Mercantiles Earnings On The Rise

January 22, 2007
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GRAND RAPIDS — Mercantile Bank Corp. reported net income of $19.8 million for fiscal 2006, up from $17.9 million in net income posted for fiscal 2005. Diluted earnings per share were $2.45, or 11.4 percent higher than the prior year, which the company attributed to effective expense control and loan growth, particularly in its newer Holland, Ann Arbor and Lansing markets. Total revenue was up nearly 10 percent to $66.8 million for the year.

Fourth quarter net income was $4.6 million, compared with $4.5 million in 2005. Diluted earnings per share for the fourth quarter were 57 cents, or 1 cent higher than the previous year's fourth quarter earnings.

Chairman and CEO Gerald R. Johnson Jr. said Mercantile faced ongoing margin pressures in 2006 that were triggered by highly competitive pricing of both loans and deposits and compounded by a flat-yield curve and an industry-wide trend toward savings and money market deposits to higher cost certificates of deposit.

"Our balance sheet environment is increasingly competitive as we continue to gain market share at the expense of our competitors, who have shown an ongoing and aggressive willingness to compromise on deal structure, as well as undercut Mercantile's pricing on potential new as well as existing credit relationships, oftentimes to absurdly low levels unreflective of the proposed transaction's credit risk," Johnson elaborated.

Mercantile's newer markets had a significant positive impact on the company's ability to continue to grow earnings and assets at double-digit rates. In fact, the Holland, Ann Arbor and Lansing markets collectively accounted for more than 50 percent of the bank's net new loan growth for the year and 41 percent of its net new local deposit growth, said President Michael Price.

CFO Charles Christmas said the net interest margin continued to decline in the fourth quarter of 2006 after being relatively stable for many prior quarters up until the third quarter of last year.

"With the market consensus expectation that the Fed will hold the federal funds rate steady for the next three to six months, we expect a further decline in our net interest margin during the next couple of quarters before leveling off," Christmas noted.

Loans were up $183.7 million, or nearly 12 percent, for the year. The composition of the company's loan portfolio was basically the same as last year, with commercial loans accounting for 90 percent of the loans on the books. Johnson said that despite the pricing pressures, the bank continues to see a substantial volume of transactions in the small to mid-sized commercial sector. Local deposits were up $176.6 million, or 38.7 percent over last year.

COO Robert Kaminski Jr. noted that 2006 was a "big year" for health savings account penetration at Mercantile. By the end of the year, primarily through a partnership with one of the area's largest employers, the bank opened more than 700 new HSAs, bringing in half a million in "new relationship" dollars.

Mercantile's total assets grew by $229.1 million, or 12.5 percent, over the past 12 months, slightly less than the traditional growth rate Mercantile has experienced in past years, Price acknowledged. As of Dec. 31, total assets were $2.07 billion.

Difficult economic times and competitive pressures have made asset growth more difficult, but the Mercantile team of bankers continues to develop strong numbers of new relationships across all of the company's markets, Price said.

"Although current metrics for 2007 portend a challenging year for all banks, we are excited about the continued success of our sales efforts," he added. "Mercantile has become one of the premier banks in each market we compete in."

Kaminski said construction is on track for the new Lansing bank center that's scheduled to open in May. He said Mercantile is preparing for the first-quarter roll out of its next generation Internet banking product.

"This product will give some features and functionality that will allow us to continue to grow this avenue of banking for Mercantile customers," Kaminski remarked.    

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