the full-year 2023.
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“We are very pleased to report another year of solid financial results,” said Ray Reitsma, President and Chief Executive Officer of Mercantile. “Our strong operating performance was fueled by robust commercial loan and local deposit growth, ongoing strength in asset quality metrics, a healthy net interest margin, and a significant increase in noninterest income. As evidenced by the noteworthy increases in commercial loans and local deposits, our team members remain committed to meeting the needs of existing clients and attracting new customers while building mutually beneficial relationships. During 2024, we successfully executed several strategic initiatives, including lowering our loan-to-deposit ratio and increasing our on-balance sheet liquidity. We believe our strong overall financial standing and commercial loan funding opportunities position us to effectively meet challenges arising from changing operating environments.”
Full-year highlights include:
— Significant reduction in the loan-to-deposit ratio
— Strong local deposit growth
— Noteworthy commercial loan portfolio expansion
— Sustained strength in commercial loan pipeline
— Notable increases in mortgage banking and treasury management income
— Ongoing low levels ofnonperforming assets, past due loans, and loan charge-offs
— Solid capital position
— Announced an increased first quarter 2025 regular cash dividend
— Contributed $1.7 million to The Mercantile Bank Foundation
Operating Results
Net revenue, consisting of net interest income and noninterest income, was $58.5 million during the fourth quarter of 2024, up $1.6 million, or 2.8 percent, from $56.9 million during the prior-year fourth quarter. Net interest income during the fourth quarter of 2024 was $48.4 million, down $0.3 million, or 0.6 percent, from $48.7 million during the respective 2023 period as growth in earning assets was more than offset by a lower net interest margin. Noninterest income totaled $10.2 million during the fourth quarter of 2024, up $1.9 million, or 22.6 percent, from $8.3 million during the fourth quarter of 2023. The increase in noninterest income primarily reflected higher levels of mortgage banking income, treasury management fees, bank owned life insurance income, and payroll service fees.
The net interest margin was 3.41 percent in the fourth quarter of 2024, down from 3.92 percent in the prior-year fourth quarter. The yield on average earning assets was 5.81 percent during the current-year fourth quarter, a decrease from 5.95 percent during the respective 2023 period. The lower yield primarily resulted from a decreased yield on loans and a change in earning asset mix. The yield on loans was 6.41 percent during the fourth quarter of 2024, down from 6.53 percent during the fourth quarter of 2023 mainly due to lower 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 50 basis points in September of 2024 and 25 basis points in each of November and December of 2024, during which time average variable-rate commercial loans represented approximately 73 percent of average total commercial loans. Reflecting the success of a strategic initiative to increase on-balance sheet liquidity, higher-yielding loans represented a reduced percentage of earning assets and lower-yielding securities and interest-earning deposits accounted for an increased percentage of earning assets in the fourth quarter of 2024 compared to the fourth quarter of 2023.
The cost of funds was 2.40 percent in the fourth quarter of 2024, up from 2.03 percent in the fourth quarter of 2023 primarily due to higher costs of deposits and borrowed funds, reflecting the impact of the rising interest rate environment stemming from the FOMC's actions to curb elevated inflation levels. A change in funding mix, mainly comprising of a decline in average noninterest-bearing and lower-cost deposits and an increase in average higher-cost money market accounts and time deposits, also contributed to the higher cost of funds. The growth in money market accounts and time deposits reflected new deposit relationships, increases in existing deposit relationships, and deposit migration.
Net revenue was $231 million during 2024, up $5.8 million, or 2.6 percent, from $226 million during 2023. Net interest income during 2024 was $191 million, down $2.5 million, or 1.3 percent, from $194 million during 2023 as growth in earning assets, most notably in loans, and a higher yield on earning assets was more than offset by an increased cost of funds. Noninterest income totaled $40.4 million during 2024, up $8.2 million, or 25.7 percent, from $32.2 million during 2023. The increase in noninterest income primarily reflected higher levels of mortgage banking income, treasury management fees, bank owned life insurance income, and payroll service fees.
The net interest margin was 3.58 percent in 2024, down from 4.05 percent in 2023. The yield on average earning assets was 6.02 percent during 2024, an increase from 5.68 percent during the prior year. The higher yield on average earning assets mainly resulted from an increased yield on loans. The yield on loans was 6.61 percent during 2024, up from 6.25 percent during 2023 primarily due to higher interest rates on variable-rate commercial loans stemming from the FOMC raising the targeted federal funds rate in an effort to reduce elevated inflation levels and a significant level of commercial loans being originated over the past 24 months in the higher interest rate environment. The FOMC increased the targeted federal funds rate by 100 basis points during the period of February 2023 through July 2023, during which time average variable-rate commercial loans represented approximately 65 percent of average total commercial loans. The positive impact of the rate hikes was partially mitigated by the FOMC's lowering of the targeted federal funds rate by 100 basis points during the last four months of 2024.
The cost of funds was 2.44 percent in 2024, up from 1.63 percent in 2023 primarily due to higher costs of deposits and borrowed funds, reflecting the impact of the rising interest rate environment. A change in funding mix, mainly consisting of a decrease in average noninterest-bearing and lower-cost deposits and an increase in average higher-cost money market accounts and time deposits, also contributed to the higher cost of funds. The increases in money market accounts and time deposits stemmed from new deposit relationships, growth in existing deposit relationships, and deposit migration.
Mercantile recorded provisions for credit losses of $1.5 million and $1.8 million during the fourth quarters of 2024 and 2023, respectively. During all of 2024 and 2023, Mercantile recorded provisions for credit losses of $7.4 million and $7.7 million, respectively. The provision expense recorded during the current-year fourth quarter primarily reflected an increased allocation from slower prepayment speeds on residential mortgage loans, allocations necessitated by net loan growth, and environmental factor allocations, which were partially offset by a reduction in the calculated allowance resulting from the sale of residential mortgage loans previously held for investment and an improved economic forecast. The provision expense recorded during 2024 mainly reflected allocations necessitated by net loan growth, individual allocations made for two deteriorated commercial loan relationships, changes in qualitative factors, and an increased allocation stemming from slower prepayments speeds on residential mortgage loans, which were partially offset by lower loan loss rates. The provision expense recorded during the 2023 periods primarily reflected allocations necessitated by net loan growth, slower residential mortgage loan prepayment rates and the associated extended average life of the portfolio, and changes in environmental factors reflecting heightened inherent risk in the commercial construction loan portfolio.
Noninterest income totaled $10.2 million during the fourth quarter of 2024, up $1.9 million, or 22.6 percent, from $8.3 million during the respective 2023 period. Noninterest income during 2024 was $40.4 million, up $8.2 million, or 25.7 percent, from $32.2 million during 2023. The increases mainly reflected growth in mortgage banking income, treasury management fees, bank owned life insurance income, and payroll service fees. Revenue generated from an investment in a private equity fund also contributed to the increased level of noninterest income during 2024. The higher levels of mortgage banking income primarily resulted from increases in the percentage of loans originated with the intent to sell, which equaled approximately 83 percent and 78 percent during the current-year fourth quarter and full-year 2024, respectively, compared to approximately 67 percent and 53 percent during the respective 2023 periods, and total loan originations, which were up approximately 37 percent and 25 percent during the fourth quarter of 2024 and all of 2024, respectively, compared to the corresponding 2023 periods. Noninterest income during 2024 included bank owned life insurance claims totaling $0.7 million.
Noninterest expense totaled $33.8 million during the fourth quarter of 2024, compared to $29.9 million during the prior-year fourth quarter. Noninterest expense totaled $126 million during 2024, compared to $115 million during 2023. The increases during the 2024 periods mainly resulted from larger salary and benefit costs, reflecting annual merit pay increases, market adjustments, higher residential mortgage lender commissions and incentives, lower residential mortgage loan deferred salary costs, increased bonus accruals, higher payroll taxes, and increased health insurance claims. Higher levels of data processing costs, primarily reflecting increased transaction volume and software support costs, also contributed to the rises in noninterest expense during both 2024 periods. Reduced credit reserves for unfunded loan commitments and interest rate swap collateral holding costs during the fourth quarter of 2024 and full-year 2024 compared to the respective 2023 periods partially mitigated the increases in overhead costs noted above. Noninterest expense during 2024 and 2023 included contributions to The Mercantile Bank Foundation totaling $1.7 million and $0.7 million, respectively, while overhead costs during 2023 included a $0.4 million write-down of a former branch facility.
Mr. Reitsma commented, “The significant growth in mortgage banking income during the 2024 periods mainly reflected the successful execution of a strategic initiative to increase the percentage of loans originated with the intent to sell and notable growth in loan production. We are pleased with the increases in treasury management fees and payroll services income, which primarily resulted from customers' expanded use of products and services. Our net interest margin, although falling as anticipated due to higher costs of deposits and borrowings, a change in funding mix, and a change in earning asset mix reflecting our success in lowering the loan-to-deposit ratio and increasing on-balance sheet liquidity, remained healthy during 2024. Growth in earning assets largely offset the negative impact of the reduced net interest margin, providing for only a slight decline in net interest income. Overhead cost constraint remains an important priority, and we will continue our efforts to enhance operating efficiency while expanding the balance sheet and continuing to provide our customers with extraordinary service and a wide selection of market-leading products and services to meet their needs.”
Balance Sheet
As of December 31, 2024, total assets were $6.05 billion, up $699 million from December 31, 2023. Total loans increased $297 million, or 6.9 percent, during 2024, mainly reflecting growth in commercial loans of $292 million. Commercial loans, which grew 8.5 percent during 2024, increased despite the full payoffs and partial paydowns of certain larger relationships, which aggregated approximately $88 million and $194 million during the fourth quarter and all of 2024, respectively. The payoffs and paydowns primarily stemmed from customers using excess cash flows generated within their operations to make line of credit and unscheduled term loan principal paydowns, as well as from sales of assets. Other consumer loans were up $14.8 million, and residential mortgage loans declined $9.8 million during 2024. Interest-earning deposits and securities available for sale grew $276 million and $113 million, respectively, during 2024, with the increases in large part reflecting the success of a strategic initiative to grow the local deposit base.
As of December 31, 2024, unfunded commitments on commercial construction and development loans, which are expected to be funded over the next 12 to 18 months, and residential construction loans, which are expected to be largely funded over the next 12 months, totaled $245 million and $30 million, respectively.
Mr. Reitsma noted, “The solid growth in commercial loans during 2024, which occurred despite elevated levels of partial paydowns and payoffs, stemmed from a mixture of expanded existing client relationships and acquired new customer relationships. The growth in commercial loans, local deposits, treasury management fees, and payroll services income reflects our sales team's success in further developing current client relationships and securing the complete banking relationships of new customers. We believe commercial loan originations will be robust in future periods based on the strength of our current pipeline and the level of credit availability on construction and development loans. Growing the local deposit base will continue to be a key area of focus as we continue our efforts to reduce our loan-to-deposit ratio and limit the use of wholesale funds as a funding source for projected loan growth.”
Commercial and industrial loans and owner-occupied commercial real estate loans together represented approximately 55 percent of total commercial loans as of December 31, 2024, a level that has remained relatively consistent with prior periods and in line with our expectations.
Total deposits as of December 31, 2024, were $4.70 billion, up $797 million, or 20.4 percent, from December 31, 2023. Local deposits increased $816 million during 2024, while brokered deposits decreased $18.7 million. The growth in local deposits during 2024 provided for a reduction in the loan-to-deposit ratio from 110 percent as of December 31, 2023, to 98 percent as of year-end 2024. The increase in local deposits during 2024, which occurred in spite of the usual level of seasonal noninterest-bearing deposit withdrawals by customers to make bonus and tax payments and partnership distributions, reflected a combination of growth in existing deposit relationships and new deposit relationships. Wholesale funds were $537 million, or approximately 10 percent of total funds, at December 31, 2024, compared to $636 million, or approximately 14 percent of total funds, at December 31, 2023. Noninterest-bearing checking accounts represented approximately 27 percent of total deposits as of December 31, 2024.
Asset Quality
Nonperforming assets totaled $5.7 million, or less than 0.1 percent of total assets, at December 31, 2024, compared to $9.9 million, or 0.2 percent of total assets, at September 30, 2024, and $3.6 million, or less than 0.1 percent of total assets, at December 31, 2023. The level of past due loans remains nominal. During the fourth quarter of 2024, loan charge-offs totaled $3.8 million while recoveries of prior period loan charge-offs equaled $0.2 million, providing for net loan charge-offs of $3.6 million, or an annualized 0.3 percent of average total loans. During the full-year 2024, loan charge-offs totaled $3.8 million while recoveries of prior period loan charge-offs equaled $0.9 million, providing for net loan charge-offs of $2.9 million, or less than 0.1 percent of average total loans. Loan charge-offs during the fourth quarter of 2024 and full-year 2024 almost entirely consisted of a charge-off related to a deteriorated commercial loan relationship that was placed on nonaccrual and fully reserved for during the second quarter of 2024.
Mr. Reitsma remarked, “Our asset quality metrics remained strong during 2024, reflecting our steadfast commitment to underwriting loans in a sound and disciplined manner, along with our commercial borrowers' demonstrated abilities to effectively operate during periods of shifting economic and operating conditions. Nonperforming assets, past due loans, and loan charge-offs remain at low levels. We believe our robust loan review program and intense focus on the early identification and reporting of deteriorating commercial loan relationships will allow us to detect any emerging credit issues and constrain the impact of such on our overall financial condition. As reflected by ongoing low delinquency and charge-off levels, our residential mortgage and consumer loan portfolios continue to perform well.”
Capital Position
Shareholders' equity totaled $585 million as of December 31, 2024, up $62.4 million from December 31, 2023. Mercantile Bank maintained “well-capitalized” positions at the end of both 2024 and 2023, with total risk-based capital ratios of 13.9 percent and 13.4 percent, respectively. As of December 31, 2024, Mercantile Bank had approximately $214 million in excess of the 10 percent minimum regulatory threshold required to be categorized as a “well-capitalized” institution.
All of Mercantile Bank's investments are categorized as available-for-sale. As of December 31, 2024, the net unrealized loss on these investments totaled $63.1 million, resulting in an after-tax reduction to equity capital of $49.8 million. As of December 31, 2023, the net unrealized loss on these investments totaled $63.9 million, resulting in an after-tax reduction to equity capital of $50.5 million. Although unrealized gains and losses on investments are excluded from regulatory capital ratio calculations, Mercantile Bank's excess capital over the minimum regulatory requirement to be considered a “well-capitalized” institution would approximate $166 million on an adjusted basisas of December 31, 2024.
Mercantile reported 16,146,374 total shares outstanding at December 31, 2024.
Mr. Reitsma concluded, “As demonstrated by our Board of Directors' declaration of an increased first quarter 2025 regular cash dividend, we remain committed to building shareholder value through meaningful cash returns while providing support for ongoing loan growth. Our robust capital position and operating results, combined with expected commercial loan portfolio expansion, should enable us to effectively address any issues resulting from changing economic environments. As evidenced by the notable increases in commercial loans and local deposits during 2024, our community banking philosophy and associated focus on fostering mutually beneficial relationships have been successful in maintaining existing customer relationships and acquiring new customer relationships.”
Investor Presentation
Mercantile has prepared presentation materials that management intends to use during its previously announced fourth quarter 2024 conference call on Tuesday, January 21, 2025, at 10:00 a.m. Eastern Time, and from time to time thereafter in presentations about the company's operations and performance. These materials, which are available for viewing in the Investor Relations section of Mercantile's website at www.mercbank.com, have been furnished to the U.S. Securities and Exchange Commission concurrently with this press release.
About Mercantile Bank Corporation
Based in Grand Rapids, Michigan, Mercantile Bank Corporation is the bank holding company for Mercantile Bank. Mercantile provides financial products and services in a professional and personalized manner designed to make banking easier for businesses, individuals, and governmental units. Distinguished by exceptional service, knowledgeable staff, and a commitment to the communities it serves, Mercantile is one of the largest Michigan-based banks with assets of approximately $6.0 billion. Mercantile Bank Corporation's common stock is listed on the NASDAQ Global Select Market under the symbol “MBWM.” For more information about Mercantile, visit www.mercbank.com, and follow us on Facebook, Instagram, X (formerly Twitter) @MercBank, and LinkedIn @merc-bank.
Forward-Looking Statements
This news release contains statements or information that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “should,” “will,” and similar references to future periods. Any such statements are based on current expectations that involve a number of risks and uncertainties. Actual results may differ materially from the results expressed in forward-looking statements. Factors that might cause such a difference include 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 nontraditional 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 factors, including those expressed as risk factors, disclosed from time to time in filings made by Mercantile with the Securities and Exchange Commission. Mercantile undertakes no obligation to update or clarify forward-looking statements, whether as a result of new information, future events or otherwise. Investors are cautioned not to place undue reliance on any forward-looking statements contained herein.
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