Mercantile Banks Net Income Up

May 5, 2006
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GRAND RAPIDS — Mercantile Bank Corp. reported continued growth for the first quarter, posting net income of $4.9 million and diluted earnings of 64 cents per share, compared with net income of $4.4 million and earnings per share of 57 cents for the first quarter of 2005. Total revenue was $16.3 million for the quarter, up nearly 18 percent over the $13.9 million posted for prior year's first quarter.

It appears Mercantile is keeping a close eye on future expansion opportunities to accommodate growth that's anticipated ahead. COO Robert Kaminski Jr. noted at Mercantile's annual shareholders' meeting recently that the company has options on two downtown properties — 1054 and 1060 Front Avenue NW — both of which are across the street and just southeast of the bank's new headquarters at Front Avenue and Leonard Street. The company has presented a rezoning request to the Grand Rapids Planning Commission.

"What we found when we moved into our new headquarters last May was that we wanted to make sure that we had enough advanced planning for the continued development of the main office in Grand Rapids, so we started at the end of 2005 to look for sites around our Leonard Street office that could be used for expansion of our downtown campus," Kaminski said.

He noted that Mercantile doesn't have a specific plan at this stage for how big the facility would be or when construction would start, but that the company wanted to go to city planners to start the process of gaining approval for what could be a fairly large facility to accommodate future growth in staff. The east side of the building would front the Grand River. Kaminski said the project is on the horizon for beyond 2006.

Mercantile's first quarter performance was strong despite the discovery of 11 related "problem" loans that former loan officers put on books, said Mercantile Chairman and CEO Gerald Johnson Jr.

Kaminski explained that during the quarter, Mercantile identified 11 loans totaling some $2.6 million that were related through a common source of origination.

"Investigation by bank loan review personnel had discovered that the purpose, collateral and the structure of the loans did not appear to coincide with what was portrayed to the bank in the application process," Kaminski said. "Comments on this situation must be limited due to the fact that details of the situation continue to unfold and that legal action is currently in process."

As stated to the bank in the application process, the purpose of the loans was to finance the purchase of vacant residential property upon which the individual borrowers were to build new homes. The loans have been placed on accrual, and Mercantile is pursuing various legal remedies against the parties involved and expects the collateral it received in connection with the loans will eventually be liquidated as part of the collection process, he said.

While it's still early in the litigation and evaluation process, Kaminski pointed out, management has allocated a portion of the allowance for loan losses to these specific credits based on their current assessment of the value of the collateral and the collection avenues being pursued.

Upon further questioning from analysts, President Michael Price said that other banks appear to be caught up in the bad loans, too. It appears that Mercantile was the first to identify the problematic credits and pursue legal action.

"There have also been changes to individual loan authorities because of that and there have also been changes to the loan policy because of it. All those things made us take a more conservative view of certain areas of our procedures and policies," Price added.

Johnson said the banking industry is operating in a tough environment today with the interest rate scenario, so the bank was extremely pleased to announce another quarter of "outstanding" earnings performance, as well as a 5-percent stock dividend and a 13-cent-per-share quarterly cash dividend, both payable in the second quarter.

"Given the 5-percent stock dividend paid in August 2005 and the 5-percent stock dividend payable on May 16, our cash dividend paid in the second quarter this year is 30 percent more than the dividend we paid in the second quarter of last year," Johnson noted.

Although the 12.3-percent increase in earnings per share in the first quarter was slightly below what Mercantile has historically reported, he said the company's performance is "especially significant" because at this time last year the company had not yet moved into its new headquarters in Grand Rapids nor had it moved into the Lansing and Ann Arbor markets.

"We had none of these expenses in our P&L (income statement) so I think a 13 percent increase in earnings per share is a pretty outstanding accomplishment," Johnson remarked. "Additionally, while many financial institutions experience volatility in their interest rate margins in 2005, we maintained our margin within a band ranging from 3.46 to 3.54, or eight basis points."

Price noted that the bank's new markets contributed to the bottom line. The Lansing branch closed the quarter at $33 million in assets and the Ann Arbor office closed at nearly $17 million in assets.

Mercantile's total assets were $1.9 billion at March 31, an increase of $232 million from March 31, 2005. Earning asset growth was $225.2 million during the 12-month period, with loans increasing $237.8 million.    

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