Net interest income expansion, substantial noninterest income growth, and ongoing strength in asset quality metrics and capital levels highlight the quarter
Mercantile Bank Corporation (NASDAQ: MBWM) (“Mercantile”) reported net income of $22.6 million, or $1.39 per diluted share, for the second quarter of 2025, compared with net income of $18.8 million, or $1.17 per diluted share, for the second quarter of 2024. Net income during the first six months of 2025 totaled $42.2 million, or $2.60 per diluted share, compared with net income of $40.3 million, or $2.50 per diluted share, during the first six months of 2024.
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“We once again reported solid quarterly financial results despite uncertain macro-economic conditions throughout the second quarter of 2025,” said Ray Reitsma, President and Chief Executive Officer of Mercantile. “Our strong operating performance reflected net interest income growth, a stabilizing and healthy net interest margin, noteworthy increases in core noninterest income revenue streams, a significant decline in federal income tax expense, robust commercial loan expansion, and sustained strength in asset quality metrics and capital levels. We remain steadfast in our efforts to lower our loan-to-deposit ratio through local deposit generation, including the expansion of existing deposit relationships and new client acquisition. Our partnership with Eastern Michigan Financial Corporation will enhance our Bank's position as the largest bank founded, headquartered, and operated in the State of Michigan and help us achieve certain strategic goals, including lowering our loan-to-deposit ratio, strengthening our on-balance sheet liquidity, and expanding our footprint in Eastern and Southeastern Michigan.”
Second quarter highlights include:
— Net interest income growth
— Notable increases in mortgage banking, interest rate swap, treasury management, and payroll services income
— Reduction in federal income tax expense resulting from the acquisition of transferable energy tax credits
— Solid commercial loan portfolio expansion
— Strong commercial loan pipeline
— Sustained low levels of nonperforming assets, past due loans, and loan charge-offs
— Robust capital position
Operating Results
Net revenue, consisting of net interest income and noninterest income, was $60.9 million during the second quarter of 2025, up $4.2 million, or 7.4 percent, from $56.7 million during the prior-year second quarter. Net interest income during the current-year second quarter was $49.5 million, up $2.4 million, or 5.1 percent, from $47.1 million during the respective 2024 period as growth in earning assets more than offset a lower net interest margin. Noninterest income totaled $11.5 million during the second quarter of 2025, compared to $9.7 million during the second quarter of 2024. The increase primarily reflected higher levels of mortgage banking income, interest rate swap income, treasury management fees, earnings on bank owned life insurance, and payroll service fees.
The net interest margin was 3.49 percent in the second quarter of 2025, down from 3.63 percent in the prior-year second quarter. The yield on average earning assets was 5.77 percent during the current-year second quarter, a decrease from 6.07 percent during the respective 2024 period. The lower yield primarily resulted from a reduced yield on loans and a change in earning asset mix, which more than offset an improved yield on securities stemming from the reinvestment of relatively low-yielding bonds and portfolio expansion activities. The yield on loans was 6.32 percent during the second quarter of 2025, down from 6.64 percent during the second quarter of 2024 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. Denoting the success of a strategic initiative to reduce the loan-to-deposit ratio and increase on-balance sheet liquidity, higher-yielding loans represented a decreased percentage of earning assets and lower-yielding securities accounted for an increased percentage of earning assets in the second quarter of 2025 compared to the second quarter of 2024.
During the second quarter of 2025, the cost of funds was 2.28 percent, down from 2.44 percent in the second quarter of 2024 mainly due to lower rates paid on money market accounts and time deposits, reflecting the decreased interest rate environment that began in September of 2024 in conjunction with the FOMC's lowering of the targeted federal funds rate. A change in funding mix, primarily consisting of declines in average noninterest-bearing checking accounts and lower-cost non-time deposits and increases in average higher-cost money market accounts and time deposits, negatively impacted the cost of funds during the second quarter of 2025. The increases in money market accounts and time deposits reflected a combination of new deposit relationships, growth in existing deposit relationships, and deposit migration.
Mercantile recorded provisions for credit losses of $1.6 million and $3.5 million during the second quarters of 2025 and 2024, respectively. The provision expense recorded during the current-year second quarter mainly reflected an individual allocation of $2.5 million related to a commercial construction loan relationship that was placed on nonaccrual during the quarter and allocations of $0.7 million necessitated by net loan growth, which more than offset an aggregate reduction of $1.0 million in individual allocations associated with nonperforming loan relationships resulting from full payoffs and partial paydowns. Changes in loan portfolio composition and an improved economic forecast positively impacted provision expense during the second quarter of 2025. The provision expense recorded during the second quarter of 2024 primarily reflected an individual allocation for a nonperforming commercial loan relationship and allocations demanded by net loan growth. The recording of net loan recoveries and ongoing strength in loan quality metrics during both periods in large part mitigated additional reserves associated with loan growth.
Noninterest income totaled $11.5 million during the second quarter of 2025, up $1.8 million, or 18.4 percent, from $9.7 million during the respective 2024 period mainly due to growth in mortgage banking income, interest rate swap income, treasury management fees, bank owned life insurance income and payroll service fees, along with the recognition of tax credit syndication fees, which more than offset a lower level of revenue generated from investments in private equity funds. The higher level of mortgage banking income primarily resulted from increases in the percentage of loans originated with the intent to sell, which equaled approximately 79 percent during the current-year second quarter compared to approximately 75 percent during the second quarter of 2024, and total loan originations, which were up approximately 16 percent during the second quarter of 2025 compared to the corresponding 2024 period. Interest rate swap income at times varies greatly from period to period due to the timing of closing transactions.
Noninterest expense totaled $33.4 million during the second quarter of 2025, up from $29.7 million during the prior-year second quarter. The increase mainly resulted from higher salary and benefit costs, primarily reflecting annual merit pay increases, market adjustments, a larger bonus accrual, lower residential mortgage loan deferred salary costs, higher health insurance claims, and increased payroll taxes. Higher allocations to the reserve for unfunded loan commitments, largely stemming from an increase in commercial loan commitments, also contributed to the rise in noninterest expense.
Federal income tax expense was $3.3 million during the current-year second quarter, compared to $4.7 million during the respective 2024 period. The acquisition of transferable energy tax credits during the second quarter of 2025 provided for an aggregate $1.5 million tax benefit during the period. The recording of the tax benefit positively impacted Mercantile's effective tax rate, which equaled 12.9 percent during the second quarter of 2025, down from 20.1 percent during the second quarter of 2024.
Mr. Reitsma commented, “Our net interest margin, although declining as expected in the second quarter of 2025 in comparison to the second quarter of 2024 as a result of a decreased yield on average earning assets, has remained relatively stable over the past four quarters. Growth in earning assets more than outweighed the impact of the lower net interest margin, providing for a higher level of net interest income. The substantial growth in mortgage banking income during the second quarter of 2025 mainly resulted from the continued success of our strategic plan to increase the percentage of loans originated with the intent to sell and sustain solid loan production, while the noteworthy increases in treasury management and payroll service fees primarily reflected clients' expanded use of products and services and successful marketing efforts. We are very pleased with the increase in interest rate swap income, reflecting a higher level of transaction volume, and significant reduction in federal tax expense, mainly reflecting the tax benefit received from the acquisition of transferable energy tax credits, during the current-year second quarter. Meeting balance sheet growth objectives in a cost-effective manner and continuing to provide our customers with exceptional service and industry-leading products and services to meet their needs remain top priorities.”
Balance Sheet
As of June 30, 2025, total assets were $6.18 billion, up $129 million from December 31, 2024. Total loans increased $97.2 million, or an annualized 4.3 percent, during the first six months of 2025, primarily reflecting growth in commercial loans of $114 million. Commercial loans grew an annualized 6.2 percent during the first half of 2025 notwithstanding the full payoffs and partial paydowns of certain larger relationships, which aggregated approximately $154 million during the period, including $99 million during the second quarter. The payoffs and paydowns stemmed from sales of assets, as well as from customers using excess cash flows generated within their operations to make line of credit reductions.
Residential mortgage loans declined $28.2 million, and other consumer loans were up $11.6 million during the first six months of 2025. During the first half of 2025, securities available for sale grew $96.1 million, and interest-earning assets decreased $139 million.
As of June 30, 2025, 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 $237 million and $35 million, respectively.
Commercial and industrial loans and owner-occupied commercial real estate loans combined represented approximately 55 percent of total commercial loans as of June 30, 2025, a level that has remained relatively consistent with prior periods and in line with our expectations.
Total deposits equaled $4.71 billion as of June 30, 2025, compared to $4.70 billion as of December 31, 2024. Local deposits were down $37.1 million, or less than 1.0 percent, during the first six months of 2025, while brokered deposits increased $49.2 million during the respective period. The slight reduction in local deposits during the first half of 2025 primarily resulted from the typical level of seasonal deposit withdrawals by customers to make bonus and tax payments and partnership distributions, the impact of which was largely offset by net growth in various existing deposit relationships and new client acquisitions. Loan portfolio expansion during the first six months of 2025 resulted in an increase in the loan-to-deposit ratio from 98 percent at year-end 2024 to 100 percent as of June 30, 2025. As of June 30, 2024, the loan-to-deposit ratio was 107 percent. Wholesale funds were $555 million, or approximately 10 percent of total funds, at June 30, 2025, compared to $537 million, or approximately 10 percent of total funds, at December 31, 2024. Noninterest-bearing checking accounts represented approximately 25 percent of total deposits as of June 30, 2025.
Mr. Reitsma noted, “Commercial loan growth accelerated during the second quarter of 2025 as commercial borrowers' tariff-induced concerns eased, resulting in the commencement of construction projects and business expansion activities that had been delayed during the first few months of the year as a result of heightened uncertainty surrounding economic and operating environments. We are pleased with the level of commercial loan expansion during the second quarter and first six months of 2025, especially when taking into consideration the ongoing economic uncertainty and significant level of partial paydowns and full payoffs during the periods, and we believe abundant opportunities to book commercial loans in future periods exist in light of our current pipeline and continuing discussions with current and prospective borrowers. Lowering our loan-to-deposit ratio through local deposit generation and limiting the use of wholesale funds to originate loans and purchase investments remains a key near-term goal.”
Asset Quality
Nonperforming assets totaled $9.7 million, or 0.2 percent of total assets, as of June 30, 2025, compared to $5.7 million, or less than 0.1 percent of total assets, as of December 31, 2024, and $9.1 million, or 0.2 percent of total assets, as of June 30, 2024. The increase in nonperforming assets during the first six months of 2025 mainly reflected the deterioration of the previously mentioned nonperforming commercial construction loan, which was placed on nonaccrual and drove provision expense during the second quarter of 2025 and represented approximately 57 percent of total nonperforming assets as of June 30, 2025. The level of past due loans remains nominal. During the first six months of 2025, loan charge-offs were less than $0.1 million, while recoveries of prior period loan charge-offs slightly exceeded $0.1 million, providing for net loan recoveries of $0.1 million, or an annualized 0.01 percent of average total loans.
Mr. Reitsma remarked, “Our asset quality metrics remained strong during the second quarter of 2025, reflecting our unwavering commitment to underwrite loans in a cautious manner and in accordance with internal policy guidelines, along with our customers' proven abilities to operate effectively during periods of economic uncertainty. The levels of nonperforming assets, delinquent loans, and loan charge-offs remained low during the second quarter, and we will continue our efforts to identify any deteriorating commercial credit relationships and emerging systemic or sector-specific credit concerns as early as possible to limit the impact of such on our overall financial condition. As evidenced by ongoing low past due and charge-off levels, our residential mortgage loan and consumer loan portfolios continued to exhibit strong performance.”
Capital Position
Shareholders' equity totaled $632 million as of June 30, 2025, up $47.0 million from December 31, 2024. Mercantile Bank maintained “well-capitalized” positions at the end of the second quarter of 2025 and year-end 2024, with total risk-based capital ratios of 13.9 percent at each period end. As of June 30, 2025, Mercantile Bank had approximately $218 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 June 30, 2025, the net unrealized loss on these investments totaled $45.3 million, resulting in an after-tax reduction to equity capital of $35.8 million. 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. 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 $183 million on an adjusted basisas of June 30, 2025.
Mercantile reported 16,248,694 total shares outstanding as of June 30, 2025.
Mr. Reitsma concluded, “Our sustained strong financial performance has allowed us to continue our regular quarterly cash dividend program, and as evidenced by our announcement of an increased third quarter cash dividend earlier this morning, we remain committed to providing shareholders with meaningful cash returns on their investments. We believe our solid operating results, asset quality metrics and capital levels, along with renewed strength in our commercial loan commitments and prospects, position us to effectively meet challenges resulting from unstable economic and operating conditions. Our community banking model and associated emphasis on developing mutually beneficial relationships with customers have been instrumental in preserving established relationships and fostering new relationships, and we believe continuing focus on each will provide us with ample opportunities to expand our local deposit base and reduce our loan-to-deposit ratio in future periods.”
Partnership with Eastern Michigan Financial Corporation
Mercantile and Eastern Michigan Financial Corporation (“Eastern Michigan”) today jointly announced that they have entered into a definitive agreement pursuant to which Eastern Michigan and its wholly owned subsidiary, Eastern Michigan Bank, will combine with Mercantile in a cash and stock transaction. The partnership presents a unique opportunity to combine two culturally aligned franchises, strengthening Mercantile's position as the largest bank headquartered in Michigan as measured by total assets. The partnership, which remains subject to customary closing conditions, is expected to strategically expand Mercantile's operating footprint with a partner that possesses an exceptional deposit franchise with substantial excess liquidity.
For additional information on the announcement of the partnership, refer to the “Mercantile Bank Corporation and Eastern Michigan Financial Corporation Announce Definitive Merger Agreement” press release available in the Investor Relations section of Mercantile's website at www.mercbank.com.
Investor Presentation
Mercantile has prepared presentation materials that management intends to use during its previously announced second quarter 2025 conference call on Tuesday, July 22, 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 $6.2 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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