Michael H. Price picked a difficult time to take the helm at Mercantile Bank Corp. in Grand Rapids.
The company's profits are shrinking, its once-stellar credit quality is suffering, largely because of the weak Michigan economy, and its stock price is down more than 40% for the year.
Still, Mr. Price, who took over at the end of June as chairman, president, and chief executive, said the $2.1 billion-asset Mercantile is not planning any drastic changes - like trying to prop up earnings by buying or building in faster-growing states.
A number of Midwestern community banks have done just that of late, and though Mr. Price did not rule out an out-of-state expansion at some point, he said Mercantile's strategy for now is to wait for the state's economy to recover and stick with what it has done best since opening in late 1997: making quality small-business loans in western Michigan.
"One thing we want to make sure we don't do is change a recipe that has worked extremely well for us for nine years," Mr. Price said.
Mr. Price, 50, had been president of the holding company and its subsidiary bank since Mercantile was founded. He added the titles of chairman and CEO when Gerald R. Johnson Jr. retired.
Ben Crabtree, an analyst with Stifel Nicolaus & Co., said Mercantile would be wise to ride out the economic downturn that is putting intense pressure on Mercantile and other Midwest banks. It is a good company with a good management team and should not risk overpaying to chase growth in unfamiliar and competitive markets such as Florida and Arizona, he said.
"There is a limited supply of good bankers and customers in those markets," Mr. Crabtree said.
But how long are Mercantile investors willing to wait for the Michigan economy to rebound?
Mercantile's shares have plunged about 22% since it reported second-quarter earnings Wednesday. The stock closed at $20.37 Monday.
The company earned $2.2 million in the quarter, down 57% from last year's second quarter. Mercantile attributed the drop to a 176% rise in nonperforming assets from a year earlier, to $24 million, and diminished loan demand. (It also took a $1.2 million charge related to Mr. Johnson's retirement package.)
Mr. Price said Mercantile investors should not expect to see meaningful growth in the loan portfolio until the state's unemployment situation improves. According to the Bureau of Labor Statistics, Michigan's unemployment rate in May was the highest in the nation at 6.9%. The national average was 4.5%.
"You really need to look at the market to see whether there is the economic growth to grow the portfolio safely," Mr. Price said.
Mercantile has taken steps to strengthen its credit operations, the CEO said. In the last year it has hired two experienced commercial lenders, appointed a senior lending officer, and put its commercial lenders into teams so that older lenders could mentor younger ones.
"It gives us a more formalized structure and breaks it down, so we have a senior person close to the street," Mr. Price said.
Mercantile has historically had good credit quality. From 2003 to 2005 its ratio of noncurrent loans to total loans was always a fraction of the national average for commercial banks.
The ratio crept up to 0.50% last year but was still below the national average, according to Federal Deposit Insurance Corp. data. By the end of the second quarter, however, it had more than doubled, to 1.2%.
Two other companies that have yet to report earnings have already issued profit warnings as a result of problem credits in Michigan. Independent Bank Corp. of Ionia, Mich., said July 9 that it had increased its loan-loss provision and that it might report a second-quarter loss. Huntington Bancshares Inc. of Columbus, Ohio, announced that a bigger loan-loss provision would reduce its second-quarter earnings by 11 cents a share. It blamed the higher provision partly on two large Michigan credits.
Terry McEvoy, an analyst with Oppenheimer & Co. Inc., said that given Mercantile's track record, its second-quarter results raise serious concerns about other Michigan banks that have taken on more risk.
"If even the best of underwriters is having these problems, what are we going to see with [banks] that are being aggressive to get deals done?" Mr. McEvoy said.
Mr. Crabtree agreed that Mercantile's results did not bode well for Michigan companies for 2007.
"Mercantile is the first reporter," he said. "We would not be surprised to see similar news coming out of most Michigan banks this quarter, and we are not convinced this quarter is the end of it."
