Banks have had a tough slog the past few years, especially smaller regional banks that have traditionally relied on mortgage lending as one of their primary drivers. Michigan-based Mercantile Bank (NASDAQ:MBWM) has been an exception, seeing growth in commercial and mortgage loans. MBWM is now taking steps to attract additional deposits and improve its loan-to-deposit ratio, which could lead to greater gains in the future.
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Attracting Deposits to Drive MBWM Higher
Mercantile Bank is the largest bank headquartered in Michigan, boasting 43 locations and approximately $5.5 billion in assets. It offers various financial products and services, including checking and savings accounts, credit and debit cards, mobile and internet banking, business loans, mobile wallets, health savings accounts, and treasury management services. These services are targeted to businesses, individuals, and governmental units.
The bank has enjoyed strong growth in commercial and mortgage loans over the last three years; however, its deposit growth, though solid, has lagged. By the end of 2023, the loan-to-deposit ratio had risen to 110%, up from 85% in 2021. A loan-to-deposit ratio is one indicator for a banks’ performance, and ratios over 100% indicate that the bank is lending more than it is attracting in deposits. This means that they need to borrow money to provide financing, forcing them to pay interest and cutting into profits.
In response, the management team at Mercantile Bank has embarked on a strategy to grow its deposit base while lowering its loan-to-deposit ratio to the mid-90% range. This strategy includes leveraging strategic personnel relationships in the public and municipal sectors, focusing on small business banking through efficient underwriting and customer relationships, and a renewed emphasis on retail customers, prioritizing total balances over transactional activities.
Significant progress on this initiative would likely propel the bank’s stock to higher levels.
Mercantile Bank’s Recent Financial Results
The bank recently announced financial results for the first quarter of 2024, beating estimates by reporting revenue of $58.2 million and net income of $21.6 million, translating to $1.34 per diluted share. These represent a slight increase compared to the net income of $21.0 million and EPS of $1.31 in the first quarter of 2023.
The board announced a regular quarterly cash dividend of $0.35 on common stock, indicating an annual yield of approximately 3.8%.
The bank reported a net interest margin of 3.74% for the first quarter, and total assets were valued at $5.47 billion. The bank is well-capitalized, with a total risk-based capital ratio of 13.8%, about $196 million above the 10% minimum regulatory threshold.
What is the Price Target for MBWM?
The stock has been trending down, dropping over -13.5% YTD, and continues to demonstrate negative price momentum, trading below the 20-day (36.33) and 50-day (36.85) moving averages.
However, analysts following the stock have been cautiously optimistic. It is rated a Moderate Buy based on the ratings and 12-month price targets issued by Wall Street analysts in the past three months.
The average price target for MBWM stock is $47.00, which represents a 30.30% upside from current levels.
Bottom Line on Mercantile Bank
In the face of a challenging climate for regional banks, Mercantile Bank has managed to navigate the environment with some success. The successful execution of the bank’s strategy to attract more deposits will likely spark rising stock prices, suggesting investors could benefit from watching closely for confirmation that these initiatives bear fruit before jumping in to participate in the upside.
