Mercantiles Net Income Up 9 Percent

July 17, 2006
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GRAND RAPIDS — Mercantile Bank Corp. posted net income of $5.1 million for the second quarter and $10 million for the first six months, compared with $4.7 million for the second quarter of 2005 and $9.1 million for the first half of last year.

Diluted earnings per share for the quarter were 63 cents, compared with 58 cents for the second quarter of 2005. Total revenue was $16.9 million for the second quarter, an increase of 14.1 percent over the $14.8 million reported for the same period the year before. Total assets were $1.97 billion at June 30, up nearly 15 percent from a year ago to $260.3 million.

Chairman and CEO Gerald Johnson Jr. said that although the first six months of 2006 have been challenging, he believes the company's management and staff "have demonstrated their ability to continue to produce superior operating results."

Johnson noted that costs associated with Mercantile's expansion into the Lansing and Ann Arbor markets did not occur until the second half of 2005 and that the bank's move to its new corporate headquarters began to impact overhead expenses in May 2005.

"These timing differences make comparing the first six months of 2006 to the first six months of 2005 difficult, to say the least," Johnson remarked.

Among other challenges in the first half were the ongoing margin pressures brought about by the volatility in short-term interest rates due to Federal Reserve Bank actions and market anticipation of Fed actions, as well as the industry-wide trend in the disintermediation of savings and money market deposits into higher costing certificates of deposit, he said.

"Growing our balance sheet in an environment that is increasingly competitive as we continue to gain market share at the expense of our competitors, who've shown a renewed and aggressive willingness to undercut Mercantile's pricing on new deals, oftentimes to absurdly low levels…"

Johnson said maintaining the bank's historical and traditional asset quality numbers has also been a challenge, but that Mercantile's numbers have remained consistent for two quarters and the slight increase in non-performance since December 2005 is, in management's view, a short-term situation and not an indication of a trend.

"I believe we have dealt and are dealing very efficiently and effectively with the numerous challenges we are facing in 2006," Johnson said. "First, diluted earnings per share increased 10.7 percent over the first six months of 2005. Our year-to-date margin of 3.49 percent is unchanged from the prior year. Loan growth for the first six months of 2006 is $246 million, an increase of 17.2 percent, and asset growth is $260 million, an increase of 15.2 percent over the prior year period."

CFO Chuck Christmas said increases in net income continue to be achieved due to strong growth in net interest income resulting from earning asset growth and a steady net interest margin, which have more than offset the initial costs associated with Mercantile's expansion into Lansing and Ann Arbor

President Michael Price said Mercantile improved its asset quality infrastructure by aggressively identifying loans that showed early signs of weakness during the quarter and putting plans in place to deal with them. The company improved its credit culture by strengthening policy and procedures, he said, and by making strategic changes in the bank's lending and credit staff.

"All our markets, including Lansing and Ann Arbor, are experiencing nice growth," he added.

COO Robert Kaminski Jr. noted that during the first half Mercantile developed some "very nice" deposit relationships with local municipalities, which boosted deposit growth. He said the company is on track for a fourth quarter roll-out of a next generation Internet banking product. He also reiterated that Mercantile is in the process of purchasing two parcels of land across the street from its

Leonard Street
headquarters.

"Mercantile has been working with the city of Grand Rapids on plans to allow for a multi-story facility that would complement the existing main office and allow for continued growth in support of lending and deposit gathering. The actual need for this space is likely still a few years away, but this gives the bank the capability and capacity to accommodate its ongoing plans for growth in KentCounty."

On Tuesday, Mercantile's board of directors declared a third quarter cash dividend of 13 cents per share on the corporation's common stock that is payable on Sept. 8 to shareholders of record as of Aug. 10.    

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