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MERCANTILE BANK CORP (MBWM)·Q4 2024 Earnings Summary

Executive Summary

  • Q4 2024 diluted EPS was $1.22, flat sequentially and down versus $1.25 in Q4 2023; net revenue was $58.5M, up 2.8% year over year, driven by strong noninterest income growth while net interest income was modestly lower .
  • Net interest margin compressed to 3.41% (vs. 3.52% in Q3 and 3.92% in Q4 2023) as deposit mix shifted toward higher-cost products and earning-asset mix included more securities and Fed balances; cost of funds rose to 2.40% while loan yields declined with Fed cuts late in 2024 .
  • Asset quality remained robust: nonperforming assets fell to $5.7M (0.09% of assets) from $9.9M in Q3; Q4 net charge-offs were $3.6M tied largely to a previously reserved commercial relationship .
  • Local deposits rose $816M in 2024, lowering the loan-to-deposit ratio to 98% (from 110% in 2023); management guided 2025 loan growth of 5–7% and NIM of 3.3–3.4%, and raised the regular quarterly dividend to $0.37 for Q1 2025 .
  • Consensus estimates comparison was unavailable due to S&P Global access limitations; use management guidance and reported trends as near-term catalysts (deposit growth trajectory, NIM stabilization, noninterest income execution) .

What Went Well and What Went Wrong

What Went Well

  • Local deposits +$816M in 2024 reduced loan-to-deposit ratio to 98%, lowering wholesale funding reliance; “growth in local deposits… provided for a reduction in the loan-to-deposit ratio from 110%… to 98%” .
  • Noninterest income +22.6% YoY in Q4 (mortgage banking, treasury management, BOLI, payroll fees); management: “significant growth in mortgage banking income… and notable growth in loan production” .
  • Asset quality remained strong: NPAs 0.09% of assets; charge-offs concentrated in one previously reserved relationship; “nonperforming assets… less than 0.1% of total assets” .

What Went Wrong

  • Net interest margin fell to 3.41% (Q4), pressured by higher deposit costs and mix (money market/time deposits) and a larger securities/Fed balance; yield on earning assets fell 14 bps while cost of funds rose 37 bps YoY .
  • Noninterest expense rose to $33.8M (Q4) on compensation, mortgage commissions, payroll taxes, health claims, and data processing costs; efficiency ratio worsened to 57.76% .
  • Q4 net charge-offs of $3.6M (0.31% annualized) tied to one deteriorated commercial loan; though previously reserved, the realized write-off hit quarterly credit cost .

Financial Results

MetricQ4 2023Q3 2024Q4 2024
Net Revenue ($USD Millions)$56.9 $58.0 $58.5
Net Interest Income ($USD Millions)$48.649 $48.292 $48.361
Noninterest Income ($USD Millions)$8.300 $9.667 $10.172
Diluted EPS ($USD)$1.25 $1.22 $1.22
Net Interest Margin (%)3.92% 3.52% 3.41%
Return on Avg Assets (%)1.52% 1.35% 1.30%
Return on Avg Equity (%)16.04% 13.73% 13.36%
Efficiency Ratio (%)52.57% 55.73% 57.76%

Segment/Lending Mix

Loan Category ($USD Thousands)Q4 2023Q3 2024Q4 2024
Commercial & Industrial1,254,586 1,312,774 1,287,308
Land Dev & Construction74,752 66,374 66,936
Owner-Occupied Comm. RE717,667 746,714 748,837
Non-Owner-Occupied Comm. RE1,035,684 1,095,988 1,128,404
Multi-family & Res. Rental332,609 426,438 475,819
Total Commercial3,415,298 3,648,288 3,707,304
1–4 Family Mortgages837,407 844,093 827,597
Other Consumer51,053 60,637 65,880
Total Retail888,460 904,730 893,477
Total Loans4,303,758 4,553,018 4,600,781

Key Performance Indicators

KPIQ4 2023Q3 2024Q4 2024
Total Deposits ($USD Millions)$3,900.918 $4,455.898 $4,698.366
Loan-to-Deposit Ratio (%)110% 102% 98%
Nonperforming Assets ($USD Millions)$3.6 $9.9 $5.7
NPA / Total Assets (%)<0.1% 0.17% 0.09%
Net Charge-offs ($USD Thousands)(107) (82) 3,637
NCOs / Avg Loans (Annualized)~(-0.01%) (-0.01%) 0.31%
Allowance to Loans (%)1.16% 1.24% 1.18%
Cost of Funds (TEA) (%)2.03% 2.56% 2.40%
Yield on Earning Assets (%)5.95% 6.08% 5.81%
Yield on Loans (%)6.53% 6.69% 6.41%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Loan GrowthFY 2025N/A5%–7% New
Net Interest MarginFY 2025N/A3.3%–3.4%; ~5 bps lower if 1–2 Fed cuts New
Tax RateFY 2025~20% historical context19% Lowered
Regular Quarterly DividendQ1 2025$0.36 (Q4 2024) $0.37 (Q1 2025) Raised

Earnings Call Themes & Trends

TopicPrevious Mentions (Q-2 and Q-1)Current Period (Q4 2024)Trend
Loan-to-Deposit Ratio107% (Q2) lowered via local deposits; 102% (Q3) continued progress 98% at YE; target mid-90s maintained Improving
Net Interest Margin3.63% (Q2) → 3.52% (Q3) amid higher deposit costs 3.41%; 2025 guide 3.3%–3.4%; ~5 bps sensitivity to cuts Down but stabilizing
Mortgage Banking Strategy (sell % of originations)~75% (Q2) to ~80% (Q3) sold; higher originations ~83% sold; strong pipeline despite seasonality Increasing
Securities PortfolioSecurities grew to $669M (Q2) and $725M (Q3) $752M (Q4); aim 15%–17% of assets in 2025 Increasing
Asset QualityNPAs rose to $9.1M (Q2) and $9.9M (Q3) due to two commercial relationships NPAs improved to $5.7M; NCOs tied to one reserved relationship Improving
CRE Concentration/FundingBroad portfolio growth; construction funding robust earlier Construction funding to be ~$100–$120M lower vs 12–18 months ago Moderating
Macro/Rate SensitivityFed hikes boosted loan yields in prior periods Late-2024 cuts reduced loan yields; margin sensitivity outlined Balanced/managed

Management Commentary

  • “Local deposits grew $216 million during the fourth quarter… and allowed reduction in wholesale funding… including an $81 million reduction in FHLB advances and a $19 million reduction in broker deposits.” — CEO Ray Reitsma .
  • “We project loan growth in a range of 5% to 7% and… NIM… 3.3% to 3.4% during all time periods [2025].” — CFO Charles Christmas .
  • “Our goal is to be as interest rate agnostic as we possibly can… so that [rate moves] have a nominal impact on our net interest margin.” — CFO Charles Christmas .
  • “Nonperforming assets… remain at low levels… our robust loan review program… will allow us to detect any emerging credit issues.” — CEO Ray Reitsma .

Q&A Highlights

  • Margin sensitivity: if 1–2 Fed cuts occur in H1 2025, NIM would be ~5 bps below the 3.3%–3.4% guide; otherwise unchanged .
  • Deposit growth expectations: repeating 2024 is “a tall order”; low double-digit deposit growth targeted while maintaining mid-90s loan-to-deposit ratio .
  • CRE funding/concentration: construction loans to fund down by ~$100–$120M versus 12–18 months ago, moderating CRE growth; portfolio mix expected around 55% C&I/owner-occupied .
  • Securities portfolio: expected to reach 15%–17% of assets in 2025, with elevated on-balance-sheet liquidity maintained at the Fed in the near term .
  • Provision/credit costs: 2025 provision driven largely by loan growth; net charge-offs expected to remain low given current asset quality and stable macro assumptions .
  • Tax rate: 19% guided for 2025; Q4 rate lower due to LIHTC/historic credit true-ups; credits expected to increasingly benefit profitability over time .

Estimates Context

  • Wall Street consensus (S&P Global) for Q4 2024 EPS and revenue was unavailable due to access limitations, so a beat/miss versus consensus cannot be assessed at this time. Values would normally be retrieved from S&P Global; consensus comparison is omitted pending data availability.

Key Takeaways for Investors

  • Deposit-led balance sheet repositioning is working: local deposits +$816M in 2024, loan-to-deposit ratio 98%, and wholesale funding down to ~10% of total funds — a foundation for more durable funding and liquidity .
  • Margin compression should moderate: 2025 NIM guided to 3.3%–3.4%; sensitivity to modest Fed cuts is limited (~5 bps), pointing to potential stabilization near current levels .
  • Noninterest income diversification is gaining traction (mortgage banking, treasury management, payroll services), supporting earnings while rate headwinds persist .
  • Asset quality remains a differentiator: NPAs at 0.09% of assets and charge-offs concentrated in a previously reserved relationship; management expects low net losses in 2025 .
  • Lending mix shifts: multi-family/residential rental and non-owner-occupied CRE grew in 2024, while construction funding is set to slow, reducing CRE concentration risk .
  • Capital deployment is disciplined: dividend raised to $0.37 with buyback capacity intact ($6.8M authorized); retained earnings expected to support loan growth and steady capital ratios .
  • Near-term watch items: Q1 seasonal deposit outflows (bonuses/taxes), mortgage pipeline seasonality, and execution on deposit growth and securities allocation (target 15%–17%) .