KBRA Affirms Ratings for Mercantile Bank Corporation

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Grand Rapids, Michigan-based Mercantile Bank Corporation (NASDAQ: MBWM) ("Mercantile" or "the company"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for Mercantile Bank, the main subsidiary. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by Mercantile’s durable business model, which has continued to deliver strong earnings across cycles. Through 9M25, ROA of roughly 1.5% reflects a stable NIM around 3.5%, as the balance sheet has been effectively managed despite recent Fed rate cuts and the potential pressure from its moderately asset-sensitive positioning. While margin moderated from its late-2022 peak following normalization in deposit costs, we expect earnings capacity to remain at the higher end of the rating group prospectively. Revenue remains relatively diversified (~19% noninterest income to total revenues), benefiting from low teens growth YTD in treasury management and payroll fees alongside an active shift in mortgage banking activity to sell a greater proportion of loans in the secondary market. Asset quality remains a strength; the 3Q25 NPA ratio is modest at ~0.21% - largely attributable to a single construction credit that migrated to nonaccrual in 2025 and has been specifically reserved for. Moreover, the company has reported net recoveries YTD, and aside from the noted idiosyncratic item, criticized/classified balances are low and trending favorably. We believe that potential CRE headwinds are mitigated by a moderate investor CRE concentration (~222% of risk based capital as of 3Q25), and a high proportion of floating rate loans that have already repriced to market rates. Additionally, the company has manageable office exposure (~5% of total loans) concentrated in suburban markets with service-oriented tenants. Given the higher RWA density (~92% of assets) tied to its commercially oriented mix, risk-based capital ratios generally track below peer averages but have strengthened over the past year (CET1 ratio of 11.3% as of 3Q25) and are complemented by a solid TCE ratio of ~9.7% at 3Q25. That said, with the pending acquisition of Eastern Michigan Financial ("Eastern") (expected to close in 4Q25), core capital ratios are projected to drop between 40-50 bps. Elsewhere, liquidity is sound and improving as evidenced by the loan-to-deposit ratio being reduced to 96% on strong core deposit inflows (including targeted growth in public funds and commercial operating accounts) and on-balance sheet liquidity (cash and AFS securities) increasing to ~21% of total assets. The Eastern acquisition is anticipated to further bolster funding and liquidity given Eastern’s low-cost, predominantly core deposit base and low loan-to-deposit ratio. Following the transaction, Mercantile is planning on a core systems conversion in early-2027, after which, cost-saves should accelerate while excess liquidity is expected to be deployed into higher yielding assets or to retire select wholesale funding.

Rating Sensitivities

A rating upgrade is not expected over the medium term, though successful integration of the Eastern Michigan Financial acquisition, a higher level of fee income, and a rebuild of capital ratios that track higher than peer averages, while maintaining peer leading earnings and credit metrics would be viewed favorably. A rating downgrade is also unlikely, though any merger-related integration issues or any deterioration or slippage among key ratios, most notably credit, capital, or earnings, could potentially pressure ratings.

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