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By Nathan Peck | MiBiz
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GRAND RAPIDS — Mercantile Bank was once one of the fastest growing banks in the Midwest, but it has emerged from the recession smaller with a more focused approach to its business.

That suits Michael Price, chairman and CEO of the bank, just fine. Price has served in various senior leadership positions at Mercantile since its founding 14 years ago. He has helped guide the bank as it took Troubled Asset Relief Program funds, restructured itself from an institution that once had $2.7 billion in assets to one that now has just over $1.5 billion, and has emerged a leaner organization.

Mercantile recently reported second quarter 2011 net income attributable to common shares of $2.4 million, or $0.27 per diluted share, for the second quarter of 2011, compared with a net loss attributable to common shares of $0.7 million, or ($0.08) per diluted share, for the prior-year period. In a one-on-one interview with MiBiz about the bank’s recovery, Price made no bones about the state of the bank as the credit crisis and recession hit.

“We got hit hard. We had no idea how difficult they were going to turn out to be, but we could see some tough times coming,” Price said. The bank’s leadership and board were committed to remaining well-capitalized throughout the crisis. “We always operated the bank since we started 14 years ago in a well-capitalized manner. We were always in excess of the regulatory definition of well-capitalized, and we said … no matter what, we will have to do the things we have to do to make sure that we get through this difficult time in a well capitalized status.”

Mercantile is working to aggressively reduce its exposure to loans secured by commercial real estate but is hampered by commercial and industrial property values not rebounding sufficiently to offset these efforts. That trend has contributed to reducing the bank’s level of total assets. As of June 30, 2011, total assets were $1.54 billion, down $94.5 million or 5.8 percent from December 31, 2010. Total loans declined $140 million or 11.1 percent to $1.12 billion over the same time period.

“We had an overconcentration, like many community banks do, in commercial real estate. Commercial real estate took a big hit and we had to take a look and start reducing our concentration. We needed to reduce the footprint of the bank and reduce the concentration of high-risk assets in commercial real estate,” Price said. “The nice side benefit is that you need less capital to keep the ratios in line for the bank.”

As important as righting the ship in terms of capital requirement ratios, Mercantile has undergone a philosophical shift. The go-go times of the mid-2000s ushered in a period of extreme competitiveness among banks of all sizes. Net interest margins slipped as Mercantile chased loan volume over quality. Today, the bank is scrutinizing whether or not loans make sense, even as the competition for slowed loan demand increases among lenders.

“We (and) all banks as an industry got into a crazy, crazy point in time where we were all out there competing on rate. We got to a point where we were competing with all the other banks saying, ‘I can make that loan at a cheaper rate than you can.’ We finally said in early 2008, ‘We’re not going to do that anymore,’” Price explained. “We got back to our roots — we are a relationship-oriented bank. This business is simple: The more risk in a deal, the more you need to be paid. We are going to look at the deals and we’re going to price them according to risk.”

As a result, net interest margins have increased from 2.2 percent to 3.6 percent, and Price is proud to have prevented investors fleeing the bank’s stock. While there are conflicting opinions on the effectiveness of TARP, Price credits the program with helping protect investors in the midst of the crisis and avoid the reverse stock-splits that have hurt investors’ portfolios.

“We were one of the few banks in the state of Michigan to take part in TARP, and that was huge for us,” Price said. TARP allowed the bank to bolster its capital ratios, as it did not want to raise common equity between 2008-2011. “Our stock price dropped at one point down to $3 per share. (Raising equity) would have been highly dilutive to the common shareholder that we had that was sticking it out with us.”

The bank’s capital ratios are ahead of regulator requirements and while the recovery is slow, Price is optimistic.

“We are back to profitability, and we are extremely well-capitalized,” Price said. “We have flexibility now because some banks are still very reticent to lend money.”

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• grand rapids
• mercantile bank
• michael price
• tarp