Two Of Regions Banks Stay On Top

November 8, 2002
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GRAND RAPIDS — Two West Michigan banks that were recognized last year as standouts among their peers remain leaders of the pack.

Mercantile Bank Corp. of Grand Rapids and Macatawa Bank Corp. of Zeeland maintained their leadership position in a follow-up to a 2001 study of the performance of 10 selected, publicly traded Midwest de novo banks. Of the 10 community banks in the study, all but one were formed between 1996 and 1999.

In their follow-up analysis of the group this year, reported in the October issue of the Midwest Banking Journal, John Donnelly and Robert France of Donnelly Penman French and Haggarty & Co. banking investment firm said they were “amazed” at the following findings:

  • Total assets of the de novos increased 57 percent from approximately $2.3 billion as of Dec. 31, 2000, to some $3.6 billion at June 30 this year.
  • Average stock price increased 56.5 percent from year-end 2000 to mid-August this year.
  • Total market capitalization — stock price times number of shares — for the 10 banks increased 130 percent from $181 million at year-end 2000 to $418 million as of mid-August this year.

Donnelly, managing director of the Detroit-based firm, said the findings reflect that “a tremendous phenomenon” is taking place.

What is taking place is a once-in-a-lifetime repositioning of assets that has come about as the result of bank consolidation, he said.

“It’s the depth of the repositioning that’s surprising even me. The very thought of generating $3.6 billion dollars of assets in five years is almost incomprehensible.

“If you think of this as a shift of assets from old to new, to have that much business move in such a short period of time is unprecedented.”

Of the 10 banks studied, Mercantile and Macatawa far outrank their de novo peers in total assets, total deposits, total equity and net income.

As of Sept. 30, Mercantile had $870.3 million in assets and Macatawa had $1.l billion in assets, which includes the assets of recently acquired Grand Bank.

The two banks opened their doors in December 1997 and November 1997, respectively.

Historically, community banks have been a slow-growing bunch. A lot of Michigan banks that have been around a long time, even as long as 100 years, have yet to achieve $100 million in assets, Donnelly pointed out.

Donnelly and France noted six factors that contributed to the growth and success of the banks in their study:

  • Undervalued prices at the beginning of the study periods allowed for significant percentage gains.
  • Bank consolidation continued to create asset attrition out of large merged banks into smaller community banks.
  • Community banks often hire talent from the big banks, and loyal customers often follow.
  • Community banks often offer one-stop shopping, which some customers prefer.
  • Community banks worked harder to compete with the talented larger banks.
  • Good geography played a role in that many new banks were formed in key, high growth markets.

The recent crop of de novo banks are run by more sophisticated and experienced bankers than were the community banks of 20 to 30 years ago.

“It’s kind of a new breed of banker — the entrepreneurial banker,” Donnelly said. “Virtually all of these management teams came out of big banks, whereas I think the legacy community banks probably grew their own management teams and were perfectly content to stay at $100 million.”

From the start, the new breed knew the competition, knew how to run a large-scale operation and had the sophistication to handle significant growth, he added.

Among other positive trends for the group, many of them recently accessed the capital markets.

Both Mercantile and Macatawa accessed the public markets thorough underwritten offerings last year.

Donnelly said some of the banks in the group are still undervalued and are suffering from liquidity discounts because there’s not a real fluid market in their stock.

The two that look to be trading with some degree of fluidity are Mercantile and Macatawa, he noted.

“They’re probably closer to what they ought to be than some of the others.”

Mercantile and Macatawa have maintained a strong growth lead over the rest of the pack. Mercantile is doing it organically, Donnelly said, and “that continues to amaze everybody” because it’s all in-market growth.

When the bank opened in 1997, its management, namely, Chairman and CEO Gerald Johnson and President Michael Price, brought a lot of their former customers with them.

“But now I think this bank is opening up a lot of new business; these aren’t old friends of Jerry’s and Mike’s anymore, these are brand new customers. I think that’s a testament to Jerry and Mike for building a franchise that is now a very attractive place to bank.”

He added that Mercantile’s ability to tap various sources of capital over the past 18 months has helped the bank continue to grow.

Macatawa has grown “very nicely” organically as well, and more recently, through the acquisition of Grand Bank.

“That’s kind of like graduating from high school and going to college. Now they’re doing acquisitions; now they’re buying a silk-stocking, blue-blood bank like Grand Bank.

“It’s unheard of for a bank to be a $1 billion bank after five years. It’s unprecedented. It’s ridiculous. But Macatawa has done it.”

Donnelly believes the de novo banks have distinguished themselves with sophisticated and personalized service — which, he added, is something people are willing to pay for. He said the thing that really, really stands out is just the significance of the critical mass that has been generated in such a short period of time.

“That’s why I’ve isolated these 10 — they capture the moment. There just aren’t that many de novos taking place anymore. I think that play is over with.

“These folks have captured kind of a once-in-a-lifetime opportunity, have seized on it, and have created a lot of value for shareholders.”

Since the de novos in the group, individually, have fairly modest market share in their respective markets, Donnelly believes they have plenty of room to grow.

“I think the biggest constraint for them is going to be capital: Where are they going to get the capital to keep growing the bank? That problem will continue to rear its ugly head every few years.”

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