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Price
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| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
Michigan
(State or other jurisdiction of incorporation or organization) |
38-3360865
(IRS Employer Identification No.) |
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
| June 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
| (Unaudited) | (Audited) | |||||||
|
ASSETS
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||||||||
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Cash and due from banks
|
$ | 16,521,000 | $ | 18,896,000 | ||||
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Short-term investments
|
9,470,000 | 1,471,000 | ||||||
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Federal funds sold
|
53,892,000 | 1,368,000 | ||||||
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||||||||
|
Total cash and cash equivalents
|
79,883,000 | 21,735,000 | ||||||
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||||||||
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Securities available for sale
|
217,117,000 | 182,492,000 | ||||||
|
Securities held to maturity (fair value of $60,271,000 at
December 31, 2009)
|
0 | 59,211,000 | ||||||
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Federal Home Loan Bank stock
|
15,681,000 | 15,681,000 | ||||||
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||||||||
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Loans and leases
|
1,410,710,000 | 1,539,818,000 | ||||||
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Allowance for loan and lease losses
|
(47,738,000 | ) | (47,878,000 | ) | ||||
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||||||||
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Loans and leases, net
|
1,362,972,000 | 1,491,940,000 | ||||||
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||||||||
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Premises and equipment, net
|
28,636,000 | 29,684,000 | ||||||
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Bank owned life insurance
|
45,890,000 | 45,024,000 | ||||||
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Accrued interest receivable
|
6,278,000 | 7,088,000 | ||||||
|
Other real estate owned and repossessed assets
|
23,020,000 | 26,608,000 | ||||||
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Other assets
|
24,585,000 | 26,745,000 | ||||||
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||||||||
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||||||||
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Total assets
|
$ | 1,804,062,000 | $ | 1,906,208,000 | ||||
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||||||||
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||||||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
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Deposits
|
||||||||
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Noninterest-bearing
|
$ | 126,572,000 | $ | 121,157,000 | ||||
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Interest-bearing
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1,213,588,000 | 1,280,470,000 | ||||||
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Total deposits
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1,340,160,000 | 1,401,627,000 | ||||||
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||||||||
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Securities sold under agreements to repurchase
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108,271,000 | 99,755,000 | ||||||
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Federal funds purchased
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0 | 2,600,000 | ||||||
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Federal Home Loan Bank advances
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160,000,000 | 205,000,000 | ||||||
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Subordinated debentures
|
32,990,000 | 32,990,000 | ||||||
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Other borrowed money
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16,836,000 | 16,890,000 | ||||||
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Accrued expenses and other liabilities
|
6,762,000 | 7,242,000 | ||||||
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||||||||
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Total liabilities
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1,665,019,000 | 1,766,104,000 | ||||||
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||||||||
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Shareholders’ equity
|
||||||||
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Preferred stock, no par value; 1,000,000 shares authorized;
21,000 shares outstanding at June 30, 2010 and December 31, 2009
|
19,955,000 | 19,839,000 | ||||||
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Common stock, no par value: 20,000,000 shares authorized;
8,594,307 shares outstanding at June 30, 2010 and
8,592,514 shares outstanding at December 31, 2009
|
172,631,000 | 172,438,000 | ||||||
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Common stock warrant
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1,138,000 | 1,138,000 | ||||||
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Retained earnings (deficit)
|
(57,818,000 | ) | (54,170,000 | ) | ||||
|
Accumulated other comprehensive income
|
3,137,000 | 859,000 | ||||||
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||||||||
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Total shareholders’ equity
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139,043,000 | 140,104,000 | ||||||
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||||||||
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||||||||
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Total liabilities and shareholders’ equity
|
$ | 1,804,062,000 | $ | 1,906,208,000 | ||||
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||||||||
1
| Three Months | Three Months | Six Months | Six Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| June 30, 2010 | June 30, 2009 | June 30, 2010 | June 30, 2009 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
|
Interest income
|
||||||||||||||||
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Loans and leases, including fees
|
$ | 20,066,000 | $ | 24,080,000 | $ | 40,471,000 | $ | 49,265,000 | ||||||||
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Securities, taxable
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2,039,000 | 1,889,000 | 4,022,000 | 3,825,000 | ||||||||||||
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Securities, tax-exempt
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544,000 | 855,000 | 1,304,000 | 1,695,000 | ||||||||||||
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Federal funds sold
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37,000 | 39,000 | 69,000 | 86,000 | ||||||||||||
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Short-term investments
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10,000 | 3,000 | 19,000 | 16,000 | ||||||||||||
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||||||||||||||||
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Total interest income
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22,696,000 | 26,866,000 | 45,885,000 | 54,887,000 | ||||||||||||
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||||||||||||||||
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Interest expense
|
||||||||||||||||
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Deposits
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5,992,000 | 11,220,000 | 12,489,000 | 24,061,000 | ||||||||||||
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Short-term borrowings
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353,000 | 475,000 | 697,000 | 915,000 | ||||||||||||
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Federal Home Loan Bank advances
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1,576,000 | 2,295,000 | 3,272,000 | 4,747,000 | ||||||||||||
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Other borrowings
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354,000 | 426,000 | 700,000 | 909,000 | ||||||||||||
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Total interest expense
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8,275,000 | 14,416,000 | 17,158,000 | 30,632,000 | ||||||||||||
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Net interest income
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14,421,000 | 12,450,000 | 28,727,000 | 24,255,000 | ||||||||||||
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Provision for loan and lease losses
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6,200,000 | 11,500,000 | 14,600,000 | 21,900,000 | ||||||||||||
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||||||||||||||||
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Net interest income after provision
for loan and lease losses
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8,221,000 | 950,000 | 14,127,000 | 2,355,000 | ||||||||||||
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||||||||||||||||
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Noninterest income
|
||||||||||||||||
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Services charges on accounts
|
447,000 | 500,000 | 913,000 | 1,012,000 | ||||||||||||
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Earnings on bank owned life insurance
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454,000 | 296,000 | 865,000 | 641,000 | ||||||||||||
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Rental income from other real estate
owned
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390,000 | 60,000 | 791,000 | 193,000 | ||||||||||||
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Mortgage banking activities
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130,000 | 403,000 | 230,000 | 772,000 | ||||||||||||
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Net gain on sales of securities
|
0 | 0 | 476,000 | 0 | ||||||||||||
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Gain on sales of commercial loans
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5,000 | 0 | 225,000 | 0 | ||||||||||||
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Other income
|
570,000 | 604,000 | 1,151,000 | 1,277,000 | ||||||||||||
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|
||||||||||||||||
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Total noninterest income
|
1,996,000 | 1,863,000 | 4,651,000 | 3,895,000 | ||||||||||||
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|
||||||||||||||||
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Noninterest expense
|
||||||||||||||||
|
Salaries and benefits
|
4,559,000 | 5,247,000 | 9,225,000 | 10,799,000 | ||||||||||||
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Occupancy
|
723,000 | 883,000 | 1,473,000 | 1,804,000 | ||||||||||||
|
Furniture and equipment depreciation,
rent and maintenance
|
396,000 | 466,000 | 805,000 | 933,000 | ||||||||||||
|
Nonperforming asset costs
|
2,460,000 | 1,119,000 | 4,964,000 | 2,101,000 | ||||||||||||
|
FDIC insurance costs
|
1,167,000 | 1,796,000 | 2,353,000 | 2,430,000 | ||||||||||||
|
Branch consolidation costs
|
0 | 1,150,000 | 0 | 1,150,000 | ||||||||||||
|
Other expense
|
2,137,000 | 1,703,000 | 4,256,000 | 3,919,000 | ||||||||||||
|
|
||||||||||||||||
|
Total noninterest expenses
|
11,442,000 | 12,364,000 | 23,076,000 | 23,136,000 | ||||||||||||
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||||||||||||||||
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|
||||||||||||||||
|
Income (loss) before federal income
tax expense (benefit)
|
(1,225,000 | ) | (9,551,000 | ) | (4,298,000 | ) | (16,886,000 | ) | ||||||||
|
|
||||||||||||||||
|
Federal income tax expense (benefit)
|
(862,000 | ) | (3,326,000 | ) | (1,292,000 | ) | (6,172,000 | ) | ||||||||
|
|
||||||||||||||||
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|
||||||||||||||||
|
Net income (loss)
|
(363,000 | ) | (6,225,000 | ) | (3,006,000 | ) | (10,714,000 | ) | ||||||||
|
|
||||||||||||||||
|
Preferred stock dividends and accretion
|
321,000 | 163,000 | 641,000 | 163,000 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Net income (loss) available to
common shareholders
|
$ | (684,000 | ) | $ | (6,388,000 | ) | $ | (3,647,000 | ) | $ | (10,877,000 | ) | ||||
|
|
||||||||||||||||
2
| Three Months | Three Months | Six Months | Six Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| June 30, 2010 | June 30, 2009 | June 30, 2010 | June 30, 2009 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
|
Basic earnings (loss) per share
|
$ | (0.08 | ) | $ | (0.75 | ) | $ | (0.43 | ) | $ | (1.28 | ) | ||||
|
|
||||||||||||||||
|
Diluted earnings (loss) per share
|
$ | (0.08 | ) | $ | (0.75 | ) | $ | (0.43 | ) | $ | (1.28 | ) | ||||
|
|
||||||||||||||||
|
Cash dividends per share
|
$ | 0.00 | $ | 0.01 | $ | 0.01 | $ | 0.05 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Average basic shares outstanding
|
8,505,086 | 8,487,747 | 8,503,388 | 8,484,524 | ||||||||||||
|
|
||||||||||||||||
|
Average diluted shares outstanding
|
8,505,086 | 8,487,747 | 8,503,388 | 8,484,524 | ||||||||||||
|
|
||||||||||||||||
3
| 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
|
116 | (116 | ) | 0 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Employee stock purchase plan
(5,086 shares)
|
23 | 23 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Dividend reinvestment plan
(687 shares)
|
3 | 3 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Stock-based compensation expense
|
252 | 252 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash dividends
($0.01 per common share)
|
(85 | ) | (85 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Preferred stock dividends
|
(526 | ) | (526 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Comprehensive income (loss):
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net loss for the period from January 1,
2010 through June 30, 2010
|
(3,006 | ) | (3,006 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
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Change in net unrealized gain on
securities available for sale, net
of reclassifications and tax effect
|
2,068 | 2,068 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
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Net unrealized gain on securities
transferred from held to maturity
to available for sale, net of tax effect
|
274 | 274 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
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Reclassification of unrealized gain on
interest rate swaps, net of tax effect
|
(64 | ) | (64 | ) | ||||||||||||||||||||
|
|
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Total comprehensive loss
|
(728 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
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|
||||||||||||||||||||||||
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Balances, June 30, 2010
|
$ | 19,955 | $ | 172,631 | $ | 1,138 | $ | (57,818 | ) | $ | 3,137 | $ | 139,043 | |||||||||||
|
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||||||||||||||||||||||||
4
| 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
|
29 | (29 | ) | 0 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
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Common stock warrant issued
|
1,138 | 1,138 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Employee stock purchase plan
(6,979 shares)
|
30 | 30 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Dividend reinvestment plan
(2,212 shares)
|
8 | 8 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Stock-based compensation expense
|
310 | 310 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash dividends
($0.05 per common share)
|
(424 | ) | (424 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Preferred stock dividends
|
(134 | ) | (134 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Comprehensive income (loss):
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net loss for the period from January 1,
2009 through June 30, 2009
|
(10,714 | ) | (10,714 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Change in net unrealized gain (loss)
on securities available for sale,
net of reclassifications and tax effect
|
(1,748 | ) | (1,748 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Reclassification of unrealized gain on
interest rate swaps, net of tax effect
|
(842 | ) | (842 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total comprehensive loss
|
(13,304 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balances June 30, 2009
|
$ | 19,725 | $ | 172,277 | $ | 1,138 | $ | (12,158 | ) | $ | 710 | $ | 181,692 | |||||||||||
|
|
||||||||||||||||||||||||
5
| Six Months | Six Months | |||||||
| Ended | Ended | |||||||
| June 30, 2010 | June 30, 2009 | |||||||
|
Cash flows from operating activities
|
||||||||
|
Net income (loss)
|
$ | (3,006,000 | ) | $ | (10,714,000 | ) | ||
|
Adjustments to reconcile net income (loss)
to net cash from operating activities
|
||||||||
|
Depreciation and amortization
|
1,306,000 | 1,472,000 | ||||||
|
Provision for loan and lease losses
|
14,600,000 | 21,900,000 | ||||||
|
Stock-based compensation expense
|
252,000 | 310,000 | ||||||
|
Proceeds from sales of mortgage loans held for sale
|
14,497,000 | 54,068,000 | ||||||
|
Origination of mortgage loans held for sale
|
(13,215,000 | ) | (56,279,000 | ) | ||||
|
Net gain from sales of mortgage loans held for sale
|
(147,000 | ) | (608,000 | ) | ||||
|
Gain from sale of commercial loans
|
(225,000 | ) | 0 | |||||
|
Net gain from sale of held to maturity securities
|
(476,000 | ) | 0 | |||||
|
Net loss from sale and valuation write-down of foreclosed assets
|
1,523,000 | 544,000 | ||||||
|
Recognition of unrealized gain on interest rate swaps
|
(99,000 | ) | (1,296,000 | ) | ||||
|
Earnings on bank owned life insurance
|
(865,000 | ) | (641,000 | ) | ||||
|
Net change in:
|
||||||||
|
Accrued interest receivable
|
810,000 | 780,000 | ||||||
|
Other assets
|
599,000 | (6,397,000 | ) | |||||
|
Accrued expenses and other liabilities
|
(480,000 | ) | (644,000 | ) | ||||
|
|
||||||||
|
Net cash from operating activities
|
15,074,000 | 2,495,000 | ||||||
|
|
||||||||
|
Cash flows from investing activities
|
||||||||
|
Loan and lease originations and payments, net
|
101,912,000 | 127,948,000 | ||||||
|
Purchases of:
|
||||||||
|
Securities available for sale
|
(37,516,000 | ) | (31,790,000 | ) | ||||
|
Securities held to maturity
|
0 | (1,024,000 | ) | |||||
|
Proceeds from:
|
||||||||
|
Maturities, calls and repayments of available for sale securities
|
45,836,000 | 33,088,000 | ||||||
|
Maturities, calls and repayments of held to maturity securities
|
0 | 3,520,000 | ||||||
|
Sales of held to maturity securities
|
20,452,000 | 0 | ||||||
|
Proceeds from sales of commercial loans
|
5,648,000 | 0 | ||||||
|
Proceeds from sales of foreclosed assets
|
7,962,000 | 1,887,000 | ||||||
|
Purchases of premises and equipment, net
|
(30,000 | ) | (26,000 | ) | ||||
|
|
||||||||
|
Net cash from investing activities
|
144,264,000 | 133,603,000 | ||||||
|
|
||||||||
|
Cash flows from financing activities
|
||||||||
|
Net decrease in time deposits
|
(152,027,000 | ) | (130,246,000 | ) | ||||
|
Net increase in all other deposits
|
90,560,000 | 9,304,000 | ||||||
|
Net increase in securities sold under agreements to repurchase
|
8,516,000 | 15,172,000 | ||||||
|
Net decrease in federal funds purchased
|
(2,600,000 | ) | 0 | |||||
|
Proceeds from Federal Home Loan Bank advances
|
0 | 5,000,000 | ||||||
|
Maturities of Federal Home Loan Bank advances
|
(45,000,000 | ) | (40,000,000 | ) | ||||
|
Net decrease in other borrowed money
|
(54,000 | ) | (2,678,000 | ) | ||||
|
Proceeds from issuance of preferred stock and common stock
warrant, net
|
0 | 20,834,000 | ||||||
|
Employee stock purchase plan
|
23,000 | 30,000 | ||||||
|
Dividend reinvestment plan
|
3,000 | 8,000 | ||||||
|
Payment of cash dividends on preferred stock
|
(526,000 | ) | 0 | |||||
|
Payment of cash dividends on common shares
|
(85,000 | ) | (424,000 | ) | ||||
|
|
||||||||
|
Net cash for financing activities
|
(101,190,000 | ) | (123,000,000 | ) | ||||
|
|
||||||||
6
| Six Months | Six Months | |||||||
| Ended | Ended | |||||||
| June 30, 2010 | June 30, 2009 | |||||||
|
Net change in cash and cash equivalents
|
58,148,000 | 13,098,000 | ||||||
|
Cash and cash equivalents at beginning of period
|
21,735,000 | 25,804,000 | ||||||
|
|
||||||||
|
Cash and cash equivalents at end of period
|
$ | 79,883,000 | $ | 38,902,000 | ||||
|
|
||||||||
|
Supplemental disclosures of cash flow information
|
||||||||
|
Cash paid during the period for:
|
||||||||
|
Interest
|
$ | 18,631,000 | $ | 33,867,000 | ||||
|
Federal income tax
|
0 | 0 | ||||||
|
Noncash financing and investing activities:
|
||||||||
|
Transfers from loans and leases to foreclosed assets
|
5,898,000 | 6,859,000 | ||||||
|
Preferred stock cash dividend accrued
|
134,000 | 134,000 | ||||||
7
| 1. |
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation : The unaudited financial statements for the six months ended June 30, 2010 include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries. These subsidiaries include Mercantile Bank of Michigan (“our bank”) and our bank’s three subsidiaries, Mercantile Bank Mortgage Company, LLC (“our mortgage company”), Mercantile Bank Real Estate Co., LLC (“our real estate company”), and Mercantile Insurance Center, Inc. (“our insurance center”). These consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Item 303(b) of Regulation S-K and do not include all disclosures required by accounting principles generally accepted in the United States of America for a complete presentation of our financial condition and results of operations. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair presentation of the results of operations for such periods. The results for the period ended June 30, 2010 should not be considered as indicative of results for a full year. For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form 10-K for the year ended December 31, 2009. |
|
| We formed a business trust, Mercantile Bank Capital Trust I (“the trust”), in 2004 to issue trust preferred securities. We issued subordinated debentures to the trust in return for the proceeds raised from the issuance of the trust preferred securities. The trust is not consolidated, but instead we report the subordinated debentures issued to the trust as a liability. | ||
| 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 restricted shares, which contain non-forfeitable rights to dividends whether paid or accrued (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 restricted shares are excluded from the calculation of both basic and diluted earnings per share. | ||
| Due to our net loss, approximately 88,000 unvested restricted shares were not included in determining both basic and diluted earnings per share for the three and six months ended June 30, 2010, and approximately 98,000 unvested restricted shares were not included in determining both basic and diluted earnings per share for the three and six months ended June 30, 2009. In addition, stock options and a stock warrant for approximately 285,000 and 616,000 shares of common stock, respectively, were antidilutive and not included in determining diluted earnings per share for the three and six months ended June 30, 2010, and stock options and a stock warrant for approximately 319,000 and 616,000 shares of common stock, respectively, were antidilutive and not included in determining diluted earnings per share for the three and six months ended June 30, 2009. Weighted average diluted common shares outstanding equals the weighted average common shares outstanding during the three and six month periods ended June 30, 2010 and 2009 due to the net losses recorded during those time periods. |
8
| 1. | SIGNIFICANT ACCOUNTING POLICIES (Continued) | |
| Allowance for Loan and Lease Losses : The allowance for loan and lease losses (“allowance”) is a valuation allowance for probable incurred credit losses. Loan and lease losses are charged against the allowance when we believe the uncollectability of a loan or lease is confirmed. Subsequent recoveries, if any, are credited to the allowance. We estimate 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 our judgment, should be charged-off. | ||
| A loan or lease is 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 in determining impairment include payment status, collateral value and the probability of collecting principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine 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 delay, the borrower’s 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 loan’s effective interest rate, the loan’s 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. | ||
| 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 borrower’s 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. | ||
| 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. Historically, our derivatives have consisted of interest rate swap agreements, which are used as part of our asset and liability management to help manage interest rate risk. We do not use derivatives for trading purposes. |
9
| 1. | SIGNIFICANT ACCOUNTING POLICIES (Continued) | |
| Changes in the fair value of derivatives that are designated as a hedge of the variability of cash flows to be received on various loans 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 hedge’s 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. | ||
| Adoption of New Accounting Standards : In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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. | ||
| 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 disclosures 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 12. 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. |
10
| 1. | SIGNIFICANT ACCOUNTING POLICIES (Continued) | |
| 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 (e.g., commercial loans, retail loans). Additional disclosures are required by class of loan and lease (e.g., commercial real estate, construction and development, residential, consumer), including credit quality, aging of past due loans, 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 lease losses as well as the effect on the allowance of troubled debt restructurings that occurred within the prior 12 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 portfolio’s 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 will be first included in our annual financial statements for the year ending December 31, 2010. The disclosures about activity that occurred prior to issuance of the ASU (e.g., allowance rollforward and loan modification disclosures) are effective for interim and annual reporting periods beginning after December 15, 2010 and will be first disclosed in our financial statements for the interim period ending March 31, 2011. Comparative disclosures for earlier reporting periods ending after initial adoption are required and encouraged for reporting periods ending before initial adoption. |
11
| 2. | SECURITIES | |
| The amortized cost and fair value of available for sale securities and the related pre-tax gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) are as follows: |
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
|
June 30, 2010
|
||||||||||||||||
|
U.S. Government agency
debt obligations
|
$ | 100,731,000 | $ | 1,577,000 | $ | (9,000 | ) | $ | 102,299,000 | |||||||
|
Mortgage-backed securities
|
54,289,000 | 3,702,000 | 0 | 57,991,000 | ||||||||||||
|
Michigan Strategic Fund bonds
|
19,695,000 | 0 | 0 | 19,695,000 | ||||||||||||
|
Municipal general obligation bonds
|
29,866,000 | 361,000 | (153,000 | ) | 30,074,000 | |||||||||||
|
Municipal revenue bonds
|
5,548,000 | 50,000 | (11,000 | ) | 5,587,000 | |||||||||||
|
Mutual funds
|
1,448,000 | 23,000 | 0 | 1,471,000 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 211,577,000 | $ | 5,713,000 | $ | (173,000 | ) | $ | 217,117,000 | |||||||
|
|
||||||||||||||||
|
December 31, 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 categorized as held to maturity were as follows at December 31, 2009 (none at June 30, 2010): |
| Gross | Gross | |||||||||||||||
| Carrying | Unrealized | Unrealized | Fair | |||||||||||||
| Amount | Gains | Losses | Value | |||||||||||||
|
December 31, 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 | |||||||
|
|
||||||||||||||||
| 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. |
12
| 2. | SECURITIES (Continued) |
| Securities with unrealized losses at June 30, 2010 and December 31, 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 | ||||||||||||||||||
|
June 30, 2010
|
||||||||||||||||||||||||
|
U.S. Government agency
debt obligations
|
$ | 2,743,000 | $ | (7,000 | ) | $ | 999,000 | $ | (2,000 | ) | $ | 3,742,000 | $ | (9,000 | ) | |||||||||
|
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
|
0 | 0 | 9,978,000 | (153,000 | ) | 9,978,000 | (153,000 | ) | ||||||||||||||||
|
Municipal revenue
bonds
|
0 | 0 | 1,066,000 | (11,000 | ) | 1,066,000 | (11,000 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | 2,743,000 | $ | (7,000 | ) | $ | 12,043,000 | $ | (166,000 | ) | $ | 14,786,000 | $ | (173,000 | ) | |||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 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 | ) | |||||||||
|
|
||||||||||||||||||||||||
13
| 2. | SECURITIES (Continued) |
| 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, and the intent and ability we have to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Effective in the second quarter of 2009, with the adoption of new fair value guidance, for those debt securities whose fair value is less than their amortized cost basis, we also 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 issuer’s 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 issuer’s financial condition. | ||
| There were 33 municipal general obligation bonds, 4 municipal revenue bonds, and 1 U.S. Government agency debt obligation in continuous loss positions for 12 months or more at June 30, 2010. At June 30, 2010, 41 debt securities with a fair value totaling $14.8 million have unrealized losses with aggregate depreciation of $0.2 million, or 0.1% from the amortized cost basis of total securities. At June 30, 2010, 223 debt securities and a mutual fund with a fair value totaling $168.4 million have unrealized gains with aggregate appreciation of $5.7 million, or 2.7% 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 our debt securities before recovery of their cost basis and we believe it is more likely than not that we will not have to sell our debt securities before recovery of the cost basis, no declines are deemed to be other-than-temporary. | ||
| The amortized cost and fair values of debt securities at June 30, 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 fees. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately. |
14
| 2. | SECURITIES (Continued) |
| The maturities of securities and their weighted average yields at June 30, 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 2010
|
5.43 | % | $ | 3,333,000 | $ | 3,354,000 | ||||||
|
Due in 2011 through 2015
|
5.98 | 6,060,000 | 6,474,000 | |||||||||
|
Due in 2016 through 2020
|
4.49 | 19,361,000 | 19,523,000 | |||||||||
|
Due in 2021 and beyond
|
5.24 | 107,391,000 | 108,609,000 | |||||||||
|
Mortgage-backed securities
|
5.14 | 54,289,000 | 57,991,000 | |||||||||
|
Michigan Strategic Fund bonds
|
3.07 | 19,695,000 | 19,695,000 | |||||||||
|
Mutual funds
|
3.06 | 1,448,000 | 1,471,000 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
|
4.95 | % | $ | 211,577,000 | $ | 217,117,000 | ||||||
|
|
||||||||||||
| At June 30, 2010, and December 31, 2009, the amortized cost of securities issued by the State of Michigan and all its political subdivisions totaled $35.4 million and $59.2 million, with an estimated market value of $35.7 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. |
| 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 $154.2 million and $158.1 million at June 30, 2010 and December 31, 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 Federal Home Loan Bank stock are restricted and may only be resold or redeemed by the issuer. |
15
| 3. | LOANS |
| Our total loans at June 30, 2010 were $1.41 billion compared to $1.54 billion at December 31, 2009, a decrease of $129.1 million, or 8.4%. The components of our outstanding balances at June 30, 2010 and December 31, 2009, and the percentage change in loans from the end of 2009 to the end of the second quarter 2010, are as follows: |
| Percent | ||||||||||||||||||||
| June 30, 2010 | December 31, 2009 | Increase | ||||||||||||||||||
| Balance | % | Balance | % | (Decrease) | ||||||||||||||||
|
Real Estate:
|
||||||||||||||||||||
|
Construction and land
development
|
$ | 152,546,000 | 10.8 | % | $ | 176,078,000 | 11.4 | % | (13.4 | )% | ||||||||||
|
Secured by 1-4 family
properties
|
119,177,000 | 8.4 | 124,805,000 | 8.1 | (4.5 | ) | ||||||||||||||
|
Secured by multi-family
properties
|
43,557,000 | 3.1 | 47,679,000 | 3.1 | (8.6 | ) | ||||||||||||||
|
Secured by nonresidential
properties
|
771,274,000 | 54.7 | 814,058,000 | 52.9 | (5.3 | ) | ||||||||||||||
|
Commercial
|
317,940,000 | 22.5 | 370,146,000 | 24.0 | (14.1 | ) | ||||||||||||||
|
Leases
|
630,000 | 0.1 | 1,055,000 | 0.1 | (40.3 | ) | ||||||||||||||
|
Consumer
|
5,586,000 | 0.4 | 5,997,000 | 0.4 | (6.9 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total loans and leases
|
$ | 1,410,710,000 | 100.0 | % | $ | 1,539,818,000 | 100.0 | % | (8.4 | )% | ||||||||||
|
|
||||||||||||||||||||
| 4. | ALLOWANCE FOR LOAN AND LEASE LOSSES |
| The following is a summary of the change in our allowance for loan and lease losses for the six months ended June 30: |
| 2010 | 2009 | |||||||
|
Balance at January 1
|
$ | 47,878,000 | $ | 27,108,000 | ||||
|
Charge-offs
|
(16,737,000 | ) | (16,851,000 | ) | ||||
|
Recoveries
|
1,997,000 | 448,000 | ||||||
|
Provision for loan and lease losses
|
14,600,000 | 21,900,000 | ||||||
|
|
||||||||
|
|
||||||||
|
Balance at June 30
|
$ | 47,738,000 | $ | 32,605,000 | ||||
|
|
||||||||
16
| 5. | PREMISES AND EQUIPMENT, NET |
| Premises and equipment are comprised of the following: |
| June 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
|
Land and improvements
|
$ | 8,531,000 | $ | 8,531,000 | ||||
|
Buildings and leasehold improvements
|
24,516,000 | 24,515,000 | ||||||
|
Furniture and equipment
|
12,464,000 | 12,532,000 | ||||||
|
|
||||||||
|
|
45,511,000 | 45,578,000 | ||||||
|
Less: accumulated depreciation
|
16,875,000 | 15,894,000 | ||||||
|
|
||||||||
|
|
||||||||
|
Premises and equipment, net
|
$ | 28,636,000 | $ | 29,684,000 | ||||
|
|
||||||||
| Depreciation expense totaled $0.5 million during the second quarter of 2010, compared to $0.6 million during the second quarter of 2009. Depreciation expense totaled $1.1 million during the first six months of 2010, compared to $1.3 million during the first six months of 2009. |
| 6. | DEPOSITS |
| Our total deposits at June 30, 2010 were $1.34 billion compared to $1.40 billion at December 31, 2009, a decrease of $61.5 million, or 4.4%. The components of our outstanding balances at June 30, 2010 and December 31, 2009, and percentage change in deposits from the end of 2009 to the end of the second quarter 2010, are as follows: |
| Percent | ||||||||||||||||||||
| June 30, 2010 | December 31, 2009 | Increase | ||||||||||||||||||
| Balance | % | Balance | % | (Decrease) | ||||||||||||||||
|
Noninterest-bearing demand
|
$ | 126,572,000 | 9.4 | % | $ | 121,157,000 | 8.6 | % | 4.5 | % | ||||||||||
|
Interest-bearing checking
|
128,293,000 | 9.6 | 86,320,000 | 6.2 | 48.6 | |||||||||||||||
|
Money market
|
79,210,000 | 5.9 | 32,008,000 | 2.3 | 147.5 | |||||||||||||||
|
Savings
|
34,595,000 | 2.6 | 38,625,000 | 2.8 | (10.4 | ) | ||||||||||||||
|
Time, under $100,000
|
78,267,000 | 5.8 | 105,195,000 | 7.5 | (25.6 | ) | ||||||||||||||
|
Time, $100,000 and over
|
234,059,000 | 17.5 | 293,455,000 | 20.9 | (20.2 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
|
680,996,000 | 50.8 | 676,760,000 | 48.3 | 0.6 | |||||||||||||||
|
|
||||||||||||||||||||
|
Out-of-area time,
under $100,000
|
47,717,000 | 3.6 | 62,760,000 | 4.5 | (24.0 | ) | ||||||||||||||
|
Out-of-area time,
$100,000 and over
|
611,447,000 | 45.6 | 662,107,000 | 47.2 | (7.7 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
|
659,164,000 | 49.2 | 724,867,000 | 51.7 | (9.1 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total deposits
|
$ | 1,340,160,000 | 100.0 | % | $ | 1,401,627,000 | 100.0 | % | (4.4 | )% | ||||||||||
|
|
||||||||||||||||||||
17
| 7. | SHORT-TERM BORROWINGS |
| Information relating to our securities sold under agreements to repurchase follows: |
| Six Months Ended | Twelve Months Ended | |||||||
| June 30, 2010 | December 31, 2009 | |||||||
|
Outstanding balance at end of period
|
$ | 108,271,000 | $ | 99,755,000 | ||||
|
Average interest rate at end of period
|
1.41 | % | 1.41 | % | ||||
|
|
||||||||
|
Average balance during the period
|
$ | 100,110,000 | $ | 98,409,000 | ||||
|
Average interest rate during the period
|
1.40 | % | 1.87 | % | ||||
|
|
||||||||
|
Maximum month end balance during the period
|
$ | 108,705,000 | $ | 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 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. |
| 8. | FEDERAL HOME LOAN BANK ADVANCES |
| Our outstanding balances at June 30, 2010 totaled $160.0 million and mature at varying dates from December 2010 through January 2014, with fixed rates of interest from 2.97% to 4.42% and averaging 3.52%. 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 4.42% 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 June 30, 2010 totaled about $220.0 million, with availability approximating $56.0 million. |
| Maturities of currently outstanding FHLB advances during the next 60 months are: |
| 2010 | $20,000,000 | |||||
| 2011 | 85,000,000 | |||||
| 2012 | 40,000,000 | |||||
| 2013 | 10,000,000 | |||||
| 2014 | 5,000,000 |
18
| 9. | COMMITMENTS AND OFF-BALANCE SHEET RISK |
| Our bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued by our bank to guarantee the performance of a customer to a third party. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. |
| These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized, if any, in the balance sheet. Our bank’s maximum exposure to loan loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. Our bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Collateral, such as accounts receivable, securities, inventory, and property and equipment, is generally obtained based on our credit assessment of the borrower. If required, estimated loss exposure resulting from these instruments is expensed and recorded as a liability. The balance of the liability was $0 as of June 30, 2010 and December 31, 2009. |
| A summary of the contractual amounts of our financial instruments with off-balance sheet risk at June 30, 2010 and December 31, 2009 follows: |
| June 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
|
Commercial unused lines of credit
|
$ | 172,889,000 | $ | 205,018,000 | ||||
|
Unused lines of credit secured by 1 — 4 family
residential properties
|
25,214,000 | 24,916,000 | ||||||
|
Credit card unused lines of credit
|
8,253,000 | 8,565,000 | ||||||
|
Other consumer unused lines of credit
|
3,518,000 | 4,526,000 | ||||||
|
Commitments to extend credit
|
11,191,000 | 7,701,000 | ||||||
|
Standby letters of credit
|
27,573,000 | 36,512,000 | ||||||
|
|
||||||||
|
|
$ | 248,638,000 | $ | 287,238,000 | ||||
|
|
||||||||
19
| 9. | COMMITMENTS AND OFF-BALANCE SHEET RISK (Continued) | |
| Certain of our commercial loan customers have entered into interest rate swap agreements directly with our correspondent banks. To assist our commercial loan customers in these transactions, and to encourage our correspondent banks to enter into the interest rate swap transactions with minimal credit underwriting analyses on their part, we have entered into risk participation agreements with the correspondent banks whereby we agree to make payments to the correspondent banks owed by our commercial loan customers under the interest rate swap agreement in the event that our commercial loan customers do not make the payments. We are not a party to the interest rate swap agreements under these arrangements. As of June 30, 2010, the total notional amount of the underlying interest rate swap agreements was $52.1 million, with a net fair value from our commercial loan customers’ perspective of negative $5.7 million. Payments made in regards to the risk participation agreements total $460,000; however, we believe the affected customer will reimburse us for such payments and therefore we have accrued no valuation allowance for our receivable from this customer and have accrued no liability for potential future payments. These risk participation agreements are considered financial guarantees in accordance with applicable accounting guidance and are therefore recorded as liabilities at fair value, generally equal to the fees collected at the time of their execution. These liabilities are accreted into income during the term of the interest rate swap agreements, generally ranging from four to fifteen years. |
| 10. | HEDGING ACTIVITIES | |
| Our interest rate risk policy includes guidelines for measuring and monitoring interest rate risk. Within these guidelines, parameters have been established for maximum fluctuations in net interest income. Possible fluctuations are measured and monitored using net interest income simulation. Our policy provides for the use of certain derivative instruments and hedging activities to aid in managing interest rate risk to within the policy parameters. | ||
| A majority of our assets are comprised of commercial loans on which the interest rates are variable, while a majority of our liabilities are comprised of fixed rate certificates of deposit and FHLB advances. Due to this repricing mismatch, we may periodically enter into derivative financial instruments to mitigate the exposure in cash flows resulting from changes in interest rates. | ||
| During 2008, we entered into several interest rate swaps with an aggregate notional amount of $275.0 million. The interest rate swaps qualified as cash flow hedges that converted the variable rate cash inflows on certain of our prime-based commercial loans to a fixed rate of interest. The interest rate swaps paid interest to us at stated fixed rates and required that we make interest payments based on the average of the Wall Street Journal Prime Rate. |
20
| 10. | HEDGING ACTIVITIES (Continued) | |
| On October 30, 2008, we terminated all of our interest rate swaps. The termination coincided with our decision to not lower our prime rate in association with the Federal Open Market Committee’s reduction of the targeted federal funds rate by 50 basis points on October 29, 2008. Virtually all of our prime rate-based commercial floating rate loans are tied to the Mercantile Bank Prime Rate, while our interest rate swaps utilized the Wall Street Journal Prime Rate. The resulting difference negatively impacted the effectiveness of our interest rate swaps, so we believed it was prudent to terminate them. The aggregate fair value of the interest rate swaps on October 30, 2008 was $2.4 million, which has been accreted into interest income on loans and leases based on the original term of the interest rate swaps. As of June 30, 2010, we had fully accreted the $2.4 million into interest income, including $0.1 million during the first six months of 2010. |
| 11. | FAIR VALUES OF FINANCIAL INSTRUMENTS | |
| Carrying amount and estimated fair values of financial instruments were as follows as of June 30, 2010 and December 31, 2009: |
| June 30, 2010 | December 31, 2009 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Values | Values | Values | Values | |||||||||||||
|
Financial assets
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 79,883,000 | $ | 79,883,000 | $ | 21,735,000 | $ | 21,735,000 | ||||||||
|
Securities available for sale
|
217,117,000 | 217,117,000 | 182,492,000 | 182,492,000 | ||||||||||||
|
Securities held to maturity
|
0 | 0 | 59,211,000 | 60,271,000 | ||||||||||||
|
Federal Home Loan Bank stock
|
15,681,000 | 15,681,000 | 15,681,000 | 15,681,000 | ||||||||||||
|
Loans, net
|
1,362,972,000 | 1,372,716,000 | 1,491,940,000 | 1,501,860,000 | ||||||||||||
|
Bank owned life insurance
|
45,890,000 | 45,890,000 | 45,024,000 | 45,024,000 | ||||||||||||
|
Accrued interest receivable
|
6,278,000 | 6,278,000 | 7,088,000 | 7,088,000 | ||||||||||||
|
Financial liabilities
|
||||||||||||||||
|
Deposits
|
1,340,160,000 | 1,347,542,000 | 1,401,627,000 | 1,407,310,000 | ||||||||||||
|
Securities sold under agreements
to repurchase
|
108,271,000 | 108,271,000 | 99,755,000 | 99,755,000 | ||||||||||||
|
Federal funds purchased
|
0 | 0 | 2,600,000 | 2,600,000 | ||||||||||||
|
Federal Home Loan Bank advances
|
160,000,000 | 164,360,000 | 205,000,000 | 208,435,000 | ||||||||||||
|
Subordinated debentures
|
32,990,000 | 33,917,000 | 32,990,000 | 32,971,000 | ||||||||||||
|
Accrued interest payable
|
4,686,000 | 4,686,000 | 6,158,000 | 6,158,000 | ||||||||||||
21
| 11. | FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued) | |
| Carrying amount is the estimated fair value for cash and cash equivalents, Federal Home Loan Bank stock, accrued interest receivable and payable, bank owned life insurance, demand deposits, securities sold under agreements to repurchase, and variable rate loans and deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans and deposits and for variable rate loans and deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of subordinated debentures and Federal Home Loan Bank advances is based on current rates for similar financing. Fair value of off-balance sheet items is estimated to be nominal. | ||
| Current accounting pronouncements require disclosure of the estimated fair value of financial instruments as disclosed in Note 12. Given current market conditions, a portion of our loan portfolio is not readily marketable and market prices do not exist. We have not attempted to market our loans to potential buyers, if any exist, to determine the fair value of those instruments. Since negotiated prices in illiquid markets depend upon the then present motivations of the buyer and seller, it is reasonable to assume that actual sales prices could vary widely from any estimate of fair value made without the benefit of negotiations. Additionally, changes in market interest rates can dramatically impact the value of financial instruments in a short period of time. Accordingly, the fair value measurements for loans included in the table above are unlikely to represent the instruments’ liquidation values. |
| 12. | FAIR VALUES | |
| Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability, or in the absence of a principal market, the most advantageous market for the asset or liability. The price of the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact. |
22
| 12. | FAIR VALUES (Continued) | |
| We are required to use valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources, or unobservable, meaning those that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. In that regard, we utilize a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: | ||
| Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that we have the ability to access as of the measurement date. | ||
| Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be derived from or corroborated by observable market data by correlation or other means. | ||
| Level 3: Significant unobservable inputs that reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability. | ||
| The following is a description of our valuation methodologies used to measure and disclose the fair values of our financial assets and liabilities on a recurring or nonrecurring basis: | ||
| Securities available for sale. Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based on quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models. Level 2 securities include U.S. Government agency bonds, mortgage-backed securities issued or guaranteed by U.S. Government agencies, municipal general obligation and revenue bonds, Michigan Strategic Fund bonds and mutual funds. We have no Level 1 or 3 securities. | ||
| Securities held to maturity . Securities held to maturity are carried at amortized cost when we have the positive intent and ability to hold them to maturity. The fair value of held to maturity securities, as disclosed in the accompanying consolidated financial statements, is based on quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models. |
23
| 12. | FAIR VALUES (Continued) | |
| Mortgage loans held for sale . Mortgage loans held for sale are carried at the lower of cost or fair value and are measured on a nonrecurring basis. Fair value is based on independent quoted market prices, where applicable, or the prices for other mortgage whole loans with similar characteristics. As of June 30, 2010 and December 31, 2009, we determined that the fair value of our mortgage loans held for sale was similar to the cost; therefore, we carried the $1.4 million and $0.9 million, respectively, of such loans at cost so they are not included in the nonrecurring table below. | ||
| Loans and leases . We do not record loans and leases at fair value on a recurring basis. However, from time to time, we record nonrecurring fair value adjustments to collateral dependent loans and leases to reflect partial write-downs or specific reserves that are based on the observable market price or current estimated value of the collateral. These loans and leases are reported in the nonrecurring table below at initial recognition of impairment and on an ongoing basis until recovery or charge-off. | ||
| Foreclosed Assets. At time of foreclosure or repossession, foreclosed and repossessed assets are adjusted to fair value less costs to sell upon transfer of the loans and leases to foreclosed and repossessed assets, establishing a new cost basis. We subsequently adjust estimated fair value of foreclosed assets on a nonrecurring basis to reflect write-downs based on revised fair value estimates. | ||
| Derivatives . For interest rate swaps, we measure fair value utilizing models that use primarily market observable inputs, such as yield curves and option volatilities, and accordingly, are classified as Level 2. We had no interest rate swaps contracts outstanding as of June 30, 2010 or December 31, 2009. | ||
| Assets and Liabilities Measured at Fair Value on a Recurring Basis | ||
| The balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 are as follows: |
| Quoted | ||||||||||||||||
| Prices in | ||||||||||||||||
| Active | Significant | |||||||||||||||
| Markets for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
|
U.S. Government agency
debt obligations
|
$ | 102,299,000 | $ | 0 | $ | 102,299,000 | $ | 0 | ||||||||
|
Mortgage-backed securities
|
57,991,000 | 0 | 57,991,000 | 0 | ||||||||||||
|
Michigan Strategic Fund bonds
|
19,695,000 | 0 | 19,695,000 | 0 | ||||||||||||
|
Municipal general
obligation bonds
|
30,074,000 | 0 | 30,074,000 | 0 | ||||||||||||
|
Municipal revenue bonds
|
5,587,000 | 0 | 5,587,000 | 0 | ||||||||||||
|
Mutual funds
|
1,471,000 | 0 | 1,471,000 | 0 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 217,117,000 | $ | 0 | $ | 217,117,000 | $ | 0 | ||||||||
|
|
||||||||||||||||
| There were no transfers in or out of Level 1, Level 2 or Level 3 during the first six months of 2010. |
24
| 12. | FAIR VALUES (Continued) | |
| The balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 are as follows: |
| Quoted | ||||||||||||||||
| Prices in | ||||||||||||||||
| Active | Significant | |||||||||||||||
| Markets for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
|
Securities available for sale
|
$ | 182,492,000 | $ | 0 | $ | 182,492,000 | $ | 0 | ||||||||
|
|
||||||||||||||||
|
Total
|
$ | 182,492,000 | $ | 0 | $ | 182,492,000 | $ | 0 | ||||||||
|
|
||||||||||||||||
| Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis |
| The balances of assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2010 are as follows: |
| Quoted | ||||||||||||||||
| Prices in | ||||||||||||||||
| Active | Significant | |||||||||||||||
| Markets for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
|
Impaired loans
(1)
|
$ | 51,935,000 | $ | 0 | $ | 0 | $ | 51,935,000 | ||||||||
|
Foreclosed assets
(1)
|
23,020,000 | 0 | 0 | 23,020,000 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 74,955,000 | $ | 0 | $ | 0 | $ | 74,955,000 | ||||||||
|
|
||||||||||||||||
| The balances of assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2009 are as follows: |
| Quoted | ||||||||||||||||
| Prices in | ||||||||||||||||
| Active | Significant | |||||||||||||||
| Markets for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
|
Impaired loans
(1)
|
$ | 41,456,000 | $ | 0 | $ | 0 | $ | 41,456,000 | ||||||||
|
Foreclosed assets
(1)
|
26,608,000 | 0 | 0 | 26,608,000 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 68,064,000 | $ | 0 | $ | 0 | $ | 68,064,000 | ||||||||
|
|
||||||||||||||||
| (1) | Represents carrying value and related write-downs for which adjustments are based on the estimated value of the property or other assets. |
25
| 13. | REGULATORY MATTERS | |
| We are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on our financial statements. | ||
| The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If an institution is not well capitalized, regulatory approval is required to accept brokered deposits. Subject to limited exceptions, no institution may make a capital distribution if, after making the distribution, it would be undercapitalized. If an institution is undercapitalized, it is subject to close monitoring by its principal federal regulator, its asset growth and expansion are restricted, and plans for capital restoration are required. In addition, further specific types of restrictions may be imposed on the institution at the discretion of the federal regulator. At June 30, 2010 and December 31, 2009, our bank was in the well capitalized category under the regulatory framework for prompt corrective action. There are no conditions or events since June 30, 2010 that we believe has changed our bank’s categorization. | ||
| Our actual capital levels (dollars in thousands) and the minimum levels required to be categorized as adequately and well capitalized were: |
| Minimum Required | ||||||||||||||||||||||||
| to be Well | ||||||||||||||||||||||||
| Minimum Required | Capitalized Under | |||||||||||||||||||||||
| for Capital | Prompt Corrective | |||||||||||||||||||||||
| Actual | Adequacy Purposes | Action Regulations | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
|
June 30,
2010
|
||||||||||||||||||||||||
|
Total capital (to risk
weighted assets)
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 187,957 | 11.9 | % | $ | 126,117 | 8.0 | % | $ | NA | NA | |||||||||||||
|
Bank
|
186,655 | 11.9 | 125,998 | 8.0 | 157,498 | 10.0 | % | |||||||||||||||||
|
Tier 1 capital (to risk
weighted assets)
|
||||||||||||||||||||||||
|
Consolidated
|
167,905 | 10.7 | 63,059 | 4.0 | NA | NA | ||||||||||||||||||
|
Bank
|
166,622 | 10.6 | 62,999 | 4.0 | 94,499 | 6.0 | ||||||||||||||||||
|
Tier 1 capital (to average assets)
|
||||||||||||||||||||||||
|
Consolidated
|
167,905 | 9.0 | 74,487 | 4.0 | NA | NA | ||||||||||||||||||
|
Bank
|
166,622 | 9.0 | 74,446 | 4.0 | 93,057 | 5.0 | ||||||||||||||||||
26
| 13. | REGULATORY MATTERS (Continued) |
| Minimum Required | ||||||||||||||||||||||||
| to be Well | ||||||||||||||||||||||||
| Minimum Required | Capitalized Under | |||||||||||||||||||||||
| for Capital | Prompt Corrective | |||||||||||||||||||||||
| Actual | Adequacy Purposes | Action Regulations | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
|
December 31, 2009
|
||||||||||||||||||||||||
|
Total capital (to risk
weighted assets)
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 193,157 | 11.2 | % | $ | 138,169 | 8.0 | % | $ | NA | NA | |||||||||||||
|
Bank
|
191,146 | 11.1 | 138,051 | 8.0 | 172,563 | 10.0 | % | |||||||||||||||||
|
Tier 1 capital (to risk
weighted assets)
|
||||||||||||||||||||||||
|
Consolidated
|
171,244 | 9.9 | 69,085 | 4.0 | NA | NA | ||||||||||||||||||
|
Bank
|
169,251 | 9.8 | 69,026 | 4.0 | 103,538 | 6.0 | ||||||||||||||||||
|
Tier 1 capital (to
average assets)
|
||||||||||||||||||||||||
|
Consolidated
|
171,244 | 8.6 | 79,325 | 4.0 | NA | NA | ||||||||||||||||||
|
Bank
|
169,251 | 8.6 | 79,119 | 4.0 | 98,899 | 5.0 | ||||||||||||||||||
| Our consolidated capital levels as of June 30, 2010 and December 31, 2009 include $32.0 million of trust preferred securities issued by the trust in September 2004 and December 2004 subject to certain limitations. Under applicable Federal Reserve guidelines, the trust preferred securities constitute a restricted core capital element. The guidelines provide that the aggregate amount of restricted core elements that may be included in our Tier 1 capital must not exceed 25% of the sum of all core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability. As of June 30, 2010 and December 31, 2009, all $32.0 million of the trust preferred securities were included as Tier 1 capital. |
| On July 9, 2010, we announced via a Form 8-K filed with the SEC that we are deferring regularly scheduled quarterly interest payments on our subordinated debentures beginning with the quarterly interest payment scheduled to be 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 are deferring regularly scheduled quarterly dividend payments on our preferred stock beginning with the quarterly dividend payment scheduled to be paid on August 15, 2010. We have not determined the duration of the deferral period. |
27
| 13. | REGULATORY MATTERS (Continued) | |
| Our and our bank’s ability to pay cash and stock dividends is subject to limitations under various laws and regulations and to prudent and sound banking practices. On January 14, 2010, we declared a $0.01 per share cash dividend on our common stock, which was paid on March 10, 2010 to record holders as of February 10, 2010. Because we had a retained deficit at the time of the declaration, the cash dividend was recorded as a reduction of our common stock account. In April 2010, we suspended future payments of cash dividends on our common stock until economic conditions and our financial performance improve. In addition, we are precluded from paying dividends on our common stock and preferred stock because, under the terms of our subordinated debentures, we cannot pay dividends during periods when we have deferred the payment of interest on our subordinated debentures; and, as indicated above in this Note 13, 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, as indicated above in this Note 13, we have suspended the payment of dividends on our preferred stock, we are precluded from paying dividends on our common stock. |
28
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
29
30
31
32
| 6/30/10 | 3/31/10 | 12/31/09 | 9/30/09 | 6/30/09 | ||||||||||||||||
|
Residential-Related:
|
||||||||||||||||||||
|
Vacant Land
|
$ | 20,351,000 | $ | 20,871,000 | $ | 19,465,000 | $ | 20,630,000 | $ | 21,400,000 | ||||||||||
|
Land Development
|
29,627,000 | 32,199,000 | 34,027,000 | 33,862,000 | 42,053,000 | |||||||||||||||
|
Construction
|
6,627,000 | 7,872,000 | 7,199,000 | 9,446,000 | 11,157,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
56,605,000 | 60,942,000 | 60,691,000 | 63,938,000 | 74,610,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
Comm’l Non-Owner Occupied:
|
||||||||||||||||||||
|
Vacant Land
|
19,812,000 | 22,304,000 | 25,549,000 | 25,564,000 | 29,005,000 | |||||||||||||||
|
Land Development
|
18,585,000 | 19,058,000 | 19,402,000 | 22,412,000 | 23,469,000 | |||||||||||||||
|
Construction
|
52,295,000 | 52,107,000 | 65,697,000 | 79,339,000 | 94,225,000 | |||||||||||||||
|
Commercial Buildings
|
512,816,000 | 539,284,000 | 537,891,000 | 528,727,000 | 545,501,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
603,508,000 | 632,753,000 | 648,539,000 | 656,042,000 | 692,200,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
Comm’l Owner Occupied:
|
||||||||||||||||||||
|
Construction
|
1,360,000 | 1,651,000 | 1,404,000 | 5,456,000 | 7,407,000 | |||||||||||||||
|
Commercial Buildings
|
302,768,000 | 316,302,000 | 324,451,000 | 349,335,000 | 359,610,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
304,128,000 | 317,953,000 | 325,855,000 | 354,791,000 | 367,017,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 964,241,000 | $ | 1,011,648,000 | $ | 1,035,085,000 | $ | 1,074,771,000 | $ | 1,133,827,000 | ||||||||||
|
|
||||||||||||||||||||
33
34
35
| 6/30/10 | 3/31/10 | 12/31/09 | 9/30/09 | 6/30/09 | ||||||||||||||||
|
Residential Real Estate:
|
||||||||||||||||||||
|
Land Development
|
$ | 21,551,000 | $ | 22,781,000 | $ | 19,722,000 | $ | 13,645,000 | $ | 10,422,000 | ||||||||||
|
Construction
|
10,231,000 | 11,425,000 | 12,103,000 | 13,021,000 | 12,882,000 | |||||||||||||||
|
Owner Occupied / Rental
|
6,159,000 | 5,908,000 | 7,493,000 | 6,830,000 | 4,910,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
37,941,000 | 40,114,000 | 39,318,000 | 33,496,000 | 28,214,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
Commercial Real Estate:
|
||||||||||||||||||||
|
Land Development
|
2,050,000 | 3,031,000 | 2,971,000 | 4,621,000 | 2,292,000 | |||||||||||||||
|
Construction
|
571,000 | 1,238,000 | 1,268,000 | 228,000 | 0 | |||||||||||||||
|
Owner Occupied
|
16,216,000 | 17,311,000 | 19,918,000 | 21,429,000 | 17,378,000 | |||||||||||||||
|
Non-Owner Occupied
|
46,706,000 | 46,552,000 | 38,417,000 | 36,473,000 | 28,110,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
65,543,000 | 68,132,000 | 62,574,000 | 62,751,000 | 47,780,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
Non-Real Estate:
|
||||||||||||||||||||
|
Commercial Assets
|
7,049,000 | 9,303,000 | 9,758,000 | 14,510,000 | 10,629,000 | |||||||||||||||
|
Consumer Assets
|
0 | 8,000 | 8,000 | 8,000 | 8,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
7,049,000 | 9,311,000 | 9,766,000 | 14,518,000 | 10,637,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 110,533,000 | $ | 117,557,000 | $ | 111,658,000 | $ | 110,765,000 | $ | 86,631,000 | ||||||||||
|
|
||||||||||||||||||||
36
| 2nd Qtr | 1st Qtr | 4th Qtr | 3rd Qtr | 2nd Qtr | ||||||||||||||||
| 2010 | 2010 | 2009 | 2009 | 2009 | ||||||||||||||||
|
Residential Real Estate:
|
||||||||||||||||||||
|
Land Development
|
$ | 1,254,000 | $ | 565,000 | $ | 2,204,000 | $ | 467,000 | $ | 1,060,000 | ||||||||||
|
Construction
|
649,000 | 587,000 | 733,000 | 3,208,000 | 1,023,000 | |||||||||||||||
|
Owner Occupied / Rental
|
407,000 | 326,000 | 946,000 | 530,000 | 729,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
2,310,000 | 1,478,000 | 3,883,000 | 4,205,000 | 2,812,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
Commercial Real Estate:
|
||||||||||||||||||||
|
Land Development
|
674,000 | 617,000 | 45,000 | 0 | 74,000 | |||||||||||||||
|
Construction
|
660,000 | 0 | 0 | 0 | 0 | |||||||||||||||
|
Owner Occupied
|
726,000 | 1,091,000 | 1,140,000 | 1,254,000 | 593,000 | |||||||||||||||
|
Non-Owner Occupied
|
2,551,000 | 1,945,000 | 3,009,000 | 3,265,000 | 2,347,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
4,611,000 | 3,653,000 | 4,194,000 | 4,519,000 | 3,014,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
Non-Real Estate:
|
||||||||||||||||||||
|
Commercial Assets
|
1,670,000 | 1,012,000 | 2,788,000 | 2,232,000 | 4,918,000 | |||||||||||||||
|
Consumer Assets
|
(3,000 | ) | 9,000 | (1,000 | ) | 7,000 | 35,000 | |||||||||||||
|
|
||||||||||||||||||||
|
|
1,667,000 | 1,021,000 | 2,787,000 | 2,239,000 | 4,953,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 8,588,000 | $ | 6,152,000 | $ | 10,864,000 | $ | 10,963,000 | $ | 10,779,000 | ||||||||||
|
|
||||||||||||||||||||
| 6/30/10 | 3/31/10 | 12/31/09 | 9/30/09 | 6/30/09 | ||||||||||||||||
|
Past due 90 days or more and
accruing interest
|
$ | 24,000 | $ | 0 | $ | 243,000 | $ | 3,040,000 | $ | 48,000 | ||||||||||
|
Nonaccrual
|
81,543,000 | 88,450,000 | 81,818,000 | 87,190,000 | 73,623,000 | |||||||||||||||
|
Troubled debt restructurings
|
5,946,000 | 6,011,000 | 2,989,000 | 1,012,000 | 0 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 87,513,000 | $ | 94,461,000 | $ | 85,050,000 | $ | 91,242,000 | $ | 73,671,000 | ||||||||||
|
|
||||||||||||||||||||
37
38
39
40
41
42
43
44
45
46
| Quarters ended June 30, | ||||||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||||||
| Average | Average | Average | Average | |||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||
|
Loans and leases
|
$ | 1,465,631 | $ | 20,066 | 5.49 | % | $ | 1,749,919 | $ | 24,080 | 5.52 | % | ||||||||||||
|
Investment securities
|
236,136 | 2,770 | 4.69 | 233,402 | 3,065 | 5.25 | ||||||||||||||||||
|
Federal funds sold
|
59,051 | 37 | 0.25 | 62,755 | 39 | 0.25 | ||||||||||||||||||
|
Short-term investments
|
9,573 | 10 | 0.43 | 3,995 | 3 | 0.27 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total interest — earning
assets
|
1,770,391 | 22,883 | 5.18 | 2,050,071 | 27,187 | 5.32 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Allowance for loan
and lease losses
|
(52,394 | ) | (35,815 | ) | ||||||||||||||||||||
|
Other assets
|
144,529 | 132,337 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total assets
|
$ | 1,862,526 | $ | 2,146,593 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
||||||||||||||||||||||||
|
Interest-bearing
deposits
|
$ | 1,269,886 | $ | 5,992 | 1.89 | % | $ | 1,442,815 | $ | 11,220 | 3.12 | % | ||||||||||||
|
Short-term borrowings
|
101,167 | 353 | 1.40 | 95,828 | 475 | 1.99 | ||||||||||||||||||
|
Federal Home Loan
Bank advances
|
176,044 | 1,576 | 3.54 | 249,505 | 2,295 | 3.64 | ||||||||||||||||||
|
Other borrowings
|
49,815 | 354 | 2.81 | 49,819 | 426 | 3.38 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total interest-bearing
liabilities
|
1,596,912 | 8,275 | 2.08 | 1,837,967 | 14,416 | 3.15 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Noninterest-bearing
deposits
|
120,511 | 115,391 | ||||||||||||||||||||||
|
Other liabilities
|
6,196 | 17,046 | ||||||||||||||||||||||
|
Shareholders’ equity
|
138,907 | 176,189 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total liabilities and
shareholders’ equity
|
$ | 1,862,526 | $ | 2,146,593 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest income
|
$ | 14,608 | $ | 12,771 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest rate spread
|
3.10 | % | 2.17 | % | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest rate margin
on average assets
|
3.15 | % | 2.39 | % | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest margin on
earning assets
|
3.31 | % | 2.50 | % | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
47
48
49
| Within | Three to | One to | After | |||||||||||||||||
| Three | Twelve | Five | Five | |||||||||||||||||
| Months | Months | Years | Years | Total | ||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Commercial loans (1)
|
$ | 469,752,000 | $ | 216,374,000 | $ | 569,305,000 | $ | 29,886,000 | $ | 1,285,317,000 | ||||||||||
|
Leases
|
3,000 | 134,000 | 493,000 | 0 | 630,000 | |||||||||||||||
|
Residential real estate loans
|
46,965,000 | 9,849,000 | 50,205,000 | 12,158,000 | 119,177,000 | |||||||||||||||
|
Consumer loans
|
2,561,000 | 294,000 | 2,555,000 | 176,000 | 5,586,000 | |||||||||||||||
|
Securities (2)
|
39,564,000 | 636,000 | 49,882,000 | 142,716,000 | 232,798,000 | |||||||||||||||
|
Federal funds sold
|
53,892,000 | 0 | 0 | 0 | 53,892,000 | |||||||||||||||
|
Short-term investments
|
9,470,000 | 0 | 0 | 0 | 9,470,000 | |||||||||||||||
|
Allowance for loan and lease losses
|
0 | 0 | 0 | 0 | (47,738,000 | ) | ||||||||||||||
|
Other assets
|
0 | 0 | 0 | 0 | 144,930,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total assets
|
622,207,000 | 227,287,000 | 672,440,000 | 184,936,000 | $ | 1,804,062,000 | ||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Liabilities:
|
||||||||||||||||||||
|
Interest-bearing checking
|
128,293,000 | 0 | 0 | 0 | 128,293,000 | |||||||||||||||
|
Savings deposits
|
34,595,000 | 0 | 0 | 0 | 34,595,000 | |||||||||||||||
|
Money market accounts
|
79,210,000 | 0 | 0 | 0 | 79,210,000 | |||||||||||||||
|
Time deposits under $100,000
|
26,247,000 | 66,455,000 | 33,282,000 | 0 | 125,984,000 | |||||||||||||||
|
Time deposits $100,000 & over
|
226,998,000 | 348,041,000 | 270,467,000 | 0 | 845,506,000 | |||||||||||||||
|
Short-term borrowings
|
108,271,000 | 0 | 0 | 0 | 108,271,000 | |||||||||||||||
|
Federal Home Loan Bank advances
|
0 | 105,000,000 | 55,000,000 | 0 | 160,000,000 | |||||||||||||||
|
Other borrowed money
|
39,826,000 | 10,000,000 | 0 | 0 | 49,826,000 | |||||||||||||||
|
Noninterest-bearing checking
|
0 | 0 | 0 | 0 | 126,572,000 | |||||||||||||||
|
Other liabilities
|
0 | 0 | 0 | 0 | 6,762,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total liabilities
|
643,440,000 | 529,496,000 | 358,749,000 | 0 | 1,665,019,000 | |||||||||||||||
|
Shareholders’ equity
|
0 | 0 | 0 | 0 | 139,043,000 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total liabilities & shareholders’
equity
|
643,440,000 | 529,496,000 | 358,749,000 | 0 | $ | 1,804,062,000 | ||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net asset (liability) GAP
|
$ | (21,233,000 | ) | $ | (302,209,000 | ) | $ | 313,691,000 | $ | 184,936,000 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Cumulative GAP
|
$ | (21,233,000 | ) | $ | (323,442,000 | ) | $ | (9,751,000 | ) | $ | 175,185,000 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Percent of cumulative GAP to
total assets
|
(1.2 | %) | (17.9 | %) | (0.5 | %) | 9.7 | % | ||||||||||||
|
|
||||||||||||||||||||
| (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 average life calculations based upon prepayment trends as of June 30, 2010. |
50
| Dollar Change | Percent Change | |||||||
| In Net | In Net | |||||||
| Interest Rate Scenario | Interest Income | Interest Income | ||||||
|
Interest rates down 300 basis points
|
$ | 285,000 | 0.5 | % | ||||
|
Interest rates down 200 basis points
|
820,000 | 1.5 | ||||||
|
Interest rates down 100 basis points
|
1,350,000 | 2.5 | ||||||
|
No change in interest rates
|
1,885,000 | 3.4 | ||||||
|
Interest rates up 100 basis points
|
210,000 | 0.4 | ||||||
|
Interest rates up 200 basis points
|
40,000 | 0.1 | ||||||
|
Interest rates up 300 basis points
|
1,200,000 | 2.2 | ||||||
51
52
53
| 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 | |
|
|
||
|
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 | |
|
|
||
|
31
|
Rule 13a-14(a) Certifications | |
|
|
||
|
32.1
|
Section 1350 Chief Executive Officer Certification | |
|
|
||
|
32.2
|
Section 1350 Chief Financial Officer Certification |
54
|
MERCANTILE BANK CORPORATION
|
||||
| By: | /s/ Michael H. Price | |||
| Michael H. Price | ||||
|
Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer) |
||||
| By: | /s/ Charles E. Christmas | |||
| Charles E. Christmas | ||||
|
Senior Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) |
||||
55
| 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 | |
|
|
||
|
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 | |
|
|
||
|
31
|
Rule 13a-14(a) Certifications | |
|
|
||
|
32.1
|
Section 1350 Chief Executive Officer Certification | |
|
|
||
|
32.2
|
Section 1350 Chief Financial Officer Certification |
No information found
* THE VALUE IS THE MARKET VALUE AS OF THE LAST DAY OF THE QUARTER FOR WHICH THE 13F WAS FILED.
| FUND | NUMBER OF SHARES | VALUE ($) | PUT OR CALL |
|---|
| DIRECTORS | AGE | BIO | OTHER DIRECTOR MEMBERSHIPS |
|---|
No information found
No Customers Found
No Suppliers Found
Price
Yield
| Owner | Position | Direct Shares | Indirect Shares |
|---|