Swearing off the KoolAid

August 7, 2011
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Mercantile Bank Corp. of Grand Rapids reported a much healthier second quarter this year, attributed at least in part to shifting its loan portfolio toward more profitable lines of business, according to chairman/CEO Michael Price.

That includes a “strategic initiative to reduce the bank’s commercial real estate lending,” according to Mercantile’s news release, which reiterated that the bank “continues to aggressively reduce its exposure to loans secured by commercial real estate.”

Mercantile lost money during 2009 and 2010 and went from about $2 billion in assets to about $1.5 billion by June 30. Now it is celebrating two straight quarters of profitability.

Real estate loans, particularly loans secured by non-owner-occupied commercial properties, are the majority of Mercantile’s loan portfolio. On June 30, real estate loans, excluding residential mortgage loans representing permanent financing of owner-occupied dwellings and home equity lines of credit, were $772 million, or approximately 69 percent of total loans. That was a 19.9 percent decline from the $964 million at the same time last year.

Non-owner-occupied commercial real estate loans totaled $430 million as of June 30, a decline of $83 million over the past 12 months. Owner-occupied CRE loans were $265 million at the end of the second quarter, a decline of $37.9 million over the year.

Bob Kaminski, executive vice president and COO of Mercantile, said commercial real estate was the hardest hit segment in business and continues to be challenged.

“What it boils down to is supply and demand,” he said. “There is way too much supply for the demand out there.”

He said Mercantile management decided the bank had more commercial real estate loans than was prudent, “given the dynamics of the recession and where we saw the recovery going.”

“We don’t think all commercial real estate is bad; that certainly isn’t the case. There are some very successful projects, some very successful developers” in West Michigan, said Kaminski.

He noted that there is “a nice rebound in the manufacturing sector,” and there is more activity now in real estate with more deals being done, but “prices are still pretty depressed” and there aren’t enough buyers.

Kaminski said a drive around West Michigan reveals too many vacant projects.

Vacancies in retail developments have led to an expression some bankers use, according to Kaminski: “missing-teeth strip malls.” Those are typically spaces once occupied by small shops such as those dealing in pizza, ladies’ nails and cell phones, which tend to shift around from one new strip mall to another.

Many offices were consolidated during the recession, leaving the “vacancy rate on office space in the Grand Rapids area … higher than we’d all like to see.”

Prior to the onset of the recession, developers were so excited about the strength of business in general that there was a feeling of “build it and they will come.”

“So you had people putting up strip malls or other types of non-owner occupied real estate facilities, thinking, ‘Now I’ll get it filled up and we’ll be on our way’ — happy cash flow and everything. And we all drank the Kool-Aid, developers and bankers alike. All contributed to the problem,” he said.

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