Mercantile Bank Corporation (NASDAQ:MBWM), a leading regional bank serving Michigan, reported its financial results for the second quarter of 2024, showcasing its resilience in the face of a dynamic economic landscape.

The company reported net income of $18.8 million, or $1.17 per diluted share, for the second quarter of 2024, compared to $20.4 million, or $1.27 per diluted share, in the same period of 2023. For the first six months of 2024, net income totaled $40.3 million, or $2.50 per diluted share, compared to $41.3 million, or $2.58 per diluted share, during the first six months of 2023. While the year-over-year comparisons reflect a decline, the company's performance remains solid, with strong underlying fundamentals.

Business Overview

Mercantile Bank is a diversified financial institution, offering a comprehensive suite of banking products and services to individuals and businesses throughout Michigan. The company's operations are primarily concentrated in the western and central regions of the state, with a strong presence in the Grand Rapids metropolitan area. Mercantile Bank's business model is centered around commercial and retail banking, complemented by mortgage banking and wealth management services.

The company's commercial lending portfolio, which accounts for approximately 79% of its total loan book, has been a key driver of growth in recent years. Mercantile Bank has maintained a disciplined approach to underwriting, resulting in a high-quality loan portfolio with minimal non-performing assets. The bank's retail banking division, which includes residential mortgage lending and consumer lending, has also contributed to its overall performance.

Financials

Mercantile Bank's financial results for the second quarter and first half of 2024 reflect the company's ability to navigate the evolving interest rate environment and maintain a strong balance sheet.

Net Interest Income and Margin

Net interest income declined by $0.5 million and $1.5 million during the second quarter and first six months of 2024, respectively, compared to the prior-year periods. This was primarily due to a 42-basis-point contraction in the net interest margin during the second quarter, from 4.12% in Q2 2023 to 3.70% in Q2 2024. The compression in the net interest margin was driven by a 88-basis-point increase in the cost of funds, which more than offset a 46-basis-point increase in the yield on earning assets.

The increase in the cost of funds was largely attributable to higher deposit rates, as the company faced heightened competition for deposits and customers shifted funds from non-interest-bearing and low-cost accounts to higher-yielding money market and time deposit products. Additionally, the company's strategic initiative to lower its loan-to-deposit ratio, which involves using excess deposits to purchase securities, also contributed to the margin compression, as the yield on securities is generally lower than the yield on loans.

Loan Growth and Asset Quality

Mercantile Bank's loan portfolio grew by $118 million, or 7% on an annualized basis, during the first half of 2024. This growth was primarily driven by the commercial lending segment, which accounts for approximately 79% of the total loan book. The company's current pipeline of commercial loan commitments, including commercial construction and residential construction loans, remains robust, suggesting that loan growth is likely to continue in the near future.

The bank's asset quality metrics remained strong, with non-performing assets totaling $9.1 million, or 16 basis points of total assets, as of June 30, 2024. This consisted of 25% residential real estate and 75% non-real estate commercial loans, with no commercial real estate representation among the non-performing assets. Past-due loans represented just 14 basis points of total loans, and there were no outstanding other real estate owned (ORE) properties.

Provision for Credit Losses

Mercantile Bank recorded a provision for credit losses of $3.5 million and $4.8 million during the second quarter and first six months of 2024, respectively. The second-quarter provision expense primarily reflected a specific allocation for a non-performing, non-real estate-related commercial loan relationship, as well as allocations necessitated by net loan growth. The first-half provision also included a specific allocation recorded during the first quarter for a different non-performing, non-real estate-related commercial loan relationship.

Non-Interest Income and Expenses

Non-interest income increased during both the second quarter and first half of 2024 compared to the prior-year periods, driven by growth in mortgage banking income, treasury management fees, interest rate swap revenue, and bank-owned life insurance income. The company's strategic initiatives to sell a greater portion of mortgage loan originations and expand its treasury management offerings contributed to the improved non-interest income performance.

Non-interest expenses were $1.9 million and $3.3 million higher during the second quarter and first six months of 2024, respectively, compared to the prior-year periods. The increases were largely due to higher salary and benefit costs, including annual merit pay increases, market adjustments, higher residential mortgage lender commissions, lower residential mortgage loan deferred salary costs, and increased medical insurance costs. Additionally, higher data processing costs, primarily reflecting higher transaction volumes and software support costs, as well as the introduction of new cash management products and services, contributed to the rise in non-interest expenses.

Liquidity

Mercantile Bank maintained a strong capital position, with its bank's total risk-based capital ratio standing at 13.9% as of June 30, 2024, well above the 10% minimum required to be categorized as "well-capitalized." The company's Tier 1 leverage capital ratio was 12.2%, and its total risk-based capital ratio was $200 million in excess of the well-capitalized threshold.

The company's liquidity position also remained robust, with a loan-to-deposit ratio of 107% as of June 30, 2024, down from 110% at the end of 2023. When accounting for the company's sweep account balances, the loan-to-deposit ratio was 102%. Mercantile Bank has undertaken a three-pronged strategy to further reduce its loan-to-deposit ratio, focusing on growing its public and municipal deposits, small business banking, and retail customer relationships.

Outlook

For the remainder of 2024, Mercantile Bank expects its net interest margin to be in the range of 3.50% to 3.60% during both the third and fourth quarters. The company projects loan growth in the range of 4% to 6% for the full year, with non-interest income and non-interest expenses expected to be relatively stable.

The company's outlook is predicated on the Federal Reserve lowering the federal funds rate by 25 basis points effective October 1, 2024. Mercantile Bank remains vigilant in monitoring the evolving economic and interest rate environment and is prepared to adjust its strategies accordingly.

Conclusion

Mercantile Bank's second-quarter and first-half 2024 results demonstrate the company's ability to navigate the challenging interest rate environment and maintain a strong financial position. The bank's focus on commercial and retail banking, coupled with its strategic initiatives to grow its deposit base and manage its loan-to-deposit ratio, have positioned it well for continued success. While the year-over-year comparisons reflect some pressure on net interest income and net income, Mercantile Bank's underlying fundamentals remain robust, and the company is well-equipped to capitalize on future growth opportunities.