KBRA Affirms Ratings for Mercantile Bank Corporation

1 Dec 2023   |   New York


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.

The ratings are supported by Mercantile’s durable business model, which has demonstrated the ability to reflect strong earnings performance throughout various interest rate environments (ROA has averaged 1.30% since 2018) due to its asset sensitive balance sheet and mortgage banking operations serving as natural hedges to one another. More recently, during this current rate hiking regime, MBWM’s ROA has reached record levels as its largely floating rate loan portfolio and lower-beta deposit base (average cost of 1.76% for 3Q23) has resulted in a significantly above peer NIM (4.03% for 9M23). While the margin has been on the decline since reaching peak levels in 4Q22 as deposit costs have accelerated in recent quarters and is projected to remain pressured in coming quarters, we believe that earnings capacity will remain at the higher end of the rating group prospectively. KBRA also favorably views the revenue diversity at the company, with noninterest income averaging 20% of revenues since 2018. However, we recognize that fee income has a tendency to be volatile given the concentration in mortgage banking, which is currently at relatively lower levels given the higher-rate environment impacting volume and GoS margins. Like many peers, Mercantile reflected some asset quality related challenges during the global financial crisis; however, the company’s favorable credit performance since that time has been supported by a more conservative stance with respect to borrower selection and loan concentrations, as well as tightened underwriting standards when necessary. In recent years, the NPA and NCO ratios have both consistently tracked below peer levels. With regard to the headwinds currently facing the banking industry, notably repricing risk for maturing fixed-rate CRE loans, as well as occupancy declines in the office sector, we believe that Mercantile is relatively insulated from both risk factors given its overall lower level of investor CRE (26% of loans or 228% of total risk-based capital as of 3Q23). Given the higher RWA levels (94% of assets) due to its more loaned up balance sheet and concentration in commercial lending, MBWM’s risk-based capital measures generally track below peer averages, though have been trending higher over the past year (CET1 ratio of 10.3% as of 3Q23). This is somewhat offset by a strong TCE ratio that is wholly reflective of unrealized losses from its securities book. The liquidity position, as measured by the loan-to-deposit ratio, has been managed more aggressively historically, though total liquidity available is considered adequate for its business model, which includes a higher level of uninsured deposits. However, these appear to be sturdy given that these are full-banking relationships that reflect a long history with Mercantile.

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Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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