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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________________ to ____________________________
Commission file number 000-26719
MERCANTILE BANK CORPORATION
(Exact name of registrant as specified in its charter)
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Michigan
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38-3360865 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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310 Leonard Street NW, Grand Rapids, Michigan
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49504 |
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(Address of principal executive offices)
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(Zip Code) |
(616) 406-3000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
Common Stock
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The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the
Exchange Act).
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate value of the common equity held by non-affiliates (persons other than directors
and executive officers) of the registrant, computed by reference to the closing price of the common
stock as of the last business day of the registrants most recently completed second fiscal
quarter, was approximately $43.0 million.
As of February 1, 2011, there were issued and outstanding 8,597,993 shares of the registrants
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2011 annual meeting of shareholders (Portions of Part III).
PART I
Item 1. Business.
The Company
Mercantile Bank Corporation is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended (the Bank Holding Company Act). Unless the text clearly suggests
otherwise, references to us, we, our, or the company include Mercantile Bank Corporation
and its wholly-owned subsidiaries. As a bank holding company, we are subject to regulation by the
Board of Governors of the Federal Reserve System (the Federal Reserve Board). We were organized
on July 15, 1997, under the laws of the State of Michigan, primarily for the purpose of holding all
of the stock of Mercantile Bank of Michigan (our bank), and of such other subsidiaries as we may
acquire or establish. Our bank commenced business on December 15, 1997.
Mercantile Bank Mortgage Company initiated business in October 2000 as a subsidiary of our
bank, and was reorganized as Mercantile Bank Mortgage Company, LLC (our mortgage company), on
January 1, 2004. Mercantile Insurance Center, Inc. (our insurance company), a subsidiary of our
bank, commenced operations during 2002 to offer insurance products. Mercantile Bank Real Estate
Co., L.L.C., (our real estate company), a subsidiary of our bank, was organized on July 21, 2003,
principally to develop, construct and own our facility in downtown Grand Rapids which serves as our
banks main office and Mercantile Bank Corporations headquarters. Mercantile Bank Capital Trust I
(our trust), a business trust subsidiary, was formed in September 2004 to issue trust preferred
securities.
To date we have raised capital from our initial public offering of common stock in October
1997, a public offering of common stock in July 1998, three private placements of common stock
during 2001, a public offering of common stock in August 2001 and a public offering of common stock
in September 2003. In addition, we raised capital through a public offering of $16.0 million of
trust preferred securities in 1999, which was refinanced as part of a $32.0 million private
placement of trust preferred securities in 2004. In May 2009, we raised $21.0 million from the
sale of preferred stock and a warrant for common stock to the United States Treasury Department
under the Capital Purchase Program. Our expenses have generally been paid using the proceeds of
the capital sales and dividends from our bank. Our principal source of future operating funds is
expected to be dividends from our bank.
We filed an election to become a financial holding company, which election became effective
March 23, 2000. Effective June 1, 2009, we withdrew our election to be a financial holding
company.
Our Bank
Our bank is a state banking company that operates under the laws of the State of Michigan,
pursuant to a charter issued by the Michigan Office of Financial and Insurance Regulation. Our
banks deposits are insured to the maximum extent permitted by law by the Federal Deposit Insurance
Corporation (FDIC). Our banks primary service area is the Kent and Ottawa County areas of West
Michigan, which includes the City of Grand Rapids, the second largest city in the State of
Michigan. In addition, our bank opened offices in the cities of East Lansing and Ann Arbor,
Michigan, during 2005, and in Novi, Michigan, during 2007. The Ann Arbor and Novi offices were
closed in mid-2009.
Our bank, through its seven offices, provides commercial banking services primarily to small-
to medium-sized businesses and retail banking services in and around the Grand Rapids, Holland and
Lansing areas. These offices consist of a main office located at 310 Leonard Street NW, Grand
Rapids, Michigan, a combination branch and retail loan center located at 4613 Alpine Avenue NW,
Comstock Park, Michigan, a combination branch and operations center located at 5610 Byron Center
Avenue SW, Wyoming, Michigan, and branches located at 4860 Broadmoor Avenue SE, Kentwood, Michigan,
3156 Knapp Street NE, Grand Rapids, Michigan, 880 East 16th Street, Holland, Michigan,
and 3737 Coolidge Road, East Lansing, Michigan.
2.
Our bank makes secured and unsecured commercial, construction, mortgage and consumer loans,
and accepts checking, savings and time deposits. Our bank owns seven automated teller machines
(ATM), located at each of our office locations, that participate in the MAC, NYCE and PLUS
regional network
systems, as well as other ATM networks throughout the country. Our bank also enables
customers to conduct certain loan and deposit transactions by telephone and personal computer.
Courier service is provided to certain commercial customers, and safe deposit facilities are
available at each of our office locations. Our bank does not have trust powers.
Our Mortgage Company
Our mortgage companys predecessor, Mercantile Bank Mortgage Company, commenced operations on
October 24, 2000, when our bank contributed most of its residential mortgage loan portfolio and
participation interests in certain commercial mortgage loans to Mercantile Bank Mortgage Company.
On the same date, our bank also transferred its residential mortgage origination function to
Mercantile Bank Mortgage Company. On January 1, 2004, Mercantile Bank Mortgage Company was
reorganized as Mercantile Bank Mortgage Company, LLC, a limited liability company, which is 99%
owned by our bank and 1% owned by our insurance company. The reorganization had no impact on the
companys financial position or results of operations. Mortgage loans originated and held by our
mortgage company are serviced by our bank pursuant to a servicing agreement.
Our Insurance Company
Our insurance company acquired an existing shelf insurance agency effective April 15, 2002.
An Agency and Institution Agreement was entered into among our insurance company, our bank and Hub
International for the purpose of providing programs of mass marketed personal lines of insurance.
Insurance product offerings include private passenger automobile, homeowners, personal inland
marine, boat owners, recreational vehicle, dwelling fire, umbrella policies, small business and
life insurance products, all of which are provided by and written through companies that have
appointed Hub International as their agent.
Our Real Estate Company
Our real estate company was organized on July 21, 2003, principally to develop, construct and
own our facility in downtown Grand Rapids that serves as our banks main office and Mercantile Bank
Corporations headquarters. This facility was placed into service during the second quarter of
2005. Our real estate company is 99% owned by our bank and 1% owned by our insurance company.
Our Trust
In 2004, we formed our trust, a Delaware business trust. Our trusts business and affairs are
conducted by its property trustee, a Delaware trust company, and three individual administrative
trustees who are employees and officers of the company. Our trust was established for the purpose
of issuing and selling its Series A and Series B trust preferred securities and common securities,
and used the proceeds from the sales of those securities to acquire Series A and Series B Floating
Rate Notes issued by the company. Substantially all of the net proceeds received by the company
from the Series A transaction were used to redeem the trust preferred securities that had been
issued by MBWM Capital Trust I in September 1999. We established MBWM Capital Trust I in 1999 to
issue the trust preferred securities that were redeemed. Substantially all of the net proceeds
received by the company from the Series B transaction were contributed to our bank as capital. The
Series A and Series B Floating Rate Notes are categorized on our consolidated financial statements
as subordinated debentures. Additional information regarding our trust is incorporated by
reference to Note 17 Subordinated Debentures and Note 18 Regulatory Matters of the Notes
to Consolidated Financial Statements included in this Annual Report.
3.
Effect of Government Monetary Policies
Our earnings are affected by domestic economic conditions and the monetary and fiscal policies
of the United States Government, its agencies, and the Federal Reserve Board. The Federal Reserve
Boards monetary policies have had, and will likely continue to have, an important impact on the
operating results of commercial banks through its power to implement national monetary policy in
order to, among other things,
curb inflation, maintain employment, and mitigate economic recessions. The policies of the Federal
Reserve Board have a major effect upon the levels of bank loans, investments and deposits through
its open market operations in United States Government securities, and through its regulation of,
among other things, the discount rate on borrowings of member banks and the reserve requirements
against member bank deposits. Our bank maintains reserves directly with the Federal Reserve Bank
of Chicago to the extent required by law. It is not possible to predict the nature and impact of
future changes in monetary and fiscal policies.
Regulation and Supervision
As a bank holding company under the Bank Holding Company Act, we are required to file an
annual report with the Federal Reserve Board and such additional information as the Federal Reserve
Board may require. We are also subject to examination by the Federal Reserve Board.
The Bank Holding Company Act limits the activities of bank holding companies that are not
qualified as financial holding companies to banking and the management of banking organizations,
and to certain non-banking activities. These non-banking activities include those activities that
the Federal Reserve Board found, by order or regulation as of the day prior to enactment of the
Gramm-Leach-Bliley Act, to be so closely related to banking as to be a proper incident to banking.
These non-banking activities include, among other things: operating a mortgage company, finance
company, or factoring company; performing certain data processing operations; providing certain
investment and financial advice; acting as an insurance agent for certain types of credit-related
insurance; leasing property on a full-payout, nonoperating basis; and providing discount securities
brokerage services for customers. With the exception of the activities of our mortgage company
discussed above, neither we nor any of our subsidiaries engages in any of the non-banking
activities listed above.
Our bank is subject to restrictions imposed by federal law and regulation. Among other
things, these restrictions apply to any extension of credit to us or to our other subsidiaries, to
investments in stock or other securities that we issue, to the taking of such stock or securities
as collateral for loans to any borrower, and to acquisitions of assets or services from, and sales
of certain types of assets to, us or our other subsidiaries. Federal law restricts our ability to
borrow from our bank by limiting the aggregate amount we may borrow and by requiring that all loans
to us be secured in designated amounts by specified forms of collateral.
With respect to the acquisition of banking organizations, we are generally required to obtain
the prior approval of the Federal Reserve Board before we can acquire all or substantially all of
the assets of any bank, or acquire ownership or control of any voting shares of any bank or bank
holding company, if, after the acquisition, we would own or control more than 5% of the voting
shares of the bank or bank holding company. Acquisitions of banking organizations across state
lines are subject to restrictions imposed by Federal and state laws and regulations.
The scope of existing regulation and supervision of various aspects of our business will be
expanded as a result of the adoption in July, 2010 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Dodd-Frank Act). For additional information on this legislation and
its potential impact, refer to the Risk Factor entitled The effect of financial services
legislation and regulations remains uncertain in Item 1A- Risk Factors in this Annual Report.
Employees
As of December 31, 2010, we and our bank employed 219 full-time and 58 part-time persons.
Management believes that relations with employees are good.
4.
Lending Policy
As a routine part of our business, we make loans and leases to businesses and individuals
located within our market areas. Our lending policy states that the function of the lending
operation is twofold: to provide a means for the investment of funds at a profitable rate of return
with an acceptable degree of risk, and to meet the credit needs of the creditworthy businesses and
individuals who are our customers. We recognize that in the normal business of lending, some
losses on loans and leases will be inevitable and should be considered a part of the normal cost of
doing business.
Our lending policy anticipates that priorities in extending loans and leases will be modified
from time to time as interest rates, market conditions and competitive factors change. The policy
sets forth guidelines on a nondiscriminatory basis for lending in accordance with applicable laws
and regulations. The policy describes various criteria for granting loans and leases, including
the ability to pay; the character of the customer; evidence of financial responsibility; purpose of
the loan or lease; knowledge of collateral and its value; terms of repayment; source of repayment;
payment history; and economic conditions.
The lending policy further limits the amount of funds that may be loaned or leased against
specified types of real estate collateral. For certain loans secured by real estate, the policy
requires an appraisal of the property offered as collateral by a state certified independent
appraiser. The policy also provides general guidelines for loan to value and lease to value limits
for other types of collateral, such as accounts receivable and machinery and equipment. In
addition, the policy provides general guidelines as to environmental analysis, loans to employees,
executive officers and directors, problem loan and lease identification, maintenance of an
allowance for loan and lease losses, loan and lease review and grading, mortgage and consumer
lending, and other matters relating to our lending practices.
The Board of Directors has delegated significant lending authority to officers of our bank.
The Board of Directors believes this empowerment, supported by our strong credit culture and the
significant experience of our commercial lending staff, makes us responsive to our customers. The
loan policy currently specifies lending authority for certain officers up to $5.0 million, and
$10.0 million for our banks Chairman of the Board and Chief Executive Officer; however, the $10.0
million lending authority is generally used only in rare circumstances where timing is of the
essence. Generally, loan requests exceeding $2.5 million require approval by the Officers Loan
Committee, and loan requests exceeding $4.0 million, up to the legal lending limit of approximately
$38.4 million, require approval by the Board of Directors. In most circumstances, we apply an
in-house lending limit that is significantly less than our banks legal lending limit.
Provisions of recent legislation, including the Dodd-Frank Act, when fully implemented by
regulations to be adopted by Federal agencies, may have a significant impact on our lending policy,
especially in the areas of single-family residential real estate and other consumer lending. For
additional information on this legislation and its potential impact, refer to the Risk Factor
entitled The effect of financial services legislation and regulations remains uncertain in Item
1A- Risk Factors in this Annual Report.
Lending Activity
Commercial Loans. Our commercial lending group originates commercial loans and leases
primarily in our market areas. Our commercial lenders have extensive commercial lending
experience, with most having at least ten years experience. Loans and leases are originated for
general business purposes, including working capital, accounts receivable financing, machinery and
equipment acquisition, and commercial real estate financing, including new construction and land
development.
Working capital loans are often structured as a line of credit and are reviewed periodically
in connection with the borrowers year-end financial reporting. These loans are generally secured
by substantially all of the assets of the borrower, and have an interest rate tied to the
Mercantile Bank Prime Rate. Loans and leases for machinery and equipment purposes typically have a
maturity of three to five years and are fully amortizing, while commercial real estate loans are
usually written with a five-year maturity and amortize over a 15 to 20 year period. Commercial
loans and leases typically have an interest rate that is fixed to maturity or is tied to the
Mercantile Bank Prime Rate.
5.
We evaluate many aspects of a commercial loan or lease transaction in order to minimize credit
and interest rate risk. Underwriting includes an assessment of the management, products, markets,
cash flow, capital, income and collateral. This analysis includes a review of the borrowers
historical and projected financial results. Appraisals are generally required by certified
independent appraisers where real estate is the primary collateral, and in some cases, where
equipment is the primary collateral. In certain situations, for creditworthy customers, we may
accept title reports instead of requiring lenders policies of title insurance.
Commercial real estate lending involves more risk than residential lending because loan
balances are greater and repayment is dependent upon the borrowers business operations. We
attempt to minimize the risks associated with these transactions by generally limiting our
commercial real estate lending to owner-operated properties and to owners of non-owner occupied
properties who have an established profitable history and
satisfactory tenant structure. In many cases, risk is further reduced by requiring personal
guarantees, limiting the amount of credit to any one borrower to an amount considerably less than
our legal lending limit and avoiding certain types of commercial real estate financings.
We have no material foreign loans, and only limited exposure to companies engaged in energy
producing and agricultural-related activities.
Single-Family Residential Real Estate Loans. Our mortgage company originates single-family
residential real estate loans in our market areas, usually according to secondary market
underwriting standards. Loans not conforming to those standards are made in limited circumstances.
Single-family residential real estate loans provide borrowers with a fixed or adjustable interest
rate with terms up to 30 years.
Our bank has a home equity line of credit program. Home equity credit is generally secured by
either a first or second mortgage on the borrowers primary residence. The program provides
revolving credit at a rate tied to the Wall Street Journal Prime Rate.
Consumer Loans. We originate consumer loans for a variety of personal financial needs,
including new and used automobiles, boats, credit cards and overdraft protection for our checking
account customers. Consumer loans generally have shorter terms and higher interest rates and
usually involve more credit risk than single-family residential real estate loans because of the
type and nature of the collateral.
We believe our consumer loans are underwritten carefully, with a strong emphasis on the amount
of the down payment, credit quality, employment stability and monthly income of the borrower.
These loans are generally repaid on a monthly repayment schedule with the source of repayment tied
to the borrowers periodic income. In addition, consumer lending collections are dependent on the
borrowers continuing financial stability, and are thus likely to be adversely affected by job
loss, illness and personal bankruptcy. In many cases, repossessed collateral for a defaulted
consumer loan will not provide an adequate source of repayment of the outstanding loan balance
because of depreciation of the underlying collateral.
We believe that the generally higher yields earned on consumer loans compensate for the
increased credit risk associated with such loans, and that consumer loans are important to our
efforts to serve the credit needs of the communities and customers that we serve.
Loan and Lease Portfolio Quality
We utilize a comprehensive grading system for our commercial loans and leases as well as
residential mortgage and consumer loans. All commercial loans and leases are graded on a ten grade
rating system. The rating system utilizes standardized grade paradigms that analyze several
critical factors such as cash flow, operating performance, financial condition, collateral,
industry condition and management. All commercial loans and leases are graded at inception and
reviewed at various intervals. Residential mortgage and consumer loans are graded on a random
sampling basis after the loan has been made using a separate standardized grade paradigm that
analyzes several critical factors such as debt-to-income and credit and employment histories.
6.
Our independent loan and lease review program is primarily responsible for the administration
of the grading system and ensuring adherence to established lending policies and procedures. The
loan and lease review program is an integral part of maintaining our strong asset quality culture.
The loan and lease review function works closely with senior management, although it functionally
reports to the Board of Directors. All commercial loan and lease relationships equal to or
exceeding $1.8 million are formally reviewed every twelve months, with a random sampling performed
on credits under $1.8 million. Our watch list credits are reviewed monthly by our Board of
Directors and our Watch List Committee, the latter of which is comprised of personnel from the
administration, lending and loan and lease review functions.
Loans and leases are placed in a nonaccrual status when, in our opinion, uncertainty exists as
to the ultimate collection of principal and interest. As of December 31, 2010, loans and leases
placed in nonaccrual status totaled $63.9 million, or 5.1% of total loans and leases. As of the
same date, loans and leases past due 90 days or more and still accruing interest totaled $0.8
million, or 0.06% of total loans and leases.
Additional detail and information relative to the loan and lease portfolio is incorporated by
reference to Managements Discussion and Analysis of Financial Condition and Results of Operations
(Managements Discussion and Analysis) and Note 3 of the Notes to Consolidated Financial
Statements in this Annual Report.
Allowance for Loan and Lease Losses
In each accounting period, we adjust the allowance for loan and lease losses (allowance) to
the amount we believe is necessary to maintain the allowance at an adequate level. Through the
loan and lease review and credit departments, we establish specific portions of the allowance based
on specifically identifiable problem loans and leases. The evaluation of the allowance is further
based on, but not limited to, consideration of the internally prepared Allowance Analysis, loan and
lease loss migration analysis, composition of the loan and lease portfolio, third party analysis of
the loan and lease administration processes and portfolio, and general economic conditions.
The Allowance Analysis applies reserve allocation factors to non-impaired outstanding loan and
lease balances, which is combined with specific reserves to calculate an overall allowance dollar
amount. For non-impaired commercial loans and leases, which continue to comprise a vast majority
of our total loans and leases, reserve allocation factors are based upon loan ratings as determined
by our standardized grade paradigms and by loan purpose. We have divided our commercial loan and
lease portfolio into five classes: 1) commercial and industrial loans and leases; 2) vacant land,
land development and residential construction loans; 3) owner occupied real estate loans; 4)
non-owner occupied real estate loans; and 5) multi-family and residential rental property loans.
The reserve allocation factors are primarily based on the historical trends of net loan and lease
charge-offs through a migration analysis whereby net loan and lease losses are tracked via assigned
grades over various time periods, with adjustments made for environmental factors reflecting the
current status of, or recent changes in, items such as: lending policies and procedures; economic
conditions; nature and volume of the loan and lease portfolio; experience, ability and depth of
management and lending staff; volume and severity of past due, nonaccrual and adversely classified
loans and leases; effectiveness of the loan and lease review program; value of underlying
collateral; lending concentrations; and other external factors, including competition and
regulatory environment. Adjustments for specific lending relationships, particularly impaired
loans and leases, are made on a case-by-case basis. Non-impaired retail loan reserve allocations
are determined in a similar fashion as those for non-impaired commercial loans and leases, except
that retail loans are segmented by type of credit and not a grading system. We regularly review
the Allowance Analysis and make adjustments periodically based upon identifiable trends and
experience.
A migration analysis is completed quarterly to assist us in determining appropriate reserve
allocation factors for non-impaired commercial loans and leases. Our migration analysis takes into
account various time periods, and while we generally place most weight on the eight-quarter time
frame as that period is close to the average duration of our loan and lease portfolio,
consideration is given to the other time periods as part of our assessment. Although the migration
analysis provides an accurate historical accounting of our loan and lease losses, it is not able to
fully account for environmental factors that will also very likely
impact the collectability of our
commercial loans and leases as of any quarter-end date. Therefore, we incorporate the
environmental factors as adjustments to the historical data.
7.
Environmental factors include both internal and external items. We believe the most
significant internal environmental factor is our credit culture and relative aggressiveness in
assigning and revising commercial loan and lease risk ratings. Although we have been consistent in
our approach to commercial loan and lease ratings, ongoing stressed economic conditions have
resulted in an even higher sense of aggressiveness with regards to the downgrading of lending
relationships. In addition, we made revisions to our grading paradigms in early 2009 that
mathematically resulted in commercial loan and lease relationships being more quickly downgraded
when signs of stress are noted, such as slower sales activity for construction and land development
commercial real estate relationships and reduced operating performance/cash flow coverage for
commercial and industrial relationships. These changes, coupled with the stressed economic
environment, have resulted in significant downgrades and the need for substantial provisions to the
allowance. To more effectively manage our commercial loan and lease portfolio, we created two
specific groups tasked with managing our higher exposure lending relationships. One team manages
the most distressed credit relationships, while the other team manages larger weakened credit
relationships.
The most significant external environmental factor is the assessment of the current economic
environment and the resulting implications on our commercial loan and lease portfolio. Currently,
we believe
conditions remain especially stressed for non-owner occupied commercial real estate; however,
recent data and performance reflect a level of stability in the commercial and industrial class of
our loan and lease portfolio.
The primary risk elements with respect to commercial loans and leases are the financial
condition of the borrower, the sufficiency of collateral, and timeliness of scheduled payments. We
have a policy of requesting and reviewing periodic financial statements from commercial loan and
lease customers and employ a disciplined and formalized review of the existence of collateral and
its value. The primary risk element with respect to each residential real estate loan and consumer
loan is the timeliness of scheduled payments. We have a reporting system that monitors past due
loans and leases and have adopted policies to pursue creditors rights in order to preserve our
collateral position.
Reflecting the stressed economic conditions and resulting negative impact on our loan and
lease portfolio, we have substantially increased the allowance as a percent of the loan and lease
portfolio over the past couple of years. The allowance equaled $45.4 million, or 3.59% of total
loans and leases outstanding, as of December 31, 2010. As of December 31, 2009, the allowance
balance was higher at $47.9 million, but a lower 3.11% of total loans and leases. The allowance as
a percent of total loans and leases was 1.46%, 1.43% and 1.23% at year-end 2008, 2007, and 2006,
respectively. Although we believe the allowance is adequate to absorb losses as they arise, there
can be no assurance that we will not sustain losses in any given period that could be substantial
in relation to, or greater than, the size of the allowance.
Additional detail regarding the allowance is incorporated by reference to Managements
Discussion and Analysis and Note 3 of the Notes to Consolidated Financial Statements included in
this Annual Report.
Investments
Bank Holding Company Investments. The principal investments of our bank holding company are
the investments in the common stock of our bank and the common securities of Mercantile trust.
Other funds of our bank holding company may be invested from time to time in various debt
instruments.
As a bank holding company, we are also permitted to make portfolio investments in equity
securities and to make equity investments in subsidiaries engaged in a variety of non-banking
activities, which include real estate-related activities such as community development, real estate
appraisals, arranging equity financing for commercial real estate, and owning and operating real
estate used substantially by our bank or acquired for its future use. Our bank holding company has
no plans at this time to make directly any of these equity investments at the bank holding company
level. Our Board of Directors may, however, alter the investment policy at any time without
shareholder approval.
8.
Our Banks Investments. Our bank may invest its funds in a wide variety of debt instruments
and may participate in the federal funds market with other depository institutions. Subject to
certain exceptions, our bank is prohibited from investing in equity securities. Among the equity
investments permitted for our bank under various conditions and subject in some instances to amount
limitations, are shares of a subsidiary insurance agency, mortgage company, real estate company, or
Michigan business and industrial development company, such as our insurance company, our mortgage
company, or our real estate company. Under another such exception, in certain circumstances and
with prior notice to or approval of the FDIC, our bank could invest up to 10% of its total assets
in the equity securities of a subsidiary corporation engaged in the acquisition and development of
real property for sale, or the improvement of real property by construction or rehabilitation of
residential or commercial units for sale or lease. Our bank has no present plans to make such an
investment. Real estate acquired by our bank in satisfaction of or foreclosure upon loans may be
held by our bank for specified periods. Our bank is also permitted to invest in such real estate
as is necessary for the convenient transaction of its business. Our banks Board of Directors may
alter the banks investment policy without shareholder approval at any time.
Additional detail and information relative to the securities portfolio is incorporated by
reference to Managements Discussion and Analysis and Note 2 of the Notes to Consolidated Financial
Statements included in this Annual Report.
Competition
Our primary markets for loans and core deposits are the Grand Rapids, Holland and Lansing
metropolitan areas. We face substantial competition in all phases of our operations from a variety
of different competitors. We compete for deposits, loans and other financial services with
numerous Michigan-based and out-of-state banks, savings banks, thrifts, credit unions and other
financial institutions as well as from other entities that provide financial services. Some of the
financial institutions and financial service organizations with which we compete are not subject to
the same degree of regulation as we are. Many of our primary competitors have been in business for
many years, have established customer bases, are larger, have substantially higher lending limits
than we do, and offer larger branch networks and other services which we do not. Most of these
same entities have greater capital resources than we do, which, among other things, may allow them
to price their services at levels more favorable to the customer and to provide larger credit
facilities than we do. Under specified circumstances (that have been modified by the Dodd-Frank
Act), securities firms and insurance companies that elect to become financial holding companies
under the Bank Holding Company Act may acquire banks and other financial institutions. Federal
banking law affects the competitive environment in which we conduct our business. The financial
services industry is also likely to become more competitive as further technological advances
enable more companies to provide financial services.
Selected Statistical Information
Managements Discussion and Analysis beginning on Page F-4 in this Annual Report includes
selected statistical information.
Return on Equity and Assets
Return on Equity and Asset information is included in Managements Discussion and Analysis
beginning on Page F-4 in this Annual Report.
Available Information
We maintain an internet website at www.mercbank.com. We make available on or through our
website, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practical after we
electronically file such material with, or furnish it to, the Securities and Exchange Commission.
We do not intend the address of our website to be an active link or to otherwise incorporate the
contents of our website into this Annual Report.
9.
Item 1A. Risk Factors.
The following risk factors could affect our business, financial condition or results of
operations. These risk factors should be considered in connection with evaluating the
forward-looking statements contained in this Annual Report because they could cause the actual
results and conditions to differ materially from those projected in forward-looking statements.
Before you buy our common stock, you should know that investing in our common stock involves risks,
including the risks described below. The risks that are highlighted here are not the only ones we
face. If the adverse matters referred to in any of the risks actually occur, our business,
financial condition or operations could be adversely affected. In that case, the trading price of
our common stock could decline, and you may lose all or part of your investment.
Difficult market conditions have adversely affected our industry.
Dramatic declines in the housing market over the past several years, with falling home prices
and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit
performance of real estate related loans and resulted in significant write-downs of asset values by
financial institutions. These write-downs, initially of asset-backed securities but spreading to
other securities and loans, have caused many financial institutions to seek additional capital, to
reduce or eliminate dividends, to merge with larger and stronger institutions and, in some cases,
to fail. Reflecting concern about the stability of the financial markets generally and the
strength of counterparties, many lenders and institutional investors have reduced or ceased
providing funding to borrowers, including to other financial institutions. This market turmoil and
tightening of credit have led to an increased level of commercial and consumer delinquencies, lack
of
consumer confidence, increased market volatility and widespread reduction of business activity
generally. The resulting economic pressure on consumers and lack of confidence in the financial
markets have adversely affected our business, financial condition and results of operations.
Market developments may affect consumer confidence levels and may cause adverse changes in payment
patterns, causing increases in delinquencies and default rates, which may impact our charge-offs
and provision for credit losses. A worsening of these conditions would likely exacerbate the
adverse effects of these difficult market conditions on us and others in the financial institutions
industry.
Significant declines in the value of commercial real estate adversely impact us.
Many of our loans relate to commercial real estate. Stressed economic conditions have
significantly reduced the value of commercial real estate and have strained the financial condition
of our commercial real estate borrowers, especially in the land development and non-owner occupied
CRE segments of our loan and lease portfolio. Those difficulties have adversely affected us and
could produce additional losses and other adverse effects on our business.
Market volatility may adversely affect us.
The capital and credit markets have been experiencing volatility and disruption. In some
cases, the markets have produced downward pressure on stock prices and credit availability for
certain issuers without apparent regard to those issuers underlying financial strength. The
current levels of market disruption and volatility have an adverse effect, which may be material,
on our ability to access capital and on our business, financial condition and results of
operations.
10.
Adverse changes in economic conditions or interest rates may negatively affect our earnings,
capital and liquidity.
The results of operations for financial institutions, including our bank, have been materially
and adversely affected by changes in prevailing local and national economic conditions, including
declines in real estate market values and the related declines in value of our real estate
collateral, rapid increases or decreases in interest rates and changes in the monetary and fiscal
policies of the federal government. Our profitability is heavily influenced by the spread between
the interest rates we earn on loans and investments and the interest rates we pay on deposits and
other interest-bearing liabilities, as well as provisions to the allowance for loan and lease
losses. Substantially all of our loans are to businesses and individuals in the cities and
surrounding areas of Grand Rapids, Holland and Lansing, Michigan, and the decline in the economy of
these areas has adversely affected us. Continued stress on our financial condition is likely until
economic conditions improve within our markets. Like most banking institutions, our net interest
spread and margin will be affected by general economic conditions and other factors that influence
market interest rates and our ability to respond to changes in these rates. At any given time, our
assets and liabilities may be such that they will be affected differently by a given change in
interest rates.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the
actions and commercial soundness of other financial institutions. Financial services institutions
are interrelated as a result of trading, clearing, counterparty or other relationships. We have
exposure to many different industries and counterparties, and we routinely execute transactions
with counterparties in the financial industry. As a result, defaults by, or even rumors or
questions about, one or more financial services institutions, or the financial services industry
generally, have led to market-wide liquidity problems and could lead to losses or defaults by
us or by other institutions. Even routine funding transactions expose us to credit risk in
the event of default of our counterparty or client. In addition, our credit risk may be
exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not
sufficient to recover the full amount of the financial instrument exposure due us. There is no
assurance that any such losses would not materially and adversely affect our results of operations.
11.
The effect of the U.S. Governments response to the financial crisis remains uncertain.
In response to the turmoil in the financial services sector and the severe recession in the
broader economy, the U.S. Government has taken legislative and other action intended to restore
financial stability and economic growth. On October 3, 2008, then President Bush signed into law
the Emergency Economic Stabilization Act of 2008 (the EESA). Among other things, the EESA
established the Troubled Asset Relief Program, or TARP. Under TARP, the United States Treasury
Department (the Treasury Department) was given the authority, among other things, to purchase up
to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments
from financial institutions and others for the purpose of stabilizing and providing liquidity to
the U.S. financial markets. On October 14, 2008, the Treasury Department announced a program under
EESA pursuant to which it would make senior preferred stock investments in qualifying financial
institutions (the TARP Capital Purchase Program). On February 17, 2009, President Obama signed
into law the American Recovery and Reinvestment Act of 2009 (the ARRA). The ARRA contained,
among other things, a further package of economic stimulus measures and amendments to EESAs
restrictions on compensation of executives of financial institutions and others participating in
the TARP. In addition to legislation, the Federal Reserve Board eased short-term interest rates
and implemented a series of emergency programs to furnish liquidity to the financial markets and
credit to various participants in those markets. The FDIC created a program to guarantee, on
specified conditions, certain indebtedness and noninterest-bearing transaction accounts of
participating insured depository institutions for limited periods. The Treasury Department also
implemented further measures to address the crisis in the financial services sector. After
permitting some of its emergency programs to lapse during the first half of the year, in November,
2010, the Federal Reserve Board implemented a further program of quantitative easing involving the
purchase of an additional $600 billion of longer-term Treasury securities by the end of the second
quarter of 2011. In addition, on December 17, 2010, President Obama signed the Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act)
which is intended to stimulate the economy. Among other things, the 2010 Tax Relief Act contained
two-year extensions of the Bush era tax cuts and of Alternative Minimum Tax relief, a
two-percentage point reduction in employee-paid payroll taxes and self-employment tax for 2011, new
incentives for investment in machinery and equipment, estate tax relief, and a significant number
of tax breaks for individuals and businesses. There can be no assurance as to the actual impact of
the EESA, the ARRA, the 2010 Tax Relief Act, and their respective implementing regulations, the
programs of the government agencies, or any further legislation or regulations, on the financial
markets or the broader economy. A failure to stabilize the financial markets, and a continuation
or worsening of the current financial market conditions, could materially and adversely affect our
business, financial condition, results of operations, access to credit or the trading price of our
common stock.
The effect of financial services legislation and regulations remains uncertain.
In response to the financial crisis, on July 21, 2010, President Obama signed the Dodd-Frank
Act, the most comprehensive reform of the regulation of the financial services industry since the
Great Depression of the 1930s. Among many other things, the Dodd-Frank Act provides for increased
supervision of financial institutions by regulatory agencies, more stringent capital requirements
for financial institutions, major changes to deposit insurance assessments by the FDIC, heightened
regulation of hedging and derivatives activities, a greater focus on consumer protection issues, in
part through the formation of a new Consumer Finance Protection Bureau having powers formerly split
among different regulatory agencies, extensive changes to the regulation of mortgage lending,
imposition of limits on interchange transaction and network fees for electronic debit transactions,
repeal of the existing prohibition on payment of interest on demand deposits, the effective winding
up of additional expenditures of funds under the TARP, and the imposition of a sunset date of
December 31, 2012 on expenditures under the ARRA. Many of the Dodd-Frank Act provisions have
delayed effective dates that have not yet occurred, while others require implementing regulations
of Federal agencies that have not yet been adopted. There can be no assurance that the Dodd-Frank
Act and its implementing regulations will not limit our ability to pursue business opportunities,
impose additional costs on us, impact our revenues and/or the value of assets, or otherwise
adversely affect our business.
12.
The U.S. Governments legislative and regulatory response to the financial crisis and our
participation in its programs may have adverse effects on us.
The programs established or to be established under the EESA, TARP, the ARRA, the Dodd-Frank
Act or other legislation or regulations may have adverse effects upon us. We may face increased
regulation in our industry. Compliance with such regulations may increase our costs and limit our
ability to pursue business opportunities. Also, our participation in specific programs may subject
us to additional restrictions. For example, we participated in the TARP Capital Purchase Program
by selling preferred stock and a warrant for common stock to the Treasury Department for $21.0
million in May of 2009. That participation limits our ability, without the consent of the Treasury
Department, to increase the cash dividend on, or to repurchase, our common stock. It also subjects
us to restrictions on the compensation we may pay to our executives. The restrictions may
adversely affect the trading price of our common stock or our ability to recruit and retain
executives.
Our credit losses could increase and our allowance may not be adequate to cover actual loan losses.
The risk of nonpayment of loans is inherent in all lending activities, and nonpayment, when it
occurs, may have a materially adverse effect on our earnings and overall financial condition as
well as the value of our common stock. Our focus on commercial lending may result in a larger
concentration of loans to small businesses. As a result, we may assume different or greater
lending risks than other banks. We make various assumptions and judgments about the collectability
of our loan portfolio and provide an allowance for losses based on several factors. If our
assumptions are wrong, our allowance may not be sufficient to cover our losses, which would have an
adverse effect on our operating results. The actual amounts of future provisions for loan and
lease losses cannot be determined at this time and may exceed the amounts of past provisions.
Additions to our allowance decrease our net income.
We rely heavily on our management and other key personnel, and the loss of any of them may
adversely affect our operations.
We are and will continue to be dependent upon the services of our management team, including
Michael H. Price, Chairman of the Board, President and Chief Executive Officer, and our other
senior managers. The loss of Mr. Price, or any of our other senior managers, could have an adverse
effect on our growth and performance. We have entered into employment contracts with Mr. Price and
two other executive officers. The contracts provide for a three year employment period that is
extended for an additional year each year unless a notice is given indicating that the contract
will not be extended.
In addition, we continue to depend on our key commercial loan officers. Several of our
commercial loan officers are responsible, or share responsibility, for generating and managing a
significant portion of our commercial loan and lease portfolio. Our success can be attributed in
large part to the relationships these officers as well as members of our management team have
developed and are able to maintain with our customers as we continue to implement our community
banking philosophy. The loss of any of these commercial loan officers could adversely affect our
loan and lease portfolio and performance, and our ability to generate new loans and leases. Many
of our key employees have signed agreements with us agreeing not to compete with us in one or more
of our markets for specified time periods if they leave employment with us.
Some of the other financial institutions in our markets also require their key employees to
sign agreements that preclude or limit their ability to leave their employment and compete with
them or solicit their customers. These agreements make it more difficult for us to hire loan
officers with experience in our markets who can immediately solicit their former or new customers
on our behalf.
13.
Decline in the availability of out-of-area deposits could cause liquidity or interest rate margin
concerns, or limit our growth.
We have utilized, and expect to continue to utilize, out-of-area or wholesale deposits to
support our assets. These deposits are generally a lower cost source of funds when compared to the
interest rates that we would have to offer in our local markets to generate a commensurate level of
funds. In addition, the overhead
costs associated with wholesale deposits are considerably less than the overhead costs we
would incur to obtain and administer a similar level of local deposits. A decline in the
availability of these wholesale deposits would require us to fund our growth with more costly
funding sources, which could reduce our net interest margin, limit our growth, reduce our asset
size, or increase our overhead costs. Wholesale deposits include deposits obtained through
brokers. If a bank is not well capitalized, regulatory approval is required to accept brokered
deposits.
Future sales of our common stock or other securities may dilute the value of our common stock.
In many situations, our Board of Directors has the authority, without any vote of our
shareholders, to issue shares of our authorized but unissued preferred or common stock, including
shares authorized and unissued under our Stock Incentive Plan of 2006. In the future, we may issue
additional securities, through public or private offerings, in order to raise additional capital.
Any such issuance would dilute the percentage of ownership interest of existing shareholders and
may dilute the per share book value of the common stock. In addition, option holders under our
stock-based incentive plans may exercise their options at a time when we would otherwise be able to
obtain additional equity capital on more favorable terms.
Our future success is dependent on our ability to compete effectively in the highly competitive
banking industry.
We face substantial competition in all phases of our operations from a variety of different
competitors. Our future growth and success will depend on our ability to compete effectively in
this highly competitive environment. We compete for deposits, loans and other financial services
with numerous Michigan-based and out-of-state banks, thrifts, credit unions and other financial
institutions as well as other entities that provide financial services, including securities firms
and mutual funds. Some of the financial institutions and financial service organizations with
which we compete are not subject to the same degree of regulation as we are. Most of our
competitors have been in business for many years, have established customer bases, are larger, have
substantially higher lending limits than we do and offer branch networks and other services which
we do not, including trust and international banking services. Most of these entities have greater
capital and other resources than we do, which, among other things, may allow them to price their
services at levels more favorable to the customer and to provide larger credit facilities than we
do. This competition may limit our growth or earnings. Under specified circumstances (that have
been modified by the Dodd-Frank Act), securities firms and insurance companies that elect to become
financial holding companies under the Bank Holding Company Act may acquire banks and other
financial institutions. Federal banking law affects the competitive environment in which we
conduct our business. The financial services industry is also likely to become more competitive as
further technological advances enable more companies to provide financial services. These
technological advances may diminish the importance of depository institutions and other financial
intermediaries in the transfer of funds between parties.
14.
We are subject to significant government regulation, and any regulatory changes may adversely
affect us.
The banking industry is heavily regulated under both federal and state law. These regulations
are primarily intended to protect customers, not our creditors or shareholders. Existing state and
federal banking laws subject us to substantial limitations with respect to the making of loans, the
purchase of securities, the payment of dividends and many other aspects of our business. Some of
these laws may benefit us, others may increase our costs of doing business, or otherwise adversely
affect us and create competitive advantages for others. Regulations affecting banks and financial
services companies undergo continuous change, and we
cannot predict the ultimate effect of these changes, which could have a material adverse
effect on our profitability or financial condition. Federal economic and monetary policy may also
affect our ability to attract deposits, make loans and achieve satisfactory interest spreads.
The impending repeal of Federal prohibitions on payment of interest on demand deposits could
increase our interest expense.
All federal law prohibitions on the ability of depository institutions to pay interest on
demand deposit accounts will be repealed as part of the Dodd-Frank Act, effective on July 21, 2011.
As a result, depository institutions could commence offering interest on demand deposits to
compete for customers. We do not yet know what interest rates we or other depository institutions
may offer on demand deposit accounts. Our interest expense could increase and our net interest
margin could decrease if we were to begin offering interest on demand deposits to attract
additional customers or maintain current customers. Some customers, however, may choose to use
noninterest-bearing checking accounts because the Dodd-Frank Act provides that those accounts are
fully insured by the FDIC until December 31, 2012.
We may need to raise additional capital in the future, and such capital may not be available when
needed or at all.
We may need or want to raise additional capital in the future to provide us with sufficient
capital resources and liquidity to meet our commitments and business needs, particularly if our
asset quality or earnings were to deteriorate significantly. Our ability to raise additional
capital will depend on, among other things, conditions in the capital markets at that time, which
are outside of our control, and our financial performance. Economic conditions and any loss of
confidence in financial institutions generally may increase our cost of funding and limit access to
certain customary sources of capital.
There can be no assurance that capital will be available on acceptable terms or at all. Any
occurrence that may limit our access to the capital markets, such as a decline in the confidence of
equity or debt purchasers, or counterparties participating in the capital markets, may adversely
affect our capital costs and our ability to raise capital and, potentially, our liquidity. Also,
if we need to raise capital in the future, we may have to do so when many other financial
institutions are also seeking to raise capital and would have to compete with those institutions
for investors. An inability to raise additional capital on acceptable terms when needed could have
a materially adverse effect on our business, financial condition and results of operations.
We continually encounter technological change, and we may have fewer resources than our competitors
to continue to invest in technological improvements.
The banking industry is undergoing technological changes with frequent introductions of new
technology-driven products and services. In addition to better serving customers, the effective
use of technology increases efficiency and enables financial institutions to reduce costs. Our
future success will depend, in part, on our ability to address the needs of our customers by using
technology to provide products and services that will satisfy customer demands for convenience as
well as create additional efficiencies in our operations. Many of our competitors have
substantially greater resources to invest in technological improvements. There can be no assurance
that we will be able to effectively implement new technology-driven products and services or be
successful in marketing these products and services to our customers.
15.
Our Articles of Incorporation and By-laws and the laws of Michigan contain provisions that may
discourage or prevent a takeover of our company and reduce any takeover premium.
Our Articles of Incorporation and By-laws, and the corporate laws of the State of Michigan,
include provisions which are designed to provide our Board of Directors with time to consider
whether a hostile takeover offer is in our and our shareholders best interest. These provisions,
however, could discourage potential acquisition proposals and could delay or prevent a change in
control. The provisions also could diminish the opportunities for a holder of our common stock to
participate in tender offers, including tender offers at a price above the then-current market
price for our common stock. These provisions could also prevent transactions in which our
shareholders might otherwise receive a premium for their shares over then-current market prices,
and may limit the ability of our shareholders to approve transactions that they may deem to be in
their best interests.
The Michigan Business Corporation Act contains provisions intended to protect shareholders and
prohibit or discourage various types of hostile takeover activities. In addition to these
provisions and the provisions of our Articles of Incorporation and Bylaws, federal law requires the
Federal Reserve Boards approval prior to acquiring control of a bank holding company. All of
these provisions may delay or prevent a change in control without action by our shareholders and
could adversely affect the price of our common stock.
There is a limited trading market for our common stock.
The price of our common stock has been, and will likely continue to be, subject to
fluctuations based on, among other things, economic and market conditions for bank holding
companies and the stock market in general, as well as changes in investor perceptions of our
company. The issuance of new shares of our common stock also may affect the market for our common
stock.
Our common stock is traded on the Nasdaq Global Select Market under the symbol MBWM. The
development and maintenance of an active public trading market depends upon the existence of
willing buyers and sellers, the presence of which is beyond our control. While we are a
publicly-traded company, the volume of trading activity in our stock is still relatively limited.
Even if a more active market develops, there can be no assurance that such a market will continue,
or that our shareholders will be able to sell their shares at or above the offering price.
At present we are not paying any dividends on our common stock. For more information on the
suspension of our cash dividend, see Item 5 of this Annual Report. Our ability to pay cash and
stock dividends is subject to limitations under various laws and regulations, to prudent and sound
banking practices, and to contractual provisions relating to our subordinated debentures and
participation in the Capital Purchase Program.
Our business is subject to operational risks.
We, like most financial institutions, are exposed to many types of operational risks,
including the risk of fraud by employees or outsiders, unauthorized transactions by employees or
operational errors. Operational errors may include clerical or record keeping errors or those
resulting from faulty or disabled computer or telecommunications systems. Given our volume of
transactions, certain errors may be repeated or compounded before they are discovered and
successfully corrected. Our necessary dependence upon automated systems to record and process our
transaction volume may further increase the risk that technical system flaws or employee tampering
or manipulation of those systems will result in losses that are difficult to detect.
16.
We may also be subject to disruptions of our operating systems arising from events that are
wholly or partially beyond our control, including, for example, computer viruses or electrical or
telecommunications outages, which may give rise to losses in service to customers and to loss or
liability to us. We are further exposed to the risk that our external vendors may be unable to
fulfill their contractual obligations to us, or will be subject to the same risk of fraud or
operational errors by their respective employees as are we, and to the risk that our or our
vendors business continuity and data security systems prove not to be sufficiently adequate. We
also face the risk that the design of our controls and procedures prove inadequate or are
circumvented, causing delays in detection or errors in information. Although we maintain a system
of controls designed to keep operational risk at appropriate levels, there can be no assurance that
we will not suffer losses from operational risks in the future that may be material in amount.
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Item 1B. |
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Unresolved Staff Comments |
We have received no written comments regarding our periodic or current reports from the staff
of the Securities and Exchange Commission that were issued 180 days or more before the end of our
2010 fiscal year and that remain unresolved.
During 2005, our bank placed into service a new four-story facility located approximately two
miles north from the center of downtown Grand Rapids. This facility serves as our headquarters and
our banks main office, and houses the administration function, our banks commercial lending and
review function, our banks loan operations function, a full service branch, and portions of our
banks retail lending and business development function. The facility consists of approximately
55,000 square feet of usable space and contains multiple drive-through lanes with ample parking.
The land and building are owned by our real estate company. The address of this facility is 310
Leonard Street NW, Grand Rapids, Michigan.
Our bank designed and constructed a full service branch and retail loan facility which opened
in July of 1999 in Alpine Township, a northwest suburb of Grand Rapids. The facility is one story
and has approximately 8,000 square feet of usable space. The land and building are owned by our
bank. The facility has multiple drive-through lanes and ample parking space. The address of this
facility is 4613 Alpine Avenue NW, Comstock Park, Michigan.
During 2001, our bank designed and constructed two facilities on a 4-acre parcel of land
located in the City of Wyoming, a southwest suburb of Grand Rapids. The land had been purchased by
our bank in 2000. The larger of the two buildings is a full service branch and deposit operations
facility which opened in September of 2001. The facility is two-stories and has approximately
25,000 square feet of usable space. The facility has multiple drive-through lanes and ample
parking space. The address of this facility is 5610 Byron Center Avenue SW, Wyoming, Michigan.
The other building is a single-story facility with approximately 11,000 square feet of usable
space. Our banks accounting, audit, loss prevention and wire transfer functions are housed in
this building, which underwent a renovation in 2005 that almost doubled its size. The address of
this facility is 5650 Byron Center Avenue SW, Wyoming, Michigan.
During 2002, our bank designed and constructed a full service branch which opened in December
of 2002 in the City of Kentwood, a southeast suburb of Grand Rapids. The land had been purchased
by our bank in 2001. The facility is one story and has approximately 10,000 square feet of usable
space. The facility has multiple drive-through lanes and ample parking space. The address of this
facility is 4860 Broadmoor Avenue SW, Kentwood, Michigan.
During 2003, our bank designed and constructed a full service branch in the northeast quadrant
of the City of Grand Rapids. The land had been purchased by our bank in 2002. The facility is one
story and has approximately 3,500 square feet of usable space. The facility has multiple
drive-through lanes and ample parking space. The address of this facility is 3156 Knapp Street NE,
Grand Rapids, Michigan.
17.
During 2003, our bank designed and started construction of a new two-story facility located in
Holland, Michigan. This facility, which was completed during the fourth quarter of 2004, serves as
a full service banking center for the Holland area, including commercial lending, retail lending
and a full service branch. The facility, which is owned by our bank, consists of approximately
30,000 square feet of usable space and contains multiple drive-through lanes with ample parking.
The address of this facility is 880 East 16th Street, Holland, Michigan.
During 2006, our bank purchased approximately 3 acres of vacant land and designed and
initiated construction of a new three-story facility in East Lansing, Michigan. This facility was
completed during the second quarter of 2007, and serves as a full service banking center for the
greater Lansing area, including commercial lending, retail lending, and a full service branch. The
facility consists of approximately 27,000 square feet of usable space and contains multiple
drive-through lanes with ample parking. The address of this facility is 3737 Coolidge Road, East
Lansing, Michigan.
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Item 3. |
|
Legal Proceedings. |
From time to time, we may be involved in various legal proceedings that are incidental to our
business. In the opinion of management, we are not a party to any legal proceedings that are
material to our financial condition, either individually or in the aggregate.
PART II
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Item 5. |
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Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities. |
Our common stock is traded on the Nasdaq Global Select Market under the symbol MBWM. At
February 1, 2011, there were 366 record holders of our common stock. In addition, we estimate that
there were approximately 4,000 beneficial owners of our common stock who own their shares through
brokers or banks.
The following table shows the high and low sales prices for our common stock as reported by
the Nasdaq Global Select Market for the periods indicated and the quarterly cash dividends paid by
us during those periods.
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High |
|
Low |
|
Dividend |
|
|
|
|
|
|
|
|
|
|
|
|
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2010 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
4.06 |
|
|
$ |
3.10 |
|
|
$ |
0.01 |
|
Second Quarter |
|
|
6.66 |
|
|
|
3.95 |
|
|
|
0.00 |
|
Third Quarter |
|
|
5.99 |
|
|
|
3.99 |
|
|
|
0.00 |
|
Fourth Quarter |
|
|
8.40 |
|
|
|
3.87 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
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2009 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
6.48 |
|
|
$ |
3.01 |
|
|
$ |
0.04 |
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Second Quarter |
|
|
6.00 |
|
|
|
2.84 |
|
|
|
0.01 |
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Third Quarter |
|
|
4.79 |
|
|
|
3.02 |
|
|
|
0.01 |
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Fourth Quarter |
|
|
4.33 |
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|
|
3.00 |
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|
|
0.01 |
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18.
Holders of our common stock are entitled to receive dividends that the Board of Directors may
declare from time to time. We may only pay dividends out of funds that are legally available for
that purpose. We are a holding company and substantially all of our assets are held by our
subsidiaries. Our ability to pay dividends to our shareholders depends primarily on our banks
ability to pay dividends to us. Dividend payments and extensions of credit to us from our bank are
subject to legal and regulatory limitations, generally based on capital levels and current and
retained earnings, imposed by law and regulatory agencies with authority over our bank. The
ability of our bank to pay dividends is also subject to its profitability, financial condition,
capital expenditures and other cash flow requirements. In addition, under the terms of our
subordinated debentures, we would be precluded from paying dividends on our common stock if an
event of default has occurred and is continuing under the subordinated debentures, or if we
exercised our right to defer payments of interest on the subordinated debentures, until the
deferral ended. Also, in connection with our participation in the Treasury Departments Capital
Purchase Program, we agreed that we would not, without the Treasury Departments consent, increase
our cash dividend rate on our common stock, or with certain exceptions, repurchase any shares of
our common stock. These restrictions relating to the Capital Purchase Program remain in effect
until the earlier of (i) May 15, 2012, or (ii) when all of the preferred stock that we sold to the
Treasury Department has been redeemed by us or transferred by the Treasury Department to third
parties.
On July 9, 2010, we announced via a Form 8-K filed with the Securities and Exchange Commission
that we were deferring regularly scheduled quarterly interest payments on our subordinated
debentures
beginning with the quarterly interest payment scheduled to have been paid on July 18, 2010.
The deferral of interest payments on the subordinated debentures results in the deferral of
distributions on our trust preferred securities. We also announced that we were deferring
regularly scheduled quarterly dividend payments on our preferred stock beginning with the quarterly
dividend payment scheduled to have been paid on August 15, 2010. We have not determined the
duration of the deferral period.
We and our bank are subject to regulatory capital requirements administered by state and
federal banking agencies. Failure to meet the various capital requirements can initiate regulatory
action that could have a direct material effect on the financial statements. Our banks ability to
pay cash and stock dividends is subject to limitations under various laws and regulations, to
prudent and sound banking practices, and to contractual provisions relating to our subordinated
debentures and participation in the Capital Purchase Program. During 2009, we paid a cash dividend
on our common stock each calendar quarter. However, reflecting our financial results and the poor
and weakening economy, we lowered the dollar amount of the cash dividends paid during the year.
During the first quarter of 2009, our cash dividend was $0.04 per share, but was lowered to $0.01
per share for the second, third and fourth quarters. Our cash dividend on our common stock was
also $0.01 per common share during the first quarter of 2010. In April 2010, we suspended future
payments of cash dividends on our common stock until economic conditions and our financial
condition improve. In addition, we are precluded from paying cash dividends on our common stock
and preferred stock because, under the terms of our subordinated debentures, we cannot pay cash
dividends during periods when we have deferred the payment of interest on our subordinated
debentures, and, we are now deferring such interest payments. Also, pursuant to our Articles of
Incorporation, we are precluded from paying dividends on our common stock while any dividends
accrued on our preferred stock have not been declared and paid. Because we have suspended the
payment of cash dividends on our preferred stock, we are precluded from paying cash dividends on
our common stock.
Issuer Purchases of Equity Securities
We did not purchase any shares of our common stock during the fourth quarter of 2010.
Shareholder Return Performance Graph
Set forth below is a line graph comparing the yearly percentage change in the cumulative total
shareholder return on our common stock (based on the last reported sales price of the respective
year) with the cumulative total return of the Nasdaq Composite Index and the SNL Bank Nasdaq Index
from December 31, 2005 through December 31, 2010. The following is based on an investment of $100
on December 31, 2005 in our common stock, the Nasdaq Composite Index and the SNL Bank Nasdaq Index, with dividends
reinvested where applicable.
19.
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|
|
Item 6. |
|
Selected Financial Data. |
The Selected Financial Data on page F-3 in this Annual Report is incorporated here by
reference.
|
|
|
Item 7. |
|
Managements Discussion and Analysis of Financial
Condition and Results of Operations. |
Managements Discussion and Analysis included in this Annual Report is incorporated here by
reference.
|
|
|
Item 7A. |
|
Quantitative and Qualitative Disclosures About Market Risk. |
The information under the heading Market Risk Analysis included in this Annual Report is
incorporated here by reference.
|
|
|
Item 8. |
|
Financial Statements and Supplementary Data. |
The Consolidated Financial Statements, Notes to Consolidated Financial Statements and the
Reports of Independent Registered Public Accounting Firm included in this Annual Report are
incorporated here by reference.
20.
|
|
|
Item 9. |
|
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. |
None
|
|
|
Item 9A. |
|
Controls and Procedures. |
As of December 31, 2010, an evaluation was performed under the supervision of and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures. Based
on that evaluation, our management, including our Chief Executive Officer and Chief Financial
Officer, concluded that our disclosure controls and procedures were effective as of December 31,
2010.
There have been no significant changes in our internal controls over financial reporting
during the quarter ended December 31, 2010, that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). There are inherent
limitations in the effectiveness of any system of internal control. Accordingly, even an effective
system of internal control can provide only reasonable assurance with respect to financial
statement preparation.
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting as of December 31, 2010. This evaluation was based
on criteria for effective internal control over financial reporting described in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control Integrated
Framework, our management concluded that our internal control over financial reporting was
effective as of December 31, 2010. Refer to page F-37 for managements report.
Our independent registered public accounting firm has issued an audit report on our internal
control over financial reporting which is included in this Annual Report.
|
|
|
Item 9B. |
|
Other Information. |
None
PART III
|
|
|
Item 10. |
|
Directors, Executive Officers and Corporate Governance. |
The information presented under the captions Election of Directors, Executive Officers,
Section 16(a) Beneficial Ownership Reporting Compliance and Corporate Governance Code of
Ethics in the definitive Proxy Statement of Mercantile for our April 28, 2011 Annual Meeting of
Shareholders (the Proxy Statement), a copy of which will be filed with the Securities and
Exchange Commission before the meeting date, is incorporated here by reference.
We have a separately-designated standing audit committee established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee
consist of David M. Cassard, Calvin D. Murdock, Merle J. Prins and Timothy O. Schad. The Board of
Directors has determined that Messrs. Cassard, Murdock and Schad, members of the Audit Committee,
are qualified as audit committee financial experts, as that term is defined in the rules of the
Securities and Exchange Commission. Messrs. Cassard, Murdock, Prins and Schad are independent, as
independence for audit committee members is defined in the Nasdaq listing standards and the rules
of the Securities and Exchange Commission.
21.
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|
|
Item 11. |
|
Executive Compensation. |
The information presented under the captions Executive Compensation, Corporate Governance
Compensation Committee Interlocks and Insider Participation and Compensation Committee Report
in the Proxy Statement is incorporated here by reference.
|
|
|
Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters. |
The information presented under the caption Stock Ownership of Certain Beneficial Owners and
Management in the Proxy Statement is incorporated here by reference.
Equity Compensation Plan Information
The following table summarizes information, as of December 31, 2010, relating to compensation
plans under which equity securities are authorized for issuance.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
|
|
|
|
|
|
|
future issuance under |
|
|
Number of securities to |
|
Weighted-average |
|
equity compensation |
|
|
be issued upon exercise |
|
exercise price of |
|
plans (excluding |
|
|
of outstanding options, |
|
outstanding options, |
|
securities reflected in |
Plan Category |
|
warrants and rights |
|
warrants and rights |
|
column (a)) |
|
|
(a) |
|
(b) |
|
(c) |
Equity compensation
plans approved by
security holders (1) |
|
|
262,042 |
|
|
$ |
21.18 |
|
|
|
419,000 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved
by security holders |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
262,042 |
|
|
$ |
21.18 |
|
|
|
419,000 |
|
|
|
|
(1) |
|
These plans are Mercantiles 1997 Employee Stock Option Plan, 2000 Employee Stock Option Plan,
2004 Employee Stock Option Plan, Independent Director Stock Option Plan and the Stock Incentive
Plan of 2006. |
|
(2) |
|
These securities are available under the Stock Incentive Plan of 2006. Incentive awards may
include, but are not limited to, stock options, restricted stock, stock appreciation rights and
stock awards. |
|
|
|
Item 13. |
|
Certain Relationships and Related Transactions, and Director Independence. |
The information presented under the captions Transactions with Related Persons and
Corporate Governance Director Independence in the Proxy Statement is incorporated here by
reference.
|
|
|
Item 14. |
|
Principal Accountant Fees and Services. |
The information presented under the caption Principal Accountant Fees and Services in the
Proxy Statement is incorporated here by reference.
22.
PART IV
|
|
|
Item 15. |
|
Exhibits and Financial Statement Schedules |
(a) (1) Financial Statements. The following financial statements and reports of the independent
registered public accounting firm of Mercantile Bank Corporation and its subsidiaries are filed as
part of this report:
|
|
|
Reports of Independent Registered Public Accounting Firm dated March 14, 2011 BDO USA,
LLP |
|
|
|
|
Consolidated Balance Sheets December 31, 2010 and 2009 |
|
|
|
|
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 2010 |
|
|
|
|
Consolidated Statements of Changes in Shareholders Equity for each of the three years in
the period ended December 31, 2010 |
|
|
|
|
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2010 |
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
|
|
The consolidated financial statements, the notes to the consolidated financial statements,
and the reports of our independent registered public accounting firm listed above are
incorporated by reference in Item 8 of this report. |
(2) |
|
Financial Statement Schedules |
|
|
|
|
|
EXHIBIT NO. |
|
EXHIBIT DESCRIPTION |
|
|
|
|
|
|
3.1 |
|
|
Our Articles of Incorporation are incorporated by reference to
exhibit 3.1 of our Form 10-Q for the quarter ended June 30,
2009 |
|
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|
|
3.2 |
|
|
Our Amended and Restated Bylaws dated as of January 16, 2003
are incorporated by reference to exhibit 3.2 of our
Registration Statement on Form S-3 (Commission File No.
333-103376) that became effective on February 21, 2003 |
|
|
|
|
|
|
10.1 |
|
|
Our 1997 Employee Stock Option Plan is incorporated by
reference to exhibit 10.1 of our Registration Statement on
Form SB-2 (Commission File No. 333-33081) that became
effective on October 23, 1997 * |
|
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|
10.2 |
|
|
Our 2000 Employee Stock Option Plan is incorporated by
reference to exhibit 10.14 of our Form 10-K for the year ended
December 31, 2000 * |
|
|
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|
|
|
10.3 |
|
|
Our 2004 Employee Stock Option Plan is incorporated by
reference to exhibit 10.1 of our Form 10-Q for the quarter
ended September 30, 2004 * |
|
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|
|
|
10.4 |
|
|
Form of Stock Option Agreement for options under the 2004
Employee Stock Option Plan is incorporated by reference to
exhibit 10.2 of our Form 10-Q for the quarter ended September
30, 2004 * |
23.
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|
|
|
|
EXHIBIT NO. |
|
EXHIBIT DESCRIPTION |
|
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|
|
10.5 |
|
|
Our Independent Director Stock Option Plan is incorporated by
reference to exhibit 10.26 of our Form 10-K for the year ended
December 31, 2002 * |
|
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|
|
|
10.6 |
|
|
Form of Stock Option Agreement for options under the
Independent Director Stock Option Plan is incorporated by
reference to exhibit 10.1 of our Form 8-K filed October 22,
2004 * |
|
|
|
|
|
|
10.7 |
|
|
Mercantile Bank of Michigan Amended and Restated Deferred
Compensation Plan for Members of the Board of Directors dated
June 29, 2006 is incorporated by reference to exhibit 10.9 of
our Form 10-K for the year ended December 31, 2007 |
|
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|
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|
10.8 |
|
|
First Amendment dated October 25, 2007 to the Mercantile Bank
of Michigan Amended and Restated Deferred Compensation Plan
for Members of the Board of Directors dated June 29, 2006 is
incorporated by reference to exhibit 10.10 of our Form 10-K
for the year ended December 31, 2007 |
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|
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|
10.9 |
|
|
Second Amendment dated October 23, 2008 to the Mercantile Bank
of Michigan Amended and Restated Deferred Compensation Plan
for Members of the Board of Directors dated June 29, 2007 is
incorporated by reference to exhibit 10.9 of our Form 10-K for
the year ended December 31, 2008 |
|
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|
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|
10.10 |
|
|
Agreement between Fiserv Solutions, Inc. and our bank dated
September 10, 1997, is incorporated by reference to exhibit
10.3 of our Registration Statement on Form SB-2 (Commission
File No. 333-33081) that became effective on October 23, 1997 |
|
|
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|
10.11 |
|
|
Extension Agreement of Data Processing Contract between Fiserv
Solutions, Inc. and our bank dated May 12, 2000 extending the
agreement between Fiserv Solutions, Inc. and our bank dated
September 10, 1997, is incorporated by reference to exhibit
10.15 of our Form 10-K for the year ended December 31, 2000 |
|
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10.12 |
|
|
Extension Agreement of Data Processing Contract between Fiserv
Solutions, Inc. and our bank dated November 21, 2002 extending
the agreement between Fiserv Solutions, Inc. and our bank
dated September 10, 1997, is incorporated by reference to
exhibit 10.5 of our Form 10-K for the year ended December 31,
2002 |
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|
10.13 |
|
|
Extension Agreement of Data Processing Contract between Fiserv
Solutions, Inc. and our bank dated December 20, 2006 extending
the agreements between Fiserv Solutions, Inc. and our bank
dated September 10, 1997 and November 21, 2002 is incorporated
by reference to exhibit 10.14 of our Form 10-K for the year
ended December 31, 2007 |
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10.14 |
|
|
Amended and Restated Employment Agreement dated as of October
18, 2001, among the company, our bank and Michael H. Price, is
incorporated by reference to exhibit 10.22 of our Form 10-K
for the year ended December 31, 2001 * |
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10.15 |
|
|
Employment Agreement dated as of October 18, 2001, among the
company, our bank and Robert B. Kaminski, Jr., is incorporated
by reference to exhibit 10.23 of our Form 10-K for the year
ended December 31, 2001 * |
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10.16 |
|
|
Employment Agreement dated as of October 18, 2001, among the
company, our bank and Charles E. Christmas, is incorporated by
reference to exhibit 10.23 of our Form 10-K for the year ended
December 31, 2001 * |
24.
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EXHIBIT NO. |
|
EXHIBIT DESCRIPTION |
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10.17 |
|
|
Amendment to Employment Agreement dated as of October 17,
2002, among the company, our bank and Michael H. Price, is
incorporated by reference to exhibit 10.22 of our Form 10-K
for the year ended December 31, 2002 * |
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10.18 |
|
|
Amendment to Employment Agreement dated as of October 17,
2002, among the company, our bank and Robert B. Kaminski, Jr.,
is incorporated by reference to exhibit 10.23 of our Form 10-K
for the year ended December 31, 2002 * |
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10.19 |
|
|
Amendment to Employment Agreement dated as of October 17,
2002, among the company, our bank and Charles E. Christmas, is
incorporated by reference to exhibit 10.24 of our Form 10-K
for the year ended December 31, 2002 * |
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|
10.20 |
|
|
Amendment to Employment Agreement dated as of October 28,
2004, among the company, our bank and Robert B. Kaminski, Jr.,
is incorporated by reference to exhibit 10.21 of our Form 10-K
for the year ended December 31, 2004 * |
|
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|
10.21 |
|
|
Junior Subordinated Indenture between us and Wilmington Trust
Company dated September 16, 2004 providing for the issuance of
the Series A and Series B Floating Rate Junior Subordinated
Notes due 2034 is incorporated by reference to exhibit 10.1 of
our Form 8-K filed December 15, 2004 |
|
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|
10.22 |
|
|
Amended and Restated Trust Agreement dated September 16, 2004
for Mercantile Bank Capital Trust I is incorporated by
reference to exhibit 10.2 of our Form 8-K filed December 15,
2004 |
|
|
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|
|
|
10.23 |
|
|
Placement Agreement between us, Mercantile Bank Capital Trust
I, and SunTrust Capital Markets, Inc. dated September 16, 2004
is incorporated by reference to exhibit 10.3 of our Form 8-K
filed December 15, 2004 |
|
|
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|
|
|
10.24 |
|
|
Guarantee Agreement dated September 16, 2004 between
Mercantile as Guarantor and Wilmington Trust Company as
Guarantee Trustee is incorporated by reference to exhibit 10.4
of our Form 8-K filed December 15, 2004 |
|
|
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|
10.25 |
|
|
Form of Agreement Amending Stock Option Agreement, dated
November 17, 2005 issued under our 2004 Employee Stock Option
Plan, is incorporated by reference to exhibit 10.1 of our Form
8-K filed December 14, 2005 * |
|
|
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|
|
|
10.26 |
|
|
Second Amendment to Employment Agreement dated as of November
17, 2005, among the company, our bank and Michael H. Price is
incorporated by reference to exhibit 10.29 of our Form 10-K
for the year ended December 31, 2005 * |
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|
10.27 |
|
|
Third Amendment to Employment Agreement dated as of November
17, 2005, among the company, our bank and Robert B. Kaminski,
Jr. is incorporated by reference to exhibit 10.30 of our Form
10-K for the year ended December 31, 2005 * |
|
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|
10.28 |
|
|
Second Amendment to Employment Agreement dated as of November
17, 2005, among the company, our bank and Charles E. Christmas
is incorporated by reference to exhibit 10.31 of our Form 10-K
for the year ended December 31, 2005 * |
25.
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|
|
EXHIBIT NO. |
|
EXHIBIT DESCRIPTION |
|
|
|
|
|
|
10.29 |
|
|
Form of Mercantile Bank of Michigan Amended and Restated
Executive Deferred Compensation Agreement dated November 18,
2006, that has been entered into between our bank and each of
Gerald R. Johnson, Jr., Michael H. Price, Robert B. Kaminski,
Jr., Charles E. Christmas, and certain other officers of our
bank is incorporated by reference to exhibit 10.34 of our Form
10-K for the year ended December 31, 2007 * |
|
|
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|
|
|
10.30 |
|
|
Form of First Amendment to the Mercantile Bank of Michigan
Executive Deferred Compensation Agreement dated November 18,
2006, that has been entered into between our bank and each of
Gerald R. Johnson, Jr., Michael H. Price, Robert B. Kaminski,
Jr., Charles E. Christmas, and certain other officers of our
bank, dated October 25, 2007 is incorporated by reference to
exhibit 10.35 of our Form 10-K for the year ended December 31,
2007 * |
|
|
|
|
|
|
10.31 |
|
|
Form of Second Amendment to the Mercantile Bank of Michigan
Executive Deferred Compensation Agreement dated November 18,
2006, that has been entered into between our bank and each of
Michael H. Price, Robert B. Kaminski, Charles E. Christmas,
and certain other officers of our bank, dated October 23, 2008
is incorporated by reference to exhibit 10.34 of our Form 10-K
for the year ended December 31, 2008 * |
|
|
|
|
|
|
10.32 |
|
|
Form of Mercantile Bank of Michigan Split Dollar Agreement
that has been entered into between our bank and each of Gerald
R. Johnson, Jr., Michael H. Price, Robert B. Kaminski, Jr.,
Charles E. Christmas, and certain other officers of our bank
is incorporated by reference to exhibit 10.33 of our Form 10-K
for the year ended December 31, 2005 * |
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|
10.33 |
|
|
Director Fee Summary is incorporated by reference to exhibit
10.33 of our Form 10-K for the year ended December 31, 2009 * |
|
|
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|
10.34 |
|
|
Lease Agreement between our bank and The Conlin Company dated
July 12, 2005 for our Ann Arbor, Michigan office is
incorporated by reference to exhibit 10.36 of our Form 10-K
for the year ended December 31, 2005 |
|
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|
10.35 |
|
|
Stock Incentive Plan of 2006 is incorporated by reference to
Appendix A of our proxy statement for our April 27, 2006
annual meeting of shareholders that was filed with the
Securities and Exchange Commission * |
|
|
|
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|
|
10.36 |
|
|
Amendment and Restatement of Stock Incentive Plan of 2006
dated November 18, 2008 is incorporated by reference to
exhibit 10.39 of our Form 10-K for the year ended December 31,
2008 * |
|
|
|
|
|
|
10.37 |
|
|
Form of Notice of Grant of Incentive Stock Option and Stock
Option Agreement for incentive stock options granted in 2006
under our Stock Incentive Plan of 2006 is incorporated by
reference to exhibit 10.1 of our Form 8-K filed November 22,
2006 * |
|
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|
|
|
10.38 |
|
|
Form of Notice of Grant of Incentive Stock Option and Stock
Option Agreement for incentive stock options granted after
2006 under our Stock Incentive Plan of 2006 is incorporated by
reference to exhibit 10.41 of our Form 10-K for the year ended
December 31, 2007 * |
26.
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|
|
EXHIBIT NO. |
|
EXHIBIT DESCRIPTION |
|
|
|
|
|
|
10.39 |
|
|
Form of Restricted Stock Award Agreement Notification of Award
and Terms and Conditions of Award for restricted stock granted
in 2006 under our Stock Incentive Plan of 2006 is incorporated
by reference to exhibit 10.2 of our Form 8-K filed November
22, 2006 * |
|
|
|
|
|
|
10.40 |
|
|
Form of Restricted Stock Award Agreement Notification of Award
and Terms and Conditions of Award for restricted stock granted
after 2006 under our Stock Incentive Plan of 2006 is
incorporated by reference to exhibit 10.43 of our Form 10-K
for the year ended December 31, 2007 * |
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|
10.41 |
|
|
Mercantile Bank Corporation Employee Stock Purchase Plan of
2002 is incorporated by reference to exhibit 10.47 of our Form
10-K for the year ended December 31, 2008 |
|
|
|
|
|
|
10.42 |
|
|
First Amendment to Mercantile Bank Corporation Employee Stock
Purchase Plan of 2002 is incorporated by reference to exhibit
4(c) of our Registration Statement on Form S-8 (Commission
File No. 333-158280) that became effective on March 30, 2009 |
|
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|
|
10.43 |
|
|
Second Amendment to Mercantile Bank Corporation Employee Stock
Purchase Plan of 2002 is incorporated by reference to exhibit
4(d) of our Registration Statement on Form S-8 (Commission
File No. 333-158280) that became effective on March 30, 2009 |
|
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|
10.44 |
|
|
Lease Agreement between our bank and CD Partners LLC dated
October 2, 2007 for our Oakland County, Michigan office is
incorporated by reference to exhibit 10.47 of our Form 10-K
for the year ended December 31, 2007 |
|
|
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|
|
10.45 |
|
|
Letter Agreement, dated as of May 15, 2009, between Mercantile
Bank Corporation and the United States Department of the
Treasury, including the Securities Purchase Agreement
Standard Terms and Schedules is incorporated by reference to
exhibit 10.1 of our Form 8-K filed May 15, 2009 |
|
|
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|
|
10.46 |
|
|
Side Letter Agreement, dated as of May 15, 2009, between
Mercantile Bank Corporation and the United States Department
of the Treasury regarding the American Recovery and
Reinvestment Act of 2009 is incorporated by reference to
exhibit 10.2 of our Form 8-K filed May 15, 2009 |
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|
10.47 |
|
|
Amendment to Employment Agreements, dated May 15, 2009, by and
among Mercantile Bank Corporation, Mercantile Bank of
Michigan, Michael H. Price, Robert B. Kaminski, Jr. and
Charles E. Christmas is incorporated by reference to exhibit
10.3 of our Form 8-K filed May 15, 2009 * |
|
|
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|
|
10.48 |
|
|
Form of Waiver executed by each of Michael H. Price, Robert B.
Kaminski, Jr. and Charles E. Christmas is incorporated by
reference to exhibit 10.4 of our Form 8-K filed May 15, 2009 |
|
|
|
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|
|
10.49 |
|
|
Amendment to Commercial Lease between our bank and Jerry
Helmer and Ruthann Helmer dated August 14, 2007 for our Ann
Arbor, Michigan office is incorporated by reference to exhibit
10.5 of our Form 10-Q for the quarter ended June 30, 2009 |
27.
|
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|
|
|
EXHIBIT NO. |
|
EXHIBIT DESCRIPTION |
|
|
|
|
|
|
10.50 |
|
|
Termination of Lease Agreement between our bank and CD
Partners LLC dated May 21, 2009 for our Oakland County,
Michigan office is incorporated by reference to exhibit 10.6
of our Form 10-Q for the quarter ended June 30, 2009 |
|
|
|
|
|
|
10.51 |
|
|
Termination of Lease Agreement between our bank and Jerry
Helmer and Ruthann Helmer dated July 22, 2009 for our Ann
Arbor, Michigan office is incorporated by reference to exhibit
10.7 of our Form 10-Q for the quarter ended June 30, 2009 |
|
|
|
|
|
|
10.52 |
|
|
Warrant to Purchase Common Stock of Mercantile Bank
Corporation, dated May 15, 2009 is incorporated by reference
to exhibit 4.2 of our Form 8-K filed May 15, 2009 |
|
|
|
|
|
|
21 |
|
|
Subsidiaries of the company is incorporated by reference to
exhibit 21 of our Form 10-K for the year ended December 31,
2008 |
|
|
|
|
|
|
23 |
|
|
Consent of BDO USA, LLP |
|
|
|
|
|
|
31 |
|
|
Rule 13a-14(a) Certifications |
|
|
|
|
|
|
32.1 |
|
|
Section 1350 Chief Executive Officer Certification |
|
|
|
|
|
|
32.2 |
|
|
Section 1350 Chief Financial Officer Certification |
|
|
|
|
|
|
99.1 |
|
|
Certification of our principal executive officer and principal
financial officer relating to our participation in the Capital
Purchase Program of the Troubled Asset Relief Program |
|
|
|
* |
|
Management contract or compensatory plan |
(c) |
|
Financial Statements Not Included In Annual Report |
28.
MERCANTILE BANK CORPORATION
FINANCIAL INFORMATION
December 31, 2010 and 2009
F-1
MERCANTILE BANK CORPORATION
FINANCIAL INFORMATION
December 31, 2010 and 2009
CONTENTS
F-2
SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands except per share data) |
|
Consolidated Results of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
88,143 |
|
|
$ |
104,909 |
|
|
$ |
121,072 |
|
|
$ |
144,181 |
|
|
$ |
137,260 |
|
Interest expense |
|
|
31,794 |
|
|
|
53,576 |
|
|
|
74,863 |
|
|
|
88,624 |
|
|
|
75,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
56,349 |
|
|
|
51,333 |
|
|
|
46,209 |
|
|
|
55,557 |
|
|
|
61,587 |
|
Provision for loan and lease losses |
|
|
31,800 |
|
|
|
59,000 |
|
|
|
21,200 |
|
|
|
11,070 |
|
|
|
5,775 |
|
Noninterest income |
|
|
9,244 |
|
|
|
7,558 |
|
|
|
7,282 |
|
|
|
5,870 |
|
|
|
5,261 |
|
Noninterest expense |
|
|
47,156 |
|
|
|
46,488 |
|
|
|
42,126 |
|
|
|
38,356 |
|
|
|
32,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit) |
|
|
(13,363 |
) |
|
|
(46,597 |
) |
|
|
(9,835 |
) |
|
|
12,001 |
|
|
|
28,811 |
|
Income tax expense (benefit) |
|
|
(47 |
) |
|
|
5,490 |
|
|
|
(4,876 |
) |
|
|
3,035 |
|
|
|
8,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(13,316 |
) |
|
|
(52,087 |
) |
|
|
(4,959 |
) |
|
|
8,966 |
|
|
|
19,847 |
|
Preferred stock dividends and accretion |
|
|
1,295 |
|
|
|
802 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shares |
|
$ |
(14,611 |
) |
|
$ |
(52,889 |
) |
|
$ |
(4,959 |
) |
|
$ |
8,966 |
|
|
$ |
19,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,632,421 |
|
|
$ |
1,906,208 |
|
|
$ |
2,208,010 |
|
|
$ |
2,121,403 |
|
|
$ |
2,067,268 |
|
Cash and cash equivalents |
|
|
64,198 |
|
|
|
21,735 |
|
|
|
25,804 |
|
|
|
29,430 |
|
|
|
51,380 |
|
Securities |
|
|
235,175 |
|
|
|
257,384 |
|
|
|
242,787 |
|
|
|
211,736 |
|
|
|
202,419 |
|
Loans and leases |
|
|
1,262,630 |
|
|
|
1,539,818 |
|
|
|
1,856,915 |
|
|
|
1,799,880 |
|
|
|
1,745,478 |
|
Allowance for loan and lease losses |
|
|
45,368 |
|
|
|
47,878 |
|
|
|
27,108 |
|
|
|
25,814 |
|
|
|
21,411 |
|
Bank owned life insurance |
|
|
46,743 |
|
|
|
45,024 |
|
|
|
42,462 |
|
|
|
39,118 |
|
|
|
30,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
1,273,832 |
|
|
|
1,401,627 |
|
|
|
1,599,575 |
|
|
|
1,591,181 |
|
|
|
1,646,903 |
|
Securities sold under agreements to repurchase |
|
|
116,979 |
|
|
|
99,755 |
|
|
|
94,413 |
|
|
|
97,465 |
|
|
|
85,472 |
|
Federal Home Loan Bank advances |
|
|
65,000 |
|
|
|
205,000 |
|
|
|
270,000 |
|
|
|
180,000 |
|
|
|
95,000 |
|
Subordinated debentures |
|
|
32,990 |
|
|
|
32,990 |
|
|
|
32,990 |
|
|
|
32,990 |
|
|
|
32,990 |
|
Shareholders equity |
|
|
125,936 |
|
|
|
140,104 |
|
|
|
174,372 |
|
|
|
178,155 |
|
|
|
171,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Financial Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
(0.80 |
%) |
|
|
(2.51 |
%) |
|
|
(0.23 |
%) |
|
|
0.43 |
% |
|
|
1.01 |
% |
Return on average shareholders equity |
|
|
(10.62 |
%) |
|
|
(29.91 |
%) |
|
|
(2.87 |
%) |
|
|
5.10 |
% |
|
|
12.19 |
% |
Average shareholders equity to average assets |
|
|
7.56 |
% |
|
|
8.40 |
% |
|
|
8.01 |
% |
|
|
8.44 |
% |
|
|
8.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans and leases to total loans and leases |
|
|
5.50 |
% |
|
|
5.52 |
% |
|
|
2.66 |
% |
|
|
1.66 |
% |
|
|
0.49 |
% |
Allowance for loan and lease losses to total loans and leases |
|
|
3.59 |
% |
|
|
3.11 |
% |
|
|
1.46 |
% |
|
|
1.43 |
% |
|
|
1.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage capital |
|
|
9.09 |
% |
|
|
8.64 |
% |
|
|
9.17 |
% |
|
|
9.97 |
% |
|
|
10.04 |
% |
Tier 1 leverage risk-based capital |
|
|
11.17 |
% |
|
|
9.92 |
% |
|
|
9.68 |
% |
|
|
10.14 |
% |
|
|
10.37 |
% |
Total risk-based capital |
|
|
12.45 |
% |
|
|
11.18 |
% |
|
|
10.93 |
% |
|
|
11.39 |
% |
|
|
11.45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(1.72 |
) |
|
$ |
(6.23 |
) |
|
$ |
(0.59 |
) |
|
$ |
1.06 |
|
|
$ |
2.36 |
|
Diluted |
|
|
(1.72 |
) |
|
|
(6.23 |
) |
|
|
(0.59 |
) |
|
|
1.05 |
|
|
|
2.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value at end of period |
|
|
12.20 |
|
|
|
13.86 |
|
|
|
20.29 |
|
|
|
20.89 |
|
|
|
21.43 |
|
Dividends declared |
|
|
0.01 |
|
|
|
0.07 |
|
|
|
0.31 |
|
|
|
0.55 |
|
|
|
0.48 |
|
Dividend payout ratio |
|
NA |
|
NA |
|
NA |
|
|
52.16 |
% |
|
|
20.34 |
% |
F-3
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion and other portions of this Annual Report contain forward-looking
statements that are based on managements beliefs, assumptions, current expectations, estimates and
projections about the financial services industry, the economy, and about our company. Words such
as anticipates, believes, estimates, expects, forecasts, intends, is likely, plans,
projects, and variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions (Future Factors) that are difficult to predict with
regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and
outcomes may materially differ from what may be expressed or forecasted in such forward-looking
statements. We undertake no obligation to update, amend, or clarify forward-looking statements,
whether as a result of new information, future events (whether anticipated or unanticipated), or
otherwise.
Future Factors include, among others, changes in interest rates and interest rate relationships;
demand for products and services; the degree of competition by traditional and non-traditional
competitors; changes in banking regulation or actions by bank regulators; changes in tax laws;
changes in prices, levies, and assessments; impact of technological advances; governmental and
regulatory policy changes; outcomes of contingencies; trends in customer behavior as well as their
ability to repay loans; changes in local real estate values; changes in the national and local
economies; and other risk factors described in Item 1A of this Annual Report. These are
representative of the Future Factors that could cause a difference between an ultimate actual
outcome and a forward-looking statement.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements Discussion and Analysis of Financial Condition and Results of Operations
(Managements Discussion and Analysis) is based on Mercantile Bank Corporations consolidated
financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan and lease losses and income
tax accounting, and actual results could differ from those estimates. Management has reviewed the
analyses with the Audit Committee of our Board of Directors.
Allowance For Loan and Lease Losses: The allowance for loan and lease losses (allowance)
is maintained at a level we believe is adequate to absorb probable incurred losses identified and
inherent in the loan and lease portfolio. Our evaluation of the adequacy of the allowance is an
estimate based on past loan loss experience, the nature and volume of the loan and lease portfolio,
information about specific borrower situations and estimated collateral values, guidance from bank
regulatory agencies, and assessments of the impact of current and anticipated economic conditions
on the loan and lease portfolio. Allocations of the allowance may be made for specific loans or
leases, but the entire allowance is available for any loan or lease that, in our judgment, should
be charged-off. Loan and lease losses are charged against the allowance when we believe the
uncollectability of a loan or lease is likely. The balance of the allowance represents our best
estimate, but significant downturns in circumstances relating to loan and lease quality or economic
conditions could result in a requirement for an increased allowance in the future. Likewise, an
upturn in loan and lease quality or improved economic conditions may result in a decline in the
required allowance in the future. In either instance, unanticipated changes could have a
significant impact on operating earnings.
F-4
The allowance is increased through a provision charged to operating expense. Uncollectable loans
and leases are charged-off through the allowance. Recoveries of loans and leases previously
charged-off are added to the allowance. A loan or lease is considered impaired when it is probable
that contractual interest and principal payments will not be collected either for the amounts or by
the dates as scheduled in the loan or lease agreement. Impairment is evaluated in aggregate for
smaller-balance loans of similar nature such as residential mortgage, consumer and credit card
loans, and on an individual loan or lease basis for other loans. If a loan or lease is impaired, a
portion of the allowance is allocated so that the loan or lease is reported, net, at the present
value of estimated future cash flows using the loans or leases existing interest rate or at the
fair value of collateral if repayment is expected solely from the collateral. The timing of
obtaining outside appraisals varies, generally depending on the nature and complexity of the
property being evaluated, general breadth of activity within the marketplace and the age of the
most recent appraisal. For collateral dependent impaired loans and leases, in most cases we obtain
and use the as is value as indicated in the appraisal report, adjusting for any expected selling
costs. In certain circumstances, we may internally update outside appraisals based on recent
information impacting a particular or similar property, or due to identifiable trends (e.g., recent
sales of similar properties) within our markets. The expected future cash flows exclude potential
cash flows from certain guarantors. To the extent these guarantors are able to provide repayments,
a recovery would be recorded upon receipt. Loans and leases are evaluated for impairment when
payments are delayed, typically 30 days or more, or when serious deficiencies are identified within
the credit relationship. Our policy for recognizing income on impaired loans is to accrue interest
unless a loan is placed on nonaccrual status. We put loans into nonaccrual status when the full
collection of principal and interest is not expected.
Income Tax Accounting: Current income tax liabilities or assets are established for the
amount of taxes payable or refundable for the current year. In the preparation of income tax
returns, tax positions are taken based on interpretation of federal and state income tax laws for
which the outcome may be uncertain. We periodically review and evaluate the status of our tax
positions and make adjustments as necessary. Deferred income tax liabilities and assets are also
established for the future tax consequences of events that have been recognized in our financial
statements or tax returns. A deferred income tax liability or asset is recognized for the
estimated future tax effects attributable to temporary differences that can be carried forward
(used) in future years. The valuation of our net deferred income tax asset is considered critical
as it requires us to make estimates based on provisions of the enacted tax laws. The assessment of
the realizability of the net deferred income tax asset involves the use of estimates, assumptions,
interpretations and judgments concerning accounting pronouncements, federal and state tax codes and
the extent of future taxable income. There can be no assurance that future events, such as court
decisions, positions of federal and state taxing authorities, and the extent of future taxable
income will not differ from our current assessment, the impact of which could be significant to the
consolidated results of operations and reported earnings.
Accounting guidance requires us to assess whether a valuation allowance should be established
against our deferred tax assets based on the consideration of all available evidence using a more
likely than not standard. In making such judgments, we consider both positive and negative
evidence and analyze changes in near-term market conditions as well as other factors which may
impact future operating results. Significant weight is given to evidence that can be objectively
verified. Despite improvements in key areas such as an expanded net interest margin, increased
regulatory capital levels, a continued shift to local funding sources and reduced controllable
overhead costs, the loan and lease loss provision expense and problem asset administration costs
remain sizable. The continuing recent losses resulting from the distressed operating environment
have significantly restricted our ability to rely on projections of future taxable income to
support the recovery of our deferred tax assets. Consequently, we determined it necessary to carry
a valuation allowance against our entire net deferred tax asset as of December 31, 2010 and 2009.
We will continue to monitor our net deferred tax asset quarterly for changes affecting its
realizability.
F-5
INTRODUCTION
This Managements Discussion and Analysis should be read in conjunction with the consolidated
financial statements contained in this Annual Report. This discussion provides information about
the consolidated financial condition and results of operations of Mercantile Bank Corporation and
its consolidated subsidiary, Mercantile Bank of Michigan (our bank), and of Mercantile Bank
Mortgage Company, LLC (our mortgage company), Mercantile Bank Real Estate Co., L.L.C. (our real
estate company) and Mercantile Insurance Center, Inc. (our insurance company), which are
subsidiaries of our bank. Unless the text clearly suggests otherwise, references to us, we,
our, or the company include Mercantile Bank Corporation and its wholly-owned subsidiaries
referred to above.
We were incorporated on July 15, 1997 as a bank holding company to establish and own our bank. Our
bank, after receiving all necessary regulatory approvals, began operations on December 15, 1997.
Our bank has a strong commitment to community banking and offers a wide range of financial products
and services, primarily to small- to medium-sized businesses, as well as individuals. Our banks
lending strategy focuses on commercial lending, and, to a lesser extent, residential mortgage and
consumer lending. Our bank also offers a broad array of deposit products, including checking,
savings, money market, and certificates of deposit, as well as security repurchase agreements. Our
primary markets are the Grand Rapids, Holland and Lansing areas. Our bank utilizes deposits from
customers located outside of our primary market areas to assist in funding assets.
We formed a business trust, Mercantile Bank Capital Trust I (our trust), in 2004 to issue trust
preferred securities. We issued subordinated debentures to our trust in return for the proceeds
raised from the issuance of the trust preferred securities. In accordance with accounting
guidelines, our trust is not consolidated, but instead we report the subordinated debentures issued
to our trust as a liability.
Our mortgage companys predecessor, Mercantile Bank Mortgage Company, was formed to increase the
profitability and efficiency of our mortgage loan operations. Mercantile Bank Mortgage Company
initiated business on October 24, 2000 from our banks contribution of most of its residential
mortgage loan portfolio and participation interests in certain commercial mortgage loans. On the
same date, our bank had also transferred its residential mortgage origination function to
Mercantile Bank Mortgage Company. On January 1, 2004, Mercantile Bank Mortgage Company was
reorganized as Mercantile Bank Mortgage Company, LLC, a limited liability company. Mortgage loans
originated and held by our mortgage company are serviced by our bank pursuant to a servicing
agreement.
Our insurance company acquired, at nominal cost, an existing shelf insurance agency effective April
15, 2002. An Agency and Institution Agreement was entered into among our insurance company, our
bank and Hub International for the purpose of providing programs of mass marketed personal lines of
insurance. Insurance product offerings include private passenger automobile, homeowners, personal
inland marine, boat owners, recreational vehicle, dwelling fire, umbrella policies, small business
and life insurance products, all of which are provided by and written through companies that have
appointed Hub International as their agent.
Our real estate company was organized on July 21, 2003, principally to develop, construct and own
our facility in downtown Grand Rapids which serves as our banks main office and Mercantile Bank
Corporations headquarters. Construction was completed during the second quarter of 2005.
FINANCIAL OVERVIEW
Our earnings performance has been negatively impacted by substantial provisions to the allowance
and problem asset administration costs. Ongoing state, regional and national economic struggles
have negatively impacted some of our borrowers cash flows and underlying collateral values,
leading to increased nonperforming assets, higher loan and lease charge-offs and increased overall
credit risk within our loan portfolio when compared to historical levels. We continue to work with
our borrowers to develop constructive dialogue to strengthen our relationships and enhance our
ability to resolve complex issues; however, with the environment for the banking industry likely to
remain stressed until economic conditions improve, credit quality will continue to be our major
concern. We will remain vigilant in the identification and
administration of problem assets, but provisions to the allowance and problem asset administration costs will likely remain above
historical levels, dampening future earnings performance.
F-6
Our earnings performance also reflects positive steps we have taken to not only partially mitigate
the impact of deteriorating asset quality in the near term, but to benefit us on a longer-term
basis as well. First, our net interest margin has been expanding as we have replaced maturing
high-rate deposits and borrowed funds with lower-cost funds, while at the same time our commercial
loan pricing initiatives significantly offset the negative impact of a relatively high level of
nonaccrual loans. Next, our regulatory risk-based capital ratios are increasing, as the 2009 sale
of preferred stock under the Treasurys Capital Purchase Program and the reduction of loans and
leases outstanding have more than offset the impact of our net losses. In addition, we are
increasing our local deposit balances, reflecting the successful implementation of various
initiatives, campaigns and product enhancements. The local deposit growth, combined with the
reduction of loans and leases outstanding, are providing for a substantial reduction of, and
reliance on, wholesale funds. Lastly, we continue to see the positive effect of our branch
consolidation and other overhead cost reduction initiatives, as we continue to make strides to
reduce controllable noninterest expense.
FINANCIAL CONDITION
Reflecting strategies employed in regards to our financial condition and the continued weak and
poor economic environments within our markets, our balance sheet has shrunk during the past two
years. Total assets declined from $1.91 billion on December 31, 2009 to $1.63 billion on December
31, 2010, representing a decrease in total assets of $273.8 million, or 14.4%. During 2009, we had
shrunk our balance sheet by $301.8 million, or 13.7%. The decline in total assets during 2010 was
primarily comprised of a $277.2 million decrease in total loans and leases, following a decline of
$317.1 million during 2009. Our total deposits decreased $127.8 million and Federal Home Loan Bank
(FHLB) advances declined $140.0 million during 2010, compared to declines of $197.9 million and
$65.0 million, respectively, during 2009.
Earning Assets
Average earning assets equaled 94.8% of average total assets during 2010, a level very similar to
the 95.1% during 2009. The loan and lease portfolio continued to comprise a majority of earning
assets, followed by securities, federal funds sold and interest-bearing deposits; however, during
2010, securities, federal funds sold and interest-bearing deposits comprised a larger percentage of
earning assets primarily reflecting our decision to operate with a larger volume of on-balance
sheet liquidity given market conditions. Average total loans and leases equaled 81.8% of average
total assets during 2010, a decline from 85.1% in 2009. Meanwhile, average securities, federal
funds sold and interest-bearing deposits equaled a combined 18.2% of average total assets during
2010, an increase from 14.9% during 2009.
Our loan and lease portfolio is primarily comprised of commercial loans and leases. Commercial
loans and leases declined by $266.7 million during 2010, and at December 31, 2010, totaled $1.18
billion, or 93.1% of the total loan and lease portfolio. The decline in outstanding balances
reflects the slowdown in business activity in our markets and the impact of a concerted effort on
our part to reduce exposure to certain non-owner occupied commercial real estate (CRE) lending.
Our commercial and industrial (C&I) loan portfolio declined $119.7 million during 2010, as usage
of commercial lines of credit was reduced, in large part reflecting the slowdown in business
activity and a corresponding reduction in accounts receivable and inventory financings, along with
only nominal equipment financing requests. We would expect to see higher commercial line of credit
usage, along with increased equipment financing requests, when economic conditions improve.
Commercial loans collateralized by non-owner occupied CRE declined $95.2 million during 2010. Our
systematic approach to reducing our exposure to certain non-owner occupied CRE lending will be
prolonged, given the nature of CRE lending and depressed economic conditions; however, we believe
that such a reduction is in our best interest when taking into account the increased inherent
credit risk and nominal deposit balances associated with targeted borrowing relationships. Also
during 2010, commercial loans collateralized by owner-occupied real estate declined $42.8 million
and commercial loans related to residential land development and construction decreased by $9.7
million.
F-7
The commercial loan and lease portfolio represents loans to businesses generally located within our
market areas. Approximately 77% of the commercial loan and lease portfolio is primarily secured by
real estate properties, with the remaining generally secured by other business assets such as
accounts receivable, inventory, and equipment. The continued concentration of the loan and lease
portfolio in commercial loans and leases is consistent with our strategy of focusing a substantial
amount of our efforts on commercial banking. Corporate and business lending is an area of
expertise for our senior management team, and our commercial lenders have extensive commercial
lending experience, with most having at least ten years experience. Of each of the loan
categories that we originate, commercial loans and leases are most efficiently originated and
managed, thus limiting overhead costs by necessitating the attention of fewer employees. Our
commercial lending business generates the largest portion of local deposits and is our primary
source of demand deposits.
The following table summarizes our loans secured by real estate, excluding residential mortgage
loans representing permanent financing of owner occupied dwellings and home equity lines of credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/10 |
|
|
9/30/10 |
|
|
6/30/10 |
|
|
3/31/10 |
|
|
12/31/09 |
|
Residential-Related: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacant Land |
|
$ |
17,201,000 |
|
|
$ |
18,013,000 |
|
|
$ |
20,351,000 |
|
|
$ |
20,871,000 |
|
|
$ |
19,465,000 |
|
Land Development |
|
|
28,147,000 |
|
|
|
29,735,000 |
|
|
|
29,627,000 |
|
|
|
32,199,000 |
|
|
|
34,027,000 |
|
Construction |
|
|
5,621,000 |
|
|
|
5,854,000 |
|
|
|
6,627,000 |
|
|
|
7,872,000 |
|
|
|
7,199,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,969,000 |
|
|
|
53,602,000 |
|
|
|
56,605,000 |
|
|
|
60,942,000 |
|
|
|
60,691,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comml Non-Owner Occupied: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacant Land |
|
|
14,293,000 |
|
|
|
15,416,000 |
|
|
|
19,812,000 |
|
|
|
22,304,000 |
|
|
|
25,549,000 |
|
Land Development |
|
|
17,807,000 |
|
|
|
18,221,000 |
|
|
|
18,585,000 |
|
|
|
19,058,000 |
|
|
|
19,402,000 |
|
Construction |
|
|
31,827,000 |
|
|
|
39,620,000 |
|
|
|
52,295,000 |
|
|
|
52,107,000 |
|
|
|
65,697,000 |
|
Commercial Buildings |
|
|
489,371,000 |
|
|
|
509,777,000 |
|
|
|
512,816,000 |
|
|
|
539,284,000 |
|
|
|
537,891,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
553,298,000 |
|
|
|
583,034,000 |
|
|
|
603,508,000 |
|
|
|
632,753,000 |
|
|
|
648,539,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comml Owner Occupied: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
672,000 |
|
|
|
0 |
|
|
|
1,360,000 |
|
|
|
1,651,000 |
|
|
|
1,404,000 |
|
Commercial Buildings |
|
|
282,388,000 |
|
|
|
298,846,000 |
|
|
|
302,768,000 |
|
|
|
316,302,000 |
|
|
|
324,451,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
283,060,000 |
|
|
|
298,846,000 |
|
|
|
304,128,000 |
|
|
|
317,953,000 |
|
|
|
325,855,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
887,327,000 |
|
|
$ |
935,482,000 |
|
|
$ |
964,241,000 |
|
|
$ |
1,011,648,000 |
|
|
$ |
1,035,085,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans and consumer loans declined in aggregate $10.4 million during 2010,
and at December 31, 2010, totaled $86.7 million, or 6.9% of the total loan and lease portfolio.
Although residential mortgage loan and consumer loan portfolios may increase in future periods, we
expect the commercial sector of the lending efforts and resultant assets to remain the dominant
loan portfolio category.
F-8
The following table presents total loans outstanding as of December 31, 2010, according to
scheduled repayments of principal on fixed rate loans and repricing frequency on variable rate
loans. Floating rate loans that are currently at interest rate floors are treated as fixed rate
loans and are reflected using maturity date and not repricing frequency.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than |
|
|
One Through |
|
|
More Than |
|
|
|
|
|
|
One Year |
|
|
Five Years |
|
|
Five Years |
|
|
Total |
|
|
Construction and land development |
|
$ |
79,504,000 |
|
|
$ |
37,272,000 |
|
|
$ |
889,000 |
|
|
$ |
117,665,000 |
|
Real estate residential properties |
|
|
48,884,000 |
|
|
|
51,674,000 |
|
|
|
9,956,000 |
|
|
|
110,514,000 |
|
Real estate multi-family properties |
|
|
4,335,000 |
|
|
|
44,445,000 |
|
|
|
235,000 |
|
|
|
49,015,000 |
|
Real estate commercial properties |
|
|
329,051,000 |
|
|
|
378,266,000 |
|
|
|
13,673,000 |
|
|
|
720,990,000 |
|
Commercial and industrial |
|
|
161,094,000 |
|
|
|
93,627,000 |
|
|
|
4,348,000 |
|
|
|
259,069,000 |
|
Leases |
|
|
132,000 |
|
|
|
262,000 |
|
|
|
0 |
|
|
|
394,000 |
|
Consumer |
|
|
2,548,000 |
|
|
|
2,318,000 |
|
|
|
117,000 |
|
|
|
4,983,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
625,548,000 |
|
|
$ |
607,864,000 |
|
|
$ |
29,218,000 |
|
|
$ |
1,262,630,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate loans and leases |
|
$ |
377,525,000 |
|
|
$ |
594,289,000 |
|
|
$ |
29,218,000 |
|
|
$ |
1,001,032,000 |
|
Floating rate loans and leases |
|
|
248,024,000 |
|
|
|
13,574,000 |
|
|
|
0 |
|
|
|
261,598,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
625,549,000 |
|
|
$ |
607,863,000 |
|
|
$ |
29,218,000 |
|
|
$ |
1,262,630,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our credit policies establish guidelines to manage credit risk and asset quality. These
guidelines include loan review and early identification of problem loans and leases to provide
effective loan and lease portfolio administration. The credit policies and procedures are meant to
minimize the risk and uncertainties inherent in lending. In following these policies and
procedures, we must rely on estimates, appraisals and evaluations of loans and leases and the
possibility that changes in these could occur quickly because of changing economic conditions.
Identified problem loans and leases, which exhibit characteristics (financial or otherwise) that
could cause the loans and leases to become nonperforming or require restructuring in the future,
are included on the internal watch list. Senior management and the Board of Directors review
this list regularly. Market value estimates of collateral on impaired loans, as well as on
foreclosed and repossessed assets, are reviewed periodically; however, we have a process in place
to monitor whether value estimates at each quarter-end are reflective of current market conditions.
Our credit policies establish criteria for obtaining appraisals and determining internal value
estimates. We may also adjust outside and internal valuations based on identifiable trends within
our markets, such as recent sales of similar properties or assets, listing prices and offers
received. In addition, we may discount certain appraised and internal value estimates to address
distressed market conditions.
The levels of net loan and lease charge-offs and nonperforming assets have been elevated since
early 2007. Although we were never directly involved in the underwriting of or the investing in
subprime residential real estate loans, the apparent substantial and rapid collapse of this line of
business during 2007 and 2008 throughout the United States had a significant negative impact on the
residential real estate development lending portion of our business. The resulting decline in real
estate prices and slowdown in sales has stretched the cash flow of our local developers and eroded
the value of our underlying collateral, which caused elevated levels of nonperforming assets and
net loan and lease charge-offs. Since that time, we have witnessed and been impacted by poor
economic conditions in Michigan and throughout the country. The resulting decline in business
revenue has negatively impacted the cash flows of many of our borrowers, some to the point where
loan payments have become past due or may likely become delinquent in future periods. In addition,
real estate and equipment prices are significantly depressed, thereby exposing us to
larger-than-typical losses in those instances where the sale of collateral is the primary source of
repayment. Also during this time, we have seen deterioration in guarantors financial capacities
to fund deficient cash flows and reduce or eliminate collateral deficiencies. It is likely that
net loan and lease charge-offs and nonperforming assets will remain elevated in comparison to our
historical levels until economic conditions improve.
F-9
As of December 31, 2007, nonperforming assets totaled $35.7 million, or 1.68% of total assets,
an increase from the $9.6 million, or 0.46% of total assets, as of December 31, 2006.
Nonperforming loans and leases totaled $29.8 million and foreclosed properties/repossessed assets
equaled $5.9 million at year-end 2007, compared to $8.6 million and $1.0 million, respectively, at
year-end 2006. As of December 31, 2007, nonperforming loans secured by real estate, combined with
all foreclosed properties, totaled $28.6 million, or about 80% of total nonperforming assets.
Nonperforming loans and foreclosed properties associated with the development of residential real
estate totaled $11.1 million, with another $3.2 million in nonperforming loans secured by, and
foreclosed properties consisting of, residential properties. Net loan and lease charge-offs during
2007 totaled $6.7 million, or 0.38% of average total loans and leases. During 2006, net loan and
lease charge-offs totaled $4.9 million, or 0.29% of average total loans and leases.
Throughout most of 2008, we experienced a sudden and rapid deterioration in a number of commercial
loan relationships which previously had been performing satisfactorily. Analyses of certain
commercial borrowers revealed a reduced capability on the part of these borrowers to make required
payments as indicated by factors such as delinquent loan payments, diminished cash flow,
deteriorating financial performance, or past due property taxes, and in the case of commercial and
residential development projects slow absorption or sales trends. In addition, commercial real
estate is the primary source of collateral for many of these borrowing relationships and updated
evaluations and appraisals in many cases reflected significant declines from the original estimated
values.
As of December 31, 2008, nonperforming assets totaled $57.4 million, or 2.60% of total assets.
Nonperforming loans and leases totaled $49.3 million and foreclosed properties/repossessed assets
equaled $8.1 million at year-end 2008, compared to $29.8 million and $5.9 million, respectively, at
year-end 2007. As of December 31, 2008, nonperforming loans secured by real estate, combined with
all foreclosed properties, totaled $52.3 million, or about 91% of total nonperforming assets.
Nonperforming loans and foreclosed properties associated with the development of residential real
estate totaled $25.3 million, with another $4.2 million in nonperforming loans secured by, and
foreclosed properties consisting of, residential properties. Net loan and lease charge-offs during
2008 totaled $19.9 million, or 1.09% of average total loans and leases. The increase in net loan
and lease charge-offs during 2008 over prior periods primarily reflected a higher level of
nonperforming assets and significant declines in property values.
As of December 31, 2009, nonperforming assets totaled $111.7 million, or 5.86% of total assets.
Nonperforming loans and leases totaled $85.1 million and foreclosed properties/repossessed assets
equaled $26.6 million at year-end 2009. As of December 31, 2009, nonperforming loans secured by,
and foreclosed properties consisting of, non-owner occupied CRE properties totaled $62.6 million.
Nonperforming loans and foreclosed properties associated with the development of
residential-related real estate totaled $31.8 million, with another $7.5 million in nonperforming
loans secured by, and foreclosed properties consisting of, residential properties. Nonperforming
C&I loans and repossessed assets totaled $9.8 million. Net loan and lease charge-offs during 2009
totaled $38.2 million, or 2.24% of average total loans and leases. The increase in net loan and
lease charge-offs during 2009 over prior periods primarily reflected a higher level of
nonperforming assets and depressed property values.
As of December 31, 2010, nonperforming assets totaled $86.1 million, or 5.28% of total assets.
Nonperforming loans and leases totaled $69.4 million and foreclosed properties/repossessed assets
equaled $16.7 million at year-end 2010. As of December 31, 2010, nonperforming loans secured by,
and foreclosed properties consisting of, non-owner occupied CRE properties totaled $51.4 million.
Nonperforming loans and foreclosed properties associated with the development of
residential-related real estate totaled $16.9 million, with another $9.5 million in nonperforming
loans secured by, and foreclosed properties consisting of, residential properties. Nonperforming
C&I loans and repossessed assets totaled $8.4 million. Net loan and lease charge-offs during 2010
totaled $34.3 million, or 2.43% of average total loans and leases. The elevated level of net loan
and lease charge-offs during 2010, like those during 2008 and 2009, were significantly higher than
historical averages due to a higher level of nonperforming loans and depressed property values.
During the latter part of 2008 and throughout 2009 and 2010, we saw a continuation of the stresses
caused by the poor economic conditions, especially in the non-owner occupied CRE markets. High
vacancy rates or slow absorption has resulted in inadequate cash flow generated from some real
estate projects we have financed, and have required guarantors to provide personal funds to make
full contractual loan payments and pay other operating costs. In some cases, the guarantors cash
and other liquid reserves have become seriously diminished. In other cases, sale of the
collateral, either by the borrower or us, is our primary source of repayment.
F-10
We are, however, encouraged by the apparent credit quality stabilization within our loan and lease
portfolio during the past several quarters. After a period of significant and ongoing increases
from 2007 through September 30,
2009, the level of nonperforming assets remained relatively unchanged through June 30, 2010 and
then declined during the third and fourth quarters of 2010. Of particular note are the reduced
level of additions to the nonperforming asset category and an increased level of nonaccrual loans
returning to performing status. We also saw an improved level of interest in, and sales of,
foreclosed properties and assets securing nonaccrual loans during the latter half of 2010.
The following table provides a breakdown of nonperforming assets by property type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/10 |
|
|
9/30/10 |
|
|
6/30/10 |
|
|
3/31/10 |
|
|
12/31/09 |
|
Residential Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development |
|
$ |
14,547,000 |
|
|
$ |
16,746,000 |
|
|
$ |
21,551,000 |
|
|
$ |
22,781,000 |
|
|
$ |
19,722,000 |
|
Construction |
|
|
2,333,000 |
|
|
|
2,924,000 |
|
|
|
10,231,000 |
|
|
|
11,425,000 |
|
|
|
12,103,000 |
|
Owner Occupied / Rental |
|
|
9,454,000 |
|
|
|
7,251,000 |
|
|
|
6,159,000 |
|
|
|
5,908,000 |
|
|
|
7,493,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,334,000 |
|
|
|
26,921,000 |
|
|
|
37,941,000 |
|
|
|
40,114,000 |
|
|
|
39,318,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development |
|
|
2,454,000 |
|
|
|
2,277,000 |
|
|
|
2,050,000 |
|
|
|
3,031,000 |
|
|
|
2,971,000 |
|
Construction |
|
|
0 |
|
|
|
0 |
|
|
|
571,000 |
|
|
|
1,238,000 |
|
|
|
1,268,000 |
|
Owner Occupied |
|
|
14,740,000 |
|
|
|
15,083,000 |
|
|
|
16,216,000 |
|
|
|
17,311,000 |
|
|
|
19,918,000 |
|
Non-Owner Occupied |
|
|
34,209,000 |
|
|
|
41,725,000 |
|
|
|
46,706,000 |
|
|
|
46,552,000 |
|
|
|
38,417,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,403,000 |
|
|
|
59,085,000 |
|
|
|
65,543,000 |
|
|
|
68,132,000 |
|
|
|
62,574,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Assets |
|
|
8,221,000 |
|
|
|
6,386,000 |
|
|
|
7,049,000 |
|
|
|
9,303,000 |
|
|
|
9,758,000 |
|
Consumer Assets |
|
|
161,000 |
|
|
|
5,000 |
|
|
|
0 |
|
|
|
8,000 |
|
|
|
8,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,382,000 |
|
|
|
6,391,000 |
|
|
|
7,049,000 |
|
|
|
9,311,000 |
|
|
|
9,766,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
86,119,000 |
|
|
$ |
92,397,000 |
|
|
$ |
110,533,000 |
|
|
$ |
117,557,000 |
|
|
$ |
111,658,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-11
The following table provides a breakdown of net loan and lease charge-offs by collateral type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole |
|
|
|
4th Qtr |
|
|
3rd Qtr |
|
|
2nd Qtr |
|
|
1st Qtr |
|
|
Year |
|
|
|
2010 |
|
|
2010 |
|
|
2010 |
|
|
2010 |
|
|
2010 |
|
Residential Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development |
|
$ |
312,000 |
|
|
$ |
2,115,000 |
|
|
$ |
1,254,000 |
|
|
$ |
565,000 |
|
|
$ |
4,246,000 |
|
Construction |
|
|
173,000 |
|
|
|
93,000 |
|
|
|
649,000 |
|
|
|
587,000 |
|
|
|
1,502,000 |
|
Owner Occupied / Rental |
|
|
120,000 |
|
|
|
1,212,000 |
|
|
|
407,000 |
|
|
|
326,000 |
|
|
|
2,065,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
605,000 |
|
|
|
3,420,000 |
|
|
|
2,310,000 |
|
|
|
1,478,000 |
|
|
|
7,813,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development |
|
|
219,000 |
|
|
|
360,000 |
|
|
|
674,000 |
|
|
|
617,000 |
|
|
|
1,870,000 |
|
Construction |
|
|
0 |
|
|
|
0 |
|
|
|
660,000 |
|
|
|
0 |
|
|
|
660,000 |
|
Owner Occupied |
|
|
976,000 |
|
|
|
2,159,000 |
|
|
|
726,000 |
|
|
|
1,091,000 |
|
|
|
4,952,000 |
|
Non-Owner Occupied |
|
|
2,642,000 |
|
|
|
6,805,000 |
|
|
|
2,551,000 |
|
|
|
1,945,000 |
|
|
|
13,943,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,837,000 |
|
|
|
9,324,000 |
|
|
|
4,611,000 |
|
|
|
3,653,000 |
|
|
|
21,425,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Assets |
|
|
819,000 |
|
|
|
1,517,000 |
|
|
|
1,670,000 |
|
|
|
1,012,000 |
|
|
|
5,018,000 |
|
Consumer Assets |
|
|
47,000 |
|
|
|
1,000 |
|
|
|
(3,000 |
) |
|
|
9,000 |
|
|
|
54,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
866,000 |
|
|
|
1,518,000 |
|
|
|
1,667,000 |
|
|
|
1,021,000 |
|
|
|
5,072,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,308,000 |
|
|
$ |
14,262,000 |
|
|
$ |
8,588,000 |
|
|
$ |
6,152,000 |
|
|
$ |
34,310,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes nonperforming loans and leases, including troubled debt
restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/10 |
|
|
12/31/09 |
|
|
12/31/08 |
|
|
12/31/07 |
|
|
12/31/06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past due 90 days or more and
accruing interest |
|
$ |
766,000 |
|
|
$ |
243,000 |
|
|
$ |
1,358,000 |
|
|
$ |
977,000 |
|
|
$ |
819,000 |
|
Nonaccrual, including troubled
debt restructurings |
|
|
63,915,000 |
|
|
|
81,818,000 |
|
|
|
47,945,000 |
|
|
|
28,832,000 |
|
|
|
7,752,000 |
|
Troubled debt restructurings,
accruing interest |
|
|
4,763,000 |
|
|
|
2,989,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
69,444,000 |
|
|
$ |
85,050,000 |
|
|
$ |
49,303,000 |
|
|
$ |
29,809,000 |
|
|
$ |
8,571,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
The following table summarizes changes in the allowance for loan and lease losses for the past
five years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases outstanding at year-end |
|
$ |
1,262,630,000 |
|
|
$ |
1,539,818,000 |
|
|
$ |
1,856,915,000 |
|
|
$ |
1,799,880,000 |
|
|
$ |
1,745,478,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily average balance of loans and leases
outstanding during the year |
|
$ |
1,412,555,000 |
|
|
$ |
1,704,335,000 |
|
|
$ |
1,829,686,000 |
|
|
$ |
1,765,465,000 |
|
|
$ |
1,660,284,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of allowance at beginning of year |
|
$ |
47,878,000 |
|
|
$ |
27,108,000 |
|
|
$ |
25,814,000 |
|
|
$ |
21,411,000 |
|
|
$ |
20,527,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases charged-off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural |
|
|
(25,498,000 |
) |
|
|
(25,858,000 |
) |
|
|
(12,566,000 |
) |
|
|
(4,232,000 |
) |
|
|
(5,208,000 |
) |
Construction and land development |
|
|
(9,273,000 |
) |
|
|
(9,606,000 |
) |
|
|
(4,835,000 |
) |
|
|
(1,353,000 |
) |
|
|
0 |
|
Leases |
|
|
(41,000 |
) |
|
|
(120,000 |
) |
|
|
(174,000 |
) |
|
|
(18,000 |
) |
|
|
0 |
|
Residential real estate |
|
|
(2,242,000 |
) |
|
|
(3,797,000 |
) |
|
|
(2,900,000 |
) |
|
|
(1,618,000 |
) |
|
|
(50,000 |
) |
Instalment loans to individuals |
|
|
(74,000 |
) |
|
|
(240,000 |
) |
|
|
(119,000 |
) |
|
|
(53,000 |
) |
|
|
(131,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
(37,128,000 |
) |
|
|
(39,621,000 |
) |
|
|
(20,594,000 |
) |
|
|
(7,274,000 |
) |
|
|
(5,389,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries of previously charged-off
loans and leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural |
|
|
1,599,000 |
|
|
|
1,141,000 |
|
|
|
597,000 |
|
|
|
586,000 |
|
|
|
487,000 |
|
Construction and land development |
|
|
995,000 |
|
|
|
81,000 |
|
|
|
8,000 |
|
|
|
11,000 |
|
|
|
0 |
|
Leases |
|
|
38,000 |
|
|
|
4,000 |
|
|
|
6,000 |
|
|
|
0 |
|
|
|
0 |
|
Residential real estate |
|
|
178,000 |
|
|
|
150,000 |
|
|
|
51,000 |
|
|
|
3,000 |
|
|
|
2,000 |
|
Instalment loans to individuals |
|
|
8,000 |
|
|
|
15,000 |
|
|
|
26,000 |
|
|
|
7,000 |
|
|
|
9,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
2,818,000 |
|
|
|
1,391,000 |
|
|
|
688,000 |
|
|
|
607,000 |
|
|
|
498,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan and lease charge-offs |
|
|
(34,310,000 |
) |
|
|
(38,230,000 |
) |
|
|
(19,906,000 |
) |
|
|
(6,667,000 |
) |
|
|
(4,891,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
31,800,000 |
|
|
|
59,000,000 |
|
|
|
21,200,000 |
|
|
|
11,070,000 |
|
|
|
5,775,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of allowance at year-end |
|
$ |
45,368,000 |
|
|
$ |
47,878,000 |
|
|
$ |
27,108,000 |
|
|
$ |
25,814,000 |
|
|
$ |
21,411,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net loan and lease charge-offs
during the year to average loans and leases
outstanding during the year |
|
|
(2.43 |
%) |
|
|
(2.24 |
%) |
|
|
(1.09 |
%) |
|
|
(0.38 |
%) |
|
|
(0.29 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance to loans and leases
outstanding at year-end |
|
|
3.59 |
% |
|
|
3.11 |
% |
|
|
1.46 |
% |
|
|
1.43 |
% |
|
|
1.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
The following table illustrates the breakdown of the allowance balance by loan type (dollars
in thousands) and of the total loan and lease portfolio (in percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2010 |
|
|
12/31/2009 |
|
|
12/31/2008 |
|
|
12/31/2007 |
|
|
12/31/2006 |
|
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
Loan |
|
|
|
Amount |
|
|
Portfolio |
|
|
Amount |
|
|
Portfolio |
|
|
Amount |
|
|
Portfolio |
|
|
Amount |
|
|
Portfolio |
|
|
Amount |
|
|
Portfolio |
|
Commercial,
financial and
agricultural |
|
$ |
32,624 |
|
|
|
81.5 |
% |
|
$ |
37,590 |
|
|
|
80.0 |
% |
|
$ |
20,170 |
|
|
|
77.9 |
% |
|
$ |
18,947 |
|
|
|
77.4 |
% |
|
$ |
15,706 |
|
|
|
74.7 |
% |
Construction and
land development |
|
|
7,019 |
|
|
|
9.3 |
|
|
|
6,566 |
|
|
|
11.4 |
|
|
|
5,137 |
|
|
|
14.1 |
|
|
|
4,907 |
|
|
|
14.7 |
|
|
|
3,975 |
|
|
|
17.1 |
|
Leases |
|
|
21 |
|
|
|
0.0 |
|
|
|
49 |
|
|
|
0.1 |
|
|
|
41 |
|
|
|
0.1 |
|
|
|
29 |
|
|
|
0.1 |
|
|
|
15 |
|
|
|
0.1 |
|
Residential real
estate |
|
|
5,495 |
|
|
|
8.8 |
|
|
|
3,517 |
|
|
|
8.1 |
|
|
|
1,656 |
|
|
|
7.6 |
|
|
|
1,829 |
|
|
|
7.5 |
|
|
|
1,591 |
|
|
|
7.6 |
|
Instalment loans to
individuals |
|
|
172 |
|
|
|
0.4 |
|
|
|
156 |
|
|
|
0.4 |
|
|
|
104 |
|
|
|
0.3 |
|
|
|
102 |
|
|
|
0.3 |
|
|
|
124 |
|
|
|
0.5 |
|
Unallocated |
|
|
37 |
|
|
|
0.0 |
|
|
|
0 |
|
|
|
0.0 |
|
|
|
0 |
|
|
|
0.0 |
|
|
|
0 |
|
|
|
0.0 |
|
|
|
0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
45,368 |
|
|
|
100.0 |
% |
|
$ |
47,878 |
|
|
|
100.0 |
% |
|
$ |
27,108 |
|
|
|
100.0 |
% |
|
$ |
25,814 |
|
|
|
100.0 |
% |
|
$ |
21,411 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In each accounting period, we adjust the allowance to the amount we believe is necessary to
maintain the allowance at an adequate level. Through the loan and lease review and credit
departments, we establish specific portions of the allowance based on specifically identifiable
problem loans and leases. The evaluation of the allowance is further based on, but not limited to,
consideration of the internally prepared Allowance Analysis, loan and lease loss migration
analysis, composition of the loan and lease portfolio, third party analysis of the loan and lease
administration processes and portfolio, and general economic conditions.
The Allowance Analysis applies reserve allocation factors to non-impaired outstanding loan and
lease balances, which is combined with specific reserves to calculate an overall allowance dollar
amount. For non-impaired commercial loans and leases, which continue to comprise a vast majority
of our total loans and leases, reserve allocation factors are based upon loan ratings as determined
by our standardized grade paradigms and by loan purpose. We have divided our commercial loan and
lease portfolio into five classes: 1) commercial and industrial loans and leases; 2) vacant land,
land development and residential construction loans; 3) owner occupied real estate loans; 4)
non-owner occupied real estate loans; and 5) multi-family and residential rental property loans.
The reserve allocation factors are primarily based on the historical trends of net loan and lease
charge-offs through a migration analysis whereby net loan and lease losses are tracked via assigned
grades over various time periods, with adjustments made for environmental factors reflecting the
current status of, or recent changes in, items such as: lending policies and procedures; economic
conditions; nature and volume of the loan and lease portfolio; experience, ability and depth of
management and lending staff; volume and severity of past due, nonaccrual and adversely classified
loans and leases; effectiveness of the loan and lease review program; value of underlying
collateral; lending concentrations; and other external factors, including competition and
regulatory environment. Adjustments for specific lending relationships, particularly impaired
loans and leases, are made on a case-by-case basis. Non-impaired retail loan reserve allocations
are determined in a similar fashion as those for non-impaired commercial loans and leases, except
that retail loans are segmented by type of credit and not a grading system. We regularly review
the Allowance Analysis and make adjustments periodically based upon identifiable trends and
experience.
F-14
A migration analysis is completed quarterly to assist us in determining appropriate reserve
allocation factors for non-impaired commercial loans and leases. Our migration takes into account
various time periods, and while we
generally place most weight on the eight-quarter time frame as that period is close to the average
duration of our loan and lease portfolio, consideration is given to the other time periods as part
of our assessment. Although the migration analysis provides an accurate historical accounting of
our loan and lease losses, it is not able to fully account for environmental factors that will also
very likely impact the collectability of our commercial loans and leases as of any quarter-end
date. Therefore, we incorporate the environmental factors as adjustments to the historical data.
Environmental factors include both internal and external items. We believe the most significant
internal environmental factor is our credit culture and the relative aggressiveness in assigning
and revising commercial loan and lease risk ratings. Although we have been consistent in our
approach to commercial loan and lease ratings, ongoing stressed economic conditions have resulted
in an even higher sense of aggressiveness with regards to the downgrading of lending relationships.
In addition, we made revisions to our grading paradigms in early 2009 that mathematically resulted
in commercial loan and lease relationships being more quickly downgraded when signs of stress are
noted, such as slower sales activity for construction and land development CRE relationships and
reduced operating performance/cash flow coverage for C&I relationships. These changes, coupled
with the stressed economic environment, have resulted in significant downgrades and the need for
substantial provisions to the allowance. To more effectively manage our commercial loan and lease
portfolio, we created two specific groups tasked with managing our higher exposure lending
relationships. One team manages the most distressed credit relationships, while the other team
manages larger weakened credit relationships.
The most significant external environmental factor is the assessment of the current economic
environment and the resulting implications on our commercial loan and lease portfolio. Currently,
we believe conditions remain especially stressed for non-owner occupied CRE; however, recent data
and performance reflect a level of stability in the C&I class of our loan and lease portfolio.
The primary risk elements with respect to commercial loans and leases are the financial condition
of the borrower, the sufficiency of collateral, and timeliness of scheduled payments. We have a
policy of requesting and reviewing periodic financial statements from commercial loan and lease
customers and employ a disciplined and formalized review of the existence of collateral and its
value. The primary risk element with respect to each residential real estate loan and consumer
loan is the timeliness of scheduled payments. We have a reporting system that monitors past due
loans and leases and have adopted policies to pursue creditors rights in order to preserve our
collateral position.
Reflecting the stressed economic conditions and resulting negative impact on our loan and lease
portfolio, we have substantially increased the allowance as a percent of the loan and lease
portfolio over the past couple of years. The allowance equaled $45.4 million, or 3.59% of total
loans and leases outstanding, as of December 31, 2010. As of December 31, 2009, the allowance
balance was higher at $47.9 million, but a lower 3.11% of total loans and leases. The allowance as
a percent of total loans and leases was 1.46%, 1.43% and 1.23% at year-end 2008, 2007, and 2006,
respectively.
As of December 31, 2010, the allowance was comprised of $35.7 million in general reserves relating
to non-impaired loans and leases and $9.7 million in specific reserve allocations relating to
impaired loans and leases. At year-end 2010, impaired loans and leases with an aggregate carrying
value of $27.7 million had been subject to previous partial charge-offs aggregating $26.1 million.
Those partial charge-offs were recorded as follows: $21.7 million in 2010, $3.4 million in 2009 and
$1.0 million in 2008. As of December 31, 2010, specific reserves allocated to impaired loans that
had been subject to a previous partial charge-off totaled
$1.0 million.
Although we believe the allowance is adequate to absorb losses as they arise, there can be no
assurance that we will not sustain losses in any given period that could be substantial in relation
to, or greater than, the size of the allowance.
F-15
Securities decreased $22.2 million during 2010, totaling $235.2 million as of December 31, 2010.
During 2010, the securities portfolio equaled 13.7% of average earning assets. The decline in the
securities portfolio primarily reflects the sale of certain tax-exempt municipal general obligation
and revenue bonds with an aggregate book value of $20.0 million, which were sold during the first
quarter of 2010 after analyzing our current and forecasted federal income tax position. Proceeds
from matured and called U.S. Government agency bonds totaled $81.2 during 2010, with another $17.9
million received from principal paydowns on mortgage-backed securities, $5.8 million from matured
and called tax-exempt municipal securities, $2.4 million from matured Michigan Strategic Fund bonds
and $1.3 million from redeemed FHLB stock. Purchases during 2010, consisting almost exclusively of
U.S. Government agency bonds, totaled $106.3 million. We maintain the securities portfolio at
levels to provide for required pledging purposes and secondary liquidity for our daily operations.
In addition, the portfolio serves a primary interest rate risk management function. At December
31, 2010, the portfolio was comprised of U.S. Government agency issued bonds (51%), U.S. Government
agency issued or guaranteed mortgage-backed securities (20%), tax-exempt municipal general
obligation and revenue bonds (14%), Michigan Strategic Fund bonds (8%), FHLB stock (6%) and mutual
funds (1%).
The following table reflects the composition of the securities portfolio, excluding FHLB stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/10 |
|
|
12/31/09 |
|
|
12/31/08 |
|
|
|
Carrying |
|
|
|
|
|
|
Carrying |
|
|
|
|
|
|
Carrying |
|
|
|
|
|
|
Value |
|
|
Percent |
|
|
Value |
|
|
Percent |
|
|
Value |
|
|
Percent |
|
U.S. Government agency
debt obligations |
|
$ |
121,562,000 |
|
|
|
55.1 |
% |
|
$ |
95,544,000 |
|
|
|
39.6 |
% |
|
$ |
62,382,000 |
|
|
|
27.5 |
% |
Mortgage-backed
securities |
|
|
46,941,000 |
|
|
|
21.2 |
|
|
|
64,982,000 |
|
|
|
26.9 |
|
|
|
77,026,000 |
|
|
|
33.9 |
|
Michigan Strategic
Fund bonds |
|
|
18,175,000 |
|
|
|
8.2 |
|
|
|
20,550,000 |
|
|
|
8.5 |
|
|
|
22,105,000 |
|
|
|
9.7 |
|
Municipal general
obligations |
|
|
28,042,000 |
|
|
|
12.7 |
|
|
|
49,892,000 |
|
|
|
20.6 |
|
|
|
54,066,000 |
|
|
|
23.8 |
|
Municipal revenue bonds |
|
|
4,843,000 |
|
|
|
2.2 |
|
|
|
9,319,000 |
|
|
|
3.9 |
|
|
|
10,371,000 |
|
|
|
4.6 |
|
Mutual funds |
|
|
1,267,000 |
|
|
|
0.6 |
|
|
|
1,416,000 |
|
|
|
0.5 |
|
|
|
1,156,000 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
220,830,000 |
|
|
|
100.0 |
% |
|
$ |
241,703,000 |
|
|
|
100.0 |
% |
|
$ |
227,106,000 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of our securities are currently designated as available for sale. Historically, we had
designated our tax-exempt municipal general obligation and revenue bonds as held to maturity;
however, we changed the designation to available for sale immediately after the sale of certain of
our tax-exempt general obligation and revenue bonds during the first quarter of 2010. Securities
designated as available for sale are stated at fair value. The fair value of securities designated
as available for sale at December 31, 2010 totaled $220.8 million, including a net unrealized gain
of $2.0 million.
FHLB stock totaled $14.3 million as of December 31, 2010, compared to $15.7 million at December 31,
2009. The reduction reflects the FHLBs unsolicited redemption of $1.4 million in late 2010. Our
investment in FHLB stock is necessary to engage in their advance and other financing programs. We
received a quarterly cash dividend throughout 2010 at an average rate of 1.88%, and believe a cash
dividend will continue to be declared and paid in future quarters.
F-16
Market values on our U.S. Government agency bonds, mortgage-backed securities issued or guaranteed
by U.S. Government agencies and tax-exempt general obligation and revenue municipal bonds are
determined on a monthly basis with the assistance of a third party vendor. Evaluated pricing
models that vary by type of security and incorporate available market data are utilized. Standard
inputs include issuer and type of security, benchmark yields, reported trades, broker/dealer quotes
and issuer spreads. The market value of other securities is estimated at carrying value as those
financial instruments are generally bought and sold at par value. We believe our valuation
methodology provides for a reasonable estimation of market value, and that it is consistent with
the requirements of accounting guidelines. Reference is made to Note 15 of the Notes to
Consolidated Financial Statements for additional information.
The following table shows by class of maturities as of December 31, 2010, the amounts and weighted
average yields (on a fully taxable-equivalent basis) of investment securities:
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Average |
|
|
|
Value |
|
|
Yield |
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government agencies: |
|
|
|
|
|
|
|
|
One year or less |
|
$ |
0 |
|
|
NA |
Over one through five years |
|
|
3,321,000 |
|
|
|
4.96 |
% |
Over five through ten years |
|
|
19,828,000 |
|
|
|
3.80 |
|
Over ten years |
|
|
98,413,000 |
|
|
|
4.29 |
|
|
|
|
|
|
|
|
|
|
|
121,562,000 |
|
|
|
4.23 |
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions: |
|
|
|
|
|
|
|
|
One year or less |
|
|
0 |
|
|
NA |
Over one through five years |
|
|
2,495,000 |
|
|
|
6.82 |
|
Over five through ten years |
|
|
1,420,000 |
|
|
|
6.21 |
|
Over ten years |
|
|
28,970,000 |
|
|
|
6.20 |
|
|
|
|
|
|
|
|
|
|
|
32,885,000 |
|
|
|
6.24 |
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
46,941,000 |
|
|
|
5.14 |
|
Michigan Strategic Fund bonds |
|
|
18,175,000 |
|
|
|
3.04 |
|
Mutual funds |
|
|
1,267,000 |
|
|
|
3.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
220,830,000 |
|
|
|
4.62 |
% |
|
|
|
|
|
|
|
Federal funds sold, consisting of excess funds sold overnight to a correspondent bank, along
with investments in interest-bearing deposits at correspondent banks, are used to manage daily
liquidity needs and interest rate sensitivity. During 2010, the average balance of these funds
equaled 4.5% of average earning assets, up from 3.0% during 2009 and considerably higher than the
historical average of less than 1%. Given stressed market and economic conditions, we made the
decision in early 2009 to operate with a higher than traditional balance of federal funds sold and
interest-bearing deposits. We expect to maintain the higher balance of federal funds sold and
other interest-bearing deposits, likely to average 2.5% to 3.5% of average earning assets, until
market and economic conditions return to more normalized levels.
F-17
Non-Earning Assets
Cash and due from bank balances totaled $6.7 million at December 31, 2010, compared to $18.9
million on December 31, 2009. Cash and due from bank balances averaged $15.4 million during 2010.
The relatively low balance as of December 31, 2010 reflected the fact that many of our business
customers were closed that particular day (i.e., Friday of a holiday weekend) and therefore did not
make their typical deposits, resulting in a lower than typical outgoing cash letter. Net premises
and equipment decreased from $29.7 million at December 31, 2009, to $27.9 million on December 31,
2010, primarily reflecting depreciation expense. Purchases of premises and equipment during 2010
were nominal.
On December 30, 2009, all FDIC-insured financial institutions were required to pre-pay estimated
FDIC deposit insurance assessments for the years 2010, 2011 and 2012. The prepaid amounts are used
to offset regular quarterly deposit insurance assessments. The amount we paid equaled $16.3
million, which is being expensed over the future quarterly assessment periods. The balance at
December 31, 2010 equaled $12.1 million. The Dodd-Frank Act significantly revised the program of
federal deposit insurance. Among other things, the Dodd-Frank Act redefined the deposit insurance
assessment base generally to equal average consolidated total assets minus average tangible equity,
raised the minimum designated reserve ratio (DRR) of the Deposit Insurance Fund (DIF) to 1.35%,
required the DRR to reach 1.35% by September 30, 2020 (rather than 1.15% by the end of 2016, as
previously required), directed the FDIC to offset the effect of that accelerated timetable on
insured institutions with consolidated assets of less than $10.0 billion, restricted any dividend
from the DIF unless the DRR exceeds 1.50%, and made any declaration of dividend discretionary with
the FDIC. The FDIC has adopted regulations that, among other things, set the minimum DRR at 2.00%,
generally require use of a daily averaging method in calculating average consolidated total assets,
define tangible equity as Tier 1 capital calculated monthly, and specify new risk-based
assessment rates (effective April 1, 2011) that are subject to adjustment for institution-specific
circumstances (such as an increase for most institutions having a ratio of brokered deposits to
domestic deposits in excess of 10.00%) and for the level of the DRR, with rates gradually declining
once the DRR reaches 2.00%. Separate assessment rates are specified for large institutions (i.e.,
those with total assets more than $10.0 billion) and for highly complex institutions. With respect
to the prepaid insurance assessments paid December 30, 2009, the FDIC in adopting the regulations
declined to bring forward the time (the third quarter of 2013) at which any unused prepaid amounts
would be returned to an institution. The FDIC stated that it would monitor its cash resources to
determine whether to adopt a rule regarding earlier return of the unused prepaid amounts.
Foreclosed and repossessed assets totaled $16.7 million at December 31, 2010, compared to $26.6
million on December 31, 2009 and $8.1 million on December 31, 2008. The increased balance at
year-end 2009 reflects the stressed economic environment, and in certain situations our decision to
foreclose or repossess collateral. The State of Michigan has a relatively protracted foreclosure
process that generally takes six to twelve months before a deed is obtained. While we experienced
further transfers from loans and leases to foreclosed and repossessed assets during 2010 reflecting
our collection efforts on impaired lending relationships, a lower volume of such transfers combined
with increased sales activity provided for a net $9.9 million reduction during 2010.
Source of Funds
Our major sources of funds are from deposits, repurchase agreements and FHLB advances. Total
deposits declined from $1.40 billion at December 31, 2009 to $1.27 billion on December 31, 2010, a
decrease of $127.8 million. In comparing total deposit balances as of December 31, 2010 to those
at December 31, 2008, total deposits have declined by $325.7 million. Local deposits increased
$294.4 million during the two-year period ended December 31, 2010, including an $88.0 million
increase during 2010. Meanwhile, out-of-area deposits decreased $620.1 million during the two-year
period ended December 31, 2010, including a $215.8 million decline during 2010. As of December 31,
2010, local deposits comprised 60.0% of total deposits, compared to 48.3% and 29.4% at December 31,
2009 and December 31, 2008, respectively.
Repurchase agreements increased from $99.8 million at December 31, 2009 to $117.0 million on
December 31, 2010, an increase of $17.2 million. Repurchase agreements increased $22.6 million
during the two-year period ended December 31, 2010. FHLB advances declined from $205.0 million at
December 31, 2009 to $65.0 million on December 31, 2010, a decline of $140.0 million. FHLB
advances declined $205.0 million during the two-year period ended December 31, 2010. At December
31, 2010, local deposits and repurchase agreements equaled 60.2% of total funding liabilities,
compared to 45.0% and 28.5% on December 31, 2009 and December 31, 2008, respectively.
F-18
The significant reduction in wholesale funding reliance reflects the increase in local deposits and
repurchase agreements, combined with the decline in total loans and leases. The increase in local
deposits reflects various
programs and initiatives we have implemented over the past two years, including: certificate of
deposit campaign; implementation of several deposit-gathering initiatives in our commercial lending
function; introduction of new deposit-related products and services; and the continuation of
providing our customers with the latest in technological advances that give improved information,
convenience and timeliness.
Noninterest-bearing checking deposit accounts remain relatively stable, averaging between $110.0
million and $120.0 million over the past several years, and $118.9 million during 2010. The
relatively lower balance of $112.9 million as of December 31, 2010 reflected the fact that many of
our business customers were closed that particular day (i.e., Friday of a holiday weekend) and
therefore did not make their typical deposits. Interest-bearing checking accounts, in large part
reflecting the strong success of our executive banking product, have increased $107.9 million
during the two-year period ended December 31, 2010, including a $71.9 million increase during 2010.
Savings deposits increased $21.6 million during 2010 after having declined by $11.3 million during
2009. The 2010 increase primarily reflects increased deposit balances from several local municipal
customers, while the 2009 decline resulted primarily from deposit transfers to other deposit
products, particularly the executive banking product. Money market deposit accounts increased
$118.6 million during 2010 after having increased $7.1 million during 2009. The increases reflect
the success of our enhanced marketing program and relatively aggressive rate which resulted in many
new individual, business and municipality deposits and increased balances from existing money
market deposit account holders.
Certificates of deposit purchased by customers located within our market areas declined $115.8
million during 2010 after having increased $164.1 million during 2009, thereby providing a net
increase of $48.3 million during the two-year period ended December 31, 2010. During 2009, we ran
a high-rate one-year certificate of deposit campaign that raised about $65.0 million, with most of
the funds representing new deposit funds. As these certificates of deposit matured during the
first quarter of 2010, we were able to retain about 70% of the maturing funds, a majority of which
were transferred to our executive banking or money market deposit accounts. The remaining
increases during 2009 primarily reflect the success of our enhanced marketing program and
relatively aggressive rate which resulted in many new individual, business and municipality
deposits. The decline during 2010 is primarily due to maturing certificates of deposit being
transferred to our executive banking and money market deposit accounts.
Certificates of deposit obtained from customers located outside of our market areas declined $620.1
million during the two-year period ended December 31, 2010, including a $215.8 million decline
during 2010. Out-of-area deposits consist of certificates of deposit obtained from depositors
located outside our market areas and placed by deposit brokers for a fee, but also include
certificates of deposit obtained from the deposit owners directly. The owners of the out-of-area
deposits include individuals, businesses and governmental units located throughout the United
States. The significant decline in out-of-area deposits since year-end 2008 primarily reflects the
influx of cash resulting from the reduction in total loans and leases and from increased local
deposits.
Repurchase agreements increased $22.6 million during the two-year period ended December 31, 2010,
including a $17.2 million increase during 2010. As part of our sweep account program, collected
funds from certain business noninterest-bearing checking accounts are invested in overnight
interest-bearing repurchase agreements. Such repurchase agreements are not deposit accounts and
are not afforded federal deposit insurance. All of our repurchase agreements are accounted for as
secured borrowings.
FHLB advances declined $205.0 million during the two-year period ended December 31, 2010, including
a $140.0 million decline during 2010. The decline during the past two years, which includes the
prepayment of $95.0 million during the fourth quarter of 2010, primarily reflects the influx of
cash resulting from the reduction in total loans and leases and from increased local deposits.
FHLB advances are collateralized by residential mortgage loans, first mortgage liens on
multi-family residential property loans, first mortgage liens on commercial real estate property
loans, and substantially all other assets of our bank, under a blanket lien arrangement. Our
borrowing line of credit at December 31, 2010 totaled about $169.7 million, with availability of
$104.7 million.
F-19
Shareholders equity declined $48.4 million during the two-year period ended December 31, 2010,
including a $14.2 million decline during 2010. The decline during the past two years was primarily
due to the net loss attributable to common shares of $67.5 million, of which $23.2 million was
related to the recording of a valuation allowance on our net deferred tax assets during 2009.
Positively impacting shareholders equity was the sale of preferred stock and a warrant for common
stock to the United States Treasury Department for $21.0 million under the Capital Purchase
Program during 2009. Cash dividends on our common stock reduced shareholders equity by $0.1
million and $0.6 million during 2010 and 2009, respectively.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2010 and 2009
Summary
We recorded a net loss attributable to common shares of $14.6 million, or $1.72 per basic and
diluted share, for 2010, compared to a net loss of $52.9 million, or $6.23 per basic and diluted
share, for 2009. The establishment of a valuation allowance against our net deferred tax asset in
the fourth quarter of 2009 distorts 2010 after-tax operating result comparisons with earlier
reporting periods. On a pre-tax basis, our net loss for 2010 was $13.4 million compared to $46.6
million for 2009.
The 71.3% improvement in pre-tax earnings performance in 2010 compared to 2009 is primarily the
result of a substantially lower provision for loan and lease losses and higher net interest income.
The reduced provision for loan and lease losses reflects lower levels of loan rating downgrades,
nonperforming loans, and net loan and lease charge-offs, as well as the solidification of real
estate market conditions and resulting valuations. An increase in loan rating upgrades during 2010
compared to the nominal level of 2009 upgrades also contributed to the lower provision expense.
The increase in net interest income is the result of an improved net interest margin, which has
been positively impacted by a substantial reduction in our cost of funds.
The net loss recorded in 2010 primarily results from a substantial provision for loan and lease
losses and costs associated with the administration and resolution of problem assets, reflecting
continuing difficulties in the loan portfolio, most notably in the CRE and construction and
development segments. Continued state, regional and national economic struggles have significantly
hampered certain commercial borrowers cash flows and negatively impacted real estate values,
resulting in elevated levels of nonperforming assets and net loan and lease charge-offs when
compared to pre-2007 reporting periods.
The following table shows some of the key performance and equity ratios for the years ended
December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
(0.80 |
%) |
|
|
(2.51 |
%) |
Return on average shareholders equity |
|
|
(10.62 |
%) |
|
|
(29.91 |
%) |
Average shareholders equity to average assets |
|
|
7.56 |
% |
|
|
8.40 |
% |
Net Interest Income
Net interest income, the difference between revenue generated from earning assets and the interest
cost of funding those assets, is our primary source of earnings. Interest income (adjusted for
tax-exempt income) and interest expense totaled $89.0 million and $31.8 million, respectively,
during 2010, providing for net interest income of $57.2 million. During 2009, interest income and
interest expense equaled $106.2 million and $53.6 million, respectively, providing for net interest
income of $52.6 million. In comparing 2010 with 2009, interest income decreased 16.2%, interest
expense was down 40.7%, and net interest income increased 8.7%. The
level of net interest income
is primarily a function of asset size, as the weighted average interest rate received on earning
assets is greater than the weighted average interest cost of funding sources; however, factors such
as types and levels of assets and liabilities, interest rate environment, interest rate risk, asset
quality, liquidity, and customer behavior also impact net interest income as well as the net
interest margin.
F-20
The $4.6 million increase in net interest income in 2010 compared to 2009 resulted from an improved
net interest margin, which more than offset a decreased level of average earning assets. Although
our yield on earning assets declined slightly in 2010 compared to 2009 primarily due to a shift in
earning asset mix (lower level of average total loans and leases and a higher level of low-yielding
average federal funds sold) and a decreased yield on average securities, our cost of funds declined
at a far greater rate, resulting in the improved net interest margin. Average total loans and
leases equaled 81.8% of average earning assets during 2010, down from 85.1% during 2009, while
average federal funds sold represented 4.0% of average earning assets during 2010 compared to 2.7%
during 2009.
The cost of funds primarily decreased as a result of higher-costing matured certificates of deposit
and FHLB advances being replaced by lower-costing funds or being allowed to runoff. The prepayment
of $95.0 million in higher-costing FHLB advances during the fourth quarter of 2010 also positively
impacted the cost of funds.
Given the multitude of factors that impact the net interest margin, it is difficult to predict
future net interest margins. However, in light of the current interest rate environment, our net
interest margin in 2011 should benefit from a continued reduction in our cost of funds and the loan
pricing initiatives instituted in 2008 and 2009. While we expect further reductions in our cost of
funds during 2011, the magnitude of the reductions will likely be at a much lower level than during
the past couple of years. While a continued reduction in our cost of funds will positively impact
our net interest margin, the impact of asset quality on the net interest margin is difficult to
predict.
The following table depicts the average balance, interest earned and paid, and weighted average
rate of our assets, liabilities and shareholders equity during 2010, 2009 and 2008. The
subsequent table also depicts the dollar amount of change in interest income and interest expense
of interest-earning assets and interest-bearing liabilities, segregated between change due to
volume and change due to rate. For tax-exempt investment securities, interest income and yield
have been computed on a tax equivalent basis using a marginal tax rate of 35%. As a result,
securities interest income was increased by $0.8 million in 2010, $1.3 million in 2009, and $1.2
million in 2008.
F-21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
(Dollars in thousands) |
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable securities |
|
$ |
176,084 |
|
|
$ |
7,846 |
|
|
|
4.46 |
% |
|
$ |
155,041 |
|
|
$ |
7,498 |
|
|
|
4.84 |
% |
|
$ |
148,347 |
|
|
$ |
7,888 |
|
|
|
5.32 |
% |
Tax-exempt
securities |
|
|
59,911 |
|
|
|
3,125 |
|
|
|
5.22 |
|
|
|
83,048 |
|
|
|
4,623 |
|
|
|
5.57 |
|
|
|
69,178 |
|
|
|
4,180 |
|
|
|
6.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
|
235,995 |
|
|
|
10,971 |
|
|
|
4.65 |
|
|
|
238,089 |
|
|
|
12,121 |
|
|
|
5.09 |
|
|
|
217,525 |
|
|
|
12,068 |
|
|
|
5.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
|
1,412,555 |
|
|
|
77,791 |
|
|
|
5.51 |
|
|
|
1,704,335 |
|
|
|
93,903 |
|
|
|
5.51 |
|
|
|
1,829,686 |
|
|
|
110,013 |
|
|
|
6.01 |
|
Short-term
investments |
|
|
9,251 |
|
|
|
39 |
|
|
|
0.42 |
|
|
|
6,730 |
|
|
|
21 |
|
|
|
0.31 |
|
|
|
392 |
|
|
|
7 |
|
|
|
1.79 |
|
Federal funds sold |
|
|
69,319 |
|
|
|
176 |
|
|
|
0.25 |
|
|
|
53,825 |
|
|
|
136 |
|
|
|
0.25 |
|
|
|
11,353 |
|
|
|
204 |
|
|
|
1.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning
assets |
|
|
1,727,120 |
|
|
|
88,977 |
|
|
|
5.15 |
|
|
|
2,002,979 |
|
|
|
106,181 |
|
|
|
5.30 |
|
|
|
2,058,956 |
|
|
|
122,292 |
|
|
|
5.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan
and lease losses |
|
|
(48,963 |
) |
|
|
|
|
|
|
|
|
|
|
(34,155 |
) |
|
|
|
|
|
|
|
|
|
|
(30,184 |
) |
|
|
|
|
|
|
|
|
Cash and due
from banks |
|
|
15,414 |
|
|
|
|
|
|
|
|
|
|
|
16,341 |
|
|
|
|
|
|
|
|
|
|
|
21,004 |
|
|
|
|
|
|
|
|
|
Other non-earning
assets |
|
|
127,354 |
|
|
|
|
|
|
|
|
|
|
|
120,508 |
|
|
|
|
|
|
|
|
|
|
|
107,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,820,925 |
|
|
|
|
|
|
|
|
|
|
$ |
2,105,673 |
|
|
|
|
|
|
|
|
|
|
$ |
2,157,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits |
|
$ |
140,384 |
|
|
$ |
2,419 |
|
|
|
1.72 |
% |
|
$ |
60,155 |
|
|
$ |
867 |
|
|
|
1.44 |
% |
|
$ |
42,734 |
|
|
$ |
492 |
|
|
|
1.15 |
% |
Savings deposits |
|
|
43,571 |
|
|
|
305 |
|
|
|
0.70 |
|
|
|
48,182 |
|
|
|
521 |
|
|
|
1.08 |
|
|
|
65,091 |
|
|
|
922 |
|
|
|
1.42 |
|
Money market
accounts |
|
|
86,283 |
|
|
|
1,225 |
|
|
|
1.42 |
|
|
|
25,759 |
|
|
|
361 |
|
|
|
1.40 |
|
|
|
13,948 |
|
|
|
192 |
|
|
|
1.38 |
|
Time deposits |
|
|
979,584 |
|
|
|
19,580 |
|
|
|
2.00 |
|
|
|
1,279,188 |
|
|
|
39,520 |
|
|
|
3.09 |
|
|
|
1,332,071 |
|
|
|
58,206 |
|
|
|
4.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-
bearing deposits |
|
|
1,249,822 |
|
|
|
23,529 |
|
|
|
1.88 |
|
|
|
1,413,284 |
|
|
|
41,269 |
|
|
|
2.92 |
|
|
|
1,453,844 |
|
|
|
59,812 |
|
|
|
4.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings |
|
|
107,802 |
|
|
|
1,410 |
|
|
|
1.31 |
|
|
|
98,513 |
|
|
|
1,845 |
|
|
|
1.87 |
|
|
|
97,313 |
|
|
|
2,021 |
|
|
|
2.08 |
|
Federal Home Loan
Bank advances |
|
|
153,575 |
|
|
|
5,509 |
|
|
|
3.59 |
|
|
|
239,699 |
|
|
|
8,808 |
|
|
|
3.67 |
|
|
|
258,939 |
|
|
|
10,554 |
|
|
|
4.08 |
|
Other borrowings |
|
|
47,315 |
|
|
|
1,346 |
|
|
|
2.84 |
|
|
|
50,278 |
|
|
|
1,654 |
|
|
|
3.29 |
|
|
|
46,579 |
|
|
|
2,476 |
|
|
|
5.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-
bearing liabilities |
|
|
1,558,514 |
|
|
|
31,794 |
|
|
|
2.04 |
|
|
|
1,801,774 |
|
|
|
53,576 |
|
|
|
2.97 |
|
|
|
1,856,675 |
|
|
|
74,863 |
|
|
|
4.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
118,904 |
|
|
|
|
|
|
|
|
|
|
|
112,821 |
|
|
|
|
|
|
|
|
|
|
|
108,584 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
5,913 |
|
|
|
|
|
|
|
|
|
|
|
14,258 |
|
|
|
|
|
|
|
|
|
|
|
19,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,683,331 |
|
|
|
|
|
|
|
|
|
|
|
1,928,853 |
|
|
|
|
|
|
|
|
|
|
|
1,984,545 |
|
|
|
|
|
|
|
|
|
Average equity |
|
|
137,594 |
|
|
|
|
|
|
|
|
|
|
|
176,820 |
|
|
|
|
|
|
|
|
|
|
|
172,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
and equity |
|
$ |
1,820,925 |
|
|
|
|
|
|
|
|
|
|
$ |
2,105,673 |
|
|
|
|
|
|
|
|
|
|
$ |
2,157,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income |
|
|
|
|
|
$ |
57,183 |
|
|
|
|
|
|
|
|
|
|
$ |
52,605 |
|
|
|
|
|
|
|
|
|
|
$ |
47,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate spread |
|
|
|
|
|
|
|
|
|
|
3.11 |
% |
|
|
|
|
|
|
|
|
|
|
2.33 |
% |
|
|
|
|
|
|
|
|
|
|
1.91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
margin |
|
|
|
|
|
|
|
|
|
|
3.31 |
% |
|
|
|
|
|
|
|
|
|
|
2.63 |
% |
|
|
|
|
|
|
|
|
|
|
2.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 over 2009 |
|
|
2009 over 2008 |
|
|
|
Total |
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
Volume |
|
|
Rate |
|
Increase (decrease) in interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable securities |
|
$ |
348,000 |
|
|
$ |
967,000 |
|
|
$ |
(619,000 |
) |
|
$ |
(390,000 |
) |
|
$ |
345,000 |
|
|
$ |
(735,000 |
) |
Tax exempt securities |
|
|
(1,498,000 |
) |
|
|
(1,222,000 |
) |
|
|
(276,000 |
) |
|
|
443,000 |
|
|
|
791,000 |
|
|
|
(348,000 |
) |
Loans |
|
|
(16,112,000 |
) |
|
|
(16,069,000 |
) |
|
|
(43,000 |
) |
|
|
(16,110,000 |
) |
|
|
(7,253,000 |
) |
|
|
(8,857,000 |
) |
Short-term investments |
|
|
18,000 |
|
|
|
9,000 |
|
|
|
9,000 |
|
|
|
14,000 |
|
|
|
24,000 |
|
|
|
(10,000 |
) |
Federal funds sold |
|
|
40,000 |
|
|
|
40,000 |
|
|
|
0 |
|
|
|
(68,000 |
) |
|
|
230,000 |
|
|
|
(298,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in tax-equivalent
interest income |
|
|
(17,204,000 |
) |
|
|
(16,275,000 |
) |
|
|
(929,000 |
) |
|
|
(16,111,000 |
) |
|
|
(5,863,000 |
) |
|
|
(10,248,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
|
1,552,000 |
|
|
|
1,354,000 |
|
|
|
198,000 |
|
|
|
375,000 |
|
|
|
232,000 |
|
|
|
143,000 |
|
Savings deposits |
|
|
(216,000 |
) |
|
|
(46,000 |
) |
|
|
(170,000 |
) |
|
|
(401,000 |
) |
|
|
(210,000 |
) |
|
|
(191,000 |
) |
Money market accounts |
|
|
864,000 |
|
|
|
859,000 |
|
|
|
5,000 |
|
|
|
169,000 |
|
|
|
165,000 |
|
|
|
4,000 |
|
Time deposits |
|
|
(19,940,000 |
) |
|
|
(7,953,000 |
) |
|
|
(11,987,000 |
) |
|
|
(18,686,000 |
) |
|
|
(2,230,000 |
) |
|
|
(16,456,000 |
) |
Short-term borrowings |
|
|
(435,000 |
) |
|
|
162,000 |
|
|
|
(597,000 |
) |
|
|
(176,000 |
) |
|
|
25,000 |
|
|
|
(201,000 |
) |
Federal Home Loan Bank
advances |
|
|
(3,299,000 |
) |
|
|
(3,094,000 |
) |
|
|
(205,000 |
) |
|
|
(1,746,000 |
) |
|
|
(751,000 |
) |
|
|
(995,000 |
) |
Other borrowings |
|
|
(308,000 |
) |
|
|
(93,000 |
) |
|
|
(215,000 |
) |
|
|
(822,000 |
) |
|
|
184,000 |
|
|
|
(1,006,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in interest
expense |
|
|
(21,782,000 |
) |
|
|
(8,811,000 |
) |
|
|
(12,971,000 |
) |
|
|
(21,287,000 |
) |
|
|
(2,585,000 |
) |
|
|
(18,702,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in tax-equivalent
net interest income |
|
$ |
4,578,000 |
|
|
$ |
(7,464,000 |
) |
|
$ |
12,042,000 |
|
|
$ |
5,176,000 |
|
|
$ |
(3,278,000 |
) |
|
$ |
8,454,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income is primarily generated from the loan and lease portfolio, and to a lesser
degree, from securities, federal funds sold, and short-term investments. Interest income decreased
$17.2 million during 2010 from that earned in 2009, totaling $89.0 million in 2010 compared to
$106.2 million in the previous year. The reduction in interest income is attributable to a
decreased level of average earning assets and, to a much lesser degree, a declining yield on
average earning assets, primarily resulting from a decreased yield on average securities, a
decreased percentage of average total loans and leases to total earning assets, and an increased
percentage of low-yielding federal funds sold to total earning assets.
During 2010, earning assets averaged $1.73 billion, or $275.9 million lower than average earning
assets of $2.00 billion during 2009. A decrease in average total loans and leases totaling $291.8
million primarily resulted in the lower level of average earning assets during 2010. Interest
income generated from the loan and lease portfolio decreased $16.1 million in 2010 compared to the
level earned in 2009; the reduction in the loan and lease portfolio during 2010 resulted in the
$16.1 million decrease in interest income. The loan and lease portfolio yield was 5.51% in both
2010 and 2009.
Interest income generated from the securities portfolio decreased $1.2 million in 2010 compared to
the level earned in 2009 due to a lower yield on average securities, which equaled 4.65% in 2010
compared to 5.09% in 2009, and portfolio contraction. The lower yield on average securities in
2010 compared to 2009 primarily resulted from a decreased yield on U.S. Government agency bonds,
reflecting a decrease in market rates, and a shift in the securities portfolio mix from
higher-yielding municipal securities to lower-yielding U.S. Government agency bonds. Reflective of
the low market rate environment experienced during 2010, U.S. Government agency bonds totaling
$78.2 million were called during the year, with a vast majority of the proceeds reinvested in the
same type of securities at reduced rates. After analyzing our current and forecasted federal
income tax position, we decided to sell certain tax-exempt municipal bonds with an aggregate book
value of $20.0 million in late March 2010. A vast majority of the sales proceeds were used to
purchase U.S. Government agency bonds during April and early May. Average securities equaled
$236.0 million during 2010 compared to $238.1 million during 2009. The lower yield on average
securities equated to a decrease in interest income of $0.9 million, while the reduced average
portfolio balance resulted in a $0.3 million decrease in interest income. Interest income earned
on federal funds sold increased slightly due to an increase in the average balance.
F-23
During 2010 and 2009, earning assets had an average yield (tax equivalent-adjusted basis) of 5.15%
and 5.30%, respectively. The slight decline in earning asset yield in 2010 compared to the prior
year primarily resulted from a shift in earning asset mix (lower level of average total loans and
leases and a higher level of low-yielding average federal funds sold) and a decreased yield on
average securities. Average total loans and leases equaled $1.41
billion, or 81.8% of average earning assets, during 2010, compared to $1.70 billion, or 85.1% of
average earning assets, during 2009. Average federal funds sold were $69.3 million, or 4.0% of
average earning assets during 2010, compared to $53.8 million, or 2.7% of average earning assets,
during 2009. During 2010 and 2009, the yield on average earning assets was relatively stable due
to the effectiveness of loan pricing initiatives instituted within the commercial loan function in
2008 and 2009.
Interest expense is primarily generated from interest-bearing deposits, and to a lesser degree,
from repurchase agreements, FHLB advances, and subordinated debentures. Interest expense decreased
$21.8 million during 2010 from that expensed in 2009, totaling $31.8 million in 2010 compared to
$53.6 million in the previous year. The decline in interest expense is attributable to a decreased
cost of funds and a decreased level of average interest-bearing liabilities. The decreased cost of
funds in 2010 compared to 2009 mainly resulted from fixed-rate certificates of deposit and
borrowings being renewed or replaced at lower interest rates, reflecting the decreasing interest
rate environment during the period of September 2007 through December 2008, or being allowed to
runoff.
Interest-bearing liabilities averaged $1.56 billion during 2010, or $243.3 million lower than
average interest-bearing liabilities of $1.80 billion during 2009. This reduction resulted in
decreased interest expense of $8.8 million. A decline in interest expense of $13.0 million was
recorded during 2010 due to a decreased cost of funds, which resulted primarily from lower average
rates paid on fixed rate certificates of deposit and borrowings. The cost of average
interest-bearing liabilities decreased from 2.97% in 2009 to 2.04% in 2010.
Average certificates of deposit declined $299.6 million during 2010, which equated to a decrease in
interest expense of $7.9 million. An additional $12.0 million reduction in interest expense
resulted from a decrease in the average rate paid as higher-rate certificates of deposit matured
and were either renewed or replaced with lower-costing certificates of deposit throughout 2010.
Growth in other average interest-bearing deposit accounts, totaling $136.1 million, equated to an
increase in interest expense of $2.2 million, while an increase in the average rate paid on these
deposit accounts resulted in a nominal increase in interest expense.
Average short-term borrowings, comprised of repurchase agreements and federal funds purchased,
increased $9.3 million during 2010, resulting in increased interest expense of $0.2 million, while
a decrease in the average rate paid during 2010 resulted in a reduction in interest expense of $0.6
million. Average FHLB advances decreased $86.1 million, equating to a $3.1 million reduction in
interest expense, while a decreased average rate paid on the advances resulted in a $0.2 million
reduction in interest expense. A reduction in average other borrowings, which is comprised of
subordinated debentures, structured repurchase agreements, and deferred director and officer
compensation programs, equating to a decrease in interest expense of $0.1 million during 2010, with
a decreased average rate reducing interest expense by $0.2 million.
Provision for Loan and Lease Losses
The provision for loan and lease losses totaled $31.8 million in 2010, compared to $59.0 million in
2009. The significant provision expense incurred in both 2010 and 2009 is in response to the
deterioration of the quality of our loan portfolio. Continued state, regional, and national
economic struggles have negatively impacted some of our borrowers cash flows and underlying
collateral values, leading to increased nonperforming assets, elevated net loan and lease
charge-offs, and increased overall credit risk within our loan and lease portfolio.
The decreased provision expense in 2010 compared to 2009 reflects lower levels of loan rating
downgrades, nonperforming loans, and net loan and lease charge-offs, as well as the solidification
of real estate market conditions and resulting valuations. Nonperforming loans and leases totaled
$69.4 million, or 5.50% of total loans and leases, as of December 31, 2010, compared to $85.1
million, or 5.52% of total loans and leases, as of December 31, 2009. Net loan and lease
charge-offs during 2010 totaled $34.3 million, or 2.43% of average total loans and leases. Net
loan and lease charge-offs during 2009 totaled $38.2 million, or 2.24% of average total loans and
leases.
F-24
Noninterest Income
Noninterest income totaled $9.2 million in 2010, an increase of $1.6 million, or 22.3%, from the
$7.6 million earned in 2009. Noninterest income during 2010 includes gains totaling $0.3 million
from the sales of guaranteed portions of certain Small Business Administration-guaranteed loans and
$0.5 million from the sales of tax-exempt municipal bonds. Excluding these gains, noninterest
income during 2010 increased $0.9 million, or 11.7%, from the prior year. Increased rental income
from foreclosed properties and earnings on bank-owned life insurance, which more
than offset decreased service charges on accounts and mortgage banking income, mainly resulted in
the higher level of noninterest income during 2010 compared to 2009, after consideration of the
above discussed gains on loan and security sales. The decreased level of service charges on
accounts during 2010 compared to the prior-year primarily resulted from a lower level of overdraft
service fees.
Noninterest Expense
Noninterest expense during 2010 totaled $47.2 million, an increase of $0.7 million, or 1.4%, from
the $46.5 million expensed in 2009. Overhead costs during 2010 include $1.0 million in
nonrecurring fees related to the prepayment of $95.0 million in FHLB advances, while overhead costs
during 2009 include $1.3 million in charges for the branch consolidations and a $0.9 million charge
for the bank industry-wide FDIC special assessment. Excluding these one-time charges, noninterest
expense in 2010 totaled $46.1 million, or $1.9 million higher than in 2009. The increase in
overhead costs during 2010 compared to 2009 primarily resulted from higher costs associated with
the administration and resolution of nonperforming assets, including legal expenses, property tax
payments, appraisal fees, and write-downs on foreclosed properties, and increased normal FDIC
insurance premiums.
Nonperforming asset administration and resolution costs totaled $10.9 million during 2010, an
increase of $3.6 million from the $7.3 million in costs incurred during 2009. FDIC insurance
premiums were $4.4 million during 2010, compared to $4.0 million, excluding the one-time special
assessment in the prior-year. Given the enormous stress on the DIF resulting from the significant
number of insured institution failures in the last three years and the major changes to the deposit
insurance program made by the Dodd-Frank Act and implementing regulations of the FDIC, it is
difficult to predict the level of our future deposit insurance assessments.
Controllable operating expenses, including salaries and benefits, occupancy, and furniture and
equipment costs, declined $3.0 million, or 11.6%, during 2010 compared to 2009. Salary and benefit
costs were down $2.0 million in 2010 compared to 2009, primarily resulting from a reduction in
full-time equivalent employees from 257 at year-end 2009 to 242 at year-end 2010. Occupancy and
furniture and equipment costs declined by $0.9 million in 2010 compared to 2009, primarily
resulting from an aggregate reduction in rent and depreciation expenses. Beginning in the fourth
quarter of 2009, overhead cost savings of approximately $0.2 million per month were achieved as a
result of the consolidation of the mid- and eastern-Michigan regions of our banking activities that
was completed in August of 2009.
Federal Income Tax Expense
During 2010, we recorded a loss before federal income tax of $13.4 million and a federal income tax
benefit of less than $0.1 million, compared to a loss before federal income tax of $46.6 million
and a federal income tax expense of $5.5 million during 2009. The tax benefit of the 2010 loss was
mostly offset by the expense to record a valuation allowance against the net deferred tax asset it
created; the nominal benefit resulted from adjustments between continuing operations and other
comprehensive income due to intraperiod tax allocation accounting rules. The tax benefit of the
2009 loss was offset by a one-time non-cash charge of $23.2 million to establish a valuation
allowance against the entire balance of net deferred tax assets at year-end 2009.
Accounting guidance requires that companies assess whether a valuation allowance should be
established against their deferred tax assets based on the consideration of all available evidence
using a more likely than not standard. We reviewed our deferred tax assets and determined that a
valuation allowance was necessary at year-end 2009 and again at year-end 2010, in light of our
recent operating losses. The utilization of our net deferred tax assets for future tax deductions
will be analyzed quarterly, and the valuation allowance will be adjusted in accordance with
accounting rules.
F-25
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Summary
We recorded a net loss attributable to common shares of $52.9 million, or $6.23 per basic and
diluted share, for 2009, compared to a net loss of $5.0 million, or $0.59 per basic and diluted
share, for 2008. The net loss attributable to common shares for 2009 includes a one-time non-cash
charge of $23.2 million to federal income tax expense to establish a valuation allowance against
our net deferred tax assets. In addition, 2009 operating results
also include $1.3 million in expenses associated with the consolidation of the mid- and
eastern-Michigan regions of our banking activities and a $0.9 million charge for the bank
industry-wide FDIC special assessment.
The decline in earnings performance during 2009 from that of 2008 is primarily the result of a
substantially higher provision for loan and lease losses, which more than offset increased net
interest income. The elevated provision for loan and lease losses reflects continuing
deterioration in the quality of the loan portfolio, most notably in the CRE and C&I segments. The
increase in net interest income is the result of an improved net interest margin, which has been
positively impacted by a substantial reduction in our cost of funds.
The following table shows some of the key performance and equity ratios for the years ended
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
(2.51 |
%) |
|
|
(0.23 |
%) |
Return on average shareholders equity |
|
|
(29.91 |
%) |
|
|
(2.87 |
%) |
Average shareholders equity to average assets |
|
|
8.40 |
% |
|
|
8.01 |
% |
Net Interest Income
Net interest income, the difference between revenue generated from earning assets and the interest
cost of funding those assets, is our primary source of earnings. Interest income (adjusted for
tax-exempt income) and interest expense totaled $106.2 million and $53.6 million during 2009,
respectively, providing for net interest income of $52.6 million. During 2008, interest income and
interest expense equaled $122.3 million and $74.9 million, respectively, providing for net interest
income of $47.4 million. In comparing 2009 with 2008, interest income decreased 13.2%, interest
expense was down 28.4%, and net interest income increased 10.9%. The level of net interest income
is primarily a function of asset size, as the weighted average interest rate received on earning
assets is greater than the weighted average interest cost of funding sources; however, factors such
as types and levels of assets and liabilities, interest rate environment, interest rate risk, asset
quality, liquidity, and customer behavior also impact net interest income as well as the net
interest margin.
The $5.2 million increase in net interest income in 2009 compared to 2008 resulted from an improved
net interest margin, which more than offset a decreased level of average earning assets. Although
our yield on earning assets declined in 2009 compared to 2008 primarily due to an increased level
of nonperforming assets and a declining interest rate environment, our cost of funds declined at a
far greater rate, resulting in the improved net interest margin. The cost of funds primarily
decreased as a result of higher-costing matured wholesale funds, consisting of certificates of
deposit and FHLB advances, being replaced by lower-costing funds.
Interest income is primarily generated from the loan and lease portfolio, and to a lesser degree,
from securities, federal funds sold, and short-term investments. Interest income decreased $16.1
million during 2009 from that earned in 2008, totaling $106.2 million in 2009 compared to $122.3
million in the previous year. The reduction in interest income is attributable to a decreased
level of average earning assets and a declining yield on earning assets, primarily resulting from a
decreased interest rate environment, an increased level of nonperforming assets, and an increased
percentage of low-yielding federal funds sold to total earning
assets.
During 2009, earning assets averaged $2.00 billion, or $56.0 million lower than average earning
assets of $2.06 billion during 2008. A reduction in average total loans and leases totaling $125.4
million resulted in the lower level of average earning assets during 2009.
F-26
Interest income generated from the loan and lease portfolio decreased $16.1 million in 2009
compared to the level earned in 2008; a decline in loan yield from 6.01% in 2008 to 5.51% in 2009
resulted in an $8.9 million decrease in interest income while a reduction in the loan and lease
portfolio during 2009 resulted in a $7.2 million decrease in interest income. The decrease in the
loan and lease portfolio yield is primarily due to a lower interest rate environment and an
increase in nonperforming loans.
Interest income generated from the securities portfolio increased slightly in 2009 compared to the
level earned in 2008 as a result of growth in the portfolio. Average securities equaled $238.1
million during 2009 compared to $217.5 million during 2008, an increase of $20.6 million. The
growth equated to an increase in interest income of $1.13 million, while the declined yield, which
equaled 5.09% in 2009 compared to 5.55% in 2008, resulted in a
$1.08 million decrease in interest income. Interest income earned on federal funds sold decreased
by $0.1 million due to a decline in the average rate, which more than offset an increase in the
average balance.
During 2009 and 2008, earning assets had an average yield (tax equivalent-adjusted basis) of 5.30%
and 5.94%, respectively. With approximately 60% of our total loans and leases tied to Prime or
LIBOR rates, our earning asset yield has been substantially impacted by the steep reduction in
market interest rates since late third quarter of 2007. Between mid-September 2007 and
early-October 2008, the Federal Market Committee (FOMC) lowered the targeted federal funds rate
by a total of 375 basis points. The resulting similar decline in the Prime and LIBOR rates,
combined with an increased level of nonperforming assets, significantly lowered our yield on
earning assets and level of interest income. Although the FOMC lowered the targeted federal funds
rate by another 50 basis points in late October 2008 and an additional 75 basis points in
mid-December 2008, we kept the Mercantile Bank Prime Rate unchanged at 4.50% in an effort to shield
interest income from further erosion. Virtually all of our prime-based commercial floating rate
loans are tied to the Mercantile Bank Prime Rate. A higher level of nonperforming assets has also
negatively impacted the yield on earning assets in 2009 compared to 2008, increasing from 2.60% of
total assets at December 31, 2008, to 5.86% at December 31, 2009. A significant increase in
average federal funds sold during 2009 also had an adverse effect on earning asset yield. During
2009, the yield on average earning assets was relatively stable, as the loan pricing initiatives
instituted within the commercial loan function in 2008 and 2009 mitigated the negative impact of an
increase in nonaccrual loans.
Interest expense is primarily generated from interest-bearing deposits, and to a lesser degree,
from repurchase agreements, FHLB advances, and subordinated debentures. Interest expense decreased
$21.3 million during 2009 from that expensed in 2008, totaling $53.6 million in 2009 compared to
$74.9 million in the previous year. The decline in interest expense is attributable to a decreased
cost of funds and a decreased level of average interest-bearing liabilities. The decreased cost of
funds in 2009 compared to 2008 mainly resulted from fixed rate certificates of deposit and
borrowings being renewed or replaced at lower interest rates, reflecting the decreasing interest
rate environment during the period of September 2007 through December 2009.
Interest-bearing liabilities averaged $1.80 billion during 2009, or $54.9 million lower than
average interest-bearing liabilities of $1.86 billion during 2008. This reduction resulted in
decreased interest expense of $2.6 million. A decline in interest expense of $18.7 million was
recorded during 2009 due to a decreased cost of funds, which resulted primarily from lower average
rates paid on fixed rate certificates of deposit and borrowings. The cost of average
interest-bearing liabilities decreased from 4.03% in 2008 to 2.97% in 2009.
Average certificates of deposit declined $52.9 million during 2009, which equated to a decrease in
interest expense of $2.2 million. An additional $16.5 million reduction in interest expense
resulted from a decrease in the average rate paid as higher-rate certificates of deposit matured
and were either renewed or replaced with lower-costing certificates of deposit throughout 2009.
Growth in other average interest-bearing deposit accounts, totaling $12.3 million, equated to an
increase in interest expense of $0.2 million, while a decrease in the average rate paid on these
deposit accounts resulted in a $0.1 million reduction in interest expense.
F-27
Average short-term borrowings, primarily comprised of repurchase agreements and federal funds
purchased, increased $1.2 million during 2009, resulting in increased interest expense of less than
$0.1 million, while a decrease in the average rate paid during 2009 resulted in a reduction in
interest expense of $0.2 million. Average FHLB advances decreased $19.2 million, equating to a
$0.7 million reduction in interest expense, while a decreased average rate paid on the advances
resulted in a $1.0 million reduction in interest expense. Growth in average other borrowings,
which is comprised of subordinated debentures, structured repurchase agreements, and deferred
director and officer compensation programs, equated to an increase in interest expense of $0.2
million during 2009, with a decreased average rate reducing interest expense by $1.0 million.
Provision for Loan and Lease Losses
The provision for loan and lease losses totaled $59.0 million in 2009, compared to the $21.2
million expensed in 2008. The increase primarily reflects a higher volume of nonperforming loans
and leases, increased net loan and lease charge-offs, other downgrades within our commercial loan
and lease portfolio, and increased reserve
allocation factors, necessitating a higher allowance balance. Nonperforming loans and leases
totaled $85.1 million, or 5.52% of total loans and leases, as of December 31, 2009, compared to
$49.3 million, or 2.66% of total loans and leases, as of December 31, 2008. Net loan and lease
charge-offs during 2009 totaled $38.2 million, or 2.24% of average total loans and leases. Net
loan and lease charge-offs during 2008 totaled $19.9 million, or 1.09% of average total loans and
leases. The allowance as a percentage of total loans and leases outstanding as of December 31,
2009 was 3.11%, compared to 1.46% at year-end 2008.
Noninterest Income
Noninterest income totaled $7.6 million in 2009, an increase of $0.3 million, or 3.8%, from the
$7.3 million earned in 2008. Income from mortgage banking activities increased $0.5 million in
2009, reflecting a higher volume of refinancing activity due to the lower interest rate
environment, while rental income on foreclosed properties, included in other income, increased $0.4
million.
Noninterest Expense
Noninterest expense during 2009 totaled $46.5 million, an increase of $4.4 million over the $42.1
million expensed in 2008. Overhead costs during 2009 include a $1.3 million charge for the branch
consolidation and a $0.9 million charge for the bank industry-wide FDIC special assessment. The
one-time charges related to the branch consolidation were fully expensed during the second and
third quarters of 2009; beginning in the fourth quarter of 2009, overhead cost savings of $0.2
million per month were achieved as a result of the branch consolidation. Excluding these one-time
charges, noninterest expense in 2009 totaled $44.3 million, or $2.1 million higher than in 2008.
Controllable operating expenses, including salaries and benefits (excluding a $0.5 million one-time
charge for severance payments included in the branch consolidation costs), occupancy, furniture and
equipment costs, and various other expenses declined $3.9 million in 2009 compared to 2008. Salary
and benefit costs were down $2.2 million, exclusive of the $0.5 million one-time charge taken in
the second quarter, in 2009 compared to 2008, primarily resulting from a reduction in full-time
equivalent employees from 303 at year-end 2008 to 257 at year-end 2009. Costs associated with the
administration and resolution of problem assets, including legal costs, property tax payments,
appraisal fees and write-downs on foreclosed properties, totaled $7.3 million in 2009 compared to
$3.3 million in 2008. Excluding the $0.9 million one-time special assessment, FDIC deposit
insurance assessments totaled $3.9 million in 2009, up $2.0 million from the previous year.
Federal Income Tax Expense
During 2009, we recorded a loss before federal income tax of $46.6 million and federal income tax
expense of $5.5 million, compared to a loss before federal income tax of $9.8 million and a federal
income tax benefit of $4.9 million during 2008. In spite of the loss before federal income tax
recorded during 2009, a federal income tax expense was recognized due to the establishment of a
full valuation allowance against our net deferred tax assets.
F-28
Accounting guidance requires that companies assess whether a valuation allowance should be
established against their deferred tax assets based on the consideration of all available evidence
using a more likely than not standard. We reviewed our deferred tax assets and determined that a
valuation allowance was necessary at year-end 2009 in light of our recent operating losses. As a
result of establishing the valuation allowance against the entire balance of net deferred tax
assets at year-end 2009, a one-time non-cash charge of $23.2 million to federal income tax expense
was recognized.
CAPITAL RESOURCES
Shareholders equity is a noninterest-bearing source of funds that can provide support for our
asset growth. Shareholders equity declined $48.4 million during the two-year period ended
December 31, 2010, including a $14.2 million decline during 2010. The decline during the past two
years was primarily due to the net loss attributable to common shares of $67.5 million, of which
$23.2 million was related to the creation of a valuation allowance on our net deferred tax assets
in 2009. Positively impacting shareholders equity was the sale of preferred stock and a warrant
for common stock to the United States Treasury Department for $21.0 million under
the Capital Purchase Program during 2009. Cash dividends on our common stock reduced shareholders
equity by $0.1 million and $0.6 million during 2010 and 2009, respectively.
Despite the reduction in shareholders equity during the past two years, our and our banks
regulatory risk-based capital ratios increased, and our bank remains well capitalized. As of
December 31, 2010, our banks total risk-based capital ratio was 12.5%, compared to 11.1% and 10.8%
at December 31, 2009 and December 31, 2008, respectively. Our banks total regulatory capital,
consisting of our shareholders equity plus a portion of the allowance, declined an aggregate $50.9
million during 2010 and 2009, primarily reflecting a net loss of $57.8 million and a reduction of
$8.3 million in eligible allowance due to a decline in total risk-weighted assets, which was
partially offset by a $19.0 million capital injection from Mercantile Bank Corporation from the
proceeds of the preferred stock and warrant sale. Despite the reduction in total regulatory
capital, our banks total risk-based capital ratio increased due to a decline of $688.5 million in
total risk-weighted assets, primarily resulting from a reduction in commercial loans. As of
December 31, 2010, our banks total regulatory capital equaled $175.1 million, or $34.6 million in
excess of the 10.0% minimum which is among the requirements to be categorized as well
capitalized. Our and our banks capital ratios as of December 31, 2010 and 2009 are disclosed in
Note 18 of the Notes to Consolidated Financial Statements.
On July 9, 2010, we announced via a Form 8-K filed with the Securities and Exchange Commission that
we are deferring regularly scheduled quarterly interest payments on our subordinated debentures
beginning with the quarterly interest payment scheduled to have been paid on July 18, 2010. The
deferral of interest payments on the subordinated debentures results in the deferral of
distributions on our trust preferred securities. We also announced that we were deferring
regularly scheduled quarterly dividend payments on our preferred stock beginning with the quarterly
dividend payment scheduled to have been paid on August 15, 2010. We have not determined the
duration of the deferral period.
F-29
We and our bank are subject to regulatory capital requirements administered by state and
federal banking agencies. Failure to meet the various capital requirements can initiate regulatory
action that could have a direct material effect on the financial statements. Our banks ability to
pay cash and stock dividends is subject to limitations under various laws and regulations, to
prudent and sound banking practices, and to contractual provisions relating to our subordinated
debentures and participation in the Capital Purchase Program. During 2009, we paid a cash dividend
on our common stock each calendar quarter. However, reflecting our financial results and the poor
and weakening economy, we lowered the dollar amount of the cash dividends paid during the year.
During the first quarter of 2009, our cash dividend was $0.04 per share, but was lowered to $0.01
per share for the second, third and fourth quarters. Our cash dividend on our common stock was
also $0.01 per common share during the first quarter of 2010. In April 2010, we suspended future
payments of cash dividends on our common stock until economic conditions and our financial
condition improve. In addition, we are precluded from paying cash dividends on our common stock
and preferred stock because, under the terms of our subordinated debentures, we cannot pay cash
dividends during periods when we have deferred the payment of interest on our subordinated
debentures, and, we are now deferring such interest payments. Also, pursuant to our Articles of
Incorporation, we are precluded from paying dividends on our common stock while any dividends
accrued on our preferred stock have not been declared and paid. Because we have suspended the
payment of cash dividends on our preferred stock, we are precluded from paying cash dividends on
our common stock.
LIQUIDITY
Liquidity is measured by our ability to raise funds through deposits, borrowed funds, capital or
cash flow from the repayment of loans and securities. These funds are used to fund loans, meet
deposit withdrawals, maintain reserve requirements and operate our company. Liquidity is primarily
achieved through local and out-of-area deposits and liquid assets such as securities available for
sale, matured and called securities, and federal funds sold. Asset and liability management is the
process of managing the balance sheet to achieve a mix of earning assets and liabilities that
maximizes profitability, while providing adequate liquidity.
To assist in providing needed funds, we have regularly obtained monies from wholesale funding
sources. Wholesale funds, primarily comprised of deposits from customers outside of our market
areas and advances from the FHLB, totaled $584.1 million, or 39.8% of combined deposits and
borrowed funds, as of December 31, 2010, compared to $944.9 million, or 54.8% of combined deposits
and borrowed funds, as of December 31, 2009, and $1.41 billion, or 71.5% of combined deposits and
borrowed funds, as of December 31, 2008. The significant decline in wholesale funds since year-end
2008 primarily reflects the influx of cash resulting from the reduction in total loans and leases
and from increased local deposits.
Although local deposits have generally increased as new business, municipal governmental unit and
individual deposit relationships are established and as existing customers increase the balances in
their accounts, and we witnessed significant local deposit growth during 2010 and 2009, the
relatively high reliance on wholesale funds will likely remain. As part of our interest rate risk
management strategy, a majority of our wholesale funds have a fixed rate and mature within one
year, reflecting the fact that a majority of our loans and leases have a floating interest rate
tied to either the Mercantile Bank Prime Rate or LIBOR rates. While this strategy increases
inherent liquidity risk, we believe the increased liquidity risk is sufficiently mitigated by the
benefits derived from an interest rate risk management standpoint. In addition, we have developed
a comprehensive contingency funding plan which we believe further mitigates the increased liquidity
risk.
Wholesale funds are generally a lower all-in cost source of funds when compared to the interest
rates that would have to be offered in the local markets to generate a commensurate level of funds.
Interest rates paid on new out-of-area deposits and FHLB advances have historically been similar
to interest rates paid on new certificates of deposit issued to local customers. In addition, the
overhead costs associated with wholesale funds are considerably less than the overhead costs that
would be incurred to attract and administer a similar level of local deposits, especially if the
estimated costs of a needed expanded branching network were taken into account.
F-30
As part of our sweep program, collected funds from certain business noninterest-bearing checking
accounts are invested into over-night interest-bearing repurchase agreements. Such repurchase
agreements are not deposit accounts and are not afforded federal deposit insurance. Repurchase
agreements increased $17.2 million during 2010, totaling $117.0 million as of December 31, 2010.
Approximately 50% of the increase is associated with one customer electing to switch their
noninterest-bearing checking account to a repurchase agreement. Generally, we see an increase in
the repurchase agreement aggregate balance throughout the calendar year, and then a decline of 10%
to 20% during the early part of the first quarter of each calendar year as customers use funds
primarily for the payment of taxes and bonuses. Information regarding our repurchase agreements as
of December 31, 2010 and during 2010 is as follows:
|
|
|
|
|
Outstanding balance at December 31, 2010 |
|
$ |
116,979,000 |
|
Weighted average interest rate at December 31, 2010 |
|
|
0.69 |
% |
Maximum daily balance for twelve months ended December 31, 2010 |
|
$ |
133,280,000 |
|
Average daily balance for twelve months ended December 31, 2010 |
|
$ |
107,781,000 |
|
Weighted average interest rate for twelve months ended December 31, 2010 |
|
|
1.31 |
% |
As a member of the FHLB, we have access to the FHLB advance borrowing programs. Advances
totaled $65.0 million as of December 31, 2010, compared to $205.0 million and $270.0 million as of
December 31, 2009 and December 31, 2008, respectively. Based on available collateral as of
December 31, 2010, we could borrow an additional $104.7 million.
We also have the ability to borrow up to $30.0 million on a daily basis through a correspondent
bank using an established unsecured federal funds purchased line of credit. During 2010, our
federal funds purchased position averaged less than $0.1 million, compared to an average federal
funds sold position of $69.3 million and another $9.3 million invested in interest-bearing deposits
at correspondent banks. During 2009, our federal funds purchased position averaged only $0.1
million, compared to an average federal funds sold position of $53.8 million and another $6.7
million invested in interest-bearing deposits at correspondent banks. Given the volatile market
and stressed economic conditions, we have been operating with a higher than normal balance of
federal funds sold and other short-term investments. It is expected that we will maintain the
higher balance of liquid funds, likely to average 2.5% to 3.5% of average earning assets, until
market and economic conditions return to more normalized levels. As a result, we expect the use of
our federal funds purchased line of credit, in at least the near future, will be rare, if at all.
We have a line of credit through the Discount Window of the Federal Reserve Bank of Chicago. Using
a substantial majority of our tax-exempt municipal securities as collateral, we could have borrowed
up to $28.0 million for terms of 1 to 28 days at December 31, 2010. We did not utilize this line
of credit during 2010 or 2009, and do not plan to access this line of credit in future periods.
The following table reflects, as of December 31, 2010, significant fixed and determinable
contractual obligations to third parties by payment date, excluding accrued interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year |
|
One to |
|
Three to |
|
Over |
|
|
|
|
or Less |
|
Three Years |
|
Five Years |
|
Five Years |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits without a stated maturity |
|
$ |
481,953,000 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
481,953,000 |
|
Certificates of deposit |
|
|
495,914,000 |
|
|
|
250,469,000 |
|
|
|
45,496,000 |
|
|
|
0 |
|
|
|
791,879,000 |
|
Short-term borrowings |
|
|
116,979,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
116,979,000 |
|
Federal Home Loan Bank
advances |
|
|
10,000,000 |
|
|
|
50,000,000 |
|
|
|
5,000,000 |
|
|
|
0 |
|
|
|
65,000,000 |
|
Subordinated debentures |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
32,990,000 |
|
|
|
32,990,000 |
|
Other borrowed money |
|
|
10,000,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,804,000 |
|
|
|
11,804,000 |
|
F-31
In addition to normal loan funding and deposit flow, we must maintain liquidity to meet the
demands of certain unfunded loan commitments and standby letters of credit. At December 31, 2010,
we had a total of $207.5 million in unfunded loan commitments and $19.3 million in unfunded standby
letters of credit. Of the total unfunded loan commitments, $197.7 million were commitments
available as lines of credit to be drawn at any time as customers cash needs vary, and $9.8
million were for loan commitments scheduled to close and become funded within the next twelve
months. The level of commitments to make loans has declined significantly when compared to
historical levels, primarily reflecting relatively stressed economic conditions. We regularly
monitor fluctuations in loan balances and commitment levels, and include such data in our overall
liquidity management.
The following table depicts our loan commitments at the end of the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/10 |
|
|
12/31/09 |
|
|
12/31/08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial unused lines of credit |
|
$ |
158,945,000 |
|
|
$ |
205,018,000 |
|
|
$ |
323,785,000 |
|
Unused lines of credit secured by 1-4 family
residential properties |
|
|
26,870,000 |
|
|
|
24,916,000 |
|
|
|
30,658,000 |
|
Credit card unused lines of credit |
|
|
7,768,000 |
|
|
|
8,565,000 |
|
|
|
9,413,000 |
|
Other consumer unused lines of credit |
|
|
4,052,000 |
|
|
|
4,526,000 |
|
|
|
4,881,000 |
|
Commitments to make loans |
|
|
9,840,000 |
|
|
|
7,701,000 |
|
|
|
10,959,000 |
|
Standby letters of credit |
|
|
19,343,000 |
|
|
|
36,512,000 |
|
|
|
51,439,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
226,818,000 |
|
|
$ |
287,238,000 |
|
|
$ |
431,135,000 |
|
|
|
|
|
|
|
|
|
|
|
We monitor our liquidity position and funding strategies on an ongoing basis, but recognize
that unexpected events, economic or market conditions, reduction in earnings performance, declining
capital levels or situations beyond our control could cause liquidity challenges. While we believe
it is unlikely that a funding crisis of any significant degree is likely to materialize, we have
developed a comprehensive contingency funding plan that provides a framework for meeting liquidity
disruptions.
MARKET RISK ANALYSIS
Our primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk.
All of our transactions are denominated in U.S. dollars with no specific foreign exchange exposure.
We have only limited agricultural-related loan assets and therefore have no significant exposure
to changes in commodity prices. Any impact that changes in foreign exchange rates and commodity
prices would have on interest rates is assumed to be insignificant. Interest rate risk is the
exposure of our financial condition to adverse movements in interest rates. We derive our income
primarily from the excess of interest collected on interest-earning assets over the interest paid
on interest-bearing liabilities. The rates of interest we earn on our assets and owe on our
liabilities generally are established contractually for a period of time. Since market interest
rates change over time, we are exposed to lower profitability if we cannot adapt to interest rate
changes. Accepting interest rate risk can be an important source of profitability and shareholder
value; however, excessive levels of interest rate risk could pose a significant threat to our
earnings and capital base. Accordingly, effective risk management that maintains interest rate
risk at prudent levels is essential to our safety and soundness.
Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the
process used to control interest rate risk and the quantitative level of exposure. Our interest
rate risk management process seeks to ensure that appropriate policies, procedures, management
information systems and internal controls are in place to maintain interest rate risk at prudent
levels with consistency and continuity. In evaluating the quantitative level of interest rate
risk, we assess the existing and potential future effects of changes in interest rates on our
financial condition, including capital adequacy, earnings, liquidity and asset quality.
F-32
We use two interest rate risk measurement techniques. The first, which is commonly referred to as
GAP analysis, measures the difference between the dollar amounts of interest-sensitive assets and
liabilities that will be refinanced or repriced during a given time period. A significant
repricing gap could result in a negative impact to the net interest margin during periods of
changing market interest rates.
The following table depicts our GAP position as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
|
Three to |
|
|
One to |
|
|
After |
|
|
|
|
|
|
Three |
|
|
Twelve |
|
|
Five |
|
|
Five |
|
|
|
|
|
|
Months |
|
|
Months |
|
|
Years |
|
|
Years |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans (1) |
|
$ |
332,181,000 |
|
|
$ |
241,803,000 |
|
|
$ |
553,610,000 |
|
|
$ |
19,145,000 |
|
|
$ |
1,146,739,000 |
|
Leases |
|
|
13,000 |
|
|
|
119,000 |
|
|
|
262,000 |
|
|
|
0 |
|
|
|
394,000 |
|
Residential real estate loans |
|
|
42,176,000 |
|
|
|
6,708,000 |
|
|
|
51,674,000 |
|
|
|
9,956,000 |
|
|
|
110,514,000 |
|
Consumer loans |
|
|
2,280,000 |
|
|
|
268,000 |
|
|
|
2,318,000 |
|
|
|
117,000 |
|
|
|
4,983,000 |
|
Securities (2) |
|
|
33,787,000 |
|
|
|
0 |
|
|
|
49,318,000 |
|
|
|
152,070,000 |
|
|
|
235,175,000 |
|
Federal funds sold |
|
|
47,924,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
47,924,000 |
|
Short-term investments |
|
|
9,600,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
9,600,000 |
|
Allowance for loan and
lease losses |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(45,368,000 |
) |
Other assets |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
122,460,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
467,961,000 |
|
|
|
248,898,000 |
|
|
|
657,182,000 |
|
|
|
181,288,000 |
|
|
$ |
1,632,421,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking |
|
|
158,177,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
158,177,000 |
|
Savings deposits |
|
|
60,201,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
60,201,000 |
|
Money market accounts |
|
|
150,631,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
150,631,000 |
|
Time deposits under $100,000 |
|
|
35,930,000 |
|
|
|
38,423,000 |
|
|
|
38,757,000 |
|
|
|
0 |
|
|
|
113,110,000 |
|
Time deposits $100,000 & over |
|
|
184,283,000 |
|
|
|
237,278,000 |
|
|
|
257,208,000 |
|
|
|
0 |
|
|
|
678,769,000 |
|
Short-term borrowings |
|
|
116,979,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
116,979,000 |
|
Federal Home Loan Bank advances |
|
|
0 |
|
|
|
10,000,000 |
|
|
|
55,000,000 |
|
|
|
0 |
|
|
|
65,000,000 |
|
Other borrowed money |
|
|
34,794,000 |
|
|
|
10,000,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
44,794,000 |
|
Noninterest-bearing checking |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
112,944,000 |
|
Other liabilities |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
5,880,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
740,995,000 |
|
|
|
295,701,000 |
|
|
|
350,965,000 |
|
|
|
0 |
|
|
|
1,506,485,000 |
|
Shareholders equity |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
125,936,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities & shareholders
equity |
|
|
740,995,000 |
|
|
|
295,701,000 |
|
|
|
350,965,000 |
|
|
|
0 |
|
|
$ |
1,632,421,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability) GAP |
|
$ |
(273,034,000 |
) |
|
$ |
(46,803,000 |
) |
|
$ |
306,217,000 |
|
|
$ |
181,288,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP |
|
$ |
(273,034,000 |
) |
|
$ |
(319,837,000 |
) |
|
$ |
(13,620,000 |
) |
|
$ |
167,668,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of cumulative GAP to
total assets |
|
|
(16.7 |
%) |
|
|
(19.6 |
%) |
|
|
(0.8 |
%) |
|
|
10.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Floating rate loans that are currently at interest rate floors are treated as fixed rate
loans and are reflected using maturity date and not repricing frequency. |
|
(2) |
|
Mortgage-backed securities are categorized by expected maturities based upon prepayment
trends as of December 31, 2010. |
F-33
The second interest rate risk measurement used is commonly referred to as net interest income
simulation analysis. We believe that this methodology provides a more accurate measurement of
interest rate risk than the GAP analysis, and therefore, it serves as our primary interest rate
risk measurement technique. The simulation model assesses the direction and magnitude of
variations in net interest income resulting from potential changes in market interest rates. Key
assumptions in the model include prepayment speeds on various loan and investment assets; cash
flows and maturities of interest-sensitive assets and liabilities; and changes in market conditions
impacting loan and deposit volume and pricing. These assumptions are inherently uncertain, subject
to fluctuation and revision in a dynamic environment; therefore, the model cannot precisely
estimate net interest income or exactly predict the impact of higher or lower interest rates on net
interest income. Actual results will differ from simulated results due to timing, magnitude, and
frequency of interest rate changes and changes in market conditions and our strategies, among other
factors.
We conducted multiple simulations as of December 31, 2010, in which it was assumed that changes in
market interest rates occurred ranging from up 400 basis points to down 400 basis points in equal
quarterly instalments over the next twelve months. The following table reflects the suggested
impact on net interest income over the next twelve months in comparison to estimated net interest
income based on our balance sheet structure, including the balances and interest rates associated
with our specific loans, securities, deposits and borrowed funds, as of December 31, 2010. The
resulting estimates are well within our policy parameters established to manage and monitor
interest rate risk.
|
|
|
|
|
|
|
|
|
|
|
Dollar Change |
|
Percent Change |
|
|
In Net |
|
In Net |
Interest Rate Scenario |
|
Interest Income |
|
Interest Income |
|
|
|
|
|
|
|
|
|
Interest rates down 400 basis points |
|
$ |
585,000 |
|
|
|
1.1 |
% |
Interest rates down 300 basis points |
|
|
1,125,000 |
|
|
|
2.1 |
|
Interest rates down 200 basis points |
|
|
1,645,000 |
|
|
|
3.0 |
|
Interest rates down 100 basis points |
|
|
2,105,000 |
|
|
|
3.9 |
|
No change in interest rates |
|
|
2,590,000 |
|
|
|
4.8 |
|
Interest rates up 100 basis points |
|
|
905,000 |
|
|
|
1.7 |
|
Interest rates up 200 basis points |
|
|
645,000 |
|
|
|
1.2 |
|
Interest rates up 300 basis points |
|
|
1,555,000 |
|
|
|
2.9 |
|
Interest rates up 400 basis points |
|
|
1,190,000 |
|
|
|
2.2 |
|
The resulting estimates have been significantly impacted by the current interest rate and
economic environment, as adjustments have been made to critical model inputs with regards to
traditional interest rate relationships. This is especially important as it relates to floating
rate commercial loans and brokered certificates of deposit, which comprise a substantial portion of
our balance sheet. As of December 31, 2010, the Mercantile Bank Prime Rate is 4.50% as compared to
the Wall Street Journal Prime Rate of 3.25%. Historically, the two indices have been equal;
however, we elected not to reduce the Mercantile Bank Prime Rate in late October and mid-December
of 2008 when the Wall Street Journal Prime Rate declined by 50 and 75 basis points, respectively.
In conducting our simulations since year-end 2008, we have made the assumption that the Mercantile
Bank Prime Rate will remain unchanged until the Wall Street Journal Prime Rate equals the
Mercantile Bank Prime Rate, at which time the two indices will remain equal in the increasing
interest rate scenarios. Also, brokered certificate of deposit rates have substantially decreased
since year-end 2008, with part of the decline attributable to a significant imbalance whereby the
supply of available funds far outweighs the demand from banks looking to raise funds. As a result,
we have substantially limited further reductions in brokered certificate of deposit rates in the
declining interest rate scenarios.
In addition to changes in interest rates, the level of future net interest income is also dependent
on a number of other variables, including: the growth, composition and absolute levels of loans,
deposits, and other earning assets and interest-bearing liabilities; level of nonperforming assets; economic and competitive conditions;
potential changes in lending, investing, and deposit gathering strategies; client preferences; and
other factors.
F-34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Mercantile Bank Corporation
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of Mercantile Bank Corporation as of
December 31, 2010 and 2009, and the related consolidated statements of operations, changes in
shareholders equity and cash flows for each of the three years in the period ended December 31,
2010. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Mercantile Bank Corporation as of December 31, 2010
and 2009, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2010, in conformity with accounting principles generally accepted in the
United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Mercantile Bank Corporations internal control over financial reporting as
of December 31, 2010, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated March 14, 2011 expressed an unqualified opinion thereon.
|
|
|
|
|
|
|
|
/s/ BDO USA, LLP
|
|
|
BDO USA, LLP |
|
|
Grand Rapids, Michigan
March 14, 2011
F-35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Mercantile Bank Corporation
Grand Rapids, Michigan
We have audited Mercantile Bank Corporations internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Mercantile Bank Corporations management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Report by Mercantile Bank Corporations
Management on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Mercantile Bank Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Mercantile Bank Corporation as of
December 31, 2010 and 2009, and the related consolidated statements of operations, changes in
shareholders equity and cash flows for each of the three years in the period ended December 31,
2010, and our report dated March 14, 2011 expressed an unqualified opinion thereon.
|
|
|
|
|
|
|
|
/s/ BDO USA, LLP
|
|
|
BDO USA, LLP |
|
|
Grand Rapids, Michigan
March 14, 2011
F-36
March 14, 2011
REPORT BY MERCANTILE BANK CORPORATIONS MANAGEMENT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective system of internal control
over financial reporting that is designed to produce reliable financial statements presented in
conformity with generally accepted accounting principles. There are inherent limitations in the
effectiveness of any system of internal control. Accordingly, even an effective system of internal
control can provide only reasonable assurance with respect to financial statement preparation.
Management assessed the Companys system of internal control over financial reporting that is
designed to produce reliable financial statements presented in conformity with generally accepted
accounting principles as of December 31, 2010. This assessment was based on criteria for effective
internal control over financial reporting described in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that, as of December 31, 2010, Mercantile Bank Corporation
maintained an effective system of internal control over financial reporting that is designed to
produce reliable financial statements presented in conformity with generally accepted accounting
principles based on those criteria.
The Companys independent auditors have issued an audit report on the effectiveness of the
Companys internal control over financial reporting.
Mercantile Bank Corporation
|
|
|
|
|
|
|
|
/s/ Michael H. Price
|
|
|
Michael H. Price |
|
|
Chairman of the Board, President and Chief Executive Officer |
|
|
|
|
|
/s/ Charles E. Christmas
|
|
|
Charles E. Christmas |
|
|
Senior Vice President Chief Financial Officer and Treasurer |
|
|
F-37
MERCANTILE BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
6,674,000 |
|
|
$ |
18,896,000 |
|
Short-term investments |
|
|
9,600,000 |
|
|
|
1,471,000 |
|
Federal funds sold |
|
|
47,924,000 |
|
|
|
1,368,000 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
64,198,000 |
|
|
|
21,735,000 |
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
|
|
220,830,000 |
|
|
|
182,492,000 |
|
Securities held to maturity
(fair value of $60,271,000 at December 31, 2009) |
|
|
0 |
|
|
|
59,211,000 |
|
Federal Home Loan Bank stock |
|
|
14,345,000 |
|
|
|
15,681,000 |
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
|
1,262,630,000 |
|
|
|
1,539,818,000 |
|
Allowance for loan and lease losses |
|
|
(45,368,000 |
) |
|
|
(47,878,000 |
) |
|
|
|
|
|
|
|
Loans and leases, net |
|
|
1,217,262,000 |
|
|
|
1,491,940,000 |
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net |
|
|
27,873,000 |
|
|
|
29,684,000 |
|
Bank owned life insurance |
|
|
46,743,000 |
|
|
|
45,024,000 |
|
Accrued interest receivable |
|
|
5,942,000 |
|
|
|
7,088,000 |
|
Other real estate owned and repossessed assets |
|
|
16,675,000 |
|
|
|
26,608,000 |
|
Other assets |
|
|
18,553,000 |
|
|
|
26,745,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,632,421,000 |
|
|
$ |
1,906,208,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
$ |
112,944,000 |
|
|
$ |
121,157,000 |
|
Interest-bearing |
|
|
1,160,888,000 |
|
|
|
1,280,470,000 |
|
|
|
|
|
|
|
|
Total |
|
|
1,273,832,000 |
|
|
|
1,401,627,000 |
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase |
|
|
116,979,000 |
|
|
|
99,755,000 |
|
Federal funds purchased |
|
|
0 |
|
|
|
2,600,000 |
|
Federal Home Loan Bank advances |
|
|
65,000,000 |
|
|
|
205,000,000 |
|
Subordinated debentures |
|
|
32,990,000 |
|
|
|
32,990,000 |
|
Other borrowed money |
|
|
11,804,000 |
|
|
|
16,890,000 |
|
Accrued interest and other liabilities |
|
|
5,880,000 |
|
|
|
7,242,000 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,506,485,000 |
|
|
|
1,766,104,000 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
Preferred stock, no par value; 1,000,000 shares
authorized;
21,000 shares outstanding |
|
|
20,077,000 |
|
|
|
19,839,000 |
|
Common stock, no par value; 20,000,000 shares
authorized; 8,597,993 shares outstanding at
December 31, 2010 and 8,592,514 shares
outstanding at December 31, 2009 |
|
|
172,677,000 |
|
|
|
172,438,000 |
|
Common stock warrant |
|
|
1,138,000 |
|
|
|
1,138,000 |
|
Retained earnings (deficit) |
|
|
(68,781,000 |
) |
|
|
(54,170,000 |
) |
Accumulated other comprehensive income |
|
|
825,000 |
|
|
|
859,000 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
125,936,000 |
|
|
|
140,104,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,632,421,000 |
|
|
$ |
1,906,208,000 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-38
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases, including fees |
|
$ |
77,791,000 |
|
|
$ |
93,903,000 |
|
|
$ |
110,013,000 |
|
Securities, taxable |
|
|
7,846,000 |
|
|
|
7,498,000 |
|
|
|
7,888,000 |
|
Securities, tax-exempt |
|
|
2,291,000 |
|
|
|
3,351,000 |
|
|
|
2,960,000 |
|
Federal funds sold |
|
|
176,000 |
|
|
|
136,000 |
|
|
|
204,000 |
|
Short-term investments |
|
|
39,000 |
|
|
|
21,000 |
|
|
|
7,000 |
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
88,143,000 |
|
|
|
104,909,000 |
|
|
|
121,072,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
23,529,000 |
|
|
|
41,269,000 |
|
|
|
59,812,000 |
|
Short-term borrowings |
|
|
1,410,000 |
|
|
|
1,845,000 |
|
|
|
2,021,000 |
|
Federal Home Loan Bank advances |
|
|
5,509,000 |
|
|
|
8,808,000 |
|
|
|
10,554,000 |
|
Other borrowings |
|
|
1,346,000 |
|
|
|
1,654,000 |
|
|
|
2,476,000 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
31,794,000 |
|
|
|
53,576,000 |
|
|
|
74,863,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
56,349,000 |
|
|
|
51,333,000 |
|
|
|
46,209,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
31,800,000 |
|
|
|
59,000,000 |
|
|
|
21,200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (deficiency) after provision
for loan and lease losses |
|
|
24,549,000 |
|
|
|
(7,667,000 |
) |
|
|
25,009,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income |
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on accounts |
|
|
1,797,000 |
|
|
|
2,023,000 |
|
|
|
1,994,000 |
|
Earnings on bank owned life insurance |
|
|
1,718,000 |
|
|
|
1,444,000 |
|
|
|
1,727,000 |
|
Rental income from other real estate owned |
|
|
1,488,000 |
|
|
|
438,000 |
|
|
|
27,000 |
|
Mortgage banking activities |
|
|
1,092,000 |
|
|
|
1,202,000 |
|
|
|
662,000 |
|
Credit and debit card fees |
|
|
727,000 |
|
|
|
670,000 |
|
|
|
745,000 |
|
Letter of credit fees |
|
|
460,000 |
|
|
|
541,000 |
|
|
|
687,000 |
|
Net gain on sale of securities |
|
|
476,000 |
|
|
|
0 |
|
|
|
0 |
|
Gain on sale of commercial loans |
|
|
324,000 |
|
|
|
0 |
|
|
|
0 |
|
Other income |
|
|
1,162,000 |
|
|
|
1,240,000 |
|
|
|
1,440,000 |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
9,244,000 |
|
|
|
7,558,000 |
|
|
|
7,282,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
18,297,000 |
|
|
|
20,331,000 |
|
|
|
22,493,000 |
|
Occupancy |
|
|
2,838,000 |
|
|
|
3,377,000 |
|
|
|
3,826,000 |
|
Furniture and equipment rent, depreciation and maintenance |
|
|
1,481,000 |
|
|
|
1,871,000 |
|
|
|
1,980,000 |
|
Nonperforming asset costs |
|
|
10,858,000 |
|
|
|
7,294,000 |
|
|
|
3,266,000 |
|
FDIC insurance costs |
|
|
4,370,000 |
|
|
|
4,852,000 |
|
|
|
1,890,000 |
|
Data processing |
|
|
2,598,000 |
|
|
|
2,526,000 |
|
|
|
2,394,000 |
|
Branch consolidation costs |
|
|
0 |
|
|
|
1,308,000 |
|
|
|
0 |
|
Advertising |
|
|
906,000 |
|
|
|
650,000 |
|
|
|
559,000 |
|
FHLB advance prepayment fees |
|
|
1,021,000 |
|
|
|
0 |
|
|
|
0 |
|
Other expense |
|
|
4,787,000 |
|
|
|
4,279,000 |
|
|
|
5,718,000 |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expenses |
|
|
47,156,000 |
|
|
|
46,488,000 |
|
|
|
42,126,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income tax expense (benefit) |
|
|
(13,363,000 |
) |
|
|
(46,597,000 |
) |
|
|
(9,835,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax expense (benefit) |
|
|
(47,000 |
) |
|
|
5,490,000 |
|
|
|
(4,876,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(13,316,000 |
) |
|
|
(52,087,000 |
) |
|
|
(4,959,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends and accretion |
|
|
1,295,000 |
|
|
|
802,000 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shares |
|
$ |
(14,611,000 |
) |
|
$ |
(52,889,000 |
) |
|
$ |
(4,959,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-39
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
Years ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(1.72 |
) |
|
$ |
(6.23 |
) |
|
$ |
(0.59 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(1.72 |
) |
|
$ |
(6.23 |
) |
|
$ |
(0.59 |
) |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-40
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Years ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Retained |
|
|
Other |
|
|
Total |
|
|
|
Preferred |
|
|
Common |
|
|
Stock |
|
|
Earnings |
|
|
Comprehensive |
|
|
Shareholders |
|
($ in thousands) |
|
Stock |
|
|
Stock |
|
|
Warrant |
|
|
(Deficit) |
|
|
Income (Loss) |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2008 |
|
$ |
0 |
|
|
$ |
172,938 |
|
|
$ |
0 |
|
|
$ |
4,948 |
|
|
$ |
269 |
|
|
$ |
178,155 |
|
Employee stock purchase plan
(10,904 shares) |
|
|
|
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76 |
|
Dividend reinvestment plan
(4,340 shares) |
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40 |
|
Stock option exercises
(2,000 shares) |
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
Stock tendered for stock option exercises
(1,123 shares) |
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16 |
) |
Stock-based compensation expense |
|
|
|
|
|
|
654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
654 |
|
Cash dividends
($0.31 per common share) |
|
|
|
|
|
|
(1,355 |
) |
|
|
|
|
|
|
(1,270 |
) |
|
|
|
|
|
|
(2,625 |
) |
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,959 |
) |
|
|
|
|
|
|
(4,959 |
) |
Change in net unrealized gain (loss)
on securities available for sale,
net of reclassifications and tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,795 |
|
|
|
1,795 |
|
Change in net fair value of interest rate
swaps, net of reclassifications and
tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,236 |
|
|
|
1,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,928 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2008 |
|
$ |
0 |
|
|
$ |
172,353 |
|
|
$ |
0 |
|
|
$ |
(1,281 |
) |
|
$ |
3,300 |
|
|
$ |
174,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-41
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Continued)
Years ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Retained |
|
|
Other |
|
|
Total |
|
|
|
Preferred |
|
|
Common |
|
|
Stock |
|
|
Earnings |
|
|
Comprehensive |
|
|
Shareholders |
|
($ in thousands) |
|
Stock |
|
|
Stock |
|
|
Warrant |
|
|
(Deficit) |
|
|
Income (Loss) |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2009 |
|
$ |
0 |
|
|
$ |
172,353 |
|
|
$ |
0 |
|
|
$ |
(1,281 |
) |
|
$ |
3,300 |
|
|
$ |
174,372 |
|
Preferred stock issued, net |
|
|
19,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,696 |
|
Accretion of preferred stock |
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
(143 |
) |
|
|
|
|
|
|
0 |
|
Common stock warrant issued |
|
|
|
|
|
|
|
|
|
|
1,138 |
|
|
|
|
|
|
|
|
|
|
|
1,138 |
|
Employee stock purchase plan
(14,694 shares) |
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57 |
|
Dividend reinvestment plan
(2,875 shares) |
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
Stock-based compensation expense |
|
|
|
|
|
|
611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
611 |
|
Cash dividends
($0.07 per common share) |
|
|
|
|
|
|
(594 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(594 |
) |
Preferred stock dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(659 |
) |
|
|
|
|
|
|
(659 |
) |
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52,087 |
) |
|
|
|
|
|
|
(52,087 |
) |
Change in net unrealized gain (loss)
on securities available for sale,
net of reclassifications |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,269 |
) |
|
|
(1,269 |
) |
Reclassification of unrealized gain on
interest rate swaps, net of tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,172 |
) |
|
|
(1,172 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2009 |
|
$ |
19,839 |
|
|
$ |
172,438 |
|
|
$ |
1,138 |
|
|
$ |
(54,170 |
) |
|
$ |
859 |
|
|
$ |
140,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-42
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Continued)
Years ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Retained |
|
|
Other |
|
|
Total |
|
|
|
Preferred |
|
|
Common |
|
|
Stock |
|
|
Earnings |
|
|
Comprehensive |
|
|
Shareholders |
|
($ in thousands) |
|
Stock |
|
|
Stock |
|
|
Warrant |
|
|
(Deficit) |
|
|
Income (Loss) |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2010 |
|
$ |
19,839 |
|
|
$ |
172,438 |
|
|
$ |
1,138 |
|
|
$ |
(54,170 |
) |
|
$ |
859 |
|
|
$ |
140,104 |
|
Accretion of preferred stock |
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
(238 |
) |
|
|
|
|
|
|
0 |
|
Employee stock purchase plan
(9,129 shares) |
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47 |
|
Dividend reinvestment plan
(687 shares) |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Stock-based compensation expense |
|
|
|
|
|
|
275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275 |
|
Cash dividends
($0.01 per common share) |
|
|
|
|
|
|
(85 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85 |
) |
Preferred stock dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,057 |
) |
|
|
|
|
|
|
(1,057 |
) |
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,316 |
) |
|
|
|
|
|
|
(13,316 |
) |
Change in net unrealized gain (loss)
on securities available for sale,
net of reclassifications and tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(244 |
) |
|
|
(244 |
) |
Net unrealized gain on securities
transferred from held to maturity to
available for sale, net of tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
274 |
|
|
|
274 |
|
Reclassification of unrealized gain on
interest rate swaps, net of tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64 |
) |
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2010 |
|
$ |
20,077 |
|
|
$ |
172,677 |
|
|
$ |
1,138 |
|
|
$ |
(68,781 |
) |
|
$ |
825 |
|
|
$ |
125,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-43
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(13,316,000 |
) |
|
$ |
(52,087,000 |
) |
|
$ |
(4,959,000 |
) |
Adjustments to reconcile net income (loss)
to net cash from (for) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,440,000 |
|
|
|
2,577,000 |
|
|
|
2,773,000 |
|
Provision for loan and lease losses |
|
|
31,800,000 |
|
|
|
59,000,000 |
|
|
|
21,200,000 |
|
Deferred income tax expense (benefit) |
|
|
(47,000 |
) |
|
|
9,973,000 |
|
|
|
(1,558,000 |
) |
Stock-based compensation expense |
|
|
275,000 |
|
|
|
611,000 |
|
|
|
654,000 |
|
Proceeds from sales of mortgage loans held for sale |
|
|
66,795,000 |
|
|
|
80,782,000 |
|
|
|
44,095,000 |
|
Origination of mortgage loans held for sale |
|
|
(66,104,000 |
) |
|
|
(82,251,000 |
) |
|
|
(42,810,000 |
) |
Net gain on sale of mortgage loans held for sale |
|
|
(846,000 |
) |
|
|
(905,000 |
) |
|
|
(506,000 |
) |
Net gain on sale of held to maturity securities |
|
|
(476,000 |
) |
|
|
0 |
|
|
|
0 |
|
Gain on sale of commercial loans |
|
|
(324,000 |
) |
|
|
0 |
|
|
|
0 |
|
Net (gain) loss on sale and write-down of
premises and equipment |
|
|
(2,000 |
) |
|
|
227,000 |
|
|
|
(11,000 |
) |
Net loss on sale and valuation write-downs of foreclosed assets |
|
|
4,432,000 |
|
|
|
3,551,000 |
|
|
|
1,768,000 |
|
Recognition of unrealized gain on interest rate swaps |
|
|
(99,000 |
) |
|
|
(1,803,000 |
) |
|
|
(974,000 |
) |
Earnings on bank owned life insurance |
|
|
(1,718,000 |
) |
|
|
(1,444,000 |
) |
|
|
(1,727,000 |
) |
Net change in: |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
1,146,000 |
|
|
|
1,425,000 |
|
|
|
1,444,000 |
|
Other assets |
|
|
7,540,000 |
|
|
|
(18,407,000 |
) |
|
|
913,000 |
|
Accrued interest and other liabilities |
|
|
(1,894,000 |
) |
|
|
(10,024,000 |
) |
|
|
(6,667,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash from (for) operating activities |
|
|
29,602,000 |
|
|
|
(8,775,000 |
) |
|
|
13,635,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
|
|
(106,329,000 |
) |
|
|
(73,059,000 |
) |
|
|
(96,292,000 |
) |
Securities held to maturity |
|
|
0 |
|
|
|
(1,025,000 |
) |
|
|
(978,000 |
) |
Federal Home Loan Bank stock |
|
|
0 |
|
|
|
0 |
|
|
|
(5,948,000 |
) |
Proceeds from: |
|
|
|
|
|
|
|
|
|
|
|
|
Maturities, calls and repayments of
securities available for sale |
|
|
107,480,000 |
|
|
|
52,343,000 |
|
|
|
73,571,000 |
|
Maturities, calls and repayments of
securities held to maturity |
|
|
0 |
|
|
|
6,270,000 |
|
|
|
1,840,000 |
|
Proceeds from sale of held to maturity securities |
|
|
20,452,000 |
|
|
|
0 |
|
|
|
0 |
|
Proceeds from Federal Home Loan Bank stock redemption |
|
|
1,336,000 |
|
|
|
0 |
|
|
|
0 |
|
Loan and lease originations and payments, net |
|
|
226,563,000 |
|
|
|
240,291,000 |
|
|
|
(86,489,000 |
) |
Proceeds from sale of commercial loans |
|
|
7,395,000 |
|
|
|
11,633,000 |
|
|
|
0 |
|
Purchases of premises and equipment, net |
|
|
(118,000 |
) |
|
|
(44,000 |
) |
|
|
(673,000 |
) |
Proceeds from sale of foreclosed assets |
|
|
14,900,000 |
|
|
|
7,276,000 |
|
|
|
4,777,000 |
|
Purchases of bank owned life insurance |
|
|
0 |
|
|
|
(1,118,000 |
) |
|
|
(1,617,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash from (for) investing activities |
|
|
271,679,000 |
|
|
|
242,567,000 |
|
|
|
(111,809,000 |
) |
See accompanying notes to consolidated financial statements.
F-44
MERCANTILE BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in time deposits |
|
|
(331,638,000 |
) |
|
|
(240,269,000 |
) |
|
|
42,774,000 |
|
Net increase (decrease) in all other deposits |
|
|
203,843,000 |
|
|
|
42,321,000 |
|
|
|
(34,380,000 |
) |
Net increase (decrease) in securities sold under
agreements to repurchase |
|
|
17,224,000 |
|
|
|
5,342,000 |
|
|
|
(3,052,000 |
) |
Net increase (decrease) in federal funds purchased |
|
|
(2,600,000 |
) |
|
|
2,600,000 |
|
|
|
(13,800,000 |
) |
Proceeds from Federal Home Loan Bank advances |
|
|
0 |
|
|
|
5,000,000 |
|
|
|
266,500,000 |
|
Maturities and prepayments of Federal Home Loan Bank advances |
|
|
(140,000,000 |
) |
|
|
(70,000,000 |
) |
|
|
(176,500,000 |
) |
Increase in structured repurchase agreements |
|
|
0 |
|
|
|
0 |
|
|
|
15,000,000 |
|
Maturities of structured repurchase agreements |
|
|
(5,000,000 |
) |
|
|
0 |
|
|
|
0 |
|
Increase (decrease) in other borrowed money |
|
|
(86,000 |
) |
|
|
(2,638,000 |
) |
|
|
515,000 |
|
Proceeds from issuance of preferred stock and common
stock warrant, net |
|
|
0 |
|
|
|
20,834,000 |
|
|
|
0 |
|
Employee stock purchase plan |
|
|
47,000 |
|
|
|
57,000 |
|
|
|
76,000 |
|
Dividend reinvestment plan |
|
|
2,000 |
|
|
|
11,000 |
|
|
|
40,000 |
|
Payment of cash dividends on preferred stock |
|
|
(525,000 |
) |
|
|
(525,000 |
) |
|
|
0 |
|
Payment of cash dividends to common shareholders |
|
|
(85,000 |
) |
|
|
(594,000 |
) |
|
|
(2,625,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash from (for) financing activities |
|
|
(258,818,000 |
) |
|
|
(237,861,000 |
) |
|
|
94,548,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
42,463,000 |
|
|
|
(4,069,000 |
) |
|
|
(3,626,000 |
) |
Cash and cash equivalents at beginning of period |
|
|
21,735,000 |
|
|
|
25,804,000 |
|
|
|
29,430,000 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
64,198,000 |
|
|
$ |
21,735,000 |
|
|
$ |
25,804,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
33,203,000 |
|
|
$ |
62,663,000 |
|
|
$ |
80,748,000 |
|
Federal income taxes |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Noncash financing and investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Transfers from loans and leases to foreclosed assets |
|
|
9,399,000 |
|
|
|
29,317,000 |
|
|
|
9,062,000 |
|
Preferred stock cash dividend accrued |
|
|
666,000 |
|
|
|
134,000 |
|
|
|
0 |
|
See accompanying notes to consolidated financial statements.
F-45
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the accounts of
Mercantile Bank Corporation (Mercantile) and its subsidiary, Mercantile Bank of Michigan
(Bank), and of Mercantile Bank Mortgage Company, LLC (Mortgage Company), Mercantile Bank Real
Estate Co., L.L.C. (Mercantile Real Estate) and Mercantile Insurance Center, Inc. (Mercantile
Insurance), subsidiaries of our Bank, after elimination of significant intercompany transactions
and accounts.
We formed a business trust, Mercantile Bank Capital Trust I (our trust), in 2004 to issue trust
preferred securities. We issued subordinated debentures to our trust in return for the proceeds
raised from the issuance of the trust preferred securities. In accordance with accounting
guidelines, our trust is not consolidated, but instead we report the subordinated debentures issued
to the trust as a liability.
Nature of Operations: Mercantile was incorporated on July 15, 1997 to establish and own
the Bank based in Grand Rapids, Michigan. The Bank is a community-based financial institution.
The Bank began operations on December 15, 1997. The Banks primary deposit products are checking,
savings, and term certificate accounts, and its primary lending products are commercial loans,
commercial leases, residential mortgage loans, and instalment loans. Substantially all loans and
leases are secured by specific items of collateral including business assets, real estate or
consumer assets. Commercial loans and leases are expected to be repaid from cash flow from
operations of businesses. Real estate loans are secured by commercial or residential real estate.
The Banks loan accounts are primarily with customers located in the Grand Rapids, Holland and
Lansing areas. The Banks retail deposits are also from customers located within those areas. As
an alternative source of funds, the Bank has also issued certificates to depositors outside of the
Banks primary market areas. Substantially all revenues are derived from banking products and
services and investment securities.
Mercantile Bank Mortgage Company was formed during 2000. A subsidiary of the Bank, Mercantile Bank
Mortgage Company was established to increase the profitability and efficiency of the mortgage loan
operations. Mercantile Bank Mortgage Company initiated business on October 24, 2000 via the Banks
contribution of most of its residential mortgage loan portfolio and participation interests in
certain commercial mortgage loans. On the same date, the Bank also transferred its residential
mortgage origination function to Mercantile Bank Mortgage Company. On January 1, 2004, Mercantile
Bank Mortgage Company was reorganized as the Mortgage Company, a limited liability company, which
is 99% owned by the Bank and 1% owned by Mercantile Insurance. Mortgage loans originated and held
by the Mortgage Company are serviced by the Bank pursuant to a servicing agreement.
Mercantile Insurance was formed during 2002 through the acquisition of an existing shelf insurance
agency. Insurance products are offered through an Agency and Institutions Agreement among
Mercantile Insurance, the Bank and Hub International. The insurance products are marketed through
a central facility operated by the Michigan Bankers Insurance Association, members of which include
the insurance subsidiaries of various Michigan-based financial institutions and Hub International.
Mercantile Insurance receives commissions based upon written premiums produced under the Agency and
Institutions Agreement.
Mercantile Real Estate was organized on July 21, 2003, principally to develop, construct, and own a
facility in downtown Grand Rapids that serves as our Banks main office and Mercantiles
headquarters. This facility was placed into service during the second quarter of 2005.
Use of Estimates: To prepare financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates and assumptions
based on available information. These estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and actual results could differ. The allowance
for loan and lease losses and the fair values of financial instruments are particularly subject to
change.
(Continued)
F-46
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Flow Reporting: Cash and cash equivalents include cash on hand, demand deposits with
other financial institutions, short-term investments (including securities with daily put
provisions) and federal funds sold. Cash flows are reported net for customer loan and deposit
transactions, interest-bearing time deposits with other financial institutions and short-term
borrowings with maturities of 90 days or less.
Securities: Debt securities classified as held to maturity are carried at amortized cost
when management has the positive intent and ability to hold them to maturity. Debt securities are
classified as available for sale when they might be sold prior to maturity. Equity securities with
readily determinable fair values are classified as available for sale. Securities available for
sale are carried at fair value, with unrealized holding gains and losses reported in other
comprehensive income, net of tax (as applicable). Other securities such as FHLB stock are carried
at cost.
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums
and discounts on securities are amortized or accreted on the level-yield method without
anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated.
Gains and losses on sales are recorded on the trade date and determined using the specific
identification method.
Declines in the fair value of securities below their amortized cost that are other than temporary
are reflected in earnings or other comprehensive income, as appropriate. For those debt securities
whose fair value is less than their amortized cost basis, we consider our intent to sell the
security, whether it is more likely than not that we will be required to sell the security before
recovery and if we do not expect to recover the entire amortized cost basis of the security. In
analyzing an issuers financial condition, we may consider whether the securities are issued by the
federal government or its agencies, whether downgrades by bond rating agencies have occurred and
the results of reviews of the issuers financial condition.
Loans and Leases: Loans and leases that management has the intent and ability to hold for
the foreseeable future or until maturity or payoff are reported at the principal balance
outstanding, net of deferred loan fees and costs and an allowance for loan and lease losses.
Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain
direct origination costs, are deferred and recognized in interest income using the level-yield
method without anticipating prepayments. Net unamortized deferred loan fees amounted to $0.5
million at December 31, 2010 and 2009.
Interest income on commercial loans and leases and mortgage loans is discontinued at the time the
loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer
and credit card loans are typically charged off no later than when they are 120 days past due.
Past due status is based on the contractual terms of the loan or lease. In all cases, loans and
leases are placed on nonaccrual or charged off at an earlier date if collection of principal and
interest is considered doubtful.
All interest accrued but not received for loans and leases placed on nonaccrual is reversed against
interest income. Interest received on such loans and leases is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual. Loans and leases are returned to
accrual status when all the principal and interest amounts contractually due are brought current
and future payments are reasonably assured.
Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary
market are carried at the lower of aggregate cost or market, as determined by outstanding
commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance
and charged to earnings. Such loans are sold service released. The balance of loans held for sale
equaled $2.7 million and $2.5 million as of December 31, 2010 and 2009, respectively. Mortgage
banking activities include fees on direct brokered mortgage loans and the net gain on sale of
mortgage loans originated for sale.
(Continued)
F-47
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Troubled Debt Restructurings: A loan or lease is accounted for as a troubled debt
restructuring if we, for economic or legal reasons related to the borrowers financial condition,
grant a significant concession to the borrower that we would not otherwise consider. A troubled
debt restructuring may involve the receipt of assets from the debtor in partial or full
satisfaction of the loan or lease, or a modification of terms such as a reduction of the stated
interest rate or balance of the loan or lease, a reduction of accrued interest, an extension of the
maturity date at a stated interest rate lower than the current market rate for a new loan with
similar risk, or some combination of these concessions. Troubled debt restructurings generally
remain categorized as nonperforming loans and leases until a six-month payment history has been
maintained.
Allowance for Loan and Lease Losses: The allowance for loan and lease losses is a
valuation allowance for probable incurred credit losses. Loan and lease losses are charged against
the allowance when management
believes the uncollectability of a loan or lease balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance. Management estimates the allowance balance required using past
loan and lease loss experience, the nature and volume of the portfolio, information about specific
borrower situations and estimated collateral values, economic conditions and other factors.
Allocations of the allowance may be made for specific loans and leases, but the entire allowance is
available for any loan or lease that, in managements judgment, should be charged-off.
A loan or lease is considered impaired when, based on current information and events, it is
probable we will be unable to collect the scheduled payments of principal and interest when due
according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan or lease and the borrower, including
the length of delay, the reasons for the delay, the borrowers prior payment record and the amount
of the shortfall in relation to the principal and interest owed. Impairment is measured on a
loan-by-loan basis for commercial loans and leases and construction loans by either the present
value of expected future cash flows discounted at the loans effective interest rate, the loans
obtainable market price or the fair value of collateral if the loan is collateral dependent. Large
groups of smaller balance homogeneous loans are collectively evaluated for impairment. We do not
separately identify individual residential and consumer loans for impairment disclosures.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales
when control over the assets has been surrendered. Control over transferred assets is deemed to be
surrendered when: (1) the assets have been isolated from the Bank and put presumptively beyond the
reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the
transferee obtains the right (free of conditions that constrain it from taking advantage of that
right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective
control over the transferred assets through an agreement to repurchase them before their maturity
or the ability to unilaterally cause the holder to return specific assets. Our transfers of
financial assets are limited to commercial loan participations sold, which were insignificant for
2010, 2009 and 2008, the 2010 sale of the guaranteed portions of certain Small Business
Administration-guaranteed loans, the 2010 sale of tax-exempt municipal bonds and the sale of
residential mortgage loans in the secondary market; the extent of the latter three are disclosed in
the Consolidated Statements of Cash Flows.
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at
cost less accumulated depreciation. Buildings and related components are depreciated using the
straight-line method with useful lives ranging from 5 to 33 years. Furniture, fixtures and
equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7
years. Maintenance, repairs and minor alterations are charged to current operations as
expenditures occur and major improvements are capitalized.
(Continued)
F-48
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-lived Assets: Premises and equipment and other long-lived assets are reviewed for
impairment when events indicate their carrying amount may not be recoverable from future
undiscounted cash flows. If impaired, the assets are recorded at the lower of carrying value or
fair value.
Foreclosed Assets: Assets acquired through or in lieu of foreclosure are initially
recorded at the estimated fair value net of estimated selling costs when acquired, establishing a
new cost basis. If fair value declines, a valuation allowance is recorded through noninterest
expense, as are collection and operating costs after acquisition.
Bank Owned Life Insurance: The Bank has purchased life insurance policies on certain key
officers. Bank owned life insurance is recorded at its cash surrender value, or the amount that
can be realized.
Repurchase Agreements: The Bank sells certain securities under agreements to repurchase.
The agreements are treated as collateralized financing transactions and the obligations to
repurchase securities sold are reflected as a liability in the Consolidated Balance Sheet. The
dollar amount of the securities underlying the agreements remains in the asset accounts.
Financial Instruments and Loan Commitments: Financial instruments include
off-balance-sheet credit instruments, such as commitments to make loans and commercial letters of
credit, issued to meet customer financing needs. The
face amount for these items represents the exposure to loss, before considering customer collateral
or ability to repay. Such financial instruments are recorded when they are funded. Instruments,
such as standby letters of credit, that are considered financial guarantees are recorded at fair
value.
Stock-Based Compensation: Compensation cost for equity-based awards is measured on the
grant date based on the fair value of the award at that date, and is recognized over the requisite
service period, net of estimated forfeitures. Fair value of stock option awards is estimated using
a closed option valuation (Black-Scholes) model. Fair value of restricted stock awards is based
upon the quoted market price of the common stock on the date of grant.
Income Taxes: Income tax expense is the total of the current year income tax due or
refundable, the change in deferred income tax assets and liabilities, and any adjustments related
to unrecognized tax benefits. Deferred income tax assets and liabilities are recognized for the
tax consequences of temporary differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates applicable to future years. A valuation allowance,
if needed, reduces deferred income tax assets to the amount expected to be realized. A full
valuation allowance was recorded at December 31, 2010 and 2009 as described in Note 8.
Fair Values of Financial Instruments: Fair values of financial instruments are estimated
using relevant market information and other assumptions. Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the estimates. The fair
value estimates of existing on- and off-balance sheet financial instruments do not include the
value of anticipated future business or the values of assets and liabilities not considered
financial instruments.
Earnings Per Share: Basic earnings per share is based on the weighted average number of
common shares and participating securities outstanding during the period. Diluted earnings per
share include the dilutive effect of additional potential common shares issuable under our
stock-based compensation plans and our common stock warrant, and are determined using the treasury
stock method. Our unvested stock awards, which contain non-forfeitable rights to dividends whether
paid or unpaid (i.e., participating securities), are included in the number of shares outstanding
for both basic and diluted earnings per share calculations. In the event of a net loss, our
unvested stock awards are excluded from the calculations of both basic and diluted earnings per
share.
(Continued)
F-49
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income (Loss): Comprehensive income (loss) consists of net income (loss) and
other comprehensive income (loss). Other comprehensive income includes unrealized gains and losses
on securities available for sale which are also recognized as separate components of equity. For
2010, 2009 and 2008, other comprehensive income (loss) also includes the change in fair value of
interest rate swaps, and the reclassification of unrealized gain on the interest rate swaps, as
discussed in more detail in Note 13.
Derivatives: Derivative financial instruments are recognized as assets or liabilities at
fair value. The accounting for changes in the fair value of derivatives depends on the use of the
derivatives and whether the derivatives qualify for hedge accounting. During 2008, our derivatives
consisted of interest rate swap agreements, which were used as part of our asset liability
management to help manage interest rate risk. We had no derivatives outstanding during 2010 or
2009. We do not use derivatives for trading purposes.
Changes in the fair value of derivatives that are designated as a hedge of the variability of cash
flows to be received on the hedged asset or liability and are effective are reported in other
comprehensive income. They are later reclassified into earnings in the same periods during which
the hedged transaction affects earnings and are included in the line item in which the hedged cash
flows are recorded. If hedge accounting does not apply, changes in the fair value of derivatives
are recognized immediately in current earnings as noninterest income or expense.
If designated as a hedge, we formally document the relationship between derivatives as hedged
items, as well as the risk-management objective and the strategy for undertaking hedge
transactions. This documentation includes linking cash flow hedges to specific assets on the
balance sheet. If designated as a hedge, we also formally assess, both at the inception and on an
ongoing basis, whether the derivative instruments that are used are highly effective in offsetting
changes in cash flows of the hedged items. Ineffective hedge gains and losses are recognized
immediately in current earnings as noninterest income or expense. We discontinue hedge accounting
when we
determine the derivative is no longer effective in offsetting changes in the cash flows of the
hedged item, the derivative is settled or terminates, or treatment of the derivatives as a hedge is
no longer appropriate or intended.
Contingencies: Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the likelihood of loss is probable
and an amount or range of loss can be reasonably estimated. We do not believe there are any such
matters that would have a material effect on the financial statements.
Operating Segment: While we monitor the revenue streams of the various products and
services offered, Mercantile manages its business on the basis of one operating segment, banking.
Adoption of New Accounting Standards: In December 2009, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) 2009-16, Accounting for Transfers of
Financial Assets (formerly Statement No. 166, Accounting for Transfers of Financial Assets, an
amendment of FASB Statement No. 140). This ASU amends the guidance on accounting for transfers of
financial assets, including securitization transactions, where entities have continued exposure to
risks related to transferred financial assets. This ASU also expands the disclosure requirements
for such transactions. It is effective as of the beginning of the first annual reporting period
that begins after November 15, 2009. The adoption of this ASU on January 1, 2010 had no impact on
our results of operations or financial position.
(Continued)
F-50
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In January 2010, the FASB issued ASU 2010-06, Improving Disclosure about Fair Value Measurements.
This ASU requires new disclosures on the amount and reason for transfers in and out of Level 1 and
Level 2 recurring fair value measurements. The ASU also requires disclosure of activities (i.e.,
on a gross basis), including purchases, sales, issuances, and settlements, in the reconciliation of
Level 3 fair value recurring measurements. The ASU clarifies existing disclosure requirements on
levels of disaggregation and disclosures about inputs and valuation techniques. The new disclosure
regarding Level 1 and Level 2 fair value measurements and clarification of existing disclosures are
effective for periods beginning after December 15, 2009. The disclosures about the reconciliation
of information in Level 3 recurring fair value measurements are required for periods beginning
after December 15, 2010. Upon adoption of the applicable portions of this ASU on January 1, 2010,
we provided the required disclosures as presented in Note 15. For those additional disclosures
required for fiscal years beginning after December 15, 2010, we anticipate first including those
disclosures in our financial statements for the period ending March 31, 2011.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. In order to provide greater transparency, this
ASU requires significant new disclosures on a disaggregated basis about the allowance for credit
losses (e.g., allowance for loan and lease losses for banks) and the credit quality of financing
receivables (e.g., loans and leases for banks). Under the ASU, a rollforward schedule of the
allowance for loan and lease losses, with the ending allowance balance further disaggregated on the
basis of the impairment method, along with the related ending loan and lease balance and
significant purchases and sales of loans and leases during the period are to be disclosed by
portfolio segment. Additional disclosures are required by class of loan and lease, including
credit quality, aging of past due loans and leases, nonaccrual status and impairment information.
Disclosure of the nature and extent of troubled debt restructurings that occurred during the period
and their effect on the allowance for loan and leases losses as well as the effect on the allowance
of troubled debt restructurings that occurred within the prior twelve months that defaulted during
the current reporting period will also be required. The disclosures are to be presented at the
level of disaggregation that management uses when assessing and monitoring the loan and lease
portfolios risk and performance. The majority of the disclosures required as of the end of a
reporting period are effective for interim and annual periods ending after December 15, 2010 and
have been presented in Note 3. The disclosures about activity that occurred prior to the issuance
of the ASU are effective for reporting periods beginning after December 15, 2010. In January 2011,
the FASB issued ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt
Restructurings in Update No. 2010-20, which temporarily defers the effective date for disclosures
related to troubled debt restructurings, which is currently expected to be effective for periods
ending after June 15, 2011.
(Continued)
F-51
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 2 SECURITIES
The amortized cost and fair value of available for sale securities and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency
debt obligations |
|
$ |
121,633,000 |
|
|
$ |
1,704,000 |
|
|
$ |
(1,775,000 |
) |
|
$ |
121,562,000 |
|
Mortgage-backed securities |
|
|
44,340,000 |
|
|
|
2,601,000 |
|
|
|
0 |
|
|
|
46,941,000 |
|
Michigan Strategic Fund bonds |
|
|
18,175,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
18,175,000 |
|
Municipal general obligation bonds |
|
|
28,594,000 |
|
|
|
227,000 |
|
|
|
(779,000 |
) |
|
|
28,042,000 |
|
Municipal revenue bonds |
|
|
4,841,000 |
|
|
|
46,000 |
|
|
|
(44,000 |
) |
|
|
4,843,000 |
|
Mutual funds |
|
|
1,264,000 |
|
|
|
3,000 |
|
|
|
0 |
|
|
|
1,267,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
218,847,000 |
|
|
$ |
4,581,000 |
|
|
$ |
(2,598,000 |
) |
|
$ |
220,830,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency
debt obligations |
|
$ |
96,438,000 |
|
|
$ |
490,000 |
|
|
$ |
(1,384,000 |
) |
|
$ |
95,544,000 |
|
Mortgage-backed securities |
|
|
62,171,000 |
|
|
|
2,811,000 |
|
|
|
0 |
|
|
|
64,982,000 |
|
Michigan Strategic Fund bonds |
|
|
20,550,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
20,550,000 |
|
Mutual funds |
|
|
1,425,000 |
|
|
|
0 |
|
|
|
(9,000 |
) |
|
|
1,416,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
180,584,000 |
|
|
$ |
3,301,000 |
|
|
$ |
(1,393,000 |
) |
|
$ |
182,492,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity
were as follows at December 31, 2009 (none at December 31, 2010):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Carrying |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Amount |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal general obligation bonds |
|
$ |
49,892,000 |
|
|
$ |
1,000,000 |
|
|
$ |
(111,000 |
) |
|
$ |
50,781,000 |
|
Municipal revenue bonds |
|
|
9,319,000 |
|
|
|
190,000 |
|
|
|
(19,000 |
) |
|
|
9,490,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
59,211,000 |
|
|
$ |
1,190,000 |
|
|
$ |
(130,000 |
) |
|
$ |
60,271,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
F-52
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 2 SECURITIES (Continued)
Securities with unrealized losses at year-end 2010 and 2009, aggregated by investment category and
length of time that individual securities have been in a continuous loss position, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Description of Securities |
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency
debt obligations |
|
$ |
56,588,000 |
|
|
$ |
(1,775,000 |
) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
56,588,000 |
|
|
$ |
(1,775,000 |
) |
Mortgage-backed securities |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Michigan Strategic Fund bonds |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Mutual funds |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Municipal general
obligation bonds |
|
|
7,847,000 |
|
|
|
(299,000 |
) |
|
|
6,497,000 |
|
|
|
(480,000 |
) |
|
|
14,344,000 |
|
|
|
(779,000 |
) |
Municipal revenue bonds |
|
|
811,000 |
|
|
|
(25,000 |
) |
|
|
805,000 |
|
|
|
(19,000 |
) |
|
|
1,616,000 |
|
|
|
(44,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
65,246,000 |
|
|
$ |
(2,099,000 |
) |
|
$ |
7,302,000 |
|
|
$ |
(499,000 |
) |
|
$ |
72,548,000 |
|
|
$ |
(2,598,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency
debt obligations |
|
$ |
50,190,000 |
|
|
$ |
(1,322,000 |
) |
|
$ |
7,927,000 |
|
|
$ |
(62,000 |
) |
|
$ |
58,117,000 |
|
|
$ |
(1,384,000 |
) |
Mortgage-backed securities |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Michigan Strategic Fund bonds |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Mutual funds |
|
|
0 |
|
|
|
0 |
|
|
|
1,211,000 |
|
|
|
(9,000 |
) |
|
|
1,211,000 |
|
|
|
(9,000 |
) |
Municipal general
obligation bonds |
|
|
738,000 |
|
|
|
(5,000 |
) |
|
|
8,638,000 |
|
|
|
(106,000 |
) |
|
|
9,376,000 |
|
|
|
(111,000 |
) |
Municipal revenue bonds |
|
|
228,000 |
|
|
|
(12,000 |
) |
|
|
1,073,000 |
|
|
|
(7,000 |
) |
|
|
1,301,000 |
|
|
|
(19,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
51,156,000 |
|
|
$ |
(1,339,000 |
) |
|
$ |
18,849,000 |
|
|
$ |
(184,000 |
) |
|
$ |
70,005,000 |
|
|
$ |
(1,523,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We evaluate securities for other-than-temporary impairment at least on a quarterly basis.
Consideration is given to the length of time and the extent to which the fair value has been less
than cost, the financial condition and near-term prospects of the issuer, our intent to sell the
security, whether it is more likely than not that we will be required to sell the security before
recovery and if we do not expect to recover the entire amortized cost basis of the security. In
analyzing an issuers financial condition, we may consider whether the securities are issued by the
federal government or its agencies, whether downgrades by bond rating agencies have occurred and
the results of reviews of the issuers financial condition.
(Continued)
F-53
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 2 SECURITIES (Continued)
There were 22 municipal general obligation bonds and three municipal revenue bonds in a continuous
loss position for 12 months or more at December 31, 2010. At December 31, 2010, 91 debt securities
with a combined fair value totaling $72.5 million have unrealized losses with aggregate
depreciation of $2.6 million, or 1.2% from the amortized cost basis of total securities. At
December 31, 2010, 178 debt securities and a mutual fund with a combined fair value totaling $119.2
million have unrealized gains with aggregate appreciation of $4.6 million, or 2.1% from the
amortized cost basis of total securities. After we considered whether the securities were issued
by the federal government or its agencies and whether downgrades by bond rating agencies had
occurred, we determined that unrealized losses were due to changing interest rate environments. As
we do not intend to sell the securities, we believe it is more likely than not that we will not be
required to sell the securities before recovery and we do expect to recover the entire amortized
cost of the securities, no declines are deemed to be other-than-temporary.
The amortized cost and fair values of debt securities at year-end 2010, by contractual maturity,
are shown below. The contractual maturity is utilized below for U.S. Government agency debt
obligations and municipal bonds. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties. Securities not due at a single maturity date, primarily mortgage backed
securities, are shown separately.
The maturities of securities and their weighted average yields at December 31, 2010 are also shown
in the following table. The yields for municipal securities are shown at their tax equivalent
yield.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Average |
|
|
Amortized |
|
|
Fair |
|
|
|
Yield |
|
|
Cost |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
NA |
|
$ |
0 |
|
|
$ |
0 |
|
Due from one to five years |
|
|
5.80 |
% |
|
|
5,430,000 |
|
|
|
5,816,000 |
|
Due from five to ten years |
|
|
3.96 |
|
|
|
21,318,000 |
|
|
|
21,248,000 |
|
Due after ten years |
|
|
4.73 |
|
|
|
128,320,000 |
|
|
|
127,383,000 |
|
Mortgage-backed securities |
|
|
5.14 |
|
|
|
44,340,000 |
|
|
|
46,941,000 |
|
Michigan Strategic Fund bonds |
|
|
3.04 |
|
|
|
18,175,000 |
|
|
|
18,175,000 |
|
Mutual funds |
|
|
3.08 |
|
|
|
1,264,000 |
|
|
|
1,267,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.62 |
% |
|
$ |
218,847,000 |
|
|
$ |
220,830,000 |
|
|
|
|
|
|
|
|
|
|
|
|
After analyzing our current and forecasted federal income tax position, we sold certain tax-exempt
municipal bonds with an aggregate book value of $20.0 million in late March of 2010. Immediately
subsequent to the sale, we reclassified the remaining tax-exempt municipal bonds with an amortized
cost of $39.2 million from held to maturity to available for sale. The net unrealized gain at the
date of transfer amounted to $0.4 million and was reported in other comprehensive income net of tax
effect. During 2009 and 2008, there were no securities sold.
At year-end 2010 and 2009, the amortized cost of securities issued by the State of Michigan and all
its political subdivisions totaled $33.4 million and $59.2 million, with an estimated fair value of
$32.9 million and $60.3 million, respectively. Total securities of any other specific issuer,
other than the U.S. Government and its agencies, did not exceed 10% of shareholders equity.
(Continued)
F-54
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 2 SECURITIES (Continued)
The carrying value of U.S. Government agency debt obligations and mortgage-backed securities that
are pledged to secure repurchase agreements, other deposits, and letters of credit issued on behalf
of our customers was $166.9 million and $158.1 million at December 31, 2010 and 2009, respectively.
In addition, substantially all of our municipal bonds have been pledged to the Discount Window of
the Federal Reserve Bank of Chicago. Investments in FHLB stock are restricted and may only be
resold, or redeemed by, the issuer.
NOTE 3 LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Year-end loans and leases disaggregated by class of loan and lease within the loan and lease
portfolio segments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
Increase |
|
|
|
Balance |
|
|
% |
|
|
Balance |
|
|
% |
|
|
(Decrease) |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
288,515,000 |
|
|
|
22.8 |
% |
|
$ |
408,234,000 |
|
|
|
26.5 |
% |
|
|
(29.3 |
)% |
Vacant land, land
development, and
residential construction |
|
|
83,786,000 |
|
|
|
6.6 |
|
|
|
109,293,000 |
|
|
|
7.1 |
|
|
|
(23.3 |
) |
Real estate owner occupied |
|
|
277,377,000 |
|
|
|
22.0 |
|
|
|
332,793,000 |
|
|
|
21.6 |
|
|
|
(16.7 |
) |
Real estate non-owner
occupied |
|
|
449,104,000 |
|
|
|
35.6 |
|
|
|
503,736,000 |
|
|
|
32.7 |
|
|
|
(10.8 |
) |
Real estate multi-family
and residential rental |
|
|
77,188,000 |
|
|
|
6.1 |
|
|
|
88,657,000 |
|
|
|
5.8 |
|
|
|
(12.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
1,175,970,000 |
|
|
|
93.1 |
|
|
|
1,442,713,000 |
|
|
|
93.7 |
|
|
|
(18.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and other |
|
|
51,186,000 |
|
|
|
4.1 |
|
|
|
57,537,000 |
|
|
|
3.7 |
|
|
|
(11.0 |
) |
1-4 family mortgages |
|
|
35,474,000 |
|
|
|
2.8 |
|
|
|
39,568,000 |
|
|
|
2.6 |
|
|
|
(10.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retail |
|
|
86,660,000 |
|
|
|
6.9 |
|
|
|
97,105,000 |
|
|
|
6.3 |
|
|
|
(10.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
1,262,630,000 |
|
|
|
100.0 |
% |
|
$ |
1,539,818,000 |
|
|
|
100.0 |
% |
|
|
(18.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrations within the loan portfolio were as follows at year-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
Percentage of |
|
|
Balance |
|
Loan Portfolio |
|
Balance |
|
Loan Portfolio |
Commercial real estate loans to
lessors of non-residential
buildings |
|
$ |
391,056,000 |
|
|
|
31.0 |
% |
|
$ |
467,017,000 |
|
|
|
30.3 |
% |
(Continued)
F-55
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 3 LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued)
Year-end nonperforming loans and leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Loans and leases past due 90 days or more still accruing interest |
|
$ |
766,000 |
|
|
$ |
243,000 |
|
Nonaccrual loans and leases, including troubled debt restructurings |
|
|
63,915,000 |
|
|
|
81,818,000 |
|
Troubled debt restructurings, accruing interest |
|
|
4,763,000 |
|
|
|
2,989,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans and leases |
|
$ |
69,444,000 |
|
|
$ |
85,050,000 |
|
|
|
|
|
|
|
|
Nonaccrual loans and leases, including troubled debt restructurings, were as follows as of December 31, 2010:
|
|
|
|
|
|
|
Recorded |
|
|
|
Principal |
|
|
|
Balance |
|
Commercial: |
|
|
|
|
Commercial and industrial |
|
$ |
10,128,000 |
|
Vacant land, land development and residential construction |
|
|
12,441,000 |
|
Real estate owner occupied |
|
|
10,172,000 |
|
Real estate non-owner occupied |
|
|
22,609,000 |
|
Real estate multi-family and residential rental |
|
|
4,686,000 |
|
|
|
|
|
Total commercial |
|
|
60,036,000 |
|
|
|
|
|
|
Retail: |
|
|
|
|
Home equity and other |
|
|
2,425,000 |
|
1-4 family mortgages |
|
|
1,454,000 |
|
|
|
|
|
Total retail |
|
|
3,879,000 |
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans and leases |
|
$ |
63,915,000 |
|
|
|
|
|
(Continued)
F-56
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 3 LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued)
An age analysis of past due loans and leases is as follows as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded |
|
|
|
3059 |
|
|
6089 |
|
|
Than 89 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Balance > 89 |
|
|
|
Days |
|
|
Days |
|
|
Days |
|
|
Total |
|
|
|
|
|
|
Loans and |
|
|
Days and |
|
|
|
Past Due |
|
|
Past Due |
|
|
Past Due |
|
|
Past Due |
|
|
Current |
|
|
Leases |
|
|
Accruing |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
industrial |
|
$ |
280,000 |
|
|
$ |
2,074,000 |
|
|
$ |
1,474,000 |
|
|
$ |
3,828,000 |
|
|
$ |
284,687,000 |
|
|
$ |
288,515,000 |
|
|
$ |
19,000 |
|
Vacant land, land
development, and
residential
construction |
|
|
0 |
|
|
|
453,000 |
|
|
|
3,586,000 |
|
|
|
4,039,000 |
|
|
|
79,747,000 |
|
|
|
83,786,000 |
|
|
|
0 |
|
Real estate
owner occupied |
|
|
1,194,000 |
|
|
|
574,000 |
|
|
|
6,497,000 |
|
|
|
8,265,000 |
|
|
|
269,112,000 |
|
|
|
277,377,000 |
|
|
|
0 |
|
Real estate
non-owner occupied |
|
|
164,000 |
|
|
|
4,341,000 |
|
|
|
12,520,000 |
|
|
|
17,025,000 |
|
|
|
432,079,000 |
|
|
|
449,104,000 |
|
|
|
747,000 |
|
Real estate
multi-family and
residential rental |
|
|
672,000 |
|
|
|
0 |
|
|
|
2,692,000 |
|
|
|
3,364,000 |
|
|
|
73,824,000 |
|
|
|
77,188,000 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
2,310,000 |
|
|
|
7,442,000 |
|
|
|
26,769,000 |
|
|
|
36,521,000 |
|
|
|
1,139,449,000 |
|
|
|
1,175,970,000 |
|
|
|
766,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and other |
|
|
1,024,000 |
|
|
|
179,000 |
|
|
|
227,000 |
|
|
|
1,430,000 |
|
|
|
49,756,000 |
|
|
|
51,186,000 |
|
|
|
0 |
|
1- 4 family mortgages |
|
|
365,000 |
|
|
|
0 |
|
|
|
316,000 |
|
|
|
681,000 |
|
|
|
34,793,000 |
|
|
|
35,474,000 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retail |
|
|
1,389,000 |
|
|
|
179,000 |
|
|
|
543,000 |
|
|
|
2,111,000 |
|
|
|
84,549,000 |
|
|
|
86,660,000 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total past due
loans and leases |
|
$ |
3,699,000 |
|
|
$ |
7,621,000 |
|
|
$ |
27,312,000 |
|
|
$ |
38,632,000 |
|
|
$ |
1,223,998,000 |
|
|
$ |
1,262,630,000 |
|
|
$ |
766,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
F-57
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 3 LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued)
Impaired loans and leases were as follows as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid |
|
|
|
|
|
|
|
|
|
Contractual |
|
|
Recorded |
|
|
|
|
|
|
Principal |
|
|
Principal |
|
|
Related |
|
|
|
Balance |
|
|
Balance |
|
|
Allowance |
|
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
3,133,000 |
|
|
$ |
2,135,000 |
|
|
|
|
|
Vacant land, land development and
residential construction |
|
|
13,255,000 |
|
|
|
10,071,000 |
|
|
|
|
|
Real estate owner occupied |
|
|
9,327,000 |
|
|
|
4,920,000 |
|
|
|
|
|
Real estate non-owner occupied |
|
|
23,380,000 |
|
|
|
15,775,000 |
|
|
|
|
|
Real estate multi-family and residential rental |
|
|
1,657,000 |
|
|
|
1,052,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
50,752,000 |
|
|
|
33,953,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and other |
|
|
277,000 |
|
|
|
151,000 |
|
|
|
|
|
1-4 family mortgages |
|
|
151,000 |
|
|
|
137,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retail |
|
|
428,000 |
|
|
|
288,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with no related allowance recorded |
|
$ |
51,180,000 |
|
|
$ |
34,241,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
7,405,000 |
|
|
$ |
6,922,000 |
|
|
$ |
3,554,000 |
|
Vacant land, land development and
residential construction |
|
|
5,702,000 |
|
|
|
4,370,000 |
|
|
|
954,000 |
|
Real estate owner occupied |
|
|
7,047,000 |
|
|
|
6,257,000 |
|
|
|
1,996,000 |
|
Real estate non-owner occupied |
|
|
13,773,000 |
|
|
|
7,875,000 |
|
|
|
1,091,000 |
|
Real estate multi-family and residential rental |
|
|
5,544,000 |
|
|
|
3,472,000 |
|
|
|
909,000 |
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
39,471,000 |
|
|
|
28,896,000 |
|
|
|
8,504,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and other |
|
|
1,799,000 |
|
|
|
1,910,000 |
|
|
|
1,007,000 |
|
1-4 family mortgages |
|
|
1,141,000 |
|
|
|
909,000 |
|
|
|
191,000 |
|
|
|
|
|
|
|
|
|
|
|
Total retail |
|
|
2,940,000 |
|
|
|
2,819,000 |
|
|
|
1,198,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with an allowance recorded |
|
$ |
42,411,000 |
|
|
$ |
31,715,000 |
|
|
$ |
9,702,000 |
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans and leases: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
90,223,000 |
|
|
|
62,849,000 |
|
|
|
8,504,000 |
|
Retail |
|
|
3,368,000 |
|
|
|
3,107,000 |
|
|
|
1,198,000 |
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans and leases |
|
$ |
93,591,000 |
|
|
$ |
65,956,000 |
|
|
$ |
9,702,000 |
|
|
|
|
|
|
|
|
|
|
|
(Continued)
F-58
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 3 LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued)
Impaired loans and leases were as follows as of December 31, 2009:
|
|
|
|
|
|
|
Recorded |
|
|
|
Principal |
|
|
|
Balance |
|
|
|
|
|
|
Loans with no allocated allowance for loan and lease losses |
|
$ |
25,500,000 |
|
Loans with allocated allowance for loan and lease losses |
|
|
39,855,000 |
|
|
|
|
|
|
|
|
|
|
Total impaired loans and leases |
|
$ |
65,355,000 |
|
|
|
|
|
Amount of the allowance for loan and lease losses allocated |
|
$ |
9,832,000 |
|
Impaired loans and leases for which no allocation of the allowance for loan and lease losses has
been made generally reflect situations whereby the loans and leases have been charged-down to
estimated collateral value. Interest income of $0.2 million, $0.1 million and less than $0.1
million was recognized on impaired loans during 2010, 2009 and 2008, respectively. Average
impaired loans were $75.1 million, $65.0 million and $35.9 million during 2010, 2009 and 2008,
respectively. Lost interest income on nonaccrual loans totaled $2.1 million during 2010, 2009 and
2008. Nonperforming loans include both smaller balance homogenous loans that are collectively
evaluated for impairment and the above individually classified impaired loans.
(Continued)
F-59
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 3 LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued)
Credit Quality Indicators. We utilize a comprehensive grading system for our commercial loans and
leases. All commercial loans and leases are graded on a ten grade rating system. The rating
system utilizes standardized grade paradigms that analyze several critical factors such as cash
flow, operating performance, financial condition, collateral, industry condition and management.
All commercial loans and leases are graded at inception and reviewed and, if appropriate, re-graded
at various intervals thereafter. The risk assessment for retail loans is primarily based on the
type of collateral.
Loans and leases by credit quality indicators were as follows as of December 31, 2010:
Commercial credit exposure credit risk profiled by internal credit risk grades:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
Vacant Land, |
|
|
Commercial |
|
|
Commercial |
|
|
Real Estate - |
|
|
|
Commercial |
|
|
Land Development, |
|
|
Real Estate - |
|
|
Real Estate - |
|
|
Multi-Family |
|
|
|
and |
|
|
and Residential |
|
|
Owner |
|
|
Non-Owner |
|
|
and Residential |
|
|
|
Industrial |
|
|
Construction |
|
|
Occupied |
|
|
Occupied |
|
|
Rental |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal credit risk grade groupings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grades 1 4 |
|
$ |
161,623,000 |
|
|
$ |
8,098,000 |
|
|
$ |
137,340,000 |
|
|
$ |
160,746,000 |
|
|
$ |
29,902,000 |
|
Grades 5 7 |
|
|
113,904,000 |
|
|
|
58,326,000 |
|
|
|
123,572,000 |
|
|
|
249,246,000 |
|
|
|
31,852,000 |
|
Grades 8 9 |
|
|
12,988,000 |
|
|
|
17,362,000 |
|
|
|
16,465,000 |
|
|
|
39,112,000 |
|
|
|
15,434,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
$ |
288,515,000 |
|
|
$ |
83,786,000 |
|
|
$ |
277,377,000 |
|
|
$ |
449,104,000 |
|
|
$ |
77,188,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail credit exposure credit risk profiled by collateral type:
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
|
Retail |
|
|
|
Home Equity |
|
|
1-4 Family |
|
|
|
and Other |
|
|
Mortgages |
|
|
|
|
|
|
|
|
|
|
Total retail |
|
$ |
51,186,000 |
|
|
$ |
35,474,000 |
|
|
|
|
|
|
|
|
(Continued)
F-60
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 3 LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued)
All commercial loans and leases are graded using the following number system:
|
|
|
Grade 1.
|
|
Excellent credit rating that contain very little, if any, risk of loss. |
|
|
|
Grade 2.
|
|
Strong sources of repayment and have low repayment risk. |
|
|
|
Grade 3.
|
|
Good sources of repayment and have limited repayment risk. |
|
|
|
Grade 4.
|
|
Adequate sources of repayment and acceptable repayment risk; however, characteristics are present that render the
credit more vulnerable to a negative event. |
|
|
|
Grade 5.
|
|
Marginally acceptable sources of repayment and exhibit defined weaknesses and
negative characteristics. |
|
|
|
Grade 6.
|
|
Well defined weaknesses which may include negative current cash flow, high leverage, or operating losses. Generally,
if the credit does not stabilize or if further deterioration is observed in the near term, the loan will likely be
downgraded and placed on the Watch List (i.e., list of lending relationships that receive increased scrutiny and
review by the Board of Directors and senior management). |
|
|
|
Grade 7.
|
|
Defined weaknesses or negative trends that merit close monitoring through Watch List status. |
|
|
|
Grade 8.
|
|
Inadequately protected by current sound net worth, paying capacity of the obligor, or pledged collateral, resulting in
a distinct possibility of loss requiring close monitoring through Watch List status. |
|
|
|
Grade 9.
|
|
Vital weaknesses exist where collection of principal is highly questionable. |
|
|
|
Grade 10.
|
|
Considered uncollectible and of such little value that their continuance as an asset
is not warranted. |
The primary risk elements with respect to commercial loans and leases are the financial condition
of the borrower, the sufficiency of collateral, and timeliness of scheduled payments. We have a
policy of requesting and reviewing periodic financial statements from commercial loan and lease
customers and employ a disciplined and formalized review of the existence of collateral and its
value. The primary risk element with respect to each residential real estate loan and consumer
loan is the timeliness of scheduled payments. We have a reporting system that monitors past due
loans and leases and have adopted policies to pursue creditors rights in order to preserve our
collateral position.
(Continued)
F-61
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 3 LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued)
The allowance for loan and lease losses and recorded investments in loans and leases for the
year-ended December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Retail |
|
|
|
|
|
|
|
|
|
Loans and Leases |
|
|
Loans |
|
|
Unallocated |
|
|
Total |
|
Allowance for loan and lease losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
46,603,000 |
|
|
$ |
1,256,000 |
|
|
$ |
19,000 |
|
|
$ |
47,878,000 |
|
Provision for loan and
lease losses |
|
|
29,030,000 |
|
|
|
2,752,000 |
|
|
|
18,000 |
|
|
|
31,800,000 |
|
Charge-offs |
|
|
(35,968,000 |
) |
|
|
(1,160,000 |
) |
|
|
0 |
|
|
|
(37,128,000 |
) |
Recoveries |
|
|
2,694,000 |
|
|
|
124,000 |
|
|
|
0 |
|
|
|
2,818,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
42,359,000 |
|
|
$ |
2,972,000 |
|
|
$ |
37,000 |
|
|
$ |
45,368,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually
evaluated for impairment |
|
$ |
8,504,000 |
|
|
$ |
1,198,000 |
|
|
$ |
0 |
|
|
$ |
9,702,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively
evaluated for impairment |
|
$ |
33,855,000 |
|
|
$ |
1,774,000 |
|
|
$ |
37,000 |
|
|
$ |
35,666,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
1,175,970,000 |
|
|
$ |
86,660,000 |
|
|
|
|
|
|
$ |
1,262,630,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually
evaluated for impairment |
|
$ |
62,850,000 |
|
|
$ |
3,106,000 |
|
|
|
|
|
|
$ |
65,956,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively
evaluated for impairment |
|
$ |
1,113,120,000 |
|
|
$ |
83,554,000 |
|
|
|
|
|
|
$ |
1,196,674,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity in the allowance for loan and lease losses is as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
27,108,000 |
|
|
$ |
25,814,000 |
|
Provision for loan and lease losses |
|
|
59,000,000 |
|
|
|
21,200,000 |
|
Charge-offs |
|
|
(39,621,000 |
) |
|
|
(20,594,000 |
) |
Recoveries |
|
|
1,391,000 |
|
|
|
688,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
47,878,000 |
|
|
$ |
27,108,000 |
|
|
|
|
|
|
|
|
(Continued)
F-62
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 4 PREMISES AND EQUIPMENT, NET
Year-end premises and equipment were as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Land and improvements |
|
$ |
8,531,000 |
|
|
$ |
8,531,000 |
|
Buildings |
|
|
24,528,000 |
|
|
|
24,515,000 |
|
Furniture and equipment |
|
|
12,478,000 |
|
|
|
12,532,000 |
|
|
|
|
|
|
|
|
|
|
|
45,537,000 |
|
|
|
45,578,000 |
|
Less: accumulated depreciation |
|
|
17,664,000 |
|
|
|
15,894,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premises and equipment |
|
$ |
27,873,000 |
|
|
$ |
29,684,000 |
|
|
|
|
|
|
|
|
Depreciation expense totaled $1.9 million in 2010, $2.5 million in 2009, and $2.7 million in 2008.
NOTE 5 DEPOSITS
Deposits at year-end are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
Increase |
|
|
|
Balance |
|
|
% |
|
|
Balance |
|
|
% |
|
|
(Decrease) |
|
Noninterest-bearing
demand |
|
$ |
112,944,000 |
|
|
|
8.9 |
% |
|
$ |
121,157,000 |
|
|
|
8.6 |
% |
|
|
(6.8 |
)% |
Interest-bearing
checking |
|
|
158,177,000 |
|
|
|
12.4 |
|
|
|
86,320,000 |
|
|
|
6.2 |
|
|
|
83.2 |
|
Money market |
|
|
150,631,000 |
|
|
|
11.8 |
|
|
|
32,008,000 |
|
|
|
2.3 |
|
|
|
370.6 |
|
Savings |
|
|
60,201,000 |
|
|
|
4.7 |
|
|
|
38,625,000 |
|
|
|
2.8 |
|
|
|
55.9 |
|
Time, under $100,000 |
|
|
75,857,000 |
|
|
|
6.0 |
|
|
|
105,195,000 |
|
|
|
7.5 |
|
|
|
(27.9 |
) |
Time, $100,000 and
over |
|
|
206,954,000 |
|
|
|
16.2 |
|
|
|
293,455,000 |
|
|
|
20.9 |
|
|
|
(29.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
764,764,000 |
|
|
|
60.0 |
|
|
|
676,760,000 |
|
|
|
48.3 |
|
|
|
13.0 |
|
Out-of-area time,
under $100,000 |
|
|
37,253,000 |
|
|
|
2.9 |
|
|
|
62,760,000 |
|
|
|
4.5 |
|
|
|
(40.6 |
) |
Out-of-area time,
$100,000 and over |
|
|
471,815,000 |
|
|
|
37.1 |
|
|
|
662,107,000 |
|
|
|
47.2 |
|
|
|
(28.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
509,068,000 |
|
|
|
40.0 |
|
|
|
724,867,000 |
|
|
|
51.7 |
|
|
|
(29.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
1,273,832,000 |
|
|
|
100.0 |
% |
|
$ |
1,401,627,000 |
|
|
|
100.0 |
% |
|
|
(9.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Out-of-area certificates of deposit consist of certificates obtained from depositors outside of the
primary market areas. As of December 31, 2010, out-of-area certificates of deposit totaling $486.9
million were obtained through deposit brokers, with the remaining $22.2 million obtained directly
from the depositors.
(Continued)
F-63
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 5 DEPOSITS (Continued)
The following table depicts the maturity distribution for certificates of deposit at year-end:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
In one year or less |
|
$ |
495,914,000 |
|
|
$ |
850,801,000 |
|
In one to two years |
|
|
179,867,000 |
|
|
|
186,135,000 |
|
In two to three years |
|
|
70,602,000 |
|
|
|
68,210,000 |
|
In three to four years |
|
|
27,842,000 |
|
|
|
11,565,000 |
|
In four to five years |
|
|
17,654,000 |
|
|
|
6,806,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total certificates
of deposit |
|
$ |
791,879,000 |
|
|
$ |
1,123,517,000 |
|
|
|
|
|
|
|
|
The following table depicts the maturity distribution for certificates of deposit with balances of
$100,000 or more at year-end:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Up to three months |
|
$ |
184,283,000 |
|
|
$ |
314,358,000 |
|
Three months to six months |
|
|
108,963,000 |
|
|
|
164,870,000 |
|
Six months to twelve months |
|
|
128,315,000 |
|
|
|
235,315,000 |
|
Over twelve months |
|
|
257,208,000 |
|
|
|
241,019,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total certificates of deposit |
|
$ |
678,769,000 |
|
|
$ |
955,562,000 |
|
|
|
|
|
|
|
|
NOTE 6 SHORT-TERM BORROWINGS
Information regarding securities sold under agreements to repurchase at year-end is summarized below:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
|
|
|
|
|
|
|
|
Outstanding balance at year-end |
|
$ |
116,979,000 |
|
|
$ |
99,755,000 |
|
Weighted average interest rate at year-end |
|
|
0.69 |
% |
|
|
1.41 |
% |
|
|
|
|
|
|
|
|
|
Average daily balance during the year |
|
|
107,781,000 |
|
|
|
98,409,000 |
|
Weighted average interest rate during the year |
|
|
1.31 |
% |
|
|
1.87 |
% |
|
|
|
|
|
|
|
|
|
Maximum daily balance during the year |
|
|
133,280,000 |
|
|
|
111,692,000 |
|
Securities sold under agreements to repurchase (repurchase agreements) generally have original
maturities of less than one year. Repurchase agreements are treated as financings, and the
obligations to repurchase securities sold are reflected as liabilities. Securities involved with
the repurchase agreements are recorded as assets of our Bank and are held in safekeeping by a
correspondent bank. Repurchase agreements are offered principally to certain large deposit
customers. Repurchase agreements are secured by securities with an aggregate market value equal to
the aggregate outstanding balance.
(Continued)
F-64
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 7 FEDERAL HOME LOAN BANK ADVANCES
Our outstanding balances at December 31, 2010 totaled $65.0 million and mature at varying dates
from June 2011 through January 2014, with fixed rates of interest from 3.04% to 4.42% and averaging
3.73%. At December 31, 2009, outstanding balances totaled $205.0 million with maturities ranging
from January 2010 through January 2014 and fixed rates of interest from 2.95% to 4.18% and
averaging 3.50%.
Each advance is payable at its maturity date, and is subject to a prepayment fee if paid prior to
the maturity date. The advances are collateralized by residential mortgage loans, first mortgage
liens on multi-family residential property loans, first mortgage liens on commercial real estate
property loans, and substantially all other assets of our Bank, under a blanket lien arrangement.
Our borrowing line of credit as of December 31, 2010 totaled $169.7 million, with availability of
$104.7 million.
Maturities over the next five years are:
|
|
|
|
|
2011 |
|
$ |
10,000,000 |
|
2012 |
|
|
40,000,000 |
|
2013 |
|
|
10,000,000 |
|
2014 |
|
|
5,000,000 |
|
2015 |
|
|
0 |
|
NOTE 8 FEDERAL INCOME TAXES
The consolidated income tax expense (benefit) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current expense (benefit) |
|
$ |
0 |
|
|
$ |
(4,483,000 |
) |
|
$ |
(3,318,000 |
) |
Deferred benefit |
|
|
(47,000 |
) |
|
|
(13,276,000 |
) |
|
|
(1,558,000 |
) |
Deferred expense establishment of valuation allowance |
|
|
0 |
|
|
|
23,249,000 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
Tax expense (benefit) |
|
$ |
(47,000 |
) |
|
$ |
5,490,000 |
|
|
$ |
(4,876,000 |
) |
|
|
|
|
|
|
|
|
|
|
For 2010, the tax benefit reflected in continuing operations relates to adjustments between other
comprehensive income and continuing operations tax expense due to accounting rules related to
intraperiod tax allocation.
A reconciliation of the differences between the federal income tax expense (benefit) recorded and
the amount computed by applying the federal statutory rate to income before income taxes is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at statutory rate (35%) |
|
$ |
(4,677,000 |
) |
|
$ |
(16,309,000 |
) |
|
$ |
(3,442,000 |
) |
Increase (decrease) from |
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest |
|
|
(706,000 |
) |
|
|
(866,000 |
) |
|
|
(818,000 |
) |
Bank owned life insurance |
|
|
(601,000 |
) |
|
|
(505,000 |
) |
|
|
(605,000 |
) |
Change in valuation allowance |
|
|
5,896,000 |
|
|
|
23,249,000 |
|
|
|
0 |
|
Other |
|
|
41,000 |
|
|
|
(79,000 |
) |
|
|
(11,000 |
) |
|
|
|
|
|
|
|
|
|
|
Tax expense (benefit) |
|
$ |
(47,000 |
) |
|
$ |
5,490,000 |
|
|
$ |
(4,876,000 |
) |
|
|
|
|
|
|
|
|
|
|
(Continued)
F-65
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 8 FEDERAL INCOME TAXES (Continued)
Significant components of deferred tax assets and liabilities as of December 31, 2010 and 2009 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Deferred income tax assets |
|
|
|
|
|
|
|
|
Allowance for loan and lease losses |
|
$ |
15,879,000 |
|
|
$ |
16,757,000 |
|
Deferred loan fees |
|
|
165,000 |
|
|
|
160,000 |
|
Deferred compensation |
|
|
631,000 |
|
|
|
661,000 |
|
Nonaccrual loan interest income |
|
|
935,000 |
|
|
|
480,000 |
|
Fair value write-downs on foreclosed properties |
|
|
2,038,000 |
|
|
|
1,436,000 |
|
Net operating loss carryforward |
|
|
10,379,000 |
|
|
|
4,941,000 |
|
Tax credit carryforwards |
|
|
807,000 |
|
|
|
668,000 |
|
Other |
|
|
704,000 |
|
|
|
726,000 |
|
|
|
|
|
|
|
|
|
|
|
31,538,000 |
|
|
|
25,829,000 |
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities |
|
|
|
|
|
|
|
|
Depreciation |
|
|
639,000 |
|
|
|
770,000 |
|
Unrealized gain on securities |
|
|
694,000 |
|
|
|
648,000 |
|
Interest rate swaps |
|
|
0 |
|
|
|
33,000 |
|
Other |
|
|
565,000 |
|
|
|
634,000 |
|
|
|
|
|
|
|
|
|
|
|
1,898,000 |
|
|
|
2,085,000 |
|
|
|
|
|
|
|
|
Net deferred tax asset before valuation allowance |
|
|
29,640,000 |
|
|
|
23,744,000 |
|
Valuation allowance |
|
|
(29,640,000 |
) |
|
|
(23,744,000 |
) |
|
|
|
|
|
|
|
Total net deferred tax asset |
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
At December 31, 2010, we had carryfowards of the following tax attributes: gross federal net
operating loss of $29.7 million that expires in years 2029 through 2030; general business tax
credits of $0.5 million that expire in the years 2027 through 2030; and $0.3 million of federal
alternative minimum tax credits with an indefinite life.
Accounting guidance requires us to assess whether a valuation allowance should be established
against our deferred tax assets based on the consideration of all available evidence using a more
likely than not standard. In making such judgments, we consider both positive and negative
evidence and analyze changes in near-term market conditions as well as other factors which may
impact future operating results. Significant weight is given to evidence that can be objectively
verified. Despite improvements in key areas such as an expanded net interest margin, increased
regulatory capital levels, a continued shift to local funding sources and reduced controllable
overhead costs, loan and lease loss provision expense and problem asset administration costs remain
sizable. The continuing recent losses resulting from the distressed operating environment have
significantly restricted our ability to rely on projections of future taxable income to support the
recovery of our deferred tax assets. Consequently, we determined it necessary to carry a valuation
allowance against our entire net deferred tax asset as of December 31, 2010 and 2009. We will
continue to monitor our net deferred tax assets quarterly for changes affecting its realizability.
We had no unrecognized tax benefits at any time during 2010 or 2009 and do not anticipate any
significant increase in unrecognized tax benefits during 2011. Should the accrual of any interest
or penalties relative to unrecognized tax benefits be necessary, it is our policy to record such
accruals in our income tax accounts; no such accruals existed at any time during 2010 or 2009. We
file U.S. federal income tax returns which are subject to examination for all years after 2006.
(Continued)
F-66
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 9 STOCK-BASED COMPENSATION
Stock-based compensation plans are used to provide directors and employees with an increased
incentive to contribute to the long-term performance and growth of Mercantile, to align the
interests of directors and employees with the interests of Mercantiles shareholders through the
opportunity for increased stock ownership and to attract and retain directors and employees. From
1997 through 2005, stock option grants were provided to directors and certain employees through
several stock option plans, including the 1997 Employee Stock Option Plan, 2000 Employee Stock
Option Plan, 2004 Employee Stock Option Plan and Independent Director Stock Option Plan. During
2006, 2007 and 2008, stock option and restricted stock grants were provided to certain employees
through the Stock Incentive Plan of 2006. No stock option or restricted stock grants were made
during 2009 or 2010.
Under our 1997 Employee Stock Option Plan, 2000 Employee Stock Option Plan and 2004 Employee Stock
Option Plan, stock options granted to employees were granted at the market price on the date of
grant, generally fully vest after one year and expire ten years from the date of grant. Stock
options granted to non-executive officers during 2005 vested about three weeks after being granted.
Under our Independent Director Stock Option Plan, stock options granted to non-employee directors
are at 125% of the market price on the date of grant, fully vest after five years and expire ten
years from the date of grant. The Stock Incentive Plan of 2006 replaced all of our outstanding
stock option plans for stock options not previously granted. Under the Stock Incentive Plan of
2006, incentive awards may include, but are not limited to, stock options, restricted stock, stock
appreciation rights and stock awards. Incentive awards that are stock options or stock
appreciation rights are granted with an exercise price not less than the closing price of
Mercantile stock on the date of grant, or for stock options granted in 2006 or 2007, the day before
the date of grant, if the closing price was higher on the day before the date of grant. Price,
vesting and expiration date parameters are determined by Mercantiles Compensation Committee on a
grant-by-grant basis. Generally, the stock options granted to employees during 2006, 2007 and 2008
fully vest after two years and expire after seven years. The restricted stock awards granted to
certain employees during 2006, 2007 and 2008 fully vest after four years. No payments were
required from employees for the restricted stock awards. At year-end 2010, there were
approximately 419,000 shares authorized for future incentive awards.
As of December 31, 2010, there was only a nominal amount of unrecognized compensation cost related
to unvested stock options granted under our various stock-based compensation plans. As of
December 31, 2010, there was $0.2 million of total unrecognized compensation cost related to
unvested restricted stock granted under our Stock Incentive Plan of 2006, which is expected to be
recognized over a weighted-average period of 1.0 year.
A summary of restricted stock activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Fair Value |
|
|
Shares |
|
|
Fair Value |
|
|
Shares |
|
|
Fair Value |
|
Nonvested at
beginning of year |
|
|
91,233 |
|
|
$ |
14.98 |
|
|
|
113,010 |
|
|
$ |
14.85 |
|
|
|
63,024 |
|
|
$ |
23.69 |
|
Granted |
|
|
0 |
|
|
NA |
|
|
|
0 |
|
|
NA |
|
|
|
56,710 |
|
|
|
6.21 |
|
Vested |
|
|
(12,941 |
) |
|
|
37.76 |
|
|
|
(3,290 |
) |
|
|
20.39 |
|
|
|
(128 |
) |
|
|
30.37 |
|
Forfeited |
|
|
(4,337 |
) |
|
|
14.62 |
|
|
|
(18,487 |
) |
|
|
13.20 |
|
|
|
(6,596 |
) |
|
|
24.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at
end of year |
|
|
73,955 |
|
|
$ |
11.02 |
|
|
|
91,233 |
|
|
$ |
14.98 |
|
|
|
113,010 |
|
|
$ |
14.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
F-67
MERCANTILE BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE 9 STOCK-BASED COMPENSATION (Continued)
A summary of stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|