Mercantile Sees Opportunities Arise From Old Kent Acquisition

June 5, 2002
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GRAND RAPIDS — With Fifth Third Bancorp’s acquisition of Old Kent, Mercantile Bank Corp. now reigns as the largest locally chartered bank in Grand Rapids.

Mercantile Chairman Gerald R. Johnson Jr. thinks that’s a distinction that will continue to draw new customers.

During the company’s recent first quarter teleconference, Johnson said Mercantile recognizes Fifth Third as one of the top banks in the nation.

But in any major city like Grand Rapids, he said, there is no way a significant acquisition such as Fifth Third’s acquisition of Old Kent can take place without disenfranchising customers and employees.

No matter how good the acquiring bank is, some market displacement is inevitable. Mercantile, Johnson said, is more than happy to be standing almost right across the street from Old Kent, ready to “help them out.”

“Since we’ve been through this with three other acquisitions here in Grand Rapids — that were fortunately timed so we could take advantage of each of them — we do know that we will continue to have some significant opportunities in the near term until the whole situation with the Fifth Third acquisition calms down and they kind of hit their own pace here in Grand Rapids.”

Everyone in banking locally sees the Fifth Third/Old Kent merger as an opportunity, and they’re out there hitting the streets as hard as ever, President Michael Price observed.

Price acknowledged that there has never been any question among Mercantile’s management team that Old Kent Bank was the No. 1 toughest competitor out there.

“As prolific as we are in growing, we always had a difficult time getting Old Kent Bank customers to move over here,” he said.

“What we are seeing now is not a mass exodus, but the opportunity where people are saying, ‘You know, I really like dealing with a local bank and the local decision-making. We know you guys at Mercantile, we’ve heard about you, come on in and talk to us.’

“We’re starting to get those kinds of opportunities. Last quarter, a fair number of them came over and became customers of Mercantile. But as we go through this evolution of the merger, we expect those opportunities to increase.”

At quarter-end, about 30 percent of Mercantile’s deposits were local. Local deposits grew 14 percent from year-end 2000 to the end of 2001’s first quarter, according to CEO Charles Christmas.

In addition to new business opportunities, Price noted, Mercantile has added some Old Kent bankers to its team.

Although very little of the loan production Mercantile experienced in the first quarter was attributable to new hires from Old Kent, some of it was attributable to ex-Old Kent customers whose business Mercantile had the opportunity to bid on, Price said.

Mercantile hired an experienced Old Kent lender mid-way through the quarter, but the impact of his loan bookings likely won’t be felt until some time in the second quarter, he said.

Asked whether Mercantile had as yet received any new city or county deposits that were formerly Old Kent accounts, Price responded that “that’s a much more complicated issue than the newspaper lets on.

“We certainly have had numerous conversations with both the city and the county. For the city it is especially an issue, as I’m sure you saw.

“We haven’t actually received any direct benefit yet, but what needs to be made clear is that we already have outstanding relationships with both the city and the county. We know we’ll get opportunities to revisit this business in the very near future.”

Mercantile, however, is not seeing any less competitive pricing pressures, Price observed, because of the many financial institutions operating in Grand Rapids, all of which view it as a great market.

Chairman Johnson said Mercantile itself has been in somewhat of an acquisitive mood of late. Although the bank remains receptive to acquisitions, it is really concentrating more on local growth and looking at opportunities the local landscape can provide, he said.

“We grew roughly $150 million between March 31 of 2000 and March 31 of 2001. That’s a bank,” Johnson stressed. “Obviously, internal, organic type growth poses none of the cultural risks and none of the credit quality risks that an acquisition would pose.

“We are really turning our attention inwardly to the MSA (metropolitan statistical area) in which we work and are going to concentrate our efforts and our capital raising on local growth — unless some really tremendous opportunity presents itself.”

The bank’s primary service areas are Kent and Ottawa counties.

Compared to one year ago, the Grand Rapids economy shows some “very big signs” of slowdown, especially in certain industries such as tool and die and automotive related businesses, Price said.

“We saw that some of them put expansion plans on hold and some of them felt that on their bottom lines. But so far, I think because of the quality of the customer base that we have, and our diligence in watching and maintaining strong credit standards, we’ve been able to avoid any serious erosion here.”

The 3-year-old company saw an 83 percent increase in net operating income in the first quarter of 2001, compared to the same quarter the year before.

Quarter-end assets were $560 million, a 37 percent increase over the $410 million recorded for the first quarter last year, and represented a $48 million, or a 9.3 percent increase, from the $512 million asset level reported at year-end 2000.

Total revenues increased to $11.3 million from the comparative quarter last year, and the company attributes 76.6 percent of the increase directly to the increase in total loans.

Key developments in the first quarter included completion of two private equity placements despite an ailing stock market. The company did a private placement of 446,600 common shares in March and raised $5.7 million. A month earlier it completed a private transaction issuing 70,000 shares and generating some $1 million in capital.

The placements will have a minimal impact from an earnings standpoint, Johnson said, due to the fact that the company can leverage the capital so quickly.

Christmas said actual shares outstanding at the end of March were 3,112,702.

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