A tight focus on deposits helped Mercantile Bank Corp. in Grand Rapids, Michigan, dramatically alter its funding equation and push its loan-to-deposit ratio below 100% for the first time in more than two years.
The $6.1 billion-asset Mercantile reported fourth-quarter and full-year 2024 earnings Tuesday. Net income for the three months ending Dec. 31 totaled $19.6 million, essentially level with the $20 million it reported at year-end 2023, despite a significantly increased cost of funds — an
Mercantile's loan-to-deposit ratio hit 100% in the third quarter of 2022. It remained stubbornly fixed in triple digits until the fourth quarter, finishing 2024 at 98%. The company grew deposits more than 5% between 2022 and 2023, but couldn't keep pace with more rapid increases in loans, according to President and CEO Raymond Reitsma. Mercantile's loan-to-deposit ratio reached 110% on Dec. 31, 2023.
Excessively high loan-to-deposit ratios can be considered troublesome for banks because they may heighten concerns about an institution's liquidity.
Reitsma said Mercantile focused on deposit-gathering throughout 2024, prioritizing cash-rich commercial clients, growing retail balances and attracting more municipal deposits. The strategy produced 20% deposit growth in 2024, more than double the bank's 9% loan growth.
Mercantile will work to extend the trend in 2025.
"We expect to continue the progress that we've made, and [a loan-to-deposit ratio in] the mid-90s is still the goal," Reitsma said Tuesday on a conference call with analysts. Mercantile is forecasting low double-digit deposit growth in 2025, Reitsma said.
Hovde analyst Brendan Nosal upgraded Mercantile to outperform, due in large part to its deposit numbers. "Throughout 2024, we were on the sidelines given the bank's traditionally asset sensitive [posture] … and a balance sheet that was at capacity with a loan-to-deposit ratio above 100%," Nosal wrote Tuesday in a research note.
John Rodis, who covers Mercantile for Janney Montgomery Scott, maintained a neutral rating on the shares. Rodis, however, increased his 2025 earnings-per-share forecast by 10% to $4.77.
The impact of Mercantile's deposit-gathering efforts resonated across its balance sheet. The full-year increase in deposits amounted to nearly $800 million, enough to fund the entirety of its growth, cover a 16% reduction in wholesale funding and boost the size of the securities portfolio by $113 million.
According to Chief Financial Officer Charles Christmas, Mercantile is forecasting loan growth of 5% to 7% in 2025. The company's commercial loan pipeline totaled $296 million on Dec. 31. Mortgage lending is also expected to remain robust, but Mercantile sells the majority of its home loan production. Mortgage banking income totaled $3.6 million for the quarter ending Dec. 31, up 50% from a year earlier.
"Our mortgage team continues to build market share despite a challenging rate environment allowing results that diverge from average in the market," Reitsma said on the conference call.
Mercantile's credit quality remained solid throughout 2024, with nonperforming loans never exceeding 0.22% of total loans. They totaled $5.7 million on Dec. 31, or 0.12% of total loans.
Investors seemed pleased with Mercantile's earnings report. Shares were trading up more than 5% at $49.18 midday Wednesday.
