Mercantile Bank Corp., a Grand Rapids company founded in December 1997, has proved an exceptionally adroit commercial lender; its business-loan portfolio has increased by an average of 37% a year.
But unlike many of its competitors, Mercantile has not been chasing retail deposits to fund growth. Instead, it depends on out-of-market, jumbo certificates of deposit - and it plans to keep doing so as it embarks on its most aggressive expansion drive ever.
Mercantile has already announced plans to enter Lansing and Ann Arbor, Mich., and chairman and chief executive Gerald R. Johnson Jr. says it is considering entering at least two cities in western Michigan and as many as six in northeast Indiana.
To help its expansion, this month it dropped the "West" from the name of its Mercantile Bank of West Michigan.
The company opened its Lansing branch in June, but its first expansion initiative outside its hometown actually came in May of last year, when it built a branch in Holland, a city just west of Grand Rapids.
Mr. Johnson said he wants Holland to serve as a "template" for all of his company's new markets. It hired a city president and a team of lenders, and in 15 months, the branch has generated $150 million of loans, he said.
Mercantile has no plans to build more branches in Holland, though, nor does it plan to open more than a handful in any of its new markets. Other expansion-oriented companies often blanket new markets with branches to attract low-cost deposits, but Mercantile is merely looking to establish visibility, leaving it to its local lenders to use their contacts to quickly build loan volume.
Charles E. Christmas, Mercantile's senior vice president and chief financial officer, said trying to attract more lower-cost core deposits would throw its operation completely out of whack.
"We don't think it's inappropriate to fund on a wholesale basis," he said last month at the Keefe, Bruyette & Woods Community Bank Investor Conference in New York. "A deposit initiative for us would be to build 20 more branches, and that would destroy our efficiency."
Mercantile relies more on brokered deposits than just about any other banking company in the country. At the end of the second quarter brokered CDs made up a staggering three-fourths of its $1.3 billion of deposits, Mr. Christmas said. The average ratio for commercial banks in its asset class is about 6%, according to Federal Deposit Insurance Corp.
Stephen Covington, who covers Mercantile for Stifel Nicolaus & Co. Inc. in St. Louis, said it is "very unique" in that respect. "I can't think of any other bank that relies as heavily" on brokered deposits. "They've been like that for as long as I've been covering them."
Many industry analysts dislike brokered CDs, because the money tends to move from bank to bank in pursuit of the highest rate. But Mr. Christmas said he is comfortable with them, because they have allowed Mercantile to fund its outsize loan growth while avoiding the heavy expenses involved in building a large branch network.
In Grand Rapids, analysts say, Mercantile has captured a large slice of the commercial lending market while operating with far fewer branches than its leading competitors. It has five branches there, while Fifth Third Bancorp of Cincinnati has 35 and Huntington Bancshares Inc. of Columbus, Ohio, has 28.
Mr. Covington attributes his company's success to its hiring experienced loan officers and holding them to high standards. "They're extremely high-performing and extremely hard-charging, and mistakes aren't necessarily tolerated," he said. "I think it's a great culture."
The net interest margin - 3.52% as of June 30 - is lower than that of most commercial banks, but Mercantile more than makes up for that with strong expense controls and sterling asset quality, he said. Its ratio of nonperforming assets to total assets was 0.22% and the end of the second quarter.
Mercantile reported its first annual profit in 1999, and the numbers have grown every year since, to $13.7 million last year. For the first half of this year it posted net income of $9.1 million.
Grand Rapids remains Mercantile's primary market, but Mr. Johnson said he is preparing for an inevitable slowdown there by moving into new markets.
His company has not ruled out buying banks, but its bias tilts clearly toward building branches and finding experienced bankers to run them. It has never done a deal in its eight-year history.
"I've looked at 15 or 20 deals over the past few years, and I've never found any that made sense from a cultural or asset-quality standpoint," Mr. Johnson said. Expanding organically "has a lot less downside."
