KBRA Assigns Ratings to Mercantile Bank Corporation

Kroll Bond Rating Agency (KBRA) assigns a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3 to Grand Rapids, Michigan-based Mercantile Bank Corporation (NASDAQ: MBWM) (“Mercantile” or “the company”). In addition, KBRA assigns deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 to Mercantile Bank of Michigan (“the bank”), the main subsidiary. The Outlook for all long-term ratings is Stable.

The ratings are supported by Mercantile’s solid earnings performance in recent years, with core ROA averaging approximately 1.30% since 2018, which more recently has been reinforced by strong noninterest income contributions (nearly 30% of revenues) since the onset of the pandemic, notably aided by the very conducive mortgage banking environment. While recently improved earnings diversity is considered a positive, we acknowledge that noninterest income has been concentrated in mortgage origination fees; typically, a more cyclical revenue component, and one which is expected to moderate somewhat following record production and GoS margins. With that said, mortgage banking has been a valuable contributor to bottom line results, serving to offset material NIM compression resulting from low interest rates and global excess liquidity. Prior to the pandemic, returns were driven by a healthy NIM that benefitted from a reasonably priced deposit base and an earning asset mix that included a fairly high component of loans (+85%), which should likely be the case moving forward once cash is redeployed into loans and mortgage banking activity normalizes. 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 necessitated. In recent years, the NPA and NCO ratios have both consistently tracked below peer levels, which have averaged 0.19% and 0.00%, respectively, since 2016. MBWM’s core capital ratios have historically tracked somewhat below most peers. While recent TCE levels are expected to increase as the balance sheet normalizes (8.2% as of 3Q21 vs. 10.1% at YE19), the CET1 measure could remain slightly below peer averages (10.3% as of 3Q21) prospectively should the company’s relatively high RWA density re-emerge. Pre-pandemic, Mercantile’s liquidity position had been managed relatively more aggressively, evidenced by a loan-to-core deposit ratio peaking above 120%. Positively, the company’s cost of deposits – benefitting from a meaningful noninterest-bearing component (43% as of 3Q21, though averaged 35% in the years leading up to the pandemic) – remained favorable during the less conducive 2019 pricing environment. Lastly, KBRA also acknowledges the company’s long tenured and cohesive management team, which has implemented a conservative growth strategy that is more focused on organic initiatives rather than M&A.

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The ratings are based on KBRA’s Bank & Bank Holding Company Global Rating Methodology published on October 16, 2019 and KBRA’s ESG Global Rating Methodology published on June 16, 2021.

Disclosures

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 pursuant to the Temporary Registration Regime. 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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