2 Billion Dollar Baby Mercantile

October 30, 2006
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GRAND RAPIDS — Mercantile Bank of Michigan has experienced dynamic growth in an industry more accustomed to moderate growth, and every cent of it has been purely organic.

Mercantile surpassed $2 billion in total assets last month. It is the largest bank headquartered in Grand Rapids, and in its nine years of operation it has never experienced a quarter of flat or decreased growth.

As Stifel Nicolaus analyst Ben Crabtree sees it, Mercantile’s key strengths have been “a well-chosen and highly focused strategy, and an experienced management team that executes its strategy very well.”

Since opening in late 1997 as a publicly-held company, Mercantile’s focus has been on providing commercial and retail banking services primarily to small- and mid-size businesses. The bank’s strategy from the get-go has been to provide high quality customer service and to recruit experienced local lenders with existing strong customer relationships.

“Mercantile’s success stems from the fact that it is very much focused on a market segment that is inadequately served by the really big banks,” Crabtree said. “What happens is that these smaller companies, in effect, need a trusted adviser on the financial side. They need a banker to talk to who knows their business, can give them advice, and who can respond quickly when they might have need for credit.”

A big bank may have a huge, wide product line or the ability to be a little more aggressive on price, but from a small business customer’s perspective, that’s far less important than having access to credit when it is needed, Crabtree said.

Like a handful of other banks in this market, Mercantile grew out of a fertile market created in the 1990s as the result of massive bank consolidation, the most notable catalyst being Huntington Bancshares’ 1997 acquisition of First Michigan Bank Corp.

Mercantile chairman and CEO Gerald R. Johnson Jr. had been president and CEO of the former First Michigan Bank-Grand Rapids, and also had served as bank chairman. When word surfaced that FMB might be acquired, Johnson resigned. He and his FMB colleague Michael Price decided to fill the void that was becoming bigger and bigger every year as other local banks got bought out. So Johnson, Price and four of their former FMB co-workers began plotting a strategy for a new community bank. Mercantile opened Dec. 15, 1997, with a staff of 16 former FMB bankers.

“All of us had worked together, so that part was easy,” Johnson recalled. “The difficult part came after we had that initial group, because we were a new bank. We were going after highly experienced people. Mike and I took pay cuts to start this, but everyone else we brought on at a higher salary than they were making.”

Johnson and Price never doubted the team’s ability to pull it off.

“We were six pretty talented people,” Price commented. “The key characteristic that we all shared was that none of us was used to being second place in anything we did in our whole lives. We said we would put 150 percent effort into it, and that’s exactly how we hit the market.”

Within two weeks of opening, the bank had reached $24 million in assets, which was beyond their expectations, Johnson said. He said the first two years were fairly easy because he and Price had attracted a lot of what they called the “superstars” in local banking. Years three and four were a little more difficult in terms of recruiting because Mercantile was still a small bank, Price said. But once the bank hit $600 million in assets, people really took notice, he said, and the recruiting issue evaporated. Since then, the company has recruited professionals from nearly every lending institution in town.

“All of our employees are highly entrepreneurial,” Johnson remarked. “Our lenders treat their loan portfolios like their own business within a larger business. We empower our employees; they have a lot more freedom and flexibility than they would have working for some of the out-of-state banks, which are all good banks — but there is no way that somebody who’s headquartered in Ohio can be as flexible with a customer as somebody who is sitting right here at 310 Leonard St. making policy.”

Crabtree contends that as the big banks increase their geographic spread, the range of authority narrows at the banker level, and they become product salesmen rather than relationship managers.

Every major competitor Mercantile had the day it opened its doors has since been acquired, Johnson observed. There was no National City, JP Morgan Chase, Fifth Third or LaSalle back then. As the big banks continued to consolidate, the stars seemed aligned in Mercantile’s favor.

“These are all good banks but because of their size they just don’t have the agility and flexibility that we do,” Johnson said. “We’ve always managed to be in the right place at the right time, and we have executed extremely well.”

Mercantile started with a single branch on Division Avenue downtown. It opened a second branch on Alpine Avenue in 1999, a Wyoming branch in 2001 and a Kentwood branch in 2002. Mercantile reached the $1 billion asset mark in June 2003, and the company’s annual compound asset growth rate since then has been approximately 26 percent. Mercantile opened a branch at Knapp’s Corner in 2003 and also began leasing a branch facility in Holland. The Holland facility was replaced with a new branch in 2004.

Last year, Mercantile opened its new headquarters on Leonard Street, and branches in both Lansing and Ann Arbor.

Mercantile has not invested heavily in brick and mortar because 90 percent of its business is in commercial lending, and less than 25 percent of transactions are even done at a branch, Johnson said.

“Basically the customer that we go after tells us to skip the Pyrex, the umbrellas and the toasters — they just want to make sure they have the same loan officer every year,” Price explained. “That’s what’s more important to them because if they’ve come from a big bank, they have more than likely had five loan officers in seven years. With us, they see the same person time and time again and they know if they have a problem they can reach me; they don’t have a ‘1-800-GOOD LUCK’ number to call.”

Mercantile recently received approval to construct the Mercantile Bank East Campus, an office building of up to four stories just across the street from its headquarters. The bank has been growing so much that the need for additional space will likely come sooner than originally anticipated, Price said. Since it takes at least two years to design, build and get a facility up and running, the company is making all the necessary preparations now.

Johnson attributes Mercantile’s success to great employees who are “proud” to be on the Mercantile team.

“Happy, challenged, motivated employees, I think, always result in satisfied customers,” Johnson said. “If you have a lot of satisfied customers, I guarantee you’re going to have satisfied shareholders.”

According to the last FDIC deposit market share report, Mercantile is second in market share only to Fifth Third Bank in both the Grand Rapids-Wyoming metropolitan statistical area and in Kent County. Nine years ago Mercantile had no market share. At that time there were 14 banks on the market share roster between Mercantile and Fifth Third’s predecessor, Old Kent Bank.

“We have overtaken everybody else,” Johnson said. “Getting to be No. 1 is going to take a few more years, but we definitely think that’s going to happen.”

Down the road, Mercantile plans to move into more markets, both in Michigan and neighboring states.

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