SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2009
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Transition report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 |
Commission File No.: 001-32434
MERCANTILE BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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37-1149138
(I.R.S. Employer
Identification Number) |
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200 N. 33rd Street, Quincy, Illinois
(Address of Principal Executive Offices)
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62301
(Zip Code) |
(217) 223-7300
(Registrants Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
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Common Stock (par value $.42 per share)
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NYSE Alternext US |
Securities registered under Section 12(g) of the Exchange Act:
Not Applicable
(Title of Class)
Indicate by check mark if the Company is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes o No þ
Indicate by check mark if the Company is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the Company is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one).
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
As of June 30, 2009 the aggregate market value of the outstanding shares of the Companys common
stock (based on the average stock price on June 30, 2009), other than shares held by persons who
may be deemed affiliates of the Company, was approximately $41.4 million. Determination of stock
ownership by non-affiliates was made solely for the purpose of responding to this requirement and
the Company is not bound by this determination for any other purpose.
As of March 29, 2010, the number of outstanding shares of the Companys common stock, par value
$0.4167 per share, was 8,703,330.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Mercantile Bancorp, Inc. definitive Proxy Statement for its 2009 Annual
Meeting of Stockholders to be held on May 24, 2010, are incorporated by reference to this Annual
Report on Form 10-K in response to items under Part III.
PART I
Item 1. Business
Company and Subsidiaries
General. Mercantile Bancorp, Inc. (the Company), a multi-state bank holding company, is
headquartered in Quincy, Illinois. The Company was incorporated on April 15, 1983 for the purpose
of enabling Mercantile Bank (formerly known as Mercantile Trust & Savings Bank), an Illinois
banking corporation, to operate within a bank holding company structure. Several of the Companys
subsidiary banks serve rural communities, and a significant portion of the Companys business is
related directly or indirectly to the agricultural industry. However, the Company has diversified
in recent years by expanding into metropolitan areas. The Company reported, as of December 31,
2009, total assets of approximately $1.4 billion and total deposits of approximately $955 million,
and as of December 31, 2008, total assets of approximately $1.8 billion and total deposits of
approximately $1.5 billion. At December 31, 2009, its subsidiaries consist of three banks in
Illinois and one bank in each of Kansas and Florida. As described in more detail below, Mercantile
Bank has represented on average approximately 75% of the Companys revenue from continuing
operations and 48% of its pre-consolidated assets annually. Most of the Companys loans are
related to real estate with, on average, approximately 70% being farmland, construction, commercial
and mortgage loans. The Companys website is located at www.mercbanx.com.
The Company, through its subsidiaries, conducts a full-service consumer and commercial banking
business, which includes mainly deposit gathering, safekeeping and distribution; lending for
commercial, financial and agricultural purposes, real estate purposes (including farmland,
construction and mortgages), and consumer purposes; and asset management including trust, estate
and agency management, retail brokerage services, and agricultural business management.
Notwithstanding the broad range of services and products, approximately 76% of the Companys
revenue is derived on average annually from its subsidiaries lending activities. The other
principal revenue sources are interest and dividends on investment securities with approximately 9%
of revenue on average, service charges and fees on customer accounts with approximately 4% of
revenue on average, and all asset management services combined with approximately 6% of revenue on
average.
The Companys principal, direct activities consist of owning and supervising the banks,
through which the Company derives most of its revenues. The Company directs the policies and
coordinates the financial resources of the banks. The Company provides and performs various
technical and advisory services for the banks, coordinates the banks general policies and
activities, and participates in the banks major decisions.
Wholly-Owned Subsidiaries. As of December 31, 2009, the Company was the sole shareholder of
the following banking subsidiaries:
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Mercantile Bank, located in Quincy, Illinois; |
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Marine Bank & Trust (Marine Bank), located in Carthage, Illinois; |
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Brown County State Bank (Brown County), located in Mt. Sterling, Illinois; and |
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Royal Palm Bancorp, Inc. (Royal Palm) the sole shareholder of The Royal Palm Bank
of Florida (Royal Palm Bank), located in Naples, Florida |
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Majority-Owned Subsidiaries. As of December 31, 2009, the Company was the majority, but not
sole, shareholder of Mid-America Bancorp, Inc. (Mid-America), the sole shareholder of Heartland
Bank (Heartland), located in Leawood, Kansas, in which the Company owns 55.5% (84,600 shares) of
the outstanding voting stock. The Companys percentage ownership of Mid-America was 55.5% as of
December 31, 2009 and December 31, 2008.
Other Investments in Financial Institutions
As of December 31, 2009, the Company had less than majority ownership interests in several
other banking organizations located throughout the United States. Specifically, the Company owned
the following percentages of the outstanding voting stock of these banking entities:
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4.3% of Integrity Bank (Integrity), located in Jupiter, Florida; |
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0.8% of Premier Bancshares, Inc. (Premier), the sole shareholder of Premier Bank,
located in Jefferson City, Missouri; |
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2.5% of Premier Community Bank of the Emerald Coast (Premier Community), located
in Crestview, Florida; |
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4.1% of Paragon National Bank (Paragon), located in Memphis, Tennessee; |
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1.4% of Enterprise Financial Services Corp. (Enterprise), the sole shareholder of
Enterprise Bank & Trust, based in Clayton, Missouri; |
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4.1% of Solera National Bancorp, Inc. (Solera), the sole shareholder of Solera
National Bank, located in Lakewood, Colorado; |
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2.9% of Manhattan Bancorp, Inc. (Manhattan), the sole shareholder of Bank of
Manhattan, located in Los Angeles, California; and |
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4.9% of Brookhaven Bank (Brookhaven), located in Atlanta, Georgia. |
2009 Events
On February 27, 2009, the Federal Deposit Insurance Corporation (FDIC) announced it had
adopted an interim rule to impose a 20 basis point emergency special assessment on June 30, 2009,
which would be collected on September 30, 2009. The interim rule also provided that an additional
emergency assessment of up to 10 basis points could be imposed if the reserve ratio of the Deposit
Insurance Fund would be estimated to fall to a level that the FDIC Board believed would adversely
affect public confidence or to a level which would be close to zero or negative at the end of the
calendar quarter. The 20 basis point assessment was originally based on the institutions
assessment base of total deposits. In the second quarter of 2009, the FDIC announced it had
revised the original interim rule to impose a 20 basis point special assessment based on deposits
to a 5 basis point special assessment based on the institutions total assets minus Tier 1 Capital.
The new rule provided that additional assessments of up to 5 basis points could be imposed on
September 30, 2009 and December 31, 2009 if the reserve ratio of the Deposit Insurance Fund was not
at an acceptable level. The 5 basis point additional assessment for each quarter cannot exceed an
institutions calculation of 10 basis points on the original assessment base of total deposits.
The Companys special assessment as of June 30, 2009 was $812 thousand, which was paid on
September 30, 2009. The FDIC did not impose an additional assessment as of September 30, 2009. On
November 12, 2009, the FDIC adopted a final rule requiring insured depository institutions to
prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all
of 2010, 2011, and 2012, on December 30, 2009, along with each institutions risk-based deposit
insurance assessment for the third quarter of 2009. The Companys prepayment amount from continuing
operations totaled approximately $3.9 million, while the prepayment amount from discontinued
operations totaled $3.0 million. The FDIC is also scheduled to increase the normal assessment rates
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with the intent being to replenish the Deposit Insurance Fund to the statutory limit of 1.15%
of insured deposits by December 31, 2013.
In June 2009, the Company decided to defer regularly scheduled interest payments on its
outstanding junior subordinated debentures relating to its trust preferred securities. The terms
of the junior subordinated debentures and the trust documents allow the Company to defer payments
of interest for up to 20 consecutive quarterly periods without default or penalty. During the
deferral period, the respective trusts will likewise suspend the declaration and payment of
dividends on the trust preferred securities. Also during the deferral period, the Company may not,
among other things and with limited exceptions, pay cash dividends on or repurchase its common
stock nor make any payment on outstanding debt obligations that rank equally with or junior to the
junior subordinated debentures. As of December 31, 2009, the accumulated deferred interest
payments totaled $2.3 million.
On August 25, 2009, the Company announced that Lee R. Keith had joined the Companys Board of
Directors as of that date. Mr. Keith, President of Premier Bank in Jefferson City, Missouri, has
over 30 years of executive leadership and community bank management experience, and was appointed
to fill the vacancy created by the resignation of a director in June 2009.
On September 30, 2009, Mid-America issued a secured convertible debenture to the Company in
the amount of $1.0 million, bringing the total of all such debentures issued by Mid-America to the
Company to $9.3 million. For each of the debentures, interest is payable quarterly at an annual
rate of 5.5%. The principal balances, together with accrued interest, shall be due and payable on
June 30, 2010. The debentures are secured by all of the outstanding common stock of Heartland, and
are convertible into common stock of Mid-America at the election of the Company.
As of September 1, 2009, the Company was in breach of certain of its covenants under its loan
agreement with Great River Bancshares, Inc. (Great River), pursuant to which Great River has
provided the Company with secured debt. Specifically, the Company was in breach of the financial
covenant requiring it not to permit, without Great Rivers consent, the aggregate amount of
non-performing assets of all of its subsidiary banks on a combined basis to equal or exceed 36% of
the then primary capital of all of its subsidiary banks. As of September 30, 2009, the Company
continued to be in breach of this financial covenant and in addition was in breach of the financial
covenant requiring it to maintain a consolidated fixed charge covenant ratio of at least 0.5 to
1.00 for the period from January 1, 2009 through September 30, 2009. In addition, at September 30,
2009, the Company was in breach of the covenant requiring it and its subsidiary banks to be
adequately capitalized and requiring the Company to cause its subsidiary banks well capitalized
at all times.
On November 21, 2009, the Company entered into a Second Waiver and Amendment to the Fourth
Amended and Restated Loan Agreement (Second Waiver), between the Company and Great River. The
Second Waiver waived the Companys breaches of, and amended, certain financial and other covenants.
These included, but are not limited to the Company (1) maintaining a consolidated fixed charge
covenant ratio of at least negative (0.75) to 1.00; (2) maintaining consolidated non-performing
assets not equaling or exceeding 85% of the then primary capital of all subsidiary banks; and (3)
maintaining regulatory capital ratios at a well capitalized level for the Company and all of its
bank and bank holding company subsidiaries. The Second Waiver included an amendment to compliance
with certain regulatory requirements reflecting the regulatory actions currently imposed on the
Company and its subsidiaries. It also provided that the default rate of interest accruing on the
aggregate principal amount outstanding on the Great River debt would cease and be replaced at
7.50%, and also extended the maturity dates on existing notes. The Second Waiver extended an
additional $11 million of short-term debt to the Company, which was used to provide additional
capital to Royal Palm. The entire $11 million was repaid upon the closing of the sale of Marine
Bank and Brown County on February 26, 2010. A new line of credit was also provided to the Company
in the principal amount of $7 million, which has a maturity date of December 31, 2010.
Also on November 21, 2009, the Company entered into an Exchange Agreement (the Exchange)
with R. Dean Phillips (Phillips) the sole shareholder and Chairman of Great River. The Exchange
provided for the sale of HNB, one of the Companys subsidiary banks, to Phillips, in exchange for
the repayment of $28 million of the Great River debt. Phillips owned, through participations from
Great River, more than $28 million of the Great River debt. On December 16, 2009, the Company
finalized the Exchange eliminating $28 million of the debt owed to Great River, and transferred
control of HNB to Phillips. In connection with the Exchange, the Company entered into other
ancillary agreements with HNB. The exchange of debt for all issued and outstanding stock of HNB
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approximately $16 million in outstanding debt owed to Phillips and Great River. The Company
repaid the remainder of this debt following the closing of the sale of Marine Bank and Brown County
on February 26, 2010.
On November 22, 2009, the Company entered into a stock purchase agreement (the Stock Purchase
Agreement), with United Community Bancorp, Inc., (United Community) of Chatham, Illinois,
pursuant to which the Company agreed to sell all of the issued and outstanding stock of Marine Bank
and Brown County (together, the Banks), to United Community for approximately $25.6 million,
subject to certain purchase price adjustments based on the combined book value of the banks at the
closing of the transactions and other factors. In connection with the execution of the Stock
Purchase Agreement, the Company obtained the consent of Great River (the Consent), to sell the
Banks to United Community and to effect the Exchange with Mr. Phillips. Pursuant to the Consent,
the Company was required to the use the proceeds from the sale of the Banks to repay any
outstanding debt under the Great River debt. The Company has entered into other ancillary
agreements with United Community in connection with the sale of the Banks. The sale of the Banks
received regulatory approval and closed on February 26, 2010. The Company and United Community
agreed to treat the acquisition of the capital stock of each of the Banks as an asset purchase for
tax purposes.
On December 1, 2009, the Company provided $11 million in capital to Royal Palm as a result of
several steps in its multi-tiered recapitalization plan. The capital injection enabled Royal Palm
to exceed FDIC-required capital ratios and enabled its management team to concentrate on managing
the banks loan portfolio and building its business.
Discontinued Operations
The assets and liabilities of Marine Bank and Brown County are included in the Companys
consolidated balance sheet as of December 31, 2009, but are reflected as Discontinued operations,
assets held for sale and Discontinued operations, liabilities held for sale as a result of their
sale to United Community on February 26, 2010. The Banks income and expenses for 2009, 2008 and
2007 are included in Income (loss) from discontinued operations in the Companys consolidated
statements of operations.
The assets and liabilities of HNB National Bank (HNB) have been excluded from the Companys
consolidated balance sheet as of December 31, 2009. The Companys consolidated statement of
operations for 2009 reflects the income and expenses of HNB through the date of the Exchange, which
are included in Income (loss) from discontinued operations.
Employees
As of December 31, 2009, the Company and its subsidiaries had 305 full-time employees and 11
part-time employees, which together equate to 306 full-time-equivalent employees. None of the
employees are represented by a collective bargaining group.
Business Strategies Growth and Operations
The Company believes it must increase revenues and expand its customer base in order to
enhance the value of its stockholders investment, and has developed both growth and operating
strategies to target its markets with banking products and services, as described in greater detail
below.
Growth Strategy. The Company has grown through a combination of internal growth, acquisitions
and minority interest investments in other banking companies. In the rural markets of west-central
Illinois and northeast Missouri in which the Company has maintained a presence historically, the
Companys strategy focuses on continuing to be, and to strengthen its position as, a significant
competitor. Beginning in 1988, the Company acquired and successfully integrated nine bank holding
companies and/or banks in these rural areas, three of which were merged into other subsidiaries of
the Company in 2006, and two of which were merged into other subsidiaries in 2008.
In addition, the Company diversified its business by expanding into urban and suburban areas
that are less dependent upon the agricultural economy. In 2004 the Company acquired a controlling
interest in Mid-America Bancorp, Inc. in Leawood, Kansas (a suburb of Kansas City), and in 2006 the
Company purchased 100% of the outstanding common stock of Royal Palm Bancorp, Inc. in Naples,
Florida. In 2005, Mercantile Bank expanded its
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trust operations by opening an office in St. Charles, Missouri, a suburb of St. Louis. In
February 2008, the Company opened a loan production office in Carmel, Indiana, a suburb of
Indianapolis. This office was transitioned to a full service branch of Mercantile Bank in April
2009.
While the Company has pursued these strategies in the past with success, as evidenced by its
growth and improvement in stock price prior to 2008, the nationwide economic turmoil experienced in
2008 and 2009 has caused the Companys management and board of directors to re-focus its efforts on
restoring the Company to profitability and recovering the stockholder value lost as a result of the
operating performance in 2008 and 2009. As was the case with many financial institutions across
the country, the Company was negatively impacted by the rapid and substantial devaluation of the
real estate markets in high growth areas. In particular, Royal Palm Bank and Heartland Bank had
significant increases in loan loss provisions and non-performing assets that were the primary cause
of the Companys net losses for 2008 and 2009. In addition, largely because the financial services
sector of the stock market was driven down, accounting rules required that the Company recognize
other-than-temporary impairment charges in 2008 and 2009 related to several of its minority
investments in financial services stocks, as well as goodwill impairment charges at all of the
Companys affiliates subsequent to an external valuation during the second quarter of 2009. The
Company believes it has identified and accounted for its problems over the past two years, and is
positioned for improvement as the economy recovers.
The Companys subsidiary banks will continue the strategy of building long-term relationships
by providing exceptional customer service to existing clients and adding new clients that fit the
target market of individuals and small businesses. In addition, the Company believes it can
return to profitability by focusing its efforts in 2010 and beyond on the following:
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Reduction of non-performing assets through loan workouts, seeking additional
collateral from borrowers with weakened financial positions, pursuing recovery through
foreclosure and sale of foreclosed properties. |
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Shift in loan portfolio mix to reduce concentration in commercial real estate,
particularly in purchased loan participations with borrowers outside of the Companys
direct markets. |
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Less reliance on wholesale and brokered funding sources and corresponding increase
in local core deposits through customer relationship development. |
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Aggressive expense management to identify opportunities to reduce overhead costs in
light of the sale of three of the Companys subsidiary banks in the fourth quarter 2009
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Operating Strategy. While pursuing the Companys growth strategy outlined above, the Company
plans to continue its focus on customer service, efficient back office and other support services,
and monitoring asset quality and capital resources.
The Company operates under a community banking philosophy that is customer driven, emphasizing
long-term customer relationships, and provides practical financial solutions, convenience and
consistent service. Each of the Companys banking centers is administered by a local president who
has knowledge of the particular community and lending expertise in the specific industries found
within the community. The bank presidents have the authority and flexibility within general
parameters to make customer-related decisions, as the Companys management believes that the most
efficient and effective decisions are made at the point of customer contact by the people who know
the customer. With the Companys decentralized decision making process, the Company is able to
provide customers with rapid decisions on lending issues.
The support services the Company provides to its banking centers are centralized in the
Companys main offices located in Quincy, Illinois. These services include back office operations,
credit administration, human resources, internal audit, compliance, investment portfolio research
and advice, and data processing. As a result, the Companys operations enhance efficiencies,
maintain consistency in policies and procedures, identify risks and enable the Companys employees
to focus on developing and strengthening customer relationships.
The Companys lending officers have developed comprehensive policies and procedures for credit
underwriting and funding that are utilized at each of the banking centers. In 2008, the Company
created a credit administration position within the holding company to provide guidance and
direction to its subsidiary banks regarding lending
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matters. Combined with the Companys significant lending experience, these procedures and
controls have enabled the Company to provide responsive, customized service to its customers.
Products and Services
General. The Company, through its subsidiaries, conducts a full-service consumer and
commercial banking business, which includes mainly deposit gathering, safekeeping and distribution;
lending for commercial, financial and agricultural purposes, real estate purposes (including
farmland, construction and mortgages), and consumer purposes; and asset management including trust,
estate and agency management, retail brokerage services, and agricultural business management.
These products and services are provided in all of the Companys markets through its main offices
and branches, which markets are identified in more detail below. However, lending activities
generate collectively most of the Companys consolidated revenue each year and individually are the
only products and services, other than interest income on investment securities that have equaled
or exceeded 10% of the Companys consolidated revenue consistently over the past three fiscal
years. Approximately 78% of the Companys revenues have been derived on average annually from its
subsidiaries lending activities.
The Company has a single segment, banking, in that all of its bank subsidiaries are engaged in
banking activities. Also, the Companys business is not seasonal although weather conditions year
to year may impact the businesses of certain borrowers such as agricultural clients and thus affect
their need for and ability to afford bank financing.
Lending Activities. The Companys objective is to offer the commercial, agricultural,
residential and consumer customers in its markets a variety of products and services, including a
full array of loan products. The Companys bank subsidiaries make real estate loans (including
farmland, construction and mortgage loans), commercial, financial and agricultural loans, and
consumer loans. Total loans include loans held for sale. The Company strives to do business in
the areas served by its banks and their branches, and all of the Companys marketing efforts and
the vast majority of its loan customers are located within its existing market areas. The following
is a discussion of each major type of lending.
Real Estate Loans. The Companys banks make real estate loans for farmland, construction
and mortgage purposes as more thoroughly described below. Collectively, these loans, which
include loans held for sale, comprise the largest category of the Companys loans. At December
31, 2009, the Company had approximately $530.3 million in such loans from continuing operations,
representing 68.4% of total loans from continuing operations, and approximately $115.4 million
from discontinued operations, representing 54.5% of total loans from discontinued operations.
At December 31, 2008, the Company had approximately $908.1 million in such loans, representing
67.6% of total loans.
Farmland Real Estate Loans. Farmland real estate loans are collateralized by
owner-occupied and investment properties located in the Companys market areas. The Companys
banks offer a variety of mortgage loan products that generally are amortized over five to twenty
years. The loans generally have rates fixed for up to a five year period, with the loans either
having an adjustable rate feature or a balloon at the maturity of the term. Loans secured by
farmland real estate are generally originated in amounts of no more than 80% of the lower of
cost or appraised value. The bank underwrites and seeks Farm Service Agency guarantees to
enhance the credit structure of some farmland real estate loans.
The banks secure a valid lien on farmland real estate loans and obtain a mortgage title
insurance policy that insures that the property is free of encumbrances prior to the banks
lien. The banks require hazard insurance if the farm property has improvements, and if the
property is in a flood plain as designated by FEMA or HUD, the banks require flood insurance.
Farmland real estate loans have generated the following approximate dollar amounts and
represented the following percentages of the Companys consolidated revenues from continuing
operations for the years indicated: $1.4 million, or 2.3% for 2009; $1.3 million, or 2.0% for
2008; and $1.2 million or 1.5% for 2007. Farmland real estate loans have generated the
following approximate dollar amounts from discontinued operations for the years indicated: $2.4
million for 2009; $5.8 million for 2008; and $4.6 million for 2007. At December 31, 2009, the
Company had approximately $19.7 million in such loans from continuing operations, representing
2.5% of total loans from continuing operations and approximately $41.2 million from discontinued
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operations, representing 19.4% of total loans from discontinued operations. At December 31,
2008, the Company had approximately $111 million in such loans, representing 8.3% of total
loans.
Construction Real Estate Loans. The Companys banks also make loans to finance the
construction of residential and non-residential properties. Construction loans generally are
secured by first liens on real estate. The Companys banks conduct periodic inspections, either
directly or through an agent, prior to approval of periodic draws on these loans. Construction
loans involve additional risks attributable to the fact that loan funds are advanced upon the
security of a project under construction, and the project is of uncertain value prior to its
completion. Because of uncertainties inherent in estimating construction costs, the market value
of the completed project and the effects of governmental regulation on real property, it can be
difficult to accurately evaluate the total funds required to complete a project and the related
loan to value ratio. As a result of these uncertainties, construction lending often involves the
disbursement of substantial funds with repayment dependent, in part, on the success of the
ultimate project rather than the ability of a borrower or guarantor to repay the loan. If a
bank is forced to foreclose on a project prior to completion, there is no assurance that the
bank will be able to recover all of the unpaid portion of the loan. In addition, the bank may
be required to fund additional amounts to complete a project and may have to hold the property
for an indeterminate period of time. While the Companys banks have underwriting procedures
designed to identify what management believes to be acceptable levels of risk in construction
lending, these procedures may not prevent losses from the risks described above.
The banks secure a valid lien on construction real estate loans and obtain a mortgage title
insurance policy that insures that the property is free of encumbrances prior to the banks lien.
The banks require hazard insurance if the construction property has improvements, insurance
bonding on a contractor, and if the property is in a flood plain as designated by FEMA or HUD,
the banks require flood insurance.
Construction real estate loans have generated the following approximate dollar amounts and
represented the following percentages of the Companys consolidated revenues for the years
indicated: $5.7 million or 9.8% for 2009, $11.9 million or 17.6% for 2008; and $13.2 million or
17.2% for 2007. Construction real estate loans have generated the following approximate dollar
amounts from discontinued operations for the years indicated: $353 thousand for 2009; $405
thousand for 2008; and $754 thousand for 2007. At December 31, 2009, the Company had $153.6
million in such loans from continuing operations, representing 19.9% of total loans from
continuing operations, and approximately $7.9 million from discontinued operations, representing
3.7% of total loans from discontinued operations. At December 31, 2008, the Company had $239
million in such loans, representing 17.8% of total loans.
Mortgage Real Estate Loans. A significant portion of the Companys lending activity
consists of the origination of mortgage loans collateralized by properties located in the
Companys market areas. The Companys banks offer a variety of residential mortgage loan
products that generally are amortized over five to twenty-five years. Residential loans
collateralized by mortgage real estate generally have been originated in amounts of no more than
90% of the lower of cost or appraised value or the bank requires private mortgage insurance. Of
the residential mortgage real estate loans originated, the Company generally retains on its
books shorter-term loans with fixed or variable rates, and sells into the secondary mortgage
market longer-term, fixed-rate loans to either Fannie Mae, or a regional Federal Home Loan Bank,
and retains the loan servicing rights.
The Companys banks offer a variety of commercial real estate mortgage loan products that
generally are amortized up to twenty years. The rates on these loans usually range from a daily
variable rate to a fixed rate for no more than five years. The commercial real estate mortgage
loans are collateralized by owner/operator real estate mortgages, as well as investment real
estate mortgages. Loans collateralized by commercial real estate mortgages are generally
originated in amounts of no more than 80% of the lower of cost or appraised value.
The banks secure a valid lien on mortgage real estate loans and obtain a mortgage title
insurance policy that insures that the property is free of encumbrances prior to the banks
lien. The banks require hazard insurance in the amount of the loan and, if the property is in a
flood plain as designated by FEMA or HUD, the banks require flood insurance.
Commercial real estate loans have generated the following approximate dollar amounts
representing the following percentages of the Companys consolidated revenues from continuing
operations for the years
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indicated: $12.5 million or 21.4% for 2009, $11.8 million or 17.5% for 2008; and $13.7
million or 17.8% for 2007. Commercial real estate loans have generated the following
approximate dollar amounts from discontinued operations for the years indicated: $613 thousand
for 2009; $5.8 million for 2008; and $3.1 million for 2007. As of December 31, 2009, the Company
had $163.3 million in such loans from continuing operations, which represented 21.0% of the
Companys total loans from continuing operations, and $12.8 million from discontinued
operations, representing 6.0% of total loans from discontinued operations. As of December 31,
2008, the Company had $214 million in such loans, which represented 16.0% of the Companys total
loans.
Residential real estate loans have generated the following approximate dollar amounts
representing the following percentages of the Companys consolidated revenues from continuing
operations for the years indicated: $8.3 million or 14.3% for 2009, $8.8 million or 13.1% for
2008; and $9.8 million or 12.7% for 2007. Residential real estate loans have generated the
following approximate dollar amounts from discontinued operations for the years indicated: $3.3
million for 2009; $8.6 million for 2008; and $6.7 million for 2007. As of December 31, 2009, the
Company had $193.8 million in such loans from continuing operations, which represented 25.0% of
the Companys total loans from continuing operations, and $53.6 from discontinued operations,
representing 25.3% of total loans from discontinued operations. As of December 31, 2008, the
Company had $344 million in such loans, which represented 25.6% of the Companys total loans.
The most significant risk concerning mortgage real estate loans is the fluctuation in
market value of the real estate collateralizing the loans. A decrease in market value of real
estate securing a loan may jeopardize a banks ability to recover all of the unpaid portion of
the loan if the bank is forced to foreclose. If there were significant decreases in market
value throughout one or more markets of the Company, the Company could experience multiple
losses in such market or markets. While the Companys banks have underwriting procedures
designed to identify what management believes to be acceptable lender risks in mortgage lending,
these procedures may not prevent losses from the risks described above. It is not the Companys
practice to make subprime loans, and the direct exposure to any subprime loans is minimal.
Approximately 67% of all of the Companys net charge-offs for the years 2005 through 2009 were
related to loans secured by real estate.
Commercial, Financial and Agricultural Loans. These loans are primarily made within the
Companys market areas and are underwritten on the basis of the borrowers ability to service
the debt from income. As a general practice, the Companys banks take as collateral a lien on
any available equipment, accounts receivables or other assets owned by the borrower and often
obtain the personal guaranty of the borrower. In general, these loans involve more credit risk
than residential mortgage loans and commercial mortgage loans and, therefore, usually yield a
higher return. The increased risk in commercial, financial and agricultural loans is due to the
type of collateral securing these loans. The increased risk also derives from the expectation
that commercial, financial and agricultural loans generally will be serviced principally from
the operations of the business, and those operations may not be successful. As a result of
these additional complexities, variables and risks, commercial, financial and agricultural loans
require more thorough underwriting and servicing than other types of loans. Approximately 22%
of all of the Companys net charge-offs for the years 2005 through 2009 were related to
commercial, financial or agricultural loans.
Commercial, financial and agricultural loans, which include floor plan loans, generated the
following approximate dollar amounts and represented the following percentages of the Companys
consolidated revenues from continuing operations for the years indicated: $10.6 million or 18.2%
for 2009, $11.0 million or 16.3% for 2008; and $12.0 million or 15.6% for 2007. Commercial,
financial and agricultural loans have generated the following approximate dollar amounts from
discontinued operations for the years indicated: $3.4 million for 2009; $7.5 million for 2008;
and $7.7 million for 2007. At December 31, 2009, the Company had $171.5 million in such loans
from continuing operations, representing 22.1% of total loans from continuing operations, and
$64.4 million from discontinued operations, representing 30.4% of total loans from discontinued
operations. At December 31, 2008, the Company had $304 million in such loans, representing
22.6% of total loans.
Within the category of commercial, financial and agricultural loans, agricultural operating
loans have produced the following approximate dollar amounts and represented the following
percentages of the Companys consolidated revenues from continuing operations for the years
indicated: $634 thousand or 1.1% for 2009; $777 thousand or 1.1% for 2008; and $1.1 million or
1.4% for 2007. Agricultural loans have generated the following approximate dollar amounts from
discontinued operations for the years indicated: $1.5
8
million for 2009; $3.2 million for 2008; and $3.5 million for 2007. At December 31, 2009,
the Company had $9.8 million in such loans from continuing operations, representing 1.3% of
total loans from continuing operations, and $33.1 million from discontinued operations,
representing15.6% of total loans from discontinued operations. At December 31, 2008, the
Company had $68 million in such loans, representing 5.1% of total loans.
Consumer Loans. The Company provides a wide variety of consumer loans (also referred to in
this report as installment loans to individuals) including motor vehicle, watercraft, education,
personal (collateralized and non-collateralized) and deposit account collateralized loans. The
terms of these loans typically range from 12 to 72 months and vary based upon the nature of
collateral and size of loan. Consumer loans entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured by rapidly
depreciating assets such as automobiles. In such cases, any repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan
balance. The remaining deficiency often does not warrant further substantial collection efforts
against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan
collections are dependent on the borrowers continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws may limit the amount that can be
recovered on such loans. Approximately 11% of all of the Companys net charge-offs from
continuing operations for the years 2005 through 2009 were related to consumer loans.
Consumer loans generated the following approximate dollar amounts and represented the
following percentages of the Companys consolidated revenues from continuing operations for the
years indicated: $6.3 million or 10.9% for 2009; $7.4 million or 10.9% for 2008; and $8.1
million or 10.6% for 2007. Consumer loans have generated the following approximate dollar
amounts from discontinued operations for the years indicated: $2.5 million for 2009; $3.5
million for 2008; and $2.9 million for 2007. At December 31, 2009, the Company had $74.8
million in such loans from continuing operations, which represented 9.6% of the Companys total
loans from continuing operations, and $32.2 million from discontinued operations, which
represented 15.2% of total loans from discontinued operations. At December 31, 2008, the
Company had $132 million in such loans, which represented 9.8% of the Companys total loans.
Underwriting Strategy
The Companys lending activities reflect an underwriting strategy that emphasizes asset
quality and fiscal prudence in order to keep capital resources available for the most attractive
lending opportunities in the Companys markets. Lending officers are assigned various levels of
loan approval authority based upon their respective levels of experience and expertise. When the
amount of loans to a borrower exceeds the officers lending limit, the loan request goes to either
an officer with a higher limit or the Board of Directors loan committee for approval. The Companys
strategy for approving or disapproving loans is to follow conservative loan policies and
underwriting practices, which include:
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granting loans on a sound and collectible basis; |
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investing funds properly for the benefit of the Companys shareholders and the
protection of its depositors; |
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serving the legitimate needs of the communities in the Companys markets while
obtaining a balance between maximum yield and minimum risk; |
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ensuring that primary and secondary sources of repayment are adequate in relation
to the amount of the loan; |
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developing and maintaining adequate diversification of the loan portfolio as a
whole and of the loans within each category; and |
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ensuring that each loan is properly documented and, if appropriate, insurance
coverage is adequate. The Companys loan review personnel and compliance officer
interact on a regular basis with commercial, mortgage and consumer lenders to identify
potential underwriting or technical exception
variances. |
9
In addition, the Company has placed increased emphasis on the early identification of problem
loans to aggressively seek resolution of the situations and thereby keep loan losses at a minimum.
In 2008, the Company created a credit administration position within the holding company to provide
guidance and direction to its subsidiary banks regarding lending matters.
Markets and Competition
The Company identifies five regional markets for its banking activities, which include the
counties in which the Company maintains offices and also counties in which the Company has no
offices but whose inhabitants are targets of the Companys financial services because of their
close proximity to counties in which the Company maintains offices. They are the following: (1)
a tri-state region including west-central Illinois, northeast Missouri, and a portion of
southeastern and central Iowa; (2) the greater St. Joseph-Savannah, Missouri market, which is
located approximately 60 miles north of Kansas City, Missouri; (3) a suburban Carmel- Indianapolis,
Indiana market; (4) a suburban Leawood, Kansas-Kansas City, Missouri market; and (5) the greater
Naples-Ft. Myers-Marco Island area in southwest Florida. The tri-state market is the Companys
principal market and has accounted for approximately 68% of the Companys consolidated revenues for
2007 through 2009.
At present, the Company maintains the following approximate percentages of market share in the
following markets as measured by the deposits held by the Companys subsidiary banks operating in
or targeting such markets relative to the deposits held by all institutions insured by the Federal
Deposit Insurance Corporation (FDIC) located in such markets as of June 30, 2009: 22.91% for the
tri-state market; 3.93% for the greater St. Joseph-Savannah, Missouri market; 0.08% for the
suburban Carmel-Indianapolis, Indiana market; 0.53% for the suburban Leawood, Kansas-Kansas City,
Missouri market; and 0.61% for the southwest Florida market. The Companys share of the tri-state
market at 22.91% is the largest of 58 FDIC-insured institutions located in that market. The
Companys shares of its other markets are discussed below in the descriptions of the subsidiary
banks.
The source of the deposit data and corresponding market shares used above and throughout this
section of the report is the FDIC Summary of Deposit (SOD) web link. The SOD contains deposit
data for all branches and offices of FDIC-insured institutions. The FDIC collects deposit balances
for commercial and savings banks as of June 30 of each year, and the Office of Thrift Supervision
collects the same data for savings institutions.
The Company believes that it maintains a visible, competitive presence in all of its markets.
The Companys banks are subject to vigorous competition from other banks and financial institutions
in their respective markets. The business lines in which the Companys banks compete are highly
competitive, and growth with profitability depends mainly on the Companys ability to effectively
compete for, and retain, deposits and loans in the markets.
The primary factors in competing for savings deposits are convenient office locations,
interest rates offered, and the range of additional bank services offered. Direct competition for
savings deposits comes from other commercial bank and thrift institutions, money market mutual
funds, insurance companies, credit unions and corporate and government securities which may offer
more attractive rates than insured depository institutions are willing to pay.
The primary factors in competing for loans include, among others, interest rate, loan
origination fees, borrower equity infusion, and the range of additional bank services offered.
Competition for origination of all loan types normally comes from other commercial banks, thrift
institutions, credit unions, finance companies, mortgage bankers, mortgage brokers, insurance
companies and government agricultural lending agencies. In that 86% on average of the Companys
consolidated revenues are derived from loans of all categories, the Companys competitive position
in lending services is crucial to its implementation of ongoing growth and operating strategies, as
discussed above.
The Company has been able to compete effectively with other financial service providers by
emphasizing customer service and technology, by establishing long-term customer relationships and
building customer loyalty, and by providing products and services designed to address the specific
needs of its customers. The Companys operating strategy emphasizing customer service, efficient
back office and other support services, asset quality and prudent capital management have permitted
the Company to compete effectively against both larger and smaller financial institutions in its
markets; however, if the Company fails to continue to successfully implement its
10
strategies and/or other financial institutions with more substantial resources become more
aggressive in their pursuit of market share, the Companys competitive position could suffer.
Many of the Companys existing competitors are well-established, larger financial institutions
with substantially greater resources and lending limits. These institutions offer some services,
such as extensive and established branch networks and trust services that the Company does not
provide or provide to the extent these other institutions provide them. In addition, many of the
Companys non-bank competitors are not subject to the same extensive federal regulations that
govern bank holding companies and federally insured banks. The Company also acknowledges that to
the extent certain larger financial institutions and potential non-bank competitors have not yet
entered the Companys markets, they could do so at any time and threaten the Companys competitive
position.
The discussion of each subsidiary bank below includes a description of each such banks market
and competitive position within such markets, as measured by FDIC-insured deposits.
Mercantile Bank
Mercantile Bank is chartered under the laws of the State of Illinois and offers complete
banking and trust services to the commercial, industrial and agricultural areas that it serves.
Its full-service branches in Savannah and St. Joseph, Missouri, were formerly branches of a
separately chartered bank (Farmers State Bank of Northern Missouri) until its merger with and into
Mercantile Bank in April 2008. Services include commercial, real estate and personal loans;
checking, savings and time deposits; trust and other fiduciary services; brokerage services; and
other customer services, such as safe deposit facilities. The largest portion of Mercantile Banks
lending business is related to the general business and real estate activities of its commercial
customers, followed closely by residential mortgage loans. Mercantile Banks principal service
area includes the City of Quincy and Adams County, Illinois. Mercantile Bank is the largest bank
owned by the Company, representing net income of approximately $1.0 million included in the
Companys pre-consolidated net loss for 2009 and approximately $2.9 million of the Companys
pre-consolidated net income in 2008. Mercantile Bank represented approximately $791 million or
56.3% of the Companys pre-consolidated assets as of December 31, 2009 and $770 million or 43.3% as
of December 31, 2008.
Mercantile Banks principal banking office is located at 200 North 33rd Street, Quincy,
Illinois. Construction of this facility began in August 2006, with the building completed and
opened for business in January 2008. Mercantile Bank owns its main banking premises in fee simple.
In addition, Mercantile Bank owns and operates three branches, one drive-through facility, and
nine automatic teller machines in Quincy, owns and operates one full-service banking facility in
each of Savannah and St. Joseph, Missouri, and leases one full-service banking facility in St.
Joseph. In addition, Mercantile has four automatic teller machines located in Savannah and St.
Joseph. Mercantile Bank opened a trust office in St. Charles, Missouri in February 2005, and a
loan production office in Carmel, Indiana in February 2008, which is now a branch. Both the St.
Charles and Carmel offices are located in leased facilities.
Mercantile Bank wholly owns Mercantile Investments, Inc. (MII), a Delaware corporation.
MIIs offices are located in a leased facility at Century Yard, Cricket Square, Elgin Avenue, Grand
Cayman, Cayman Islands. The sole activity of the subsidiary is to invest in securities, including
corporate debentures. As of December 31, 2009 and 2008, MII had total assets of approximately
$123.0 million and $119.3 million, respectively, which represented a significant portion of
Mercantile Banks securities portfolio at those dates. The primary strategy for forming the
subsidiary was to take advantage of the current State of Illinois tax laws that exclude income
generated by a subsidiary that operates offshore from State of Illinois taxable income. The only
other impact on the Companys consolidated financial statements in regard to the investment
subsidiary is the additional administrative costs to operate the subsidiary, which is a minimal
amount. For 2009 and 2008, the Companys Illinois income taxes decreased by approximately $162
thousand and $120 thousand, respectively, as a result of MIIs operations offshore.
Mercantile Bank plans to continue to utilize the subsidiary to manage a significant amount of
its securities portfolio as long as it is advantageous to do so from a tax standpoint. All
securities purchased by MII are approved by the MII Investment Committee which includes members of
the Companys management. The Illinois Department of Revenue could challenge the establishment of
and/or related business purposes of MII or a change in state law could negate or lessen the state
income tax advantages of MII in future years.
11
The by-laws of MII only allow holding investments and corporate debentures as permissible
activities. There are no current plans to expand these permissible activities for MII.
Mercantile Bank owns a 6.35% interest in Illinois Real Estate Title Center, LLC (IRETC), a
multi-bank-owned limited liability company that operates a title insurance agency. IRETC is
located in leased space in Springfield, Illinois, and owned in partnership with other
central-Illinois banking companies and Investors Title Insurance Company of Chapel Hill, North
Carolina. IRETC engages in the sale and issuance of commercial and residential, owner and
mortgagee title insurance policies. As of December 31, 2009 and 2008, IRETC had total assets of
approximately $417 thousand and $515 thousand, respectively.
As of December 31, 2009, Mercantile Bank had 159 full-time employees and 4 part-time employees
and approximately 18,404 depositors. The population of its primary service area is approximately
250,000.
The primary source of Mercantile Banks revenue is from lending activities, which have
represented on average approximately 73% of its revenue annually for the years 2007 through 2009.
Mercantile Bank generated the following approximate revenues from loans for the following years:
$31.6 million for 2009; $34.2 million for 2008, and $29.8 million for 2007. At December 31, 2009,
loans totaled $550.2 million or 69.6% of Mercantile Banks total assets. Other principal revenue
sources are investment securities with approximately 10% of revenue on average, service charges and
fees on customer accounts with approximately 4% of revenue on average, and all asset management
services combined with approximately 7% of revenue on average.
As indicated above, Mercantile Banks market includes the core market of Adams County,
Illinois, in which Mercantile Banks main office and branches are located. Also, Mercantile Bank
targets its products and services to the inhabitants of Andrew and Buchanan counties in Missouri,
where its Savannah and St. Joseph branches are located, and Hamilton County, Indiana. Therefore,
its total market includes all four counties.
Mercantile Bank maintained a 7.8% share of its total market and 31.2% of its core market, as
measured by the deposits held by Mercantile Bank relative to the deposits held by all FDIC-insured
institutions located in such markets as of June 30, 2009. Mercantile Banks shares were the
largest held by any of the 57 institutions in its total market and 18 institutions in its core
market. The next largest shares in the total market were 7.6%, held by a substantially larger
federally chartered bank with significant regional and national presence, and 5.7% held by another
federally chartered bank, and 5.1% held by another locally headquartered bank holding company and
its subsidiary bank. The next largest shares in its core market were 23.1% held by another locally
headquartered bank holding company and its subsidiary bank, 6.8% also held by a locally
headquartered bank holding company and its subsidiary bank, and 5.6% held by a substantially larger
bank holding company headquartered outside of the market with one or more branches in the market.
Included in Mercantile Banks total market is the greater St. Joseph-Savannah, Missouri
market, located in Andrew and Buchanan counties approximately 60 miles north of Kansas City,
Missouri. Mercantile Banks Savannah and St. Joseph branches maintained a 3.9% share of this
market, as measured by the deposits held by Mercantile Bank relative to the deposits held by all
FDIC-insured institutions located in the market as of June 30, 2009. Mercantile Banks share was
the tenth largest held by any of the 13 institutions in the market. The largest shares in the
market were 20.1%, held by a substantially larger state chartered bank, and 19.4% held by a
federally chartered bank with significant regional and national presence.
On March 8, 2010, Mercantile Bank entered into a MOU with the FDIC and the IDFPR. Under the
terms of the MOU, Mercantile Bank agreed, among other things, to provide certain information to
each supervisory authority including, but not limited to, financial performance updates, loan
performance updates, written plan for reducing classified assets and concentrations of credit,
written plan to improve liquidity and reduce dependency on volatile liabilities, written capital
plan, and written reports of progress. In addition, the bank agreed not to declare any dividends or
make any distributions of capital without the prior approval of the supervisory authorities, and
within 30 days of the date of the MOU, to maintain its Tier 1 leverage capital ratio at no less
than 8.0% and total risk based capital ratio at no less than 12.0%.
Marine Bank & Trust
Marine Bank is chartered under the laws of the State of Illinois and offers complete banking
and trust services to the commercial, industrial and agricultural areas that it serves. Its
full-service branches in Hamilton and Augusta
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were formerly separately chartered banks (Security State Bank of Hamilton and State Bank of
Augusta) until their merger with and into Marine Bank in November 2006. Services include
commercial, real estate and personal loans; checking, savings and time deposits; trust and other
fiduciary services; brokerage services and safe deposit facilities. The largest portion of Marine
Banks lending business is related to commercial and agricultural customers. Marine Banks
principal service area includes the villages of Carthage, Hamilton and Augusta, Hancock County,
Illinois; portions of northeastern Adams County, western Schuyler County and southwestern McDonough
County, all in Illinois; and the City of Keokuk and Lee County, Iowa. Marine Bank represented net
income of approximately $2.1 million included in the Companys pre-consolidated net loss for 2009
and $2.0 million of the Companys pre-consolidated net loss for 2008. Marine represented
approximately $201.7 million or 14.3% of the Companys pre-consolidated assets as of December 31,
2009 and $186.5 million or 10.5% as of December 31, 2008.
Marine Banks principal banking office is located at 410 Buchanan Street, Carthage, Illinois.
Marine Bank owns its main banking premises in fee simple and currently owns and operates a
full-service banking facility in each of Hamilton and Augusta, Illinois. Marine Bank also owns and
operates six automatic teller machines located in Carthage, Hamilton and Augusta.
As of December 31, 2009, Marine Bank had 42 full-time employees and 3 part-time employees and
approximately 7,107 depositors. The population of its primary service area is approximately
20,000.
The primary source of Marine Banks revenue is from lending activities, which have represented
on average approximately 79% of its revenue annually for the years 2007 through 2009. Marine Bank
generated the following approximate revenues from loans for the following years: $8.4 million for
2009, $8.7 million for 2008, and $8.8 million for 2007. At December 31, 2009, loans totaled $143.5
million or 71.1% of Marine Banks total assets. Other principal revenue sources are investment
securities with approximately 10% of revenue on average, service charges and fees on customer
accounts with approximately 6% of revenue on average, and all asset management services combined
with approximately 1% of revenue on average.
As indicated above, Marine Banks market includes the core market of Hancock County, Illinois,
in which its main office is located, the target markets of McDonough and Schuyler counties in
Illinois, which border Hancock County to the east and southeast, respectively, and the target
market of Lee County, Iowa, which borders Hancock County to the west. Marine Bank maintained an
8.9% share of its total market and 39.3% of its core market, as measured by the deposits held by
Marine Bank relative to the deposits held by all FDIC-insured institutions located in such markets
as of June 30, 2009. Marine Banks share was the largest of 27 institutions in its total market.
The next largest share of 8.7% is held by an Illinois state chartered bank, and the third largest
share of 7.9% is held by an Iowa state chartered bank.
On February 26, 2010, the Company completed the sale of Marine Bank to United Community. The
assets and liabilities of Marine Bank are included in the Companys consolidated balance sheet as
of December 31, 2009, but are reflected as Discontinued operations, assets held for sale and
Discontinued operations, liabilities held for sale. Marine Banks income and expenses for 2009,
2008 and 2007 are included in Income (loss) from discontinued operations in the Companys
consolidated statements of operations.
Brown County State Bank
Brown County is chartered under the laws of the State of Illinois and offers complete banking
services to the commercial, industrial and agricultural areas that it serves. Its full-service
branch in Golden was formerly a separately chartered bank (Golden State Bank) until its merger with
and into Brown County in July 2006. Services include commercial, real estate and personal loans;
checking, savings and time deposits; brokerage services; safe deposit facilities and other customer
services. The largest portion of Brown Countys lending activity involves agricultural operating
and real estate loans; however, residential mortgage loans also represent a significant though
lesser portion of the banks lending activities. Brown Countys principal service area includes
the village of Mt. Sterling and Brown County, the village of Camp Point and Adams County, and a
portion of southern Hancock County, all in Illinois. Brown County represented net income of
approximately $1.3 million included in the Companys pre-consolidated net loss for 2009 and $1.2
million net income in the Companys pre-consolidated net loss from 2008. Brown County represented
approximately $83.7 million or 5.9% of the Companys pre-consolidated assets as of December 31,
2009 and $93.3 million or 5.2% as of December 31, 2008.
13
Brown Countys principal banking office is located at 101 E. Main St., Mt. Sterling, Illinois.
Brown County owns the property in fee simple and currently owns and operates a full-service
banking facility in Golden, Illinois. Brown County also owns and operates two automatic teller
machines in Mt. Sterling and Golden.
As of December 31, 2009, Brown County had 18 full time employees and 1 part-time employee and
approximately 3,044 depositors. The population of its primary service area is approximately 10,000.
The primary source of Brown Countys revenue is from lending activities, which have
represented on average approximately 77% of its revenue annually for the years 2007 through 2009.
Brown County generated the following approximate revenues from loans for the following years: $4.2
million for 2009, $4.3 million for 2008, and $3.9 million for 2007. At December 31, 2009, loans
totaled $66.7 million or 79.7% of Brown Countys total assets. Other principal revenue sources are
investment securities with approximately 11% of revenue on average, service charges and fees on
customer accounts with approximately 7% of revenue on average and all asset management services
combined with approximately 4% of revenue on average.
As indicated above, Brown Countys market includes the core market of Brown County, in which
its main office is located, and the target markets of Adams and Hancock counties, which border
Brown County to the west and northwest, respectively. Brown County maintained a 2.5% share of its
total market and 32.3% of its core market, as measured by the deposits held by Brown County
relative to the deposits held by all FDIC-insured institutions located in such markets as of June
30, 2009. Brown County held the second largest share out of 5 institutions in its core market.
The largest share was held by another rural Illinois bank with 44.5%. The third-ranked institution
in its core market is a federally chartered bank that holds a 9.5% share.
On February 26, 2010, the Company completed the sale of Brown County to United Community. The
assets and liabilities of Brown County are included in the Companys consolidated balance sheet as
of December 31, 2009, but are reflected as Discontinued operations, assets held for sale and
Discontinued operations, liabilities held for sale. Brown Countys income and expenses for 2009,
2008 and 2007 are included in Income (loss) from discontinued operations in the Companys
consolidated statements of operations.
Mid-America Bancorp, Inc.
Mid-America Bancorp, Inc. (Mid-America), parent company of Heartland Bank (Heartland), is
chartered under the laws of the State of Kansas and offers complete banking services to the
commercial and retail areas that it serves. Services include commercial, real estate and personal
loans; checking, savings and time deposits; brokerage services, safe deposit facilities and other
customer services. The largest portion of Heartlands lending business is related to the
activities of its commercial customers. Heartlands principal service area includes greater Kansas
City, primarily Johnson County in Kansas and Jackson County in Missouri.
Mid-America became a majority-owned subsidiary of the Company in February 2004. The Companys
ownership percentage was 55.5% (84,600 shares) as of December 31, 2009. Mid-Americas financial
information has been reported on a consolidated basis with the Companys financial statements as of
December 31, 2009. Mid-America represented a net loss of approximately $4.1 million included in
the Companys pre-consolidated net loss for 2009, and net loss of $7.5 million of the Companys
pre-consolidated net loss for 2008. Mid-America represented $180.4 million or 12.8% of the
Companys pre-consolidated assets as of December 31, 2009 and $197 million or 11.1% as of December
31, 2008.
Heartlands principal banking office is located at 4801 Town Center Drive, Leawood, Kansas.
Heartland owns its main banking premises in fee simple and owns and operates two automatic teller
machines located in Leawood and Prairie Village. In December 2006, Heartland opened a
full-service branch bank in a leased facility in Kansas City, Missouri. A mortgage banking branch
in a leased facility in Prairie Village, Kansas was closed in December 2008.
As of December 31, 2009, Heartland had 25 full-time employees and 3 part-time employees and
approximately 2,717 depositors. The population of its primary service area is approximately
1,500,000.
The primary source of Heartlands revenue is from lending activities, which have represented
on average approximately 89% of its revenue annually for the years 2007 through 2009. Heartland
generated the following approximate revenues from loans for the following years: $7.2 million for
2009, $10.3 million for 2008, and $13.3
14
million for 2007. At December 31, 2009, loans totaled $125.3 million or 69.5% of Heartlands
total assets. Other principal revenue sources are investment securities with approximately 3% of
revenue on average, service charges and fees on customer accounts with approximately 2% of revenue
on average, and all asset management services combined with approximately 2% of revenue on average.
As indicated above, Heartlands market includes the core market of Johnson County, Kansas, in
which its main office is located, and the target market of Jackson County, Missouri, which borders
Johnson County to the east and includes Kansas City, Missouri. Together these counties comprise
the Companys suburban Leawood, Kansas-Kansas City, Missouri market.
Heartland held relatively small shares of both its total market and core market with 0.5% and
1.0%, respectively, as measured by the deposits held by Heartland relative to the deposits held by
all FDIC-insured institutions located in such markets as of June 30, 2009. The largest shares of
its total market were 12.9%, 12.3% and 8.6% and were held by substantially larger, federally
chartered banks with significant regional and/or national presence. Heartland ranked 32nd out of
91 FDIC-insured institutions in its total market and 24th out of 67 such institutions in its core
market, as measured by such deposits; therefore, though small, Heartlands shares were greater than
at least one-half of the other institutions in its markets.
In March 2009, Heartland signed a cease and desist order (CDO) with the FDIC. Under the terms
of the CDO, Heartland agreed to, among other things, prepare and submit plans and reports to the
FDIC regarding certain matters including, but not limited to, progress reports detailing actions
taken to secure compliance with all provisions of the order, loan performance updates as well as a
written plan for the reduction of adversely classified assets, a revised comprehensive strategic
plan, and a written profit plan and comprehensive budget. In addition, Heartland agreed not to
declare any dividends without the prior consent of the FDIC and to maintain its Tier 1 capital
ratio at no less than 8.0% and maintain its Total Risk Based Capital at no less than 12.0%.
In September 2009, Mid-America entered into a Memorandum of Understanding (MOU) with the
Federal Reserve Bank of St. Louis (FRB). Under the terms of the MOU, Mid-America agreed to, among
other things, prepare and submit plans and reports to the FDIC regarding certain matters including,
but not limited to, progress reports detailing actions taken to secure compliance with all
provisions of the order, a written cash flow plan and quarterly parent company financial
statements. In addition, Mid-America agreed not to declare any dividends, incur any debt or pay any
salaries, bonuses or fees to insiders without the prior consent of the FRB. For further discussion
of these issues, see the Regulatory Matters section in Part II, Item 7 of this filing.
Royal Palm Bancorp, Inc.
Royal Palm Bancorp, Inc. (Royal Palm), parent company of The Royal Palm Bank of Florida
(Royal Palm Bank), is chartered under the laws of the State of Florida and offers complete
banking services to the commercial and retail areas that it serves. Services include commercial,
real estate and personal loans; checking, savings and time deposits; safe deposit facilities and
other customer services. The largest portion of Royal Palm Banks lending business is related to
the activities of its commercial customers. Royal Palm Banks principal service area includes the
communities of Naples and Marco Island in Collier County, Florida and Fort Myers, Bonita Springs
and Cape Coral in Lee County, Florida.
Royal Palm became a wholly-owned subsidiary of the Company in November 2006, and its financial
information has been reported on a consolidated basis with the Companys financial statements as of
December 31, 2009. Royal Palm represented net loss of approximately $41.4 million included in the
Companys pre-consolidated net loss for 2009 and net loss of approximately $7.1 million of the
Companys pre-consolidated net loss for 2008. Royal Palm represented approximately $142.6 million
or 10.3% of the Companys pre-consolidated assets as of December 31, 2009, and $177.7 million or
10.0% as of December 31, 2008.
Royal Palms principal banking office is located at 1255 Creekside Parkway, Naples, Florida.
Royal Palm leases its main banking premises, owns and operates a full-service banking facility in
Fort Myers and leases a full-service banking facility in Marco Island. In addition, Royal Palm
owns and operates three automatic teller machines located in Naples, Fort Myers and Marco Island.
As of December 31, 2009, Royal Palm Bank had 32 full-time employees and 1 part-time employee
and approximately 2,220 depositors. The population of its primary service area is approximately
900,000.
15
The primary source of Royal Palms revenue is from lending activities, which represented on
average approximately 94% of its revenue annually for the years 2007 through 2009. Royal Palm
generated the following approximate revenues from loans for the following years: $6.0 million for
2009, $7.8 million for 2008, and $9.6 million for 2007, including the period prior to acquisition
by the Company in November 2006. At December 31, 2009, loans totaled $101.1 million or 73.2% of
Royal Palms total assets. Other principal revenue sources are investment securities with
approximately 8% of revenue on average and service charges and fees on customer accounts with
approximately 1% of revenue on average.
As indicated above, Royal Palms market includes the core market of Collier County, Florida,
in which its main office is located, and the target market of Lee County, Florida, which borders
Collier County to the northwest and includes Fort Myers, Florida. Together these counties comprise
the Companys Southwest Florida market.
Royal Palm held relatively small shares of both its total market and core market with 0.6% and
1.1%, respectively, as measured by the deposits held by Royal Palm relative to the deposits held by
all FDIC-insured institutions located in such markets as of June 30, 2009. The largest shares of
its total market were 14.0%, 13.2% and 12.3% and were held by two substantially larger, federally
chartered banks with significant regional and/or national presence and one state chartered bank
headquartered outside of the market. Royal Palm ranked 26th out of 56 FDIC-insured institutions in
its total market and 17 out of 41 such institutions in its core market, as measured by such
deposits; therefore, though small, Royal Palms shares were greater than almost half of the other
institutions in its markets.
In October 2008, Royal Palm Bank entered into a Memorandum of Understanding (MOU) with the
FDIC and Florida Office of Financial Regulation (FOFR). Under the terms of the MOU, Royal Palm
Bank agreed, among other things, to provide certain information to each supervisory authority
including, but not limited to, financial performance updates, loan performance updates, written
plan for improved earnings, written capital plan, review and assessment of all officers who head
departments of the bank, and written reports of progress. In addition, Royal Palm Bank agreed not
to declare any dividends or make any distributions of capital without the prior approval of the
supervisory authorities, and to maintain its Tier 1 Leverage Capital Ratio at no less than 8.0%,
the Tier 1 Risk Based Capital Ratio at no less than 10.0%, and Total Risk Based Capital Ratio at no
less than 12.0%.
In May 2009, Royal Palm Bank signed a Cease and Desist Order (CDO) with the FDIC and FOFR.
Under the CDO, Royal Palm Bank agreed, among other things, to provide certain information to each
supervisory authority including, but not limited to, notification of plans to add any individual to
the board of directors or employ any individual as a senior executive officer, financial
performance updates, loan performance updates, written plan for improved earnings, written capital
plan, written contingency funding plan, written strategic plan, and written reports of progress. In
addition, Royal Palm Bank agreed not to declare any dividends or make any distributions of capital
without the prior approval of the supervisory authorities, and to maintain its Tier 1 Leverage
Capital Ratio at no less than 8.0%, the Tier 1 Risk Based Capital Ratio at no less than 10.0%, and
Total Risk Based Capital Ratio at no less than 12.0%.
In September 2009, Royal Palm entered into a Memorandum of Understanding (MOU) with the
Federal Reserve Bank of St. Louis (FRB). Under the terms of the MOU, Royal Palm agreed to, among
other things, prepare and submit plans and reports to the FDIC regarding certain matters including,
but not limited to, progress reports detailing actions taken to secure compliance with all
provisions of the order, a written cash flow plan and quarterly parent company financial
statements. In addition, Royal Palm agreed not to declare any dividends, incur any debt or pay any
salaries, bonuses or fees to insiders without the prior consent of the FRB.
For further discussion of these issues, see the Regulatory Matters section in Part II, Item
7 of this filing.
HNB Financial Services, Inc.
HNB Financial Services, Inc. (HNB Financial) was the parent of HNB National Bank (HNB),
headquartered in Hannibal, Missouri. HNB Financial became a wholly-owned subsidiary of the Company
in September 2007 and its financial information has been reported on a consolidated basis with the
Companys financial statements since that time. In December 2009, ownership of HNB was transferred
to R. Dean Phillips (Phillips), a significant shareholder of the Company and the sole shareholder
of Great River Bancshares, Inc. (Great River), in exchange for repayment of $28 million in debt
owed to Great River. The assets and liabilities of HNB have been excluded from the Companys
consolidated balance sheet as of December 31, 2009. The
16
Companys consolidated statement of operations for 2009 reflects the income and expenses of
HNB through the date of the exchange, which are included in Income (loss) from discontinued
operations.
HNB represented net loss of approximately $10.7 million included in the Companys
pre-consolidated net loss for 2009 and net income of approximately $3.9 million of the Companys
pre-consolidated net loss for 2008. HNB represented approximately $355.4 million or 20.0% of the
Companys pre-consolidated assets as of December 31, 2008.
HNB Financials only significant asset was its ownership of HNB. As of December 31, 2009, the
Company still owned HNB Financial, but had initiated liquidation proceedings with the state of
Missouri. The Company received the necessary approvals from the state of Missouri in March 2010,
and HNB Financial was liquidated at that time.
Lending Activities
Additional information regarding the Companys lending activities, including the nature of the
Companys loan portfolio, loan maturities, non-performing assets, allowances for loan losses and
related matters, is set forth in Managements Discussion and Analysis of Financial Condition and
Results of Operations, Item 7 of this Annual Report, under the headings Provision for Loan
Losses, Loan Portfolio, Non-Performing Loans, and Potential Problem Loans, among others.
Investment Securities Activities
A description of the Companys investment activities including the investment portfolio and
maturities thereof is included in Managements Discussion and Analysis of Financial Condition and
Results of Operations, Item 7 under the heading Investment Securities.
Sources of Funds
A description of the Companys sources of funds, including deposits and borrowings, is set
forth in Managements Discussion and Analysis of Financial Condition and Results of Operations,
Item 7 under the headings Deposits, Short-term Borrowings, and Long-term Debt, among others.
Laws and Regulations Applicable to Bank Holding Companies
General. As a registered bank holding company under the Bank Holding Company Act (the BHC
Act), the Company is subject to regulation and supervision by the Board of Governors of the
Federal Reserve System (the FRB). The FRB has the authority to issue cease and desist orders or
take other enforcement action against our holding company if it determines that our actions
represent unsafe and unsound practices or violations of law. Regulation by the FRB is principally
intended to protect depositors of our subsidiary banks and the safety and soundness of the U.S.
banking system, not the stockholders of the Company.
Limitation on Acquisitions. The BHC Act requires a bank holding company to obtain prior
approval of the FRB before: (1) taking any action that causes a bank to become a controlled
subsidiary of the bank holding company; (2) acquiring direct or indirect ownership or control of
voting shares of any bank or bank holding company, if the acquisition results in the acquiring bank
holding company having control of more than 5% of the outstanding shares of any class of voting
securities of such bank or bank holding company, and such bank or bank holding company is not
majority-owned by the acquiring bank holding company prior to the acquisition; (3) acquiring all or
substantially all the assets of a bank; or (4) merging or consolidating with another bank holding
company.
Limitation on Activities. The activities of bank holding companies are generally limited
to the business of banking, managing or controlling banks, and other activities that the FRB has
determined to be so closely related to banking or managing or controlling banks as to be a proper
incident thereto. Bank holding companies that qualify and register as financial holding
companies are also able to engage in certain additional financial activities, such as
17
securities and insurance underwriting, subject to limitations set forth in federal law. As of
December 31, 2009, the Company was not a financial holding company.
Regulatory Capital Requirements. The FRB has promulgated capital adequacy guidelines for use
in its examination and supervision of bank holding companies. If a bank holding companys capital
falls below minimum required levels, then the bank holding company must implement a plan to
increase its capital, and its ability to pay dividends and make acquisitions of new banks may be
restricted or prohibited.
The FRB currently uses two types of capital adequacy guidelines for holding companies, a
two-tiered risk-based capital guideline and a leverage ratio guideline. The two-tiered risk-based
capital guideline assigns risk weightings to all assets and certain off-balance sheet items of the
holding companys banking operations, and then establishes a minimum ratio of the holding companys
Tier 1 capital to the aggregate dollar amount of risk-weighted assets (which amount is almost
always less than the aggregate dollar amount of such assets without risk weighting) and a minimum
ratio of the holding companys total qualified capital (Tier 1 capital plus Tier 2 capital,
adjusted) to the aggregate dollar amount of such risk-weighted assets. The leverage ratio guideline
establishes a minimum ratio of the holding companys Tier 1 capital to its total tangible assets,
without risk-weighting.
Under both guidelines, Tier 1 capital (also referred to as core capital) is defined to
include: common shareholders equity (including retained earnings), qualifying non-cumulative
perpetual preferred stock and related surplus, qualifying cumulative perpetual preferred stock and
related surplus (limited to a maximum of 25% of Tier 1 capital), and minority interests in the
equity accounts of consolidated subsidiaries. Goodwill and most intangible assets are deducted
from Tier 1 capital.
For purposes of the total risk-based capital guideline, Tier 2 capital (also referred to as
supplementary capital) is defined to include: allowances for loan and lease losses (limited to
1.25% of risk-weighted assets), perpetual preferred stock not included in Tier 1 capital,
intermediate-term preferred stock and any related surplus, certain hybrid capital instruments,
perpetual debt and mandatory convertible debt securities, and intermediate-term subordinated debt
instruments (subject to limitations). The maximum amount of qualifying Tier 2 capital is 100% of
qualifying Tier 1 capital. For purposes of the total risk-based capital guideline, total capital
equals Tier 1 capital, plus qualifying Tier 2 capital, minus investments in
unconsolidated subsidiaries, reciprocal holdings of bank holding company capital securities, and
deferred tax assets and other deductions.
The FRBs current capital adequacy guidelines require that a bank holding company maintain a
Tier 1 risk-based capital ratio of at least 4%, a total risk-based capital ratio of at least 8%,
and a Tier 1 leverage ratio of at least 4%. Top performing companies may be permitted to operate
with slightly lower capital ratios, while poor performing or troubled institutions may be required
to maintain or build higher capital ratios.
On December 31, 2009 the Company exceeds these regulatory capital guidelines, except for its
Tier 1 leverage ratio, which was 3.32%. For a discussion of the Companys plans to restore its
Tier 1 leverage ratio to the regulatory minimum, see the Capital Resources section in Part II,
Item 7 of this filing.
The Company has issued the following amounts of junior subordinated debentures to Mercantile
Bancorp Capital Trust I, II, III and IV (the Trusts), respectively: $10.3 million in August 2005,
$20.6 million in July 2006, $10.3 million in July 2006 and $20.6 million in August 2007. The Trusts
are wholly-owned unconsolidated subsidiaries, which were formed for the purpose of these
transactions. The Company owns all of the securities of the Trusts that possess general voting
powers. In connection with the Companys issuance of the debentures to the Trusts, the Trusts
issued cumulative preferred securities to third parties in private placement offerings. The Trusts
invested the proceeds of its issuances in the Companys junior subordinated debentures. In
accordance with current bank regulations, 25% of Tier 1 capital may be comprised of the junior
subordinated debentures owed to the Trusts, with any excess above the 25% limit included in Tier 2
capital. As of December 31, 2009, all of the Companys junior subordinated debentures qualify as
either Tier 1 or Tier 2 capital. On March 1, 2005, the Federal Reserve Board adopted a final rule
that allows the continued limited inclusion of trust-preferred securities in the calculation for
Tier 1 capital for regulatory purposes. The final rule provided a five-year transition period that
ended March 31, 2009, for application of the quantitative limits. The rule limits the Companys
amount of junior subordinated debt to 25% of Tier 1 capital net of goodwill, with any excess
includable in Tier 2, subject to a limit of 50% of total Tier 1 and Tier 2 capital. However, there
has been no impact to the Companys total risk-based capital as the Companys
18
excess over the 25%
Tier 1 limit is includable in Tier 2 capital based on the Companys current debt and capital
structure.
Source of Strength. FRB policy requires a bank holding company to serve as a source of
financial and managerial strength to its subsidiary banks. Under this source of strength
doctrine, a bank holding company is expected to stand ready to use its available resources to
provide adequate capital funds to its subsidiary banks during periods of financial stress or
adversity, and to maintain resources and the capacity to raise capital that it can commit to its
subsidiary banks. Furthermore, the FRB has the right to order a bank holding company to terminate
any activity that the FRB believes is a serious risk to the financial safety, soundness or
stability of any subsidiary bank.
Liability of Commonly Controlled Institutions. Under cross-guaranty provisions of the Federal
Deposit Insurance Act (the FDIA), each bank subsidiary of a bank holding company is liable for
any loss incurred by the Federal Deposit Insurance Corporations insurance fund for banks in
connection with the failure of any other bank subsidiary of the bank holding company.
Laws and Regulations Applicable to the Companys Subsidiary Banks
General. The Companys three subsidiary banks located in Illinois, Mercantile Bank, Marine
Bank and Brown County, are all state non-member banks. As such, they are subject to regulation and
supervision by the Illinois Department of Financial and Professional Regulation and the Federal
Deposit Insurance Corporation (FDIC). Heartland, the Companys subsidiary bank in Kansas, is a
state non-member bank and is subject to regulation and supervision by the Kansas Division of
Banking and the FDIC. Royal Palm Bank, the Companys subsidiary bank in Florida, is a state
non-member bank and is subject to regulation and supervision by the Florida Office of Financial
Regulation and the FDIC.
These bank regulatory agencies, in addition to supervising and examining the banks subject to
their authority, are empowered to issue cease and desist orders or take other enforcement action
against the banks if they determine that the banks activities represent unsafe and unsound banking
practices or violations of law. Regulation by these agencies is principally designed to protect
the depositors of the banks and the safety and soundness of the U.S. banking system, not the
stockholders of the banks or bank holding companies such as the Company.
Bank Regulatory Capital Requirements. The FDIC has adopted minimum capital requirements
applicable to state non-member banks which are similar to the capital adequacy guidelines
established by the FRB for bank holding companies. These guidelines are discussed above under
Laws and Regulations Applicable to Bank Holding Companies Regulatory Capital Requirements.
Depending on the status of a banks capitalization under the applicable guidelines, federal
law may require or permit federal bank regulators to take certain corrective actions against the
bank. For purposes of these laws, an insured bank is classified in one of the following five
categories, depending upon its regulatory capital:
well-capitalized if it has a total Tier 1 leverage ratio of 5% or greater, a Tier 1
risk-based capital ratio of 6% or greater and a total risk-based capital ratio of 10% or
greater (and is not subject to any order or written directive specifying any higher capital
ratio);
adequately capitalized if it has a total Tier 1 leverage ratio of 4% or greater (or a Tier
1 leverage ratio of 3% or greater, if the bank has a CAMELS rating of 1), a Tier 1
risk-based capital ratio of 4% or greater and a total risk-based capital ratio of 8% or
greater;
undercapitalized if it has a total Tier 1 leverage ratio that is less than 4% (or a Tier 1
leverage ratio that is less than 3%, if the bank has a CAMELS rating of 1), a Tier 1
risk-based capital ratio that is less than 4% or a total risk-based capital ratio that is
less than 8%;
19
significantly undercapitalized if it has a total Tier 1 leverage ratio that is less than
3%, a Tier 1 risk based capital ratio that is less than 3% or a total risk-based capital
ratio that is less than 6%; and
critically undercapitalized if it has a Tier 1 leverage ratio that is equal to or less
than 2%.
Federal banking laws require the federal regulatory agencies to take prompt corrective action
against undercapitalized banks, that is, banks falling into any of the latter three categories set
forth above.
On December 31, 2009 and 2008, all of the Companys subsidiary banks were well capitalized
under applicable requirements. In addition to the capital requirements applicable to all banks,
Mercantile Bank, Royal
Palm Bank and Heartland Bank are subject to stricter requirements pursuant to various
regulatory enforcement actions taken at each bank. For further discussion, see the Regulatory
Matters section in Part II, Item 7 of this filing.
Deposit Insurance and Assessments. The deposits of all of the Companys subsidiary banks are
insured by the FDICs Depository Insurance Fund, in general, up to a maximum of $100,000 per
insured depositor, except for deposits held in an IRA account, which are insured up to a maximum of
$250,000 per account. Under federal banking law and regulations, insured banks are required to pay
quarterly assessments to the FDIC for deposit insurance. The FDICs assessment system requires
insured banks to pay varying assessment rates, depending upon the level of the banks capital, the
degree of supervisory concern over the bank, and various other factors, including the overall
levels of reserves in the FDICs insurance fund from time to time.
The Emergency Economic Stabilization Act of 2008 (EESA), enacted by Congress on October 3,
2008, temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to
$250,000 per depositor. On May 20, 2009, the temporary increase in the basic limit was extended
through December 31, 2013. The additional cost of the increase, assessed on a quarterly basis, is a
10 basis point annualized surcharge on balances in non-interest bearing transaction accounts that
exceed $250,000.
On October 14, 2008 the FDIC instituted the Temporary Liquidity Guaranty Program (TLGP),
which provides full deposit coverage for non-interest bearing transaction deposit accounts,
regardless of dollar amount. This coverage is over and above the $250,000 in coverage otherwise
provided to a customer. The Companys subsidiary banks have each opted into the TLGP. The
additional cost of this program, assessed on a quarterly basis, is a 10 basis point annualized
surcharge on balances in non-interest bearing transactions accounts that exceed $250,000. The
Company does not believe this surcharge will have a material effect on its results of operations in
2010.
During 2008 and 2009, losses from bank failures diminished the Depository Insurance Fund. Late
in 2008 the FDIC announced a multi-year restoration plan for the Fund, which included an increase
in deposit insurance rates of 7 basis points across all rate categories, effective for the first
quarter of 2009. On February 27, 2009, the FDIC adopted a final rule modifying the risk-based
assessment system and setting initial base assessment rates beginning April 1, 2009, at 12 to 45
basis points and, due to extraordinary circumstances, extended the period of the restoration plan
to increase the deposit insurance fund to seven years. The FDIC also issued final rules on changes
to the risk-based assessment system. The final rules both increase base assessment rates and
incorporate additional assessments for excess reliance on brokered deposits and FHLB advances. The
new rates would increase annual assessment rates from 5 to 7 basis points to 7 to 24 basis points.
This new assessment took effect April 1, 2009. The Company has expensed $2.8 million from
continuing operations and $1.1 million from discontinued operations for this assessment in 2009.
Also on February 27, 2009, the FDIC announced it had adopted an interim rule to impose a 20
basis point emergency special assessment based on total deposits as of June 30, 2009. The interim
rule also provided that an additional emergency assessment of up to 10 basis points may be imposed
if the reserve ratio of the Deposit Insurance Fund is estimated to fall to a level that the Board
believes would adversely affect public confidence or to a level which shall be close to zero or
negative at the end of the calendar quarter. Subsequently, the FDICs Treasury borrowing authority
was increased, allowing the agency to cut the planned special assessment from 20 to 10 basis
points. On May 22, 2009, the FDIC adopted a final rule which established a special assessment of
five basis points on each FDIC-insured depository institutions assets, minus its Tier 1 capital, as
of September 30, 2009. The
20
assessment was capped at 10 basis points of an institutions domestic
deposits so that no institution would pay an amount higher than they would have under the interim
rule. This special assessment was collected September 30, 2009. The Company expensed $509 thousand
from continuing operations and $286 thousand from discontinued operations as of June 30, 2009 for
this special assessment.
On September 29, 2009, the FDIC adopted a Deposit Insurance Fund restoration plan that
required banks to prepay, on December 30, 2009, their estimated quarterly risk-based assessments
for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. Banks were assessed through 2010
according to the risk-based premium schedule adopted earlier this year. Beginning January 1, 2011,
the base rate increases by 3 basis points. The Company recorded a prepaid expense asset from
continuing operations of $3.6 million and $1.2 million from discontinued operations as of December
31, 2009, which will be amortized to non-interest expense over the next three years.
Limitations on Interest Rates and Loans to One Borrower. The rate of interest a bank may
charge on certain classes of loans may be limited by state and federal law. At certain times in
the past, these limitations have resulted in reductions of net interest margins on certain classes
of loans. Federal and state laws impose additional restrictions on the lending activities of banks
including, among others, the maximum amount that a bank may loan to one borrower.
Payment of Dividends. The Companys subsidiary banks are subject to federal and state banking
laws limiting the payment of cash dividends by banks. Typically, such laws restrict dividends to
the banks undivided profits account or, if greater, profits earned during the current and
preceding fiscal year. In addition, under federal banking law, an FDIC-insured institution may not
pay dividends while it is undercapitalized under regulatory capital guidelines or if payment would
cause it to become undercapitalized. In addition, the FDIC has authority to prohibit or to limit
the payment of dividends by a bank if, in the banking regulators opinion, payment of a dividend
would constitute an unsafe or unsound practice in light of the financial condition of the banking
organization. Mercantile Bank, Royal Palm Bank and Heartland Bank are each prohibited from paying
any dividends without regulatory consent, pursuant to various regulatory enforcement actions taken
at each bank. For further discussion, see the Regulatory Matters section in Part II, Item 7 of
this filing.
The USA Patriot Act. The USA Patriot Act of 2001, as recently renewed and amended (the
Patriot Act), has imposed substantial new record-keeping and due diligence obligations on banks
and other financial institutions, with a particular focus on detecting and reporting
money-laundering transactions involving domestic or international customers. The U.S. Treasury
Department has issued and will continue to issue regulations clarifying the Patriot Acts
requirements. The Patriot Act requires all financial institutions, as defined, to establish
certain anti-money laundering compliance and due diligence programs, which impose significant costs
on our Company and all financial institutions.
Community Reinvestment Act. The Companys subsidiary banks are subject to the federal
Community Reinvestment Act (the CRA) and implementing regulations. CRA regulations establish the
framework and criteria by which the federal bank regulatory agencies assess an institutions record
of helping to meet the credit needs of its community, including low- and moderate-income
neighborhoods. Some states have enacted their own community reinvestment laws and regulations
applicable to financial institutions doing business within their borders. A banking institutions
performance under the federal CRA and any applicable state community reinvestment act laws is taken
into account by regulators in reviewing certain applications made by the institution, including
applications for approval of expansion transactions such as mergers and branch acquisitions.
Transactions with Affiliates. The Companys subsidiary banks are subject to federal laws that
limit certain transactions between banks and their affiliated companies, including loans, other
extensions of credit, investments or asset purchases. Among other things, these laws place a
ceiling on the aggregate dollar amount of such transactions expressed as a percentage of the banks
capital and surplus. Furthermore, loans and extensions of credit from banks to their non-bank
affiliates, as well as certain other transactions, are required to be secured in specified amounts.
Finally, the laws require that such transactions be on terms and conditions that are or would be
offered to nonaffiliated parties. We carefully monitor our compliance with these restrictions on
transactions between banks and their affiliates.
21
Other Laws. Our banking subsidiaries are subject to a variety of other laws particularly
affecting banks and financial institutions, including laws regarding permitted investments; loans
to officers, directors and their affiliates; security requirements; anti-tying limitations;
anti-money laundering, financial privacy and customer identity verification; truth-in-lending;
permitted types of interest bearing deposit accounts; trust department operations; brokered
deposits; and audit requirements.
Laws Governing Interstate Banking and Branching
Under federal law, a bank holding company generally is permitted to acquire additional banks
located anywhere in the United States, including in states other than the acquiring holding
companys home state. There are a few limited exceptions to this ability, such as interstate
acquisitions of newly organized banks (if the law of the acquired banks home state prohibits such
acquisitions), interstate acquisitions of banks where the acquiring holding company would control
more than 10% of the total amount of insured deposits in the United States, and interstate
acquisitions where the acquiring holding company would control more than 30% of the insured
deposits in the acquired banks home state (or any lower percentage established by the acquired
banks home state), unless such acquisition represents the initial entry of the acquiring holding
company into the acquired banks home state or where the home
state waives such limit by regulatory approval or by setting a higher percentage threshold for
the insured deposit limit.
Under federal law, banks generally are permitted to merge with banks headquartered in other
states, thereby creating interstate branches. The principal exception to this ability is a merger
with a bank in another state that is a newly organized bank, if the laws of the other state
prohibit such mergers. Interstate bank mergers are subject to the same type of limits on the
acquiring bank and its bank affiliates controlling deposits in the acquired institutions home
state as interstate bank acquisitions. In addition, banks may acquire one or more branches from a
bank headquartered in another state or establish de novo branches in another state, if the laws of
the other state permit such branch acquisitions or the establishment of such de novo branches.
In addition, states may prohibit interstate acquisitions, by a bank holding company
controlling only out of state banks or by an out of state bank, of an in-state bank or bank
branches, if such acquisition would result in the acquiring institutions controlling more than a
specified percentage of in-state deposits, provided such restriction applies as well to in-state
banking organizations acquisitions within the state.
Regulation of Other Non-Banking Activities
Federal and state banking laws affect the ability of the Company or its subsidiary banks to
engage, directly or indirectly through non-bank subsidiaries or third parties, in activities of a
non-traditional banking nature, such as insurance agency, securities brokerage, or investment
advisory activities. To the extent that we are authorized to engage and do engage in such
activities, we are careful to comply with the applicable banking laws, as well as any other laws
and regulations specifically regulating the conduct of these non-banking activities, such as the
federal and state securities laws, regulations of self-regulatory organizations such as the
Financial Industry Regulatory Authority and state insurance laws and regulations. These laws and
regulations are principally focused on protecting customers of the Companys subsidiaries rather
than the stockholders of the Company.
Sarbanes-Oxley Act of 2002
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002
(Sarbanes-Oxley), which implemented legislative reforms intended to address corporate and
accounting fraud. In addition to the establishment of a new accounting oversight board that
enforces auditing, quality control and independence standards on registered companies and their
independent public accounting firms, Sarbanes-Oxley placed certain direct restrictions on the scope
of non-audit services that may be provided by accounting firms to their public company audit
clients. Any permitted non-audit services provided by an auditing firm to a public company audit
client must be preapproved by the companys audit committee. In addition, Sarbanes-Oxley makes
certain changes to the requirements for periodic rotation of audit partners in public audit firms.
Sarbanes-Oxley requires chief executive officers and chief financial officers, or their equivalent,
to certify to the accuracy of their companys periodic reports filed with the Securities and
Exchange Commission, subject to civil and criminal penalties if they knowingly or willingly violate
this certification requirement. The Companys Chief Executive Officer and Chief
22
Financial Officer
have signed certifications to this Form 10-K as required by Sarbanes-Oxley. In addition, under
Sarbanes-Oxley, counsel is required to report evidence of a material violation of the securities
laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal
officer, and, if such officer does not appropriately respond, to report such evidence to the audit
committee or other similar committee of the board of directors or the board itself.
Under Sarbanes-Oxley, longer prison terms will apply to corporate executives who violate
federal securities laws; the period during which certain types of suits can be brought against a
company or its officers is extended; and bonuses issued to top executives prior to restatement of a
companys financial statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from trading the companys securities during
retirement plan blackout periods, and loans to company executives (other than loans by financial
institutions permitted by federal rules and regulations) are restricted. In addition, a provision
directs that civil penalties levied by the Securities and Exchange Commission as a result of any
judicial or administrative action under Sarbanes-Oxley be deposited to a fund for the benefit of
harmed investors. The Federal Accounts for Investor Restitution provision also requires the
Securities and Exchange Commission to develop methods of improving collection rates. The
legislation accelerates the time frame for disclosures by public companies, as they must
immediately disclose any material changes in their financial condition or operations. Directors
and executive officers must also provide information for most changes in their individual ownership
of their companys securities within two business days of the change.
Sarbanes-Oxley increases the oversight of, and codifies certain requirements relating to audit
committees of public companies and how they interact with the companys registered public
accounting firm. Audit Committee members must be independent and are absolutely barred from
accepting consulting, advisory or other compensatory fees from the issuer, other than normal
directors fees. In addition, companies must disclose whether at least one member of the committee
is a financial expert (as such term is defined by the Securities and Exchange Commission) and if
not, why not. Under Sarbanes-Oxley, an independent public accounting firm is prohibited from
performing audit services for a registered company if the companys chief executive officer, chief
financial officer, comptroller, chief accounting officer or any person serving in equivalent
positions was previously employed by the audit firm and participated in the firms audit of the
company during the one-year period preceding the audit initiation date. Sarbanes-Oxley also
prohibits any officer or director of a company or any other person acting under their direction
from taking any action to fraudulently influence, coerce, manipulate or mislead any independent
accountant engaged in the audit of the companys financial statements for the purpose of rendering
the financial statements materially misleading. Sarbanes-Oxley requires the Securities and
Exchange Commission to prescribe rules requiring inclusion of any internal control report and
assessment by management in the annual report to shareholders. Sarbanes-Oxley requires the
companys registered public accounting firm that issues the audit report to attest to and report on
managements assessment of the companys internal controls.
EESA Legislation & TARP Participation
In October 2008, the U.S. Congress enacted the Emergency Economic Stabilization Act of 2008
(EESA). EESA was an attempt to address several difficulties facing the banking system and
financial markets in the U.S. Among other things, EESA temporarily increased the FDIC deposit
account insurance limit from $100,000 to $250,000, created, preserved, or extended certain tax
incentives, and authorized the SEC to modify a fair value accounting rule. Under EESA the U.S.
Department of the Treasury (Treasury) and the FDIC have established, among other things, a
Troubled Asset Relief Program (TARP) and, under the TARP, a Capital Purchase Program (CPP) and
a Temporary Liquidity Guarantee Program (TLGP), all of which are applicable to banks and their
holding companies.
As the Company has previously disclosed, the Company filed an application in November 2008 to
participate in the CPP; however, the application was withdrawn in May 2009. Participation in the
CPP would make several terms, restrictions and covenants of CPP applicable to the Company,
including, but not limited to, restrictions regarding the payment of dividends, redemption or
repurchase of capital stock, certain business combinations, and executive compensation. The terms,
restrictions and covenants of the CPP are explained in more detail on the Treasurys website at
www.ustreas.gov. The Company is considering various capital-raising alternatives and has made no
decision at this time whether to reapply to participate in the CPP.
23
In February 2009, the U.S. Congress enacted the American Recovery and Reinvestment Act of 2009
(the Recovery Act). A provision of the Recovery Act significantly expanded EESAs restrictions on
executive compensation and extended those new restrictions to certain additional employees.
Changes in Law and Regulation Affecting the Company Generally
Future Legislation. Various items of legislation are from time to time introduced in Congress
and state legislatures with respect to the regulation of financial institutions. Such legislation
may change our operating environment and the operating environment of our subsidiaries in
substantial and unpredictable ways. We cannot determine the ultimate effect that potential
legislation, if enacted, or implementing regulations, would have upon our financial condition or
results of operations or upon our shareholders.
Fiscal Monetary Policies. The Companys business and earnings are affected significantly by
the fiscal and monetary policies of the federal government and its agencies. The Company is
particularly affected by the policies of the FRB, which regulates the supply of money and credit in
the United States. Among the instruments of monetary policy available to the FRB are conducting
open market operations in United States government securities, changing the discount rates of
borrowings of depository institutions, imposing or changing reserve requirements against depository
institutions deposits, and imposing or changing reserve requirements against certain borrowings by
banks and their affiliates.
These methods are used in varying degrees and combinations to directly affect the availability
of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits.
The policies of the FRB have a material effect on the Companys business, results of operations and
financial condition.
The references in the foregoing discussion to various aspects of statutes and regulations are
merely summaries which do not purport to be complete and which are qualified in their entirety by
reference to the actual statutes and regulations.
Item 1A Risk Factors
Various risks and uncertainties, some of which are difficult to predict and beyond the
Companys control, could negatively impact the Company. Adverse experience with the risks listed
below could have a material impact on the Companys financial condition and results of operations,
as well as the value of its common stock.
The Company and its subsidiaries are subject to Regulatory Agreements and Orders that restrict
the Company and its subsidiaries from taking certain actions. As is more fully discussed in the
Regulatory Matters section in Part II, Item 7 of this filing, the Company, Mercantile Bank, Royal
Palm, Royal Palm Bank, Mid-America and Heartland Bank are subject to various regulatory enforcement
actions taken at each bank. As of December 31, 2009, the Company and each subsidiary have met all
regulatory requirements and continue to work diligently to maintain compliance with the enforcement
actions. However, there can be no assurance that these efforts will be successful in the future.
If the Company is unable to comply with such requirements, the regulatory agencies could force a
sale, liquidation or federal conservatorship or receivership of the subsidiaries.
Non-performing assets take significant time to resolve and adversely affect the Companys
results of operations and financial condition, and could result in further losses in the future.
At December 31, 2009 and 2008, our non-performing loans (which consist of non-accrual loans and
loans past due 90 days or more and still accruing loans) totaled $50.8 million and $38.0 million,
or 6.54% and 2.83% of our loan portfolio, respectively. At December 31, 2009 and 2008, total
non-performing assets (which include non-performing loans plus other real estate owned) were $67.2
million and $48.0 million, or 8.66% and 3.57% of total loans, respectively. Non-performing assets
adversely affect net income in various ways. While the Company pays interest expense to fund
non-performing assets, no interest income is recorded on non-accrual loans or other real estate
owned, thereby adversely affecting income and returns on assets and equity, and loan administration
costs increase and the efficiency ratio is adversely affected. When the Company takes collateral in
foreclosures and similar proceedings, it is required to mark the collateral to its then-fair market
value, which, when compared to the value of the loan, may result in a loss. These non-performing
loans and other real estate owned also increase the Companys risk profile and the capital that
regulators believe is appropriate in light of such risks. The resolution of non-performing assets
24
requires significant time commitments from management, which can be detrimental to the performance
of their other responsibilities. There is no assurance that the Company will not experience further
increases in non-performing loans in the future, or that non-performing assets will not result in
further losses in the future.
The Company incurred net losses for 2009 and 2008 and cannot make any assurances that it will
not incur further losses. The Company incurred a net loss of $58.5 million and $8.8 million for
the years ended December 31, 2009 and 2008, respectively, due to high levels of provision for loan
losses and goodwill impairment. The Company cannot provide any assurances that it will not incur
future losses, especially in light of economic conditions that continue to adversely affect its
borrowers, particularly those in the southwest Florida market.
If the value of real estate in the Companys market area were to decline materially, a
significant portion of the loan portfolio could become under-collateralized, which might have a
material adverse affect on the Company. In addition to considering the financial strength and cash
flow characteristics of borrowers, the Company often secures loans with real estate collateral,
which in each case provides an alternate source of repayment in the event of default by the
borrower. This real property may deteriorate in value during the time the credit is extended, and
if it is necessary to liquidate the collateral securing a loan to satisfy the debt during a period
of reduced real estate values, earnings and capital could be adversely affected.
Real estate construction, land acquisition and development loans are based upon estimates of
costs and values associated with the complete project. These estimates may be inaccurate, and the
Company may be exposed to significant losses on loans for these projects. Construction, land
acquisition, and development loans involve additional risks because funds are advanced upon the
security of the project, which is of uncertain value prior to its completion, and costs may exceed
realizable values in declining real estate markets. Because of the uncertainties inherent in
estimating construction costs and the realizable market value of the completed project and the
effects of governmental regulation of real property, it is relatively difficult to evaluate
accurately the total funds required to complete a project and the related loan-to-value ratio. As a
result, construction loans often involve the disbursement of substantial funds with repayment
dependent, in part, on the success of the ultimate project and the
ability of the borrower to sell or lease the property, rather than the ability of the borrower
or guarantor to repay principal and interest. If appraisal of the value of the completed project
proves to be overstated or market values or rental rates decline, the Company may have inadequate
security for the repayment of the loan upon completion of construction of the project. If the
Company is forced to foreclose on a project prior to or at completion due to a default, there can
be no assurance that it will be able to recover all of the unpaid balance of, and accrued interest
on, the loan as well as related foreclosure and holding costs. In addition, the Company may be
required to fund additional amounts to complete the project and may have to hold the property for
an unspecified period of time while attempting to dispose of it.
If economic conditions worsen, the Company may suffer from credit risk and the Companys
allowance for loan losses may not be adequate to cover actual losses. Credit risk is the risk that
loan customers or other counter-parties will be unable to perform their contractual obligations
resulting in a negative impact on earnings. Like all financial institutions, the Company maintains
an allowance for loan losses to provide for loan defaults and non-performance. The allowance for
loan losses is based on historical loss experience as well as an evaluation of the risks associated
with the loan portfolio, including the size and composition of the portfolio, current economic
conditions and geographic concentrations within the portfolio. If the economy in the Companys
primary geographic market areas should worsen, this may have an adverse impact on the loan
portfolio. If for any reason the quality of the portfolio should weaken, the allowance for loan
losses may not be adequate to cover actual loan losses, and future provisions for loan losses could
materially and adversely affect financial results.
Recent, ongoing unfavorable economic conditions may continue or worsen. Unfavorable
conditions that have affected the economy and financial markets since mid-2007, further intensified
in 2008 and 2009, as did a global economic slowdown, resulting in an overall decrease in the
confidence in the markets and with negative effects on the business, financial condition and
results of operations of financial institutions in the United States and other countries. The
Companys business activities and earnings are affected by these general business conditions.
Dramatic declines in the housing market over the past two years, with falling home prices and
increasing foreclosures and unemployment, have negatively impacted the credit performance of real
estate related loans and resulted in significant write-downs of asset values by financial
institutions. These write-downs have caused many financial institutions to seek additional capital,
to reduce or eliminate dividends, to merge with larger and stronger
25
institutions and, in some
cases, to fail. Reflecting concern about the stability of the financial markets generally and the
strength of counterparties, many lenders and institutional investors have reduced or ceased
providing funding to borrowers, including to other financial institutions. This market turmoil and
tightening of credit have led to an increased level of commercial and consumer delinquencies, lack
of consumer confidence, increased market volatility and widespread reduction of business activity
generally. Market developments may further erode consumer confidence levels and may cause adverse
changes in payment patterns, causing increases in delinquencies and default rates, which may impact
the Companys charge-offs and provision for loan losses. Continuing economic deterioration that
affects household and/or corporate incomes could also result in reduced demand for loan or
fee-based products and services. In addition, changes in securities market conditions and monetary
fluctuations could adversely affect the availability and terms of funding necessary to meet the
Companys liquidity needs. A worsening of these conditions would likely exacerbate the adverse
effects of these difficult market conditions on the Company and others in the financial
institutions industry.
Current levels of market volatility are unprecedented. The market for certain investment
securities has become highly volatile or inactive, and may not stabilize or resume in the near
term. This volatility has resulted in significant fluctuations in the prices of those securities,
and additional market volatility may continue to adversely affect the Companys results of
operations.
There can be no assurance that recently enacted legislation will stabilize the U.S. financial
markets. The Emergency Economic Stabilization Act of 2008 (the EESA) was signed into law in
October 2008 for the purpose of stabilizing and providing liquidity to the U.S. financial markets.
Shortly thereafter, the U.S. Department of the Treasury announced a program under the EESA pursuant
to which it would make senior preferred stock investments in participating financial institutions
(the Capital Purchase Program). In February 2009, the American Recovery and Reinvestment Act of
2009 (the Recovery Act) was passed, which is intended to stabilize the financial markets and slow
or reverse the downturn in the U.S. economy, and which revised certain provisions of the EESA. The
FDIC has also commenced a guarantee program under which the FDIC would offer a guarantee of certain
financial institution indebtedness in exchange for an insurance premium to be paid to the FDIC by
issuing financial institutions. There can be no assurance, however, that the EESA and its
implementing regulations, the Recovery Act, the FDIC programs, or any other governmental program
will have a positive impact on the financial markets. The failure of the EESA, the Recovery Act,
the FDIC programs, or any other actions of the U.S. government to
stabilize the financial markets and a continuation or worsening of current financial market
conditions could materially and adversely affect the Companys business, financial condition,
results of operations, access to credit or the trading price of the Companys common stock.
The Company may be adversely affected by recently enacted or contemplated legislation and
rulemaking. The programs established or to be established under the EESA and Troubled Asset Relief
Program, as well as restrictions contained in current or future rules implementing or related to
them and those contemplated by the Recovery Act, may adversely affect the Company if the Company
elects to participate in the programs in the future. In specific, any governmental or regulatory
action having the effect of requiring the Company to obtain additional capital, whether from
governmental or private sources, could have a material dilutive effect on current shareholders. The
Company would face increased regulation of the Companys business and increased costs associated
with these programs. The EESA, as amended by the Recovery Act, contains, among other things,
significant restrictions on the payment of executive compensation, which may have an adverse effect
on the retention or recruitment of key members of senior management. Also, the Companys
participation in the Capital Purchase Program would limit (without the consent of the Department of
Treasury) the Companys ability to increase the Companys dividend and to repurchase the Companys
common stock for up to three years. Similarly, programs established by the FDIC may have an adverse
effect on the Company, due to the costs of participation.
The Company may be adversely affected by government regulation. All banks are subject to
extensive federal and state banking regulations and supervision. Banking regulations are intended
primarily to protect depositors funds and the federal deposit insurance funds, not the
shareholders. Regulatory requirements affect lending practices, capital structure, investment
practices, dividend policy and growth. Failure to meet minimum capital requirements could result
in the imposition of limitations that would adversely impact operations and could, if capital
levels dropped significantly, result in being required to cease operations. Changes in governing
law, regulations or regulatory practices could impose additional costs on the Company or adversely
affect the ability to obtain deposits or make loans and thereby hurt revenues and profitability.
26
The Company is subject to the local economies where it operates, and unfavorable economic or
market conditions in these areas could have a material adverse effect on the Companys financial
condition and results of operations. The Companys success depends upon the general business and
economic conditions in the United States and in its primary areas of operation. Economic
conditions in the local market areas, including the agricultural prices for land and crops and
commercial and residential real estate values, may have an adverse effect on the quality of the
Companys loan portfolio and financial performance. An economic downturn within the Companys
footprint could negatively impact household and corporate incomes. This impact may lead to
decreased demand for loan and deposit products and increase the number of customers who fail to pay
interest or principal on their loans.
The Company may not be able to influence the activities of the banking organizations in which
it owns a minority interest. The Company owns a minority interest in several banking organizations
throughout the United States. As minority shareholders, the Company may be unable to influence the
activities of these organizations, and may suffer losses due to these activities.
Higher FDIC deposit insurance premiums and assessments could adversely affect the Companys
financial condition. FDIC insurance premiums increased substantially in 2009, and the Company
expects to pay significantly higher FDIC premiums in the future. Bank failures have significantly
depleted the FDICs Deposit Insurance Fund and reduced the Deposit Insurance Funds ratio of
reserves to insured deposits. The FDIC adopted a revised risk-based deposit insurance assessment
schedule on February 27, 2009, which raised deposit insurance premiums. On May 22, 2009, the FDIC
also implemented a special assessment equal to five basis points of each insured depository
institutions assets minus Tier 1 capital as of June 30, 2009, but no more than 10 basis points
times the institutions assessment base for the second quarter of 2009, which was paid on September
30, 2009. Additional special assessments may be imposed by the FDIC for future periods. The Company
participates in the FDICs Temporary Liquidity Guarantee Program (TLGP), for noninterest-bearing
transaction deposit accounts. Banks that participate in the TLGPs noninterest-bearing transaction
account guarantee will pay the FDIC an annual assessment of 10 basis points on the amounts in such
accounts above the amounts covered by FDIC deposit insurance. To the extent that these TLGP
assessments are insufficient to cover any loss or expenses arising from the TLGP program, the FDIC
is authorized to impose an emergency special assessment on all FDIC-insured depository
institutions. The FDIC has authority to impose charges for the TLGP upon depository institution
holding companies, as well. The TLGP was scheduled to end December 31, 2009, but the FDIC extended
it to June 30, 2010 at an increased charge of 15 to 25 basis points, depending on the depository
institutions risk assessment category rating assigned with respect to
regular FDIC assessments if the institution elects to remain in the TLGP. These changes have
caused the premiums and TLGP assessments charged by the FDIC to increase. These actions
significantly increased the Companys noninterest expense in 2009 and are expected to increase
costs for the foreseeable future.
The Company may continue to suffer increased losses in its loan portfolio and in foreclosed
assets held for sale despite its underwriting practices. The Company seeks to mitigate the risks
inherent in its loan portfolio by adhering to specific underwriting practices. These practices
often include: analysis of a borrowers credit history, financial statements, tax returns and cash
flow projections; valuation of collateral based on reports of independent appraisers; and
verification of liquid assets. Although the Company believes that its underwriting criteria are,
and historically have been, appropriate for the various kinds of loans it makes, the Company has
already incurred higher than expected levels of losses on loans that have met these criteria, and
may continue to experience higher than expected losses depending on economic factors and consumer
behavior.
The Companys declines in the value of securities held in the investment portfolio may
negatively affect earnings. The value of an investment in the Companys portfolio could decrease
due to changes in market factors. The market value of certain investment securities is volatile and
future declines or other-than-temporary impairments could materially adversely affect future
earnings and regulatory capital. Continued volatility in the market value of certain investment
securities, whether caused by changes in market perceptions of credit risk, as reflected in the
expected market yield of the security, or actual defaults in the portfolio could result in
significant fluctuations in the value of the securities. This could have a material adverse impact
on the Companys accumulated other comprehensive income and stockholders equity depending upon the
direction of the fluctuations.
Furthermore, future downgrades or defaults in these securities could result in future
classifications as other-than-temporarily impaired. The Company has invested in common stock of
other financial institutions and the
27
Federal Home Loan Bank of Chicago. Deterioration of the
financial stability of the underlying financial institutions for these investments could result in
other-than-temporary impairment charges to the Company and could have a material impact on future
earnings.
The soundness of other financial institutions could adversely affect the Company. The
Companys ability to engage in routine funding transactions could be adversely affected by the
actions and commercial soundness of other financial institutions. Financial services institutions
are interrelated as a result of trading, clearing, counterparty or other relationships. The Company
has exposure to many different counterparties, and the Company routinely executes transactions with
counterparties in the financial industry. As a result, defaults by, or even rumors or questions
about, one or more financial services institutions, or the financial services industry generally,
have led to market-wide liquidity problems and could lead to losses or defaults by the Company or
by other institutions. Many of these transactions expose the Company to credit risk in the event of
default of the Companys counterparty or client. In addition, the Companys credit risk may be
exacerbated when the collateral held by the Company cannot be realized upon or is liquidated at
prices not sufficient to recover the full amount of the financial instrument exposure due the
Company. There is no assurance that any such losses would not materially and adversely affect the
Companys results of operations.
The Company has a significant deferred tax asset and cannot assure it will be fully realized.
The Company had net deferred tax assets of $10.2 million as of December 31, 2009, and believes that
it is more likely than not that these assets will be realized. In evaluating the need for a
valuation allowance, management estimated future taxable income based on forecasts and tax planning
strategies that may be available to the Company. This process required significant judgment by
management about matters that are by nature uncertain. If future events differ significantly from
the current forecasts, the Company may need to establish additional valuation allowances, which
could have a material adverse effect on our results of operations and financial condition.
The Companys stock price could decline from levels at December 31, 2009. The Company
evaluates goodwill balances at least annually for impairment, and if the value of its business
declines, an impairment charge on goodwill is recognized. Due to the decline in the Companys stock
price and the additional provision for loan losses and increased nonperforming assets in the first
half of 2009, the Company performed an interim goodwill impairment assessment as of June 30, 2009.
The Companys valuation for goodwill impairment includes comparable merger and acquisition
transactions, discounted cash flow and present value analysis, dilution analysis, premium-to-market
analysis and representative potential acquisition modeling. Based on this analysis, the Company
determined that the goodwill was fully impaired, and recorded an impairment charge of $44.6 million
in the second quarter of 2009.
The Companys stock price can be volatile. The Companys stock price can fluctuate widely in
response to a variety of factors, including: actual or anticipated variations in quarterly
operating results; recommendations by securities analysts; significant acquisitions or business
combinations; operating and stock price performance of other companies that investors deem
comparable; new technology used or services offered by competitors; news reports relating to
trends, concerns and other issues in the financial services industry, and changes in government
regulations. Many of these factors that may adversely affect the Companys stock price do not
directly pertain to its operating results, including general market fluctuations, industry factors
and economic and political conditions and events, including terrorist attacks, economic slowdowns
or recessions, interest rate changes, credit loss trends or currency fluctuations.
There is no assurance the Company will be able to implement successfully its capital plan.
The Company is developing and implementing a capital raising plan to address its future needs for
capital, and has engaged an investment-banking firm to assist with the process. While the Company
is committed to the completion and execution of the plan and is devoting necessary resources to
achieve that result, there can be no assurance the Company will be able to execute on the plan
successfully under current market conditions.
There is no assurance the Company will be able to operate profitably without the revenue
stream from its discontinued operations. The Companys losses in 2008 and 2009 were largely due to
the operating losses at Royal Palm Bank and Heartland. These losses were partially offset by the
operating profits (net of goodwill impairment charges) of Marine Bank, Brown County, and HNB, which
were subsequently sold. While the Company believes it has addressed the majority of the asset
quality issues responsible for the operating losses at Royal Palm Bank and Heartland, additional
unforeseen losses could have a material adverse effect on our results of operations and financial
condition.
28
Changes in the domestic interest rate environment could negatively affect the Companys net
interest income. Interest rate risk is the risk that changes in market rates and prices will
adversely affect financial condition or results of operations. Net interest income is the Companys
largest source of revenue and is highly dependent on achieving a positive spread between the
interest earned on loans and investments and the interest paid on deposits and borrowings. Changes
in interest rates could negatively impact the ability to attract deposits, make loans, and achieve
a positive spread resulting in compression of the net interest margin.
Liquidity risk may affect the ability of the Company to meet future contractual obligations.
Liquidity risk is the risk that the Company will have insufficient cash or access to cash to
satisfy current and future financial obligations, including demands for loans and deposit
withdrawals, funding operating costs, and for other corporate purposes. Liquidity risk arises
whenever the maturities of financial instruments included in assets and liabilities differ. The
Companys liquidity could be constrained in particular by an unexpected inability to access the
capital markets due to a variety of market dislocations or interruptions. Results of operations
could be affected if the Company were unable to satisfy current or future financial obligations.
The financial services industry is highly competitive, and competitive pressures could
intensify and adversely affect the Companys financial results. The Company operates in a highly
competitive industry that could become even more competitive as a result of legislative, regulatory
and technological changes and continued consolidation. The Company competes with other commercial
banks, savings and loan associations, mutual savings banks, finance companies, mortgage banking
companies, credit unions and investment companies. In addition, technology has lowered barriers to
entry and made it possible for non-banks to offer products and services traditionally provided by
banks. Many of these competitors have fewer regulatory constraints and some have lower cost
structures.
The Company faces operational risks, including systems failure risks. The Company may suffer
from operational risks, which may create loss resulting from human error, inadequate or failed
internal processes and systems, and other external events. Losses may occur due to violations of,
or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards. In
addition, the Companys computer systems and network infrastructure, like that used by competitors,
is always vulnerable to unforeseen problems. These problems may arise in both internally developed
systems and the systems of third-party service providers. The Companys operations are dependent
upon the ability to protect computer equipment against physical damage as well as security risks,
which include hacking or identity theft.
The Company relies on other companies to provide key components of the Companys business
infrastructure. Third party vendors provide key components of business infrastructure such as
internet connections,
network access and mutual fund distribution. These parties are beyond the Companys control,
and any problems caused by these third parties, including their not providing their services for
any reasons or their performing their services poorly, could adversely affect the ability to
deliver products and services to customers and otherwise to conduct business.
Significant legal actions could subject the Company to substantial uninsured liabilities.
From time to time the Company is subject to claims related to operations. These claims and legal
actions, including supervisory actions by regulators, could involve large monetary claims and
significant defense costs. To protect the Company from the cost of these claims, insurance
coverage is maintained in amounts and with deductibles believed to be appropriate, but this
insurance coverage may not cover all claims or continue to be available at a reasonable cost. As a
result, the Company may be exposed to substantial uninsured liabilities, which could adversely
affect results of operations and financial condition.
Changes in accounting standards may materially impact the Companys financial statements.
From time to time, the Financial Accounting Standards Board (FASB) changes the financial accounting
and reporting standards that govern the preparation of financial statements. These changes can be
hard to predict and can materially impact how the Company records and reports financial condition
and results of operations. In some cases, it may be necessary to apply a new or revised standard
retroactively, resulting in the significant restatement of prior period financial statements.
29
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2009, the Companys principal office is located in a building owned and
also occupied by Mercantile Bank in Quincy, Illinois. Mercantile Bank began construction of this
building in 2006 and completed it in January 2008. Total capital expenditures for the project were
approximately $14,424,000. Each of the Companys subsidiary banks operates from a main office,
branch locations, and other offices in their respective communities. In the aggregate, the
Companys banks have five main offices in addition to seventeen full-service branch locations and
one other office.
The banks own all of their main offices, branches and other locations, except for one main
bank, five branches and one other office that are leased. All of the leases have initial and/or
renewal terms that the Companys management deems adequate to accommodate its present business
plans for such locations. The total net book value of the Companys and subsidiary banks
investment in premises and equipment from continuing operations was $25.7 million at December 31,
2009. Total net book value in premises and equipment at December 31, 2008 was $40.6 million.
Item 3. Legal Proceedings
The Company and its subsidiary banks are involved in various legal actions arising from
ordinary business activities. Management believes that the liability, if any, arising from such
actions will not have a material adverse effect on the Companys financial statements or business.
As is more fully discussed in the Regulatory Matters section in Part II, Item 7 of this
filing, the Company, Mercantile Bank, Royal Palm, Royal Palm Bank, Mid-America and Heartland Bank
are subject to various regulatory enforcement actions taken at each bank.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of 2009.
Item 4A. Executive Officers of Registrant
The following information is provided for the Companys executive officers as of January 1,
2010. The executive officers are elected annually by the Board of Directors.
Ted T. Awerkamp, age 52, has been President and Chief Executive Officer of the Company since
March 1, 2007; and also serves as a director of Mercantile Bank, Royal Palm (and its subsidiary,
Royal Palm Bank), and Mid-America (and its subsidiary, Heartland); and served as a director of
Marine Bank, Brown County, and HNB until the recent sales of each. Mr. Awerkamp previously held
the position of Vice President and Secretary of the Company since 1994, as well as President and
CEO of Mercantile Bank since 2005. He served as Executive Vice President and Chief Operating
Officer of Mercantile Bank from 1993 to 2005. Prior to that time, he served as Assistant Vice
President and Vice President of Mercantile Bank and as President of the former Security State Bank
of Hamilton (now merged with Marine Bank). Mr. Awerkamp has been a member of the Board of
Directors of the Company and Mercantile Bank since 1994.
Michael P. McGrath, age 55, has served as Executive Vice President, Chief Financial Officer
and Treasurer of the Company since December 2006, and as Secretary of the Company since March 1,
2007. He served as Vice President and Treasurer of the Company from 1986 to December 2006 and as
Senior Vice President and Controller of Mercantile Bank from 2002 to December 2006. From 1985
through 2002, he served as Vice President and
30
Controller of Mercantile Bank. Prior to 1985, he was
a certified public accountant with the firm of Gray Hunter Stenn LLP in Quincy, Illinois.
Daniel J. Cook, age 54, has served as Executive Vice President and Chief Investment Officer of
the Company since December 2006. He served as Vice President-Investments of the Company from 2005
to December 2006 and Senior Vice President-Investments of Mercantile Bank from 2002 to December
2006. Prior to 2002, he served as Vice President-Investments for Mercantile Bank. Mr. Cook also
has served as President of MII since January 2003. Before joining Mercantile Bank in 1993, Mr.
Cook was Vice President-Investments of Southwest Bank of St. Louis. He coordinates investment
purchases and sales, manages asset/liability allocations, and assists in formulating and executing
investment policies for the Company and its subsidiary banks.
31
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
The common stock, $0.42 par value per share of the Company (the Common Stock), the Companys
only outstanding capital stock, is registered under the Securities Exchange Act of 1934 and began
trading on the American Stock Exchange (now NYSE Alternext US) (the Exchange) on February 28,
2005, under the symbol MBR. Prior to that date, the Companys shares were traded between
shareholders and third parties either privately or through market makers utilizing the
Over-the-Counter Bulletin Board (the OTCBB), a regulated quotation service that displays
real-time quotes, last-sale prices, and volume information in over-the-counter equity securities.
During such period, price information concerning trades through the OTCBB was available from the
OTCBB.
Based on information obtained from the Exchange, the high and low bid quotations for the
Common Stock for each of the quarters of 2009 and 2008, the two last completed fiscal years of the
Company, are set forth in the table below. All such quotations reflect inter-dealer prices,
without retail mark-up, markdown or commissions and may not necessarily represent actual
transactions.
As of December 31, 2009, there were 214 record holders of the Common Stock, which includes 52
holders whose shares are held by The Depository Trust Company, a registered clearing agency, but
excludes persons or entities holding stock in nominee or street name through various banks,
brokerage houses and other institutions. The exact number of beneficial owners is unknown to the
Company at this time.
The Companys shareholders are entitled to receive dividends when, as and if declared by the
Board of Directors out of funds legally available therefore. Funds for the payment of dividends by
the Company are primarily obtained from dividends paid to the Company by its subsidiary banks. The
Companys policy has been to pay dividends on a quarterly basis, the amount of which has been
determined by the Board of Directors considering the Companys capital needs and other plans at the
time. In March 2009, the Company elected to suspend quarterly payments of dividends as a result of
losses from operations. Shortly thereafter, the Company entered into a Memorandum of Understanding
with the Federal Reserve Bank of St. Louis, which, among other things, prohibited the Company from
paying dividends without prior regulatory approval. The declaration of future dividends is in the
sole discretion of the Board. There is no assurance as to future dividends because they are
dependent upon earnings, general economic conditions, the financial condition of the Company and
its subsidiary banks and other factors as may be appropriate in the Boards determination of
dividend policy, including but not limited to, restrictions arising from federal and state banking
laws and regulations to which the Company and its banks are subject.
For the fiscal years 2009 and 2008, the dollar amounts of the dividends paid per share of
Common Stock are set forth on the table below. All per share amounts have been restated to reflect
the three-for-two stock split in December 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Range |
|
Cash Dividends |
2009 |
|
High($) |
|
Low($) |
|
Declared Per Share ($) |
1st Quarter |
|
|
11.98 |
|
|
|
5.00 |
|
|
|
.00 |
|
2nd Quarter |
|
|
8.75 |
|
|
|
4.07 |
|
|
|
.00 |
|
3rd Quarter |
|
|
5.05 |
|
|
|
2.60 |
|
|
|
.00 |
|
4th Quarter |
|
|
4.70 |
|
|
|
2.25 |
|
|
|
.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Range |
|
Cash Dividends |
2008 |
|
High($) |
|
Low($) |
|
Declared Per Share ($) |
1st Quarter |
|
|
18.65 |
|
|
|
16.55 |
|
|
|
.06 |
|
2nd Quarter |
|
|
18.61 |
|
|
|
14.95 |
|
|
|
.06 |
|
3rd Quarter |
|
|
18.90 |
|
|
|
15.30 |
|
|
|
.06 |
|
4th Quarter |
|
|
17.67 |
|
|
|
10.36 |
|
|
|
.06 |
|
There were no issuer purchases of equity securities (i.e., the Companys common stock) during
the three months ended December 31, 2009:
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Maximum Approximate |
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Dollar Value of Shares |
|
|
Total Number of |
|
|
|
|
|
Part of Publicly |
|
that May Yet Be Purchased |
Fourth Quarter 2009 |
|
Shares Purchased |
|
Average Price Paid |
|
Announced Plans or |
|
Under the Plans or |
Calendar Month |
|
(1) |
|
per Share (1) |
|
Programs (2) |
|
Programs (3) |
|
October |
|
|
0 |
|
|
|
n/a |
|
|
|
0 |
|
|
$ |
8,229,424 |
|
November |
|
|
0 |
|
|
|
n/a |
|
|
|
0 |
|
|
$ |
8,229,424 |
|
December |
|
|
0 |
|
|
|
n/a |
|
|
|
0 |
|
|
$ |
8,229,424 |
|
Total |
|
|
0 |
|
|
|
n/a |
|
|
|
0 |
|
|
|
|
|
|
|
|
(1) |
|
The total number of shares purchased and the average price paid per share include, in addition
to other purchases, shares purchased in the open market and through privately negotiated
transactions by the Companys 401(k) Profit Sharing Plan. For the months indicated, there were no
shares purchased by the Plan. |
|
(2) |
|
Includes only those shares that were repurchased under the Companys publicly announced stock
repurchase program, i.e. the $10 million stock repurchase program approved by the Board on August
15, 2005 and announced on August 17, 2005 (the 2005 Repurchase Program). Does not include shares
purchased by the Companys 401(k) Profit Sharing Plan. |
|
(3) |
|
Dollar amount of repurchase authority remaining at month-end under the 2005 Repurchase
Program, the Companys only publicly announced repurchase program in effect at such dates. The
2005 Repurchase Program is limited to 883,656 shares (10% of the number of outstanding shares on
the date the Board approved the program, adjusted to reflect the three-for-two stock split in
December 2007), subject to adjustment, but not to exceed $10 million in repurchases. |
Company Performance
Set forth below is a line graph comparing the cumulative total stockholder return on the
Companys common stock over an approximately five-year period ending on December 31, 2009, with the
cumulative total return on the S&P 500 Regional Banks Index and the Russell 2000 Index over the
same period, assuming the investment of $100 in each on February 28, 2005, the first date the
Companys common stock was registered with the Securities and Exchange Commission and listed for
trading on the NYSE Amex US (formerly the American Stock Exchange), and the reinvestment of all
dividends. These indices are included for comparative purposes only and do not necessarily reflect
managements opinion that such indices are an appropriate measure of the relative performance of
the stock involved, and are not intended to forecast or be indicative of possible future
performance of the Companys common stock.
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company / Index |
|
Feb 05 |
|
Jun 05 |
|
Dec 05 |
|
Jun 06 |
|
Dec 06 |
|
Jun 07 |
|
Dec 07 |
|
Jun 08 |
|
Dec 08 |
|
Jun 09 |
|
Dec 09 |
|
Mercantile Bancorp,
Inc. |
|
$ |
100.00 |
|
|
$ |
100.44 |
|
|
$ |
105.17 |
|
|
$ |
120.28 |
|
|
$ |
120.01 |
|
|
$ |
122.43 |
|
|
$ |
141.18 |
|
|
$ |
131.47 |
|
|
$ |
85.35 |
|
|
$ |
38.51 |
|
|
$ |
24.35 |
|
S&P 500
Regional Banks
Index |
|
$ |
100.00 |
|
|
$ |
100.79 |
|
|
$ |
101.07 |
|
|
$ |
105.17 |
|
|
$ |
112.03 |
|
|
$ |
107.10 |
|
|
$ |
76.69 |
|
|
$ |
45.60 |
|
|
$ |
40.11 |
|
|
$ |
28.50 |
|
|
$ |
35.20 |
|
Russell 2000
Index |
|
$ |
100.00 |
|
|
$ |
100.88 |
|
|
$ |
106.18 |
|
|
$ |
114.29 |
|
|
$ |
124.22 |
|
|
$ |
131.49 |
|
|
$ |
120.81 |
|
|
$ |
108.77 |
|
|
$ |
78.77 |
|
|
$ |
80.16 |
|
|
$ |
98.63 |
|
34
Item 6. Selected Financial Data
The following selected financial data for each of the five years in the period ended December
31, 2009, have been derived from Mercantile Bancorp, Inc.s annual consolidated financial
statements. The data has been revised to separately state income (loss) from discontinued
operations for each year represented. The financial data for each of the three years in the period
ended December 31, 2009, appears elsewhere in this report. This financial data should be read in
conjunction with the financial statements and the related notes thereto appearing in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, except per share data) |
|
|
|
|
BALANCE SHEET ITEMS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
$ |
130,484 |
|
|
$ |
194,097 |
|
|
$ |
205,757 |
|
|
$ |
188,579 |
|
|
$ |
165,066 |
|
Loans held for sale |
|
|
681 |
|
|
|
4,366 |
|
|
|
3,338 |
|
|
|
1,660 |
|
|
|
3,635 |
|
Loans |
|
|
775,989 |
|
|
|
1,339,374 |
|
|
|
1,212,051 |
|
|
|
1,031,656 |
|
|
|
857,648 |
|
Allowance for loan losses |
|
|
18,851 |
|
|
|
23,467 |
|
|
|
12,794 |
|
|
|
10,613 |
|
|
|
8,082 |
|
Discontinued operations, assets held for sale |
|
|
285,992 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Total assets |
|
|
1,390,482 |
|
|
|
1,774,983 |
|
|
|
1,639,145 |
|
|
|
1,422,827 |
|
|
|
1,137,824 |
|
Total deposits |
|
|
954,524 |
|
|
|
1,462,276 |
|
|
|
1,319,459 |
|
|
|
1,166,814 |
|
|
|
946,129 |
|
Short-term borrowings |
|
|
30,740 |
|
|
|
49,227 |
|
|
|
45,589 |
|
|
|
26,338 |
|
|
|
32,587 |
|
Long-term debt |
|
|
87,030 |
|
|
|
146,519 |
|
|
|
143,358 |
|
|
|
107,249 |
|
|
|
51,720 |
|
Discontinued operations, liabilities held for sale |
|
|
264,044 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Noncontrolling interest |
|
|
3,901 |
|
|
|
5,735 |
|
|
|
9,446 |
|
|
|
9,198 |
|
|
|
7,561 |
|
Stockholders equity, net of noncontrolling interest |
|
|
41,302 |
|
|
|
98,957 |
|
|
|
108,282 |
|
|
|
100,658 |
|
|
|
91,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESULTS OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income |
|
$ |
50,317 |
|
|
$ |
58,906 |
|
|
$ |
67,075 |
|
|
$ |
52,291 |
|
|
$ |
38,722 |
|
Interest expense |
|
|
29,101 |
|
|
|
37,152 |
|
|
|
40,489 |
|
|
|
28,470 |
|
|
|
17,314 |
|
Net interest income |
|
|
21,216 |
|
|
|
21,754 |
|
|
|
26,586 |
|
|
|
23,821 |
|
|
|
21,408 |
|
Provision for loan losses |
|
|
22,083 |
|
|
|
23,176 |
|
|
|
2,724 |
|
|
|
3,401 |
|
|
|
1,828 |
|
Noninterest income |
|
|
7,791 |
|
|
|
9,157 |
|
|
|
10,445 |
|
|
|
11,196 |
|
|
|
6,195 |
|
Noninterest expense |
|
|
71,483 |
|
|
|
38,574 |
|
|
|
27,766 |
|
|
|
21,620 |
|
|
|
18,450 |
|
Income tax expense (benefit) |
|
|
(12,137 |
) |
|
|
(11,371 |
) |
|
|
952 |
|
|
|
3,062 |
|
|
|
1,578 |
|
Income (loss) from continuing operations |
|
|
(52,422 |
) |
|
|
(19,468 |
) |
|
|
5,589 |
|
|
|
6,934 |
|
|
|
5,747 |
|
Income (loss) from discontinued operations |
|
|
(7,958 |
) |
|
|
7,326 |
|
|
|
5,034 |
|
|
|
4,177 |
|
|
|
4,405 |
|
Noncontrolling interest |
|
|
(1,833 |
) |
|
|
(3,321 |
) |
|
|
622 |
|
|
|
792 |
|
|
|
648 |
|
Net income (loss) |
|
|
(58,547 |
) |
|
|
(8,821 |
) |
|
|
10,001 |
|
|
|
10,319 |
|
|
|
9,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets |
|
|
10.62 |
% |
|
|
9.25 |
% |
|
|
10.49 |
% |
|
|
10.92 |
% |
|
|
11.75 |
% |
Tier 1 capital to risk-weighted assets |
|
|
5.31 |
% |
|
|
6.10 |
% |
|
|
7.86 |
% |
|
|
9.70 |
% |
|
|
10.88 |
% |
Tier 1 capital to average assets |
|
|
3.31 |
% |
|
|
5.08 |
% |
|
|
6.72 |
% |
|
|
8.09 |
% |
|
|
9.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER SHARE DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share continuing operations (1) |
|
$ |
(5.81 |
) |
|
$ |
(1.85 |
) |
|
$ |
.57 |
|
|
$ |
0.72 |
|
|
$ |
0.61 |
|
Basic earnings (loss) per share discontinued operations (1) |
|
$ |
(0.91 |
) |
|
$ |
(0.84 |
) |
|
$ |
.58 |
|
|
$ |
0.46 |
|
|
$ |
0.47 |
|
Cash dividends |
|
|
N/A |
|
|
|
.24 |
|
|
|
.24 |
|
|
|
0.21 |
|
|
|
0.20 |
|
Book value |
|
|
4.75 |
|
|
|
11.37 |
|
|
|
12.43 |
|
|
|
11.50 |
|
|
|
10.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets (2) |
|
|
(4.43 |
)% |
|
|
(1.46 |
)% |
|
|
0.48 |
% |
|
|
0.76 |
% |
|
|
0.77 |
% |
Return on average equity (2) |
|
|
(68.42 |
)% |
|
|
(15.38 |
)% |
|
|
4.77 |
% |
|
|
6.59 |
% |
|
|
5.95 |
% |
Dividend payout ratio |
|
|
N/A |
|
|
|
(23.68 |
)% |
|
|
20.87 |
% |
|
|
17.80 |
% |
|
|
18.52 |
% |
Net interest margin (2) |
|
|
2.01 |
% |
|
|
2.20 |
% |
|
|
2.86 |
% |
|
|
3.38 |
% |
|
|
3.55 |
% |
Average stockholders equity to average assets |
|
|
4.27 |
% |
|
|
6.19 |
% |
|
|
7.08 |
% |
|
|
7.87 |
% |
|
|
8.33 |
% |
Allowance for loan losses as a percentage of total loans |
|
|
2.43 |
% |
|
|
1.75 |
% |
|
|
1.06 |
% |
|
|
1.03 |
% |
|
|
0.94 |
% |
Full service offices |
|
|
17 |
|
|
|
26 |
|
|
|
27 |
|
|
|
22 |
|
|
|
18 |
|
|
|
|
(1) |
|
In December 2007, the Companys Board of Directors approved a three-for-two stock split.
Share and per share data in the selected consolidated financial information have been
retroactively restated for the stock split as if it occurred on January 1, 2005. |
|
(2) |
|
Information reflected is from continuing operations. |
35
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following is managements discussion and analysis of the financial condition and results
of operations of Mercantile Bancorp, Inc. for the years ended December 31, 2009, 2008, and 2007. It
should be read in conjunction with Business, Selected Financial Data, the consolidated
financial statements and the related notes to the consolidated financial statements.
Forward-Looking Statements
Statements and financial discussion and analysis contained in the Form 10-K that are not
historical facts are forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995 and are including this
statement for purposes of invoking these safe harbor provisions. These forward-looking statements
include information about possible or assumed future results of the Companys operations or
performance. Use of the words believe, expect, anticipate, continue, intend, may,
will, should, or similar expressions, identifies these forward-looking statements. Examples of
forward-looking statements include, but are not limited to, estimates or projections with respect
to our future financial condition, results of operations or business, such as:
Examples of forward-looking statements include, but are not limited to, estimates or
projections with respect to our future financial condition, results of operations or business, such
as:
|
|
|
projections of revenues, income, earnings per share, capital expenditures, assets,
liabilities, dividends, capital structure, or other financial items; |
|
|
|
|
descriptions of plans or objectives of management for future operations, products, or
services, including pending acquisition transactions; |
|
|
|
|
forecasts of future economic performance; and |
|
|
|
|
descriptions of assumptions underlying or relating to any of the foregoing. |
By their nature, forward-looking statements are subject to risks and uncertainties. There are
a number of factors, many of which are beyond our control, that could cause actual conditions,
events, or results to differ significantly from those described in the forward-looking statements.
Factors which could cause or contribute to such differences include but are not limited to:
|
|
|
general business and economic conditions on both a regional and national level; |
|
|
|
|
worldwide political and social unrest, including acts of war and terrorism; |
|
|
|
|
increased competition in the products and services we offer and the markets in which we
conduct our business; |
|
|
|
|
the interest rate environment; |
|
|
|
|
fluctuations in the capital markets, which may directly or indirectly affect our asset
portfolio; |
|
|
|
|
legislative or regulatory developments, including changes in laws concerning taxes,
banking, securities, insurance and other aspects of the financial services industry; |
|
|
|
|
technological changes, including the impact of the Internet; |
36
|
|
|
monetary and fiscal policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board; |
|
|
|
|
accounting principles, policies, practices or guidelines; |
|
|
|
|
deposit attrition, operating costs, customer loss and business disruption greater than
the Company expects; |
|
|
|
|
impairment of the goodwill and core deposit intangibles the Company has recorded with
acquisitions and the resulting adverse impact on the Companys profitability; and |
|
|
|
|
the occurrence of any event, change or other circumstance that could result in the
Companys failure to develop and implement successfully capital raising and debt
restructuring plans. |
A forward-looking statement may include a statement of the assumptions or bases underlying the
forward-looking statement. The Company believes it has chosen the assumptions or bases in good
faith and that they are reasonable. However, the Company cautions you that assumptions or bases
almost always vary from actual results, and the differences between assumptions or bases and actual
results can be material. Any forward-looking statements made or incorporated by reference in this
report are made as of the date of this report, and, except as required by applicable law, the
Company assumes no obligation to update such statements or to update the reasons why actual results
could differ from those projected in such statements. You should consider these risks and
uncertainties in evaluation forward-looking statements and you should not place undue reliance on
these statements.
Overview
General
As of December 31, 2009, Mercantile Bancorp, Inc. was a five-bank holding company
headquartered in Quincy, Illinois with 18 banking facilities (17 full service offices and 1
stand-alone drive-up) serving 14 communities located throughout west-central Illinois, central
Indiana, western Missouri, eastern Kansas, and southwestern Florida. In addition to the five banks
included in its consolidated group, the Company has minority interests in eight other banking
organizations located in Missouri, Georgia, Tennessee, Florida, Colorado and California. The
Company is focused on meeting the financial needs of its markets by offering competitive financial
products, services and technologies. It is engaged in retail, commercial and agricultural banking
and its core products include loans, deposits, trust and investment management.
On November 21, 2009, the Company entered into an Exchange Agreement with Great River and
Phillips which provided for the sale of HNB, one of the Companys subsidiary banks, to Phillips in
exchange for the repayment of $28 million of debt owed to Great River. The transfer of ownership
of HNB to Phillips and the debt repayment was completed on December 16, 2009. The Companys
consolidated statement of operations for 2009, as well as the restated statements of operations for
2008 and 2007, reflects the income and expenses of HNB through the exchange date as Income (loss)
from discontinued operations.
On November 22, 2009, the Company entered into a Stock Purchase Agreement with United
Community, pursuant to which the Company would sell all of the issued and outstanding stock of two
of its subsidiary banks, Marine Bank and Brown County, to United Community for approximately $25.6
million. This transaction closed on February 26, 2010. The Company used part of the proceeds of
the sale to repay the remainder of the debt owed to Great River. The assets and
liabilities of Marine Bank and Brown County are included in the Companys consolidated balance
sheet as of December 31, 2009, but are reflected as Discontinued operations, assets held for sale
and Discontinued operations, liabilities held for sale. The Companys consolidated statement of
operations for 2009, as well as the restated statements of operations for 2008 and 2007, reflects
the income and expenses of Marine Bank and Brown County as Income (loss) from discontinued
operations.
Unfavorable conditions that have affected the economy and financial markets since mid-2007,
further intensified in 2009, as did a global economic slowdown, resulting in an overall decrease in
the confidence in the
37
markets and with negative effects on the business, financial condition and
results of operations of financial institutions in the United States and other countries. The
Companys business activities and earnings, and thus its ability to implement its strategic plans,
are affected by these general business conditions. Dramatic declines in the housing market over
the past two years, with falling home prices and increasing foreclosures and unemployment, have
negatively impacted the credit performance of real estate related loans and resulted in significant
write-downs of asset values by financial institutions. These write-downs have caused many financial
institutions to seek additional capital, to reduce or eliminate dividends, to merge with larger and
stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the
financial markets generally and the strength of counterparties, many lenders and institutional
investors have reduced or ceased providing funding to borrowers, including to other
financial institutions. This market turmoil and tightening of credit have led to an increased
level of commercial and consumer delinquencies, lack of consumer confidence, increased market
volatility and widespread reduction of business activity generally. Despite these unprecedented
challenges, the Company believes its strategic plans, grounded solidly in community banking, should
position the Company to weather these difficulties and to succeed when the economy improves.
Results of Operations
The Company generates the majority of its revenue from interest on loans, income from
investment securities and service charges on customer accounts. These revenues are offset by
interest expense incurred on deposits and other borrowings and noninterest expense such as
administrative and occupancy expenses. Net interest income is the difference between interest
income on earning assets, such as loans and securities, and interest expense on liabilities, such
as deposits and borrowings, which are used to fund those assets. Net interest margin is determined
by dividing net interest income by average interest-earning assets. Interest and dividend income is
the largest source of revenue, representing 87% of total revenue during 2009 and 2008. The level of
interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net
interest income and margin.
Due to the exchange for debt of HNB in December 2009 and the sales of Marine Bank and Brown
County in February 2010, the consolidated statement of operations for 2009, as well as the restated
statements of operations for 2008 and 2007, reflects the income and expenses of HNB, Marine Bank
and Brown County as Income (loss) from discontinued operations.
The Companys net interest margin declined in 2009, primarily due to the increase in
non-accrual loans as well as declines in the prime rate, LIBOR and other benchmark rates to which
many of the Companys loans are indexed, resulting in significant decreases in asset yields. Due
to the lower interest rate environment, the Company was able to reduce its interest expense on
deposits and borrowings as well, but the drop in cost of funds was not sufficient to offset the
reduced asset yields. Net interest margins reflected from continuing operations were 2.01%, 2.20%,
and 2.86%, for the years ended December 31, 2009, 2008, and 2007, respectively.
Net loss was $58.5 million and $8.8 million for the years ended December 31, 2009 and 2008,
respectively. Net income was $10.0 million for the year ended December 31, 2007. The main factors
contributing to the increased net loss in 2009 were a goodwill impairment charge of $30.4 million,
an increase in deposit insurance premiums of $2.0 million, a decrease in noninterest income of $1.4
million, a net loss from discontinued operations of $8.0 million in 2009 compared to net income of
$7.3 million in 2008. Included in the net loss from discontinued operations in 2009 was a goodwill
impairment charge of $14.0 million related to the Companys acquisition of HNB Financial in 2007.
Basic earnings (loss) per share from continuing operations, reflecting the three-for-two stock
split in December 2007, were $(5.81), $(1.85), and $.57 for the years ended December 31, 2009,
2008, and 2007, respectively. Basic earnings (loss) per share from discontinued operations were
$(0.91), $0.84, and $0.58 for the years ended December 31, 2009, 2008, and 2007, respectively.
Financial Condition
Due to the exchange for debt of HNB in December 2009, the assets and liabilities of HNB
are not included in the Companys consolidated balance sheet as of December 31, 2009. Due to the
sales of Marine Bank and Brown County in February 2010, the assets and liabilities of those banks
are included in the Companys consolidated balance sheet as of December 31, 2009, but are reflected
as Discontinued operations, assets held for sale and Discontinued operations, liabilities held
for sale.
38
Total assets at December 31, 2009 were $1.4 billion compared with $1.8 billion at
December 31, 2008, a decrease of $385 million or 21.7%. Total loans, including loans held for
sale, at December 31, 2009 were $776.7 million compared with $1.3 billion at December 31, 2008, a
decrease of $567 million or 42.2%. Total deposits at December 31, 2009 were $954.5 million
compared with $1.5 billion at December 31, 2008, a decrease of $507.8 million or 34.7%. Total
Mercantile Bancorp, Inc. stockholders equity at December 31, 2009 was $41.3 million compared with
$99.0 million at December 31, 2008, a decrease of $57.7 million or (58.3)%.
The allowance for loan losses, as a percentage of total loans, increased as of December 31,
2009, compared with December 31, 2008, lessening the impact on future earnings from losses in the
loan portfolio. Nonperforming loans and nonperforming other assets to total loans from continuing
operations increased to 8.66% of loans as of December 31, 2009 from 3.57% of loans from total
operations as of December 31, 2008. The allowance for loan losses from continuing operations, as a
percentage of total loans from continuing operations, increased to 2.43% as of December 31, 2009
from 1.75% from total operations as of December 31, 2008. Provision for loan losses from
continuing operations decreased $1.1 million to $22.1 million for 2009 from $23.2 million from
total operations for 2008. Interest rate risk exposure is actively managed and relatively low.
Capital
As of December 31, 2009, 2008 and 2007, each of the Companys subsidiary banks was categorized
as well-capitalized under the capital adequacy guidelines established by the bank regulatory
agencies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
Dividend payout ratio (dividends per share divided by net income per share) |
|
|
N/A |
|
|
|
N/A |
|
|
|
20.87 |
% |
Equity to assets ratio (average equity divided by average total assets) |
|
|
4.27 |
% |
|
|
6.19 |
% |
|
|
7.08 |
% |
Return on Equity and Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
Return on assets (net income (loss) divided by average total assets) |
|
|
(4.43 |
)% |
|
|
(1.46 |
)% |
|
|
0.48 |
% |
Return on equity (net income (loss) divided by average equity) |
|
|
(68.42 |
)% |
|
|
(15.38 |
)% |
|
|
4.77 |
% |
Summary of Banking Subsidiaries and Cost and Equity Method Investments
The Companys consolidated income (loss) is generated primarily by the financial services
activities of its subsidiaries. As of December 31, 2009, the Company has five wholly-owned banks,
one majority-owned bank, and minority interests in eight other unconsolidated banking
organizations. The following table illustrates the amounts of net income (loss) contributed by
each of the consolidated subsidiaries (on a pre-consolidation basis) since January 1, 2007, less
purchase accounting adjustments.
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/09 |
|
|
|
|
|
|
Date |
|
|
Ownership |
|
|
Pre-consolidated Net Income (Loss) |
|
Subsidiary |
|
Acquired |
|
|
Percentage |
|
|
2009 |
2008 |
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
Mercantile Bank |
|
|
4/15/83 |
|
|
|
100.00 |
% |
|
$ |
1,029 |
|
|
|
N/A |
|
|
$ |
2,930 |
|
|
|
N/A |
|
|
$ |
5,559 |
|
|
|
43.2 |
% |
Marine Bank & Trust |
|
|
4/02/91 |
|
|
|
100.00 |
% |
|
|
2,139 |
|
|
|
N/A |
|
|
|
2,025 |
|
|
|
N/A |
|
|
|
1,813 |
|
|
|
14.1 |
% |
Perry State Bank |
|
|
10/04/94 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
N/A |
|
|
|
1,888 |
|
|
|
14.7 |
% |
Brown County State Bank |
|
|
12/07/97 |
|
|
|
100.00 |
% |
|
|
1,347 |
|
|
|
N/A |
|
|
|
1,207 |
|
|
|
N/A |
|
|
|
923 |
|
|
|
7.2 |
% |
Farmers State Bank of Northern Missouri |
|
|
10/4/99 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
N/A |
|
|
|
408 |
|
|
|
3.2 |
% |
Mid America Bancorp, Inc. |
|
|
2/28/05 |
|
|
|
55.52 |
% |
|
|
(4,120 |
) |
|
|
N/A |
|
|
|
(7,453 |
) |
|
|
N/A |
|
|
|
1,322 |
|
|
|
10.3 |
% |
Royal Palm Bancorp, Inc. |
|
|
11/10/06 |
|
|
|
100.00 |
% |
|
|
(41,386 |
) |
|
|
N/A |
|
|
|
(7,107 |
) |
|
|
N/A |
|
|
|
444 |
|
|
|
3.4 |
% |
HNB Financial Services, Inc. |
|
|
9/07/07 |
|
|
|
100.00 |
% |
|
|
(9,248 |
) |
|
|
N/A |
|
|
|
3,390 |
|
|
|
N/A |
|
|
|
497 |
|
|
|
3.9 |
% |
Total |
|
|
|
|
|
|
|
|
|
$ |
(50,239 |
) |
|
|
N/A |
|
|
$ |
(5,008 |
) |
|
|
N/A |
|
|
$ |
12,854 |
|
|
|
100.0 |
% |
At December 31, 2009 and December 31, 2008, the Companys percentage ownership of Mid-America
was 55.5%. During 2008, Mid-America repurchased 2,572 shares of its common stock, resulting in the
Companys percentage ownership of Mid-America increasing to 55.5% as of December 31, 2008 from
54.6% as of December 31, 2007.
The following table details the Companys cost method investments in common stock of other
banking organizations that are not consolidated with the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
|
|
|
|
|
|
|
|
Premier Community Bank of the |
|
|
(2) |
|
|
(3) |
|
|
|
Emerald Coast |
|
|
Integrity Bank |
|
|
Premier Bancshares, Inc. |
|
|
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
Date |
|
Shares |
|
|
Cost |
|
|
Shares |
|
|
Cost |
|
|
Shares |
|
|
Cost |
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
12/02/03 |
|
|
|
|
|
|
|
|
|
|
69,500 |
|
|
$ |
695 |
|
|
|
|
|
|
|
|
|
11/29/05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
|
$ |
1,000 |
|
06/21/06 |
|
|
50,000 |
|
|
$ |
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(695 |
) |
|
|
|
|
|
$ |
(1,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total as of 12/31/09 |
|
|
50,000 |
|
|
$ |
500 |
|
|
|
69,500 |
|
|
$ |
|
|
|
|
100,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership Percentage as of 12/31/09 |
|
|
2.5 |
% |
|
|
|
|
|
|
4.3 |
% |
|
|
|
|
|
|
.82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) |
|
|
|
Brookhaven Bank |
|
|
|
Number of |
|
|
|
|
Date |
|
Shares |
|
|
Cost |
|
7/17/07 |
|
|
112,275 |
|
|
$ |
1,123 |
|
9/17/07 |
|
|
4,396 |
|
|
|
44 |
|
Other-than-temporary impairment charges |
|
|
|
|
|
$ |
(336 |
) |
|
|
|
|
|
|
|
|
|
Total as of 12/31/09 |
|
|
116,671 |
|
|
$ |
831 |
|
|
|
|
|
|
|
|
|
|
Ownership Percentage as of 12/31/09 |
|
|
4.9 |
% |
|
|
|
|
|
|
|
(1) |
|
Premier Community Bank of the Emerald Coast is a privately held bank holding company located
in Crestview, Florida. |
40
|
|
|
(2) |
|
Integrity Bank is a privately held bank located in Jupiter, Florida. |
|
(3) |
|
Premier Bancshares, Inc. is a privately held bank holding company located in Jefferson City,
Missouri. |
|
(4) |
|
Brookhaven Bank is a privately held bank located in Atlanta, Georgia. |
Critical Accounting Policies
The accounting and reporting policies of the Company are in accordance with accounting
principles generally accepted in the United States of America and conform to general practices
within the banking industry. The Companys significant accounting policies are described in detail
in the notes to the Companys consolidated financial statements for the years ended December 31,
2009 and 2008. The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions. The financial position and results of operations can be affected by these estimates
and assumptions and are integral to the understanding of reported results. Critical accounting
policies are those policies that management believes are the most important to the portrayal of the
Companys financial condition and results, and they require management to make estimates that are
difficult, subjective, or complex.
Allowance for Loan Losses. The allowance for loan losses provides coverage for probable losses
inherent in the Companys loan portfolio. Management evaluates the adequacy of the allowance for
loan losses each quarter based on changes, if any, in underwriting activities, the loan portfolio
composition (including product mix and geographic, industry or customer-specific concentrations),
trends in loan performance, regulatory guidance and economic factors. This evaluation is
inherently subjective, as it requires the use of significant management estimates. Many factors
can affect managements estimates of specific and expected losses, including volatility of default
probabilities, rating migrations, loss severity and economic and political conditions. The
allowance is increased through provisions charged to operating earnings and reduced by net
charge-offs.
The Company determines the amount of the allowance based on relative risk characteristics of
the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual
credit relationships and an analysis of the migration of commercial loans and actual loss
experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan
mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical
losses, adjusted for current trends, for each homogeneous category or group of loans. The
allowance for loan losses relating to impaired loans is based on the loans observable market
price, the collateral for certain collateraldependent loans, or the discounted cash flows using
the loans effective interest rate.
Regardless of the extent of the Companys analysis of customer performance, portfolio trends
or risk management processes, certain inherent but undetected losses are probable within the loan
portfolio. This is due to several factors including inherent delays in obtaining information
regarding a customers financial condition or changes in their unique business conditions, the
judgmental nature of individual loan evaluations, collateral assessments and the interpretation of
economic trends. Volatility of economic or customer-specific conditions affecting the
identification and estimation of losses for larger non-homogeneous credits and the sensitivity of
assumptions utilized to establish allowances for homogeneous groups of loans are among other
factors. The Company estimates a range of inherent losses related to the existence of the
exposures. The estimates are based upon the Companys evaluation of imprecision risk associated
with the commercial and consumer allowance levels and the estimated impact of the current economic
environment.
Goodwill and Core Deposit and Other Intangibles. Goodwill and core deposit and other
intangibles were recognized from the Companys acquisition of other entities. Core deposit and
other intangibles were determined through a core deposit intangible study and, as a result, the
Company recorded the core deposit intangibles based on the determined fair value.
The Company evaluates goodwill balances at least annually for impairment, and if the value of
its business declines, an impairment charge on goodwill could be recognized. Due to the decline in
the Companys stock price and the additional provision for loan losses and increased nonperforming
assets in the first half of 2009, the
41
Company performed an interim goodwill impairment assessment
as of June 30, 2009. The Companys valuation for goodwill impairment includes comparable merger and
acquisition transactions, discounted cash flow and present value analysis, dilution analysis,
premium-to-market analysis and representative potential acquisition modeling. Based on this
analysis, the Company determined that the goodwill was fully impaired, and recorded an impairment
charge of $44.6 million in the second quarter of 2009.
Core deposit and other intangibles are amortized on the straight-line basis over periods
ranging from five to ten years. Such assets and intangible assets with indefinite lives are
periodically evaluated as to the recoverability of their carrying value.
Discontinued Operations
On November 21, 2009, the Company entered into an Exchange Agreement with Phillips. The
Exchange Agreement provided for the sale of HNB, one of the Companys subsidiary banks, to
Phillips, the sole shareholder
and Chairman of Great River, in exchange for the repayment of $28 million of the Great River
debt. Phillips owned, through participations from Great River, more than $28 million of the Great
River debt. The Company finalized the debt exchange transaction eliminating $28 million of debt
owed to Great River and transferred control of HNB to Phillips. On December 16, 2009, the Company
recognized a loss of $2.4 million related to the exchange. The exchange of debt for all issued and
outstanding stock of HNB, headquartered in Hannibal, Missouri, left approximately $16 million in
outstanding debt owed to Phillips and Great River. The Company repaid the remainder of this debt
following the closing of a definitive agreement to sell its two smallest banks, Brown County and
Marine Bank, both based in Illinois, to United Community for approximately $25.6 million. These
sales closed in the first quarter of 2010, extinguishing the remaining debt owed to Phillips and
Great River.
The assets and liabilities of Marine Bank and Brown County are included in the Companys
consolidated balance sheet as of December 31, 2009, but are reflected as Discontinued operations,
assets held for sale and Discontinued operations, liabilities held for sale. The Banks income
and expenses for 2009, 2008 and 2007 are included in Income (loss) from discontinued operations
in the Companys consolidated statements of operations.
The assets and liabilities of HNB have been excluded from the Companys consolidated balance
sheet as of December 31, 2009. The Companys consolidated statement of operations for 2009 reflects
the income and expenses of HNB through the date of the exchange, which are included in Income
(loss) from discontinued operations.
Revenue Recognition
Income on interest-earning assets is accrued based on the effective yield of the underlying
financial instruments. A loan is considered to be impaired when, based on current information and
events, it is probable the Company will not be able to collect all amounts due. The accrual of
interest income on impaired loans is discontinued when there is reasonable doubt as to the
borrowers ability to meet contractual payments of interest or principal.
Income recognized on service charges, trust fees, commissions, and loan gains is recognized
based on contractual terms and are accrued based on estimates, or are recognized as transactions
occur or services are provided. Income from the servicing of sold loans is recognized based on
estimated asset valuations and transaction volumes. While these estimates and assumptions may be
considered complex, the Company has implemented controls and processes to ensure the reasonableness
of these accruals.
Effect of Inflation
The effect of inflation on a financial institution differs significantly from the effect on an
industrial company. While a financial institutions operating expenses, particularly salary and
employee benefits, are affected by general inflation, the asset and liability structure of a
financial institution consists largely of monetary items. Monetary items, such as cash, loans and
deposits, are those assets and liabilities that are or will be converted into a fixed number of
dollars regardless of changes in prices. As a result, changes in interest rates have a more
significant impact on a financial institutions performance than does general inflation. For
additional information regarding interest rates and changes in net interest income see Selected
Statistical Information.
42
Results of Operations
Summary
Due to the exchange for debt of HNB in December 2009 and the sales of Marine Bank and Brown
County in February 2010, the consolidated statement of operations for 2009, as well as the
statements of operations for 2008 and 2007, reflects the income and expenses of HNB, Marine and
Brown as Income (loss) from discontinued operations.
2009 versus 2008. The Company reported a net loss of $58.5 million for the year ended
December 31, 2009, compared to a net loss of $8.8 million for 2008. Basic loss per share from
continuing operations for the year ended December 31, 2009 was $(5.81) compared to $(1.85) in 2008.
Basic income (loss) per share from discontinued operations for the year ended December 31, 2009 was
$(0.91) compared to $0.84 in 2008. The main factors contributing to the net loss in 2009 were a
goodwill impairment valuation adjustment of $30.4 million, a slight decrease in net interest income
of $538 thousand, a decrease in noninterest income of $1.4 million, an increase in noninterest
expense excluding goodwill impairment of $2.5 million, and a net loss from discontinued operations
of
$8.0 million at December 31, 2009 compared to net income from discontinued operations of $7.3
million at December 31, 2008. These factors were partially offset by a decrease in provision for
loan losses of $1.1 million, a decrease in net loss attributable to noncontrolling interest of $1.5
million, and an increase in income tax benefit of $766 thousand.
The 2009 decrease in net interest income of $538 thousand was the result of a decrease in
interest and dividend income of $8.6 million, offset by a decrease in interest expense of $8.1
million. The decrease in net interest income was primarily due to a decrease in rates on the
majority of interest-earning assets, decreased volume of federal funds sold, and decreased rates on
the majority of all interest-bearing liabilities, largely offset by an increased volume of all
interest-bearing liabilities. The net interest margin decreased to 2.01% for the year ended
December 31, 2009 compared to 2.20% for 2008, primarily due to the increase in non-accrual loans as
well as current economic conditions reflecting decreased rates of all interest-bearing assets and
liabilities.
The 2009 decrease in provision for loan losses from continuing operations of $1.1 million was
attributable to the Company aggressively reserving for estimated losses during 2008, primarily
offset by increases of $9.1 million in net charge-offs from continuing operations and $12.8 million
in nonperforming loans from continuing operations in 2009. The increase in net charge-offs in 2009
was partly the result of the continued deterioration of the commercial real estate markets in
several of the Companys locations, particularly in southwest Florida. The ratio of non-performing
loans to total loans from continuing operations increased to 6.54% as of December 31, 2009,
compared to 2.83% as of December 31, 2008. The increase in non-performing loans was primarily due
to several large commercial real estate loans and construction and development loans at Royal Palm,
Mercantile Bank, and Heartland. The majority of these loans are at Mercantile Bank, and largely
related to a developer who experienced cash flow problems due to a slowing economy and oversupply
of commercial properties. The loan is secured by land in western Missouri, and Mercantile Bank is
actively working with the developer to identify potential purchasers of the property.
The decrease in noninterest income of $1.4 million in 2009 was primarily due to decreases in
brokerage fees of $330 thousand, customer service charges of $246 thousand, net gains on sales of
assets of $433 thousand, and net gains on sale of available-for-sale securities of $942 thousand.
These were offset by increases in net gains on loan sales of $517 thousand and other noninterest
income of $110 thousand. The decrease in brokerage fees was primarily attributable to market-driven
fees decreasing with the stock market in general as compared to 2008. The decrease in customer
service charges was primarily due to a decrease in overdraft fees. The decrease in net gains on
sales of assets was primarily attributable to the Company recognizing a net gain of approximately
$300 thousand for the same period in 2008 related to a sale of a vacant lot. The decrease in net
gains on sales of available-for-sale securities was primarily due to the Company recognizing
approximately $943 thousand in 2008 from the sale of its shares of First Charter Corporation. The
increase in other noninterest income was primarily due to the subsidiary banks receiving regulatory
fee settlements in June 2009.
The 2009 increase in noninterest expense of $32.9 million was primarily due to goodwill
impairment losses from continuing operations of $30.4 million, increases in deposit insurance
premiums of $2.0 million, professional fees of $1.5 million, and net losses on foreclosed assets of
$1.8 million. These were offset by decreases in salaries and employee benefits of $459 thousand and
other than temporary losses on available for sale securities and cost
43
method investments of $1.8
million. The goodwill impairment loss was a result of the Company determining that goodwill was
fully impaired on a consolidated basis during the second quarter of 2009. The increase in deposit
insurance premiums was primarily due to the FDIC approving an additional special assessment during
the second quarter of 2009, as well as the FDIC raising the assessment rates charged to all banks.
The increase in professional fees was due to the Company incurring additional fees related to the
creation and implementation of a capital restoration plan. The increase in net losses on
foreclosed assets was primarily attributable to continued declines in the fair value of foreclosed
properties held for sale. The decrease in salaries and employee benefits was primarily due to
severance payments associated with the change in management personnel in 2008. The decrease in
other-than-temporary losses on available-for-sale securities and cost method investments was
attributable to the Company recognizing other-than-temporary impairment charges of $5.3 million in
2008, compared to only $3.4 million during 2009.
The 2009 increase in provision for income tax benefit from continuing operations of $766
thousand was primarily due to a net loss before taxes and noncontrolling interest of $64.6 million
in 2009, compared to net loss before taxes and noncontrolling interest of $30.8 million in 2008.
The 2009 decrease in noncontrolling interest net loss of $1.5 million was attributable to
Mid-Americas pre-consolidated net loss of $4.1 million in 2009 compared to pre-consolidated net
loss of $7.5 million in 2008. The
decrease in Mid-Americas 2009 net loss compared to 2008 was primarily due to a reduction in
loan loss provision. Mid-America had aggressively reserved for estimated losses in its loan
portfolio as of December 31, 2008. However, non-accrual loans remain at elevated levels, reducing
interest income on loans and largely contributing to the operating loss for 2009.
The Companys return on average assets from continuing operations was (4.43)%, (1.46)%, and
0.48% for the years ended December 31, 2009, 2008, and 2007, respectively, and return on average
equity from continuing operations was (68.42)%, (15.38)%, and 4.77% for the years ended December
31, 2009, 2008, and 2007, respectively.
2008 versus 2007. The Company reported a net loss of $8.8 million for the year ended December
31, 2008, compared to net income of $10.0 million for 2007. Basic earnings (loss) per share from
continuing operations for the year ended December 31, 2008 was $(1.85) compared to $0.57 in 2007.
Basic earnings (loss) per share from discontinued operations for the year ended December 31, 2008
was $0.84 compared to $0.58 in 2007. The main factors contributing to the net loss in 2008 were a
decrease in net interest income of $4.8 million, an increase in provision for loan losses of $20.5
million, a decrease in noninterest income of $1.3 million, and an increase in noninterest expense
of $10.8 million, offset by a decrease in noncontrolling interest of $3.9 million, and a decrease
in provision for income taxes of $12.3 million.
The 2008 decrease in net interest income of $4.8 million was the result of a decrease in
interest and dividend income of $8.2 million, partially offset by a decrease in interest expense of
$3.3 million. The decrease in net interest income was primarily due to decreased volumes of
investment securities, decreased rates on most interest-earning assets, and increased volume of
most interest-bearing liabilities, offset by a decrease in rates on the majority of
interest-bearing liabilities. The net interest margin decreased to 2.20% for the year ended
December 31, 2008 compared to 2.86% for 2007, primarily due to the impact of the Federal Open
Market Committee (FOMC) cutting short-term interest rates by 400 basis points in 2008, causing a
rapid decline in the Companys loan yields relative to the interest rates paid on deposits and
borrowings.
The 2008 increase in provision for loan losses of $20.5 million was attributable to increases
of $11.5 million in net charge-offs and $15.0 million in nonperforming loans in 2008. The increase
in net charge-offs in 2008 was partly the result of the charge-off of a $4 million subordinated
debenture issued by Integrity Bank to Mid-America. Integrity Bank, located in Atlanta, Georgia,
was closed by the FDIC in September 2008. Other increases in 2008 net charge-offs were at Royal
Palm Bank, due to the severe devaluation of the commercial real estate market in Florida, and at
Mercantile Bank and Heartland, largely related to a commercial real estate development loan in
Arkansas, in which both banks participated. The ratio of non-performing loans to total loans
increased to 2.83% as of December 31, 2008, compared to 1.91% as of December 31, 2007. The
increase in non-performing loans was primarily due to several large commercial real estate loans
and construction and development loans at Royal Palm and Heartland, the majority of which were
related to participation loans purchased from Integrity Bank.
44
The decrease in noninterest income of $1.3 million in 2008 was primarily due to a decrease in
customer service charges of $304 and a decrease in net gains on sales of equity and cost method
investments of $2.1 million. These were offset by increases in brokerage fees of $214 thousand,
net gains on sales of assets of $326, net gains on loan sales of $166, and net gains on sale of
available-for-sale securities of $243. The decrease in customer service charges was primarily due
to a decrease in overdraft fees. The decrease in net gains on sales of equity and cost method
investments was primarily due to the Company recognizing approximately $2.1 million from the sale
of its shares of New Frontier Bancshares in 2007. The increase in brokerage fees was primarily
attributable to expansion of the brokerage operations established at Mercantile Bank. The increase
in net gains on sales of assets was primarily attributable to the Company recognizing a gain of
approximately $300 thousand in 2008 related to a sale of a vacant lot. The increase in net gains on
loan sales was primarily attributable to increased residential mortgage refinancings as a result of
the lower interest rate environment. The increase in net gains on sales of available-for-sale
securities was primarily due to the Company recognizing approximately $943 thousand in 2008 from
the sale of its shares of First Charter Corporation.
The 2008 increase in noninterest expense of $10.8 million was largely due to increases in
salaries and employee benefits of $1.6 million, net occupancy expense of $695 thousand, equipment
expense of $631 thousand, deposit insurance premiums of $644 thousand, net losses on foreclosed
assets of $954 thousand, other than temporary losses on available for sale securities and cost
method investments of $5.3 million, and other noninterest expense of $634 thousand. The increase
in salaries and employee benefits was primarily due to severance payments associated with the
change in management personnel in 2008, as well as the opening of a new loan production office in
Carmel, Indiana. The increase in net occupancy expense and equipment expense was attributable to
Mercantile Bank placing
a new building into service in January. The increase in deposit insurance premiums was
primarily due to the expiration of the FDICs One-Time Assessment Credits that offset premiums in
2007 and to the FDIC raising the assessment rates charged to all banks. The increase in net losses
on foreclosed assets was primarily attributable to Royal Palm recognizing impairment charges due to
declines in the fair value of foreclosed properties held for sale. The increase in
other-than-temporary losses on available-for-sale securities and cost method investments was
attributable to the Company recognizing other-than-temporary impairment charges on several of its
investments in stock of other financial institutions. The increase in other noninterest expense was
largely attributable to the marketing and establishing a loan production office in Carmel, Indiana,
as well as increases in noninterest expenses at the Companys other subsidiaries.
The 2008 decrease in provision for income tax (benefit) from continuing operations of $12.3
million was primarily due to a net loss before taxes and noncontrolling interest of $30.8 million
in 2008, compared to net income before taxes and noncontrolling interest of $6.5 million in 2007.
The 2008 decrease in noncontrolling interest of $3.9 million was attributable to Mid-Americas
pre-consolidated net loss of $7.5 million in 2008 compared to pre-consolidated net income of $1.3
million in 2007. Mid-Americas 2008 net loss was primarily due to a deterioration in asset quality,
resulting in substantial increases in nonperforming assets, net charge-offs and provision for loan
losses.
The Companys return on average assets from continuing operations was (1.46)% and 0.48% for
the years ended December 31, 2008 and 2007, respectively, and return on average equity from
continuing operations was (15.38)% and 4.77% for the years ended December 31, 2008 and 2007,
respectively.
Earning Assets, Sources of Funds, And Net Interest Margin
Net interest income represents the amount by which interest income on interest-earning assets,
including securities and loans, exceeds interest expense incurred on interest-bearing liabilities,
including deposits and other borrowed funds. Net interest income is the principal source of the
Companys earnings. Interest rate fluctuations, as well as changes in the amount and type of
interest-earning assets and interest-bearing liabilities, combine to affect net interest income.
Changes in the amount and mix of interest-earning assets and interest-bearing liabilities are
referred to as a volume change and changes in yields earned on interest-earning assets and rates
paid on interest-bearing deposits and other borrowed funds are referred to as a rate change.
45
Selected Statistical Information
The following tables contain information concerning the consolidated financial condition
and operations of the Company for the years, or as of the dates, shown. All average information is
provided on a daily average basis.
Consolidated Average Balance Sheets
The following table shows the consolidated average balance sheets separately stating
discontinued operations, detailing the major categories of assets and liabilities, the interest
income earned on interest-earnings assets, the interest expense paid for interest-bearing
liabilities, and the related interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At |
|
|
|
|
|
|
December 31 |
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Yield/ |
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
|
Cost |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
|
0.40 |
% |
|
$ |
82,557 |
|
|
$ |
251 |
|
|
|
0.30 |
% |
|
$ |
20,647 |
|
|
$ |
442 |
|
|
|
2.14 |
% |
|
$ |
17,397 |
|
|
$ |
966 |
|
|
|
5.55 |
% |
Federal funds sold |
|
|
0.10 |
% |
|
|
11,842 |
|
|
|
18 |
|
|
|
0.15 |
% |
|
|
19,915 |
|
|
|
343 |
|
|
|
1.72 |
% |
|
|
20,093 |
|
|
|
1,060 |
|
|
|
5.28 |
% |
Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries and government
agencies |
|
|
N/A |
|
|
|
1,287 |
|
|
|
27 |
|
|
|
2.10 |
% |
|
|
4,796 |
|
|
|
162 |
|
|
|
3.38 |
% |
|
|
22,118 |
|
|
|
1,148 |
|
|
|
5.19 |
% |
Mortgage-backed securities |
|
|
3.79 |
% |
|
|
25,210 |
|
|
|
1,057 |
|
|
|
4.19 |
% |
|
|
23,475 |
|
|
|
1,118 |
|
|
|
4.76 |
% |
|
|
16,600 |
|
|
|
853 |
|
|
|
5.14 |
% |
Other securities |
|
|
4.55 |
% |
|
|
70,978 |
|
|
|
3,262 |
|
|
|
4.60 |
% |
|
|
70,273 |
|
|
|
3,271 |
|
|
|
4.65 |
% |
|
|
64,760 |
|
|
|
3,561 |
|
|
|
5.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total taxable |
|
|
|
|
|
|
97,475 |
|
|
|
4,346 |
|
|
|
4.46 |
% |
|
|
98,544 |
|
|
|
4,551 |
|
|
|
4.62 |
% |
|
|
103,478 |
|
|
|
5,562 |
|
|
|
5.38 |
% |
Non-taxable State and political
subdivision (3) |
|
|
5.28 |
% |
|
|
27,974 |
|
|
|
944 |
|
|
|
3.37 |
% |
|
|
31,596 |
|
|
|
1,149 |
|
|
|
3.64 |
% |
|
|
36,939 |
|
|
|
1,314 |
|
|
|
3.56 |
% |
Loans (net of unearned discount) (1)(2) |
|
|
6.03 |
% |
|
|
830,740 |
|
|
|
44,744 |
|
|
|
5.39 |
% |
|
|
814,613 |
|
|
|
52,357 |
|
|
|
6.43 |
% |
|
|
746,944 |
|
|
|
58,049 |
|
|
|
7.77 |
% |
Federal Home Loan Bank stock |
|
|
0.34 |
% |
|
|
3,222 |
|
|
|
14 |
|
|
|
0.43 |
% |
|
|
3,787 |
|
|
|
64 |
|
|
|
1.69 |
% |
|
|
3,820 |
|
|
|
124 |
|
|
|
3.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets (1) |
|
|
|
|
|
$ |
1,053,810 |
|
|
$ |
50,317 |
|
|
|
4.77 |
% |
|
$ |
989,102 |
|
|
$ |
58,906 |
|
|
|
5.96 |
% |
|
$ |
928,671 |
|
|
$ |
67,075 |
|
|
|
7.22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & due from banks |
|
|
|
|
|
$ |
12,042 |
|
|
|
|
|
|
|
|
|
|
$ |
25,803 |
|
|
|
|
|
|
|
|
|
|
$ |
20,460 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
|
|
|
|
26,455 |
|
|
|
|
|
|
|
|
|
|
|
27,930 |
|
|
|
|
|
|
|
|
|
|
|
21,362 |
|
|
|
|
|
|
|
|
|
Foreclosed assets held for sale, net |
|
|
|
|
|
|
11,298 |
|
|
|
|
|
|
|
|
|
|
|
4,011 |
|
|
|
|
|
|
|
|
|
|
|
859 |
|
|
|
|
|
|
|
|
|
Equity method investment in common
stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,765 |
|
|
|
|
|
|
|
|
|
Cost method investment in common stock |
|
|
|
|
|
|
2,573 |
|
|
|
|
|
|
|
|
|
|
|
4,369 |
|
|
|
|
|
|
|
|
|
|
|
5,481 |
|
|
|
|
|
|
|
|
|
Interest receivable |
|
|
|
|
|
|
4,349 |
|
|
|
|
|
|
|
|
|
|
|
5,222 |
|
|
|
|
|
|
|
|
|
|
|
5,865 |
|
|
|
|
|
|
|
|
|
Cash surrender value of life insurance |
|
|
|
|
|
|
14,381 |
|
|
|
|
|
|
|
|
|
|
|
13,165 |
|
|
|
|
|
|
|
|
|
|
|
10,743 |
|
|
|
|
|
|
|
|
|
Allowance for loan loss |
|
|
|
|
|
|
(20,640 |
) |
|
|
|
|
|
|
|
|
|
|
(11,471 |
) |
|
|
|
|
|
|
|
|
|
|
(8,359 |
) |
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
15,410 |
|
|
|
|
|
|
|
|
|
|
|
36,237 |
|
|
|
|
|
|
|
|
|
|
|
29,077 |
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
|
|
|
|
2,298 |
|
|
|
|
|
|
|
|
|
|
|
3,806 |
|
|
|
|
|
|
|
|
|
|
|
4,221 |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
19,845 |
|
|
|
|
|
|
|
|
|
|
|
5,286 |
|
|
|
|
|
|
|
|
|
|
|
9,426 |
|
|
|
|
|
|
|
|
|
Discontinued operations, held for sale
(4) |
|
|
|
|
|
|
588,065 |
|
|
|
|
|
|
|
|
|
|
|
593,310 |
|
|
|
|
|
|
|
|
|
|
|
440,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
|
|
$ |
1,729,886 |
|
|
|
|
|
|
|
|
|
|
$ |
1,696,770 |
|
|
|
|
|
|
|
|
|
|
$ |
1,471,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing transaction deposits |
|
|
0.20 |
% |
|
$ |
64,587 |
|
|
$ |
203 |
|
|
|
0.31 |
% |
|
$ |
58,849 |
|
|
$ |
535 |
|
|
|
.91 |
% |
|
$ |
61,028 |
|
|
$ |
1,054 |
|
|
|
1.73 |
% |
Savings deposits |
|
|
0.15 |
% |
|
|
46,801 |
|
|
|
278 |
|
|
|
0.59 |
% |
|
|
47,728 |
|
|
|
818 |
|
|
|
1.71 |
% |
|
|
47,423 |
|
|
|
1,526 |
|
|
|
3.22 |
% |
Money-market deposits |
|
|
0.22 |
% |
|
|
148,053 |
|
|
|
1,316 |
|
|
|
0.89 |
% |
|
|
155,839 |
|
|
|
3,561 |
|
|
|
2.29 |
% |
|
|
143,292 |
|
|
|
5,966 |
|
|
|
4.16 |
% |
Time and brokered time deposits |
|
|
1.86 |
% |
|
|
606,967 |
|
|
|
19,969 |
|
|
|
3.29 |
% |
|
|
579,315 |
|
|
|
25,125 |
|
|
|
4.34 |
% |
|
|
500,161 |
|
|
|
24,595 |
|
|
|
4.92 |
% |
Short-term borrowings |
|
|
6.53 |
% |
|
|
44,912 |
|
|
|
2,475 |
|
|
|
5.50 |
% |
|
|
23,500 |
|
|
|
797 |
|
|
|
3.39 |
% |
|
|
28,072 |
|
|
|
1,546 |
|
|
|
5.51 |
% |
Long-term debt |
|
|
5.02 |
% |
|
|
34,522 |
|
|
|
1,516 |
|
|
|
4.39 |
% |
|
|
49,701 |
|
|
|
2,435 |
|
|
|
4.90 |
% |
|
|
49,718 |
|
|
|
2,494 |
|
|
|
5.02 |
% |
Junior subordinated debentures |
|
|
5.12 |
% |
|
|
61,858 |
|
|
|
3,344 |
|
|
|
5.41 |
% |
|
|
61,858 |
|
|
|
3,881 |
|
|
|
6.27 |
% |
|
|
48,112 |
|
|
|
3,308 |
|
|
|
6.88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
|
|
|
$ |
1,007,700 |
|
|
$ |
29,101 |
|
|
|
2.89 |
% |
|
$ |
976,790 |
|
|
$ |
37,152 |
|
|
|
3.80 |
% |
|
$ |
877,806 |
|
|
$ |
40,489 |
|
|
|
4.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
|
|
|
$ |
86,185 |
|
|
|
|
|
|
|
|
|
|
$ |
65,415 |
|
|
|
|
|
|
|
|
|
|
$ |
69,103 |
|
|
|
|
|
|
|
|
|
Interest payable |
|
|
|
|
|
|
3,547 |
|
|
|
|
|
|
|
|
|
|
|
3,796 |
|
|
|
|
|
|
|
|
|
|
|
4,417 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
|
|
|
|
4,502 |
|
|
|
|
|
|
|
|
|
|
|
3,418 |
|
|
|
|
|
|
|
|
|
|
|
3,793 |
|
|
|
|
|
|
|
|
|
Discontinued operations, held for sale
(4) |
|
|
|
|
|
|
549,042 |
|
|
|
|
|
|
|
|
|
|
|
533,899 |
|
|
|
|
|
|
|
|
|
|
|
402,356 |
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
|
|
|
|
4,973 |
|
|
|
|
|
|
|
|
|
|
|
8,446 |
|
|
|
|
|
|
|
|
|
|
|
9,480 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
73,937 |
|
|
|
|
|
|
|
|
|
|
|
105,006 |
|
|
|
|
|
|
|
|
|
|
|
104,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders
Equity |
|
|
|
|
|
$ |
1,729,886 |
|
|
|
|
|
|
|
|
|
|
$ |
1,696,770 |
|
|
|
|
|
|
|
|
|
|
$ |
1,471,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.88 |
% |
|
|
|
|
|
|
|
|
|
|
2.16 |
% |
|
|
|
|
|
|
|
|
|
|
2.61 |
% |
Net interest income |
|
|
|
|
|
|
|
|
|
|
21,216 |
|
|
|
|
|
|
|
|
|
|
|
21,754 |
|
|
|
|
|
|
|
|
|
|
|
26,586 |
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.01 |
% |
|
|
|
|
|
|
|
|
|
|
2.20 |
% |
|
|
|
|
|
|
|
|
|
|
2.86 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets to
interest-bearing liabilities |
|
|
|
|
|
|
104.58 |
% |
|
|
|
|
|
|
|
|
|
|
101.26 |
% |
|
|
|
|
|
|
|
|
|
|
105.79 |
% |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Non-accrual loans have been included in average loans, net of unearned discount |
|
(2) |
|
Includes loans held for sale |
|
(3) |
|
The tax exempt income for state and political subdivisions is not recorded on a tax
equivalent basis. |
|
(4) |
|
Due to the exchange of HNB in 2009, HNB is no longer included in the balance sheet as of
December 31, 2009, however year-to-date average balances up through the date of the exchange
have been included in the average balance sheet. |
46
Changes in Net Interest Income
Rate/Volume Analysis. The following table presents the extent to which changes in interest
rates and changes in the volume of interest-earning assets and interest-bearing liabilities have
affected the Companys interest income and interest expense during the periods indicated.
Information is provided in each category with respect to: (1) changes attributable to changes in
volume (changes in volume multiplied by prior rate); (2) changes attributable to changes in rate
(changes in rate multiplied by prior volume); and (3) the net change. The changes attributable to
the combined impact of volume and rate have been allocated proportionally to the change due to
volume and the change due to rate. Information in the table has been adjusted to reflect continuing
operations only.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, 2009, 2008 and 2007 |
|
|
|
Year 2009 vs. 2008 Change |
|
|
Year 2008 vs. 2007 Change |
|
|
|
Average |
|
|
Average |
|
|
Total |
|
|
Average |
|
|
Average |
|
|
Total |
|
|
|
Volume |
|
|
Yield/Rate |
|
|
Change |
|
|
Volume |
|
|
Yield/Rate |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Increase (decrease) in interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing bank deposits |
|
$ |
440 |
|
|
$ |
(630 |
) |
|
$ |
(190 |
) |
|
$ |
155 |
|
|
$ |
(680 |
) |
|
$ |
(525 |
) |
Federal funds sold |
|
|
(100 |
) |
|
|
(225 |
) |
|
|
(325 |
) |
|
|
(9 |
) |
|
|
(708 |
) |
|
|
(717 |
) |
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries and agencies |
|
|
(89 |
) |
|
|
(46 |
) |
|
|
(135 |
) |
|
|
(682 |
) |
|
|
(304 |
) |
|
|
(986 |
) |
Mortgage-backed securities |
|
|
79 |
|
|
|
(140 |
) |
|
|
(61 |
) |
|
|
331 |
|
|
|
(66 |
) |
|
|
265 |
|
States and political subdivision (1) |
|
|
(126 |
) |
|
|
(79 |
) |
|
|
(205 |
) |
|
|
(194 |
) |
|
|
29 |
|
|
|
(165 |
) |
Other securities |
|
|
33 |
|
|
|
(42 |
) |
|
|
(9 |
) |
|
|
287 |
|
|
|
(577 |
) |
|
|
(290 |
) |
Loans (net of unearned discounts) |
|
|
1,018 |
|
|
|
(8,632 |
) |
|
|
(7,614 |
) |
|
|
4,946 |
|
|
|
(10,637 |
) |
|
|
(5,691 |
) |
Federal Home Loan Bank stock |
|
|
(8 |
) |
|
|
(42 |
) |
|
|
(50 |
) |
|
|
(1 |
) |
|
|
(59 |
) |
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in interest income (1) |
|
|
1,247 |
|
|
|
(9,836 |
) |
|
|
(8,589 |
) |
|
|
4,833 |
|
|
|
(13,002 |
) |
|
|
(8,169 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing transaction deposits |
|
|
48 |
|
|
|
(380 |
) |
|
|
(332 |
) |
|
|
(36 |
) |
|
|
(483 |
) |
|
|
(519 |
) |
Savings deposit |
|
|
(16 |
) |
|
|
(524 |
) |
|
|
(540 |
) |
|
|
10 |
|
|
|
(718 |
) |
|
|
(708 |
) |
Money-market deposits |
|
|
(170 |
) |
|
|
(2,075 |
) |
|
|
(2,245 |
) |
|
|
484 |
|
|
|
(2,889 |
) |
|
|
(2,405 |
) |
Time and brokered time deposits |
|
|
1,151 |
|
|
|
(6,307 |
) |
|
|
(5,156 |
) |
|
|
3,629 |
|
|
|
(3,099 |
) |
|
|
530 |
|
Short-term borrowings |
|
|
995 |
|
|
|
683 |
|
|
|
1,678 |
|
|
|
(223 |
) |
|
|
(526 |
) |
|
|
(749 |
) |
Long-term debt |
|
|
(807 |
) |
|
|
(649 |
) |
|
|
(1,456 |
) |
|
|
786 |
|
|
|
(272 |
) |
|
|
514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in interest expense |
|
|
1,201 |
|
|
|
(9,252 |
) |
|
|
(8,051 |
) |
|
|
4,650 |
|
|
|
(7,987 |
) |
|
|
(3,337 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net interest
income (1) |
|
$ |
46 |
|
|
$ |
(584 |
) |
|
$ |
(538 |
) |
|
$ |
183 |
|
|
$ |
(5,015 |
) |
|
$ |
(4,832 |
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The tax exempt income for state and political subdivision is not recorded on a tax equivalent
basis. |
2009 versus 2008. Average earning assets from continuing operations increased 6.5% or
$64.7 million to $1.1 billion during the year ended December 31, 2009 from the December 31, 2008
average balance of $989 million. The average balance of loans increased 2.0% or $16.1 million to
$831 million during 2009 from the December 31, 2008 average balance of $815 million. The increase
was primarily attributable to moderate growth at each of the Companys subsidiary banks. The
average balance of U.S. treasury and government agency securities decreased 73.2% or $3.5 million
to $1.3 million during 2009 from the December 31, 2008 average balance of $4.8 million. The average
balance of mortgage-backed securities increased 7.4% or $1.7 million to $25.2 million during 2009
from the December 31, 2008 average balance of $23.5 million. The average balance of other
securities, primarily collateralized mortgage obligations, increased 1.0% or $705 thousand to $71.0
million during 2009 from the December 31, 2008 average balance of $70.3 million. The average
balance of nontaxable state and political subdivision securities decreased 11.5% or $3.6 million to
$28.0 million during 2009 from the December 31, 2008 average balance of $31.6 million. The balance
fluctuations in the various categories of investment securities from year to year is dependent
partially on the liquidity needs of the Company and partially on yields and cash flow
characteristics of those categories of securities relative to other investment opportunities.
The balance of interest-bearing liabilities from continuing operations averaged $1.0 billion
at December 31, 2009, an increase of $30.9 million or 3.2% from the December 31, 2008 average
balance of $977 million. The average balance of interest-bearing transaction deposits increased
9.8% or $5.7 million to $64.6 million during 2009 from the December 31, 2008 average balance of
$58.8 million. The average balance of savings deposits decreased 1.9% or $927 thousand to $46.8
million during 2009 from the December 31, 2008 average balance of $47.7 million.
47
The average balance of money market deposits decreased 5.0% or $7.8 million to $148.1 million
during 2009 from the December 31, 2008 average balance of $155.8 million. The average balance of
time and brokered time deposits increased 4.8% or $27.7 million to $607.0 million during 2009 from
the December 31, 2008 average balance of $579.3 million. The growth in average time and brokered
time deposits was attributable to moderate growth at all subsidiary banks. The average balance of
long-term debt decreased 30.5% or $15.2 million to $34.5 million during 2009 from the December 31,
2008 average balance of $49.7 million, due to the reclassification of debt to short-term from
long-term. The average balance of junior subordinated debentures remained constant at $61.9
million from 2008 to the 2009. The average balance of short-term borrowings increased $21.4
million to $44.9 million from the December 31, 2008 average balance of $23.5 million primarily due
to the reclassification of debt to short-term from long-term.
The average balance of noninterest-bearing demand deposits was $86.2 million at December 31,
2009, an increase of $20.8 million or 31.8% from the December 31, 2008 average balance of $65.4
million. This increase is primarily attributable to marketing efforts targeted towards attracting
core deposit relationships with borrowers.
The Companys net interest margin expressed as a percentage of average earning assets was
2.01% for the year ended December 31, 2009, a decrease of 19 basis points from 2.20% in 2008. The
interest spread, expressed as the difference between yield on average earning assets and the cost
of average interest-bearing liabilities, was 1.88% for the year ended December 31, 2009, a decrease
of 28 basis points from 2.16% for the same period in 2008.
Interest income decreased $8.9 million or 14.6% to $50.3 million for the year ended December
31, 2009, as compared to interest income of $58.9 million for the year ended December 31, 2008.
The decrease in interest income is due to a decreased volume of federal funds sold and a decrease
in rates on the majority of interest-earning assets in 2009 compared to 2008. The average yield on
interest-earning assets decreased 119 basis points to 4.77% for the year ended December 31, 2009 as
compared to 5.96% for 2008.
Interest expense decreased $8.1 million or 21.7% to $29.1 million for the year ended December
31, 2009 as compared to interest expense of $37.2 million for the year ended December 31, 2008.
The decrease in interest expense is attributable primarily to the decreased rates on all
interest-bearing liabilities. The decrease in rates paid on liabilities for 2009 was consistent
with the decrease in general market rates as influenced by the actions of the FOMC and the Federal
Reserve. The average rate paid on interest-bearing liabilities decreased 91 basis points to 2.89%
for 2009 as compared to 3.80% for 2008.
Net interest income decreased $538 thousand or 2.5% for the year ended December 31, 2009 to
$21.2 million from $21.8 million for the same period in 2008. For the year ended December 31,
2009, the average yield on interest-earning assets decreased 119 basis points compared to the same
period in 2008, which was partially offset by a decrease of 91 basis points in the average rate
paid on interest-bearing liabilities, resulting in a net decrease in interest spread of 28 basis
points.
2008 versus 2007. Average earning assets increased 6.5% or $60.4 million to $989.1 million
during the year ended December 31, 2008 from the December 31, 2007 average balance of $928.7
million. The average balance of loans increased 9.1% or $67.7 million to $814.6 million during
2008 from the December 31, 2007 average balance of $746.9 million. The increase was attributable
to moderate growth at all subsidiary banks. The average balance of U.S. treasury and government
agency securities decreased 78.3% or $17.3 million to $4.8 million during 2008 from the December
31, 2007 average balance of $22.1 million. The average balance of mortgage-backed securities
increased 41.4% or $6.9 million to $23.5 million during 2008 from the December 31, 2007 average
balance of $16.6 million. The average balance of other securities, primarily collateralized
mortgage obligations, increased 8.5% or $5.5 million to $70.3 million during 2008 from the December
31, 2007 average balance of $64.8 million. The average balance of nontaxable state and political
subdivision securities decreased 14.5% or $5.3 million to $31.6 million during 2008 from the
December 31, 2007 average balance of $36.9 million. The balance fluctuations in the various
categories of investment securities from year to year is dependent partially on the liquidity needs
of the Company and partially on yields and cash flow characteristics of those categories of
securities relative to other investment opportunities.
The balance of interest-bearing liabilities averaged $976.8 million at December 31, 2008, an
increase of $99.0 million or 11.3% from the December 31, 2007 average balance of $877.8 million.
The average balance of savings deposits increased 0.6% or $305 thousand to $47.7 million during
2008 from the December 31, 2007 average balance of $47.4 million. The average balance of money
market deposits increased 8.8% or $12.5 million to $155.8
48
million during 2008 from the December 31, 2007 average balance of $143.3 million. The average
balance of time and brokered time deposits increased 15.8% or $79.2 million to $579.3 million
during 2008 from the December 31, 2007 average balance of $500.2 million. The increase in average
time and brokered time deposits was attributable to moderate growth at all subsidiary banks. The
average balance of short-term borrowings decreased 16.3% or $4.6 million to $23.5 million during
2008 from the December 31, 2007 average balance of $28.1 million. The average balance of junior
subordinated debentures increased 28.6% or $13.7 million to $61.9 million during 2008 from the
December 31, 2007 average balance of $48.1 million, due to the HNB Financial acquisition. A less
significant decrease was experienced in the average balance of long-term debt.
The average balance of noninterest-bearing demand deposits averaged $65.4 million at December
31, 2008, a decrease of $3.7 million or 5.3% from the December 31, 2007 average balance of $69.1
million.
The Companys net interest margin expressed as a percentage of average earning assets was
2.20% for the year ended December 31, 2008 a decrease of 66 basis points from 2.86% in 2007. The
interest spread, expressed as the difference between yield on average earning assets and the cost
of average interest-bearing liabilities, was 2.16% for the year ended December 31, 2008, a decrease
of 45 basis points from 2.61% for the same period in 2007.
Interest income decreased $8.2 million or 12.3% to $58.9 million for the year ended December
31, 2008, as compared to interest income of $67.1 million for the year ended December 31, 2007.
The decrease in interest income is due to a decrease in rates on all interest-earning assets in
2008 compared to 2007. The average yield on interest-earning assets decreased 126 basis points to
5.96% for the year ended December 31, 2008 as compared to 7.22% for 2007.
Interest expense decreased $3.3 million or 8.2% to $37.2 million for the year ended December
31, 2008 as compared to interest expense of $40.5 million for the year ended December 31, 2007.
The decrease in interest expense is attributable primarily to the decreased rates on all
interest-bearing liabilities. The decrease in rates paid on liabilities for 2008 was consistent
with the decrease in general market rates as influenced by the actions of the FOMC and the Federal
Reserve. The average rate paid on interest-bearing liabilities decreased 81 basis points to 3.80%
for 2008 as compared to 4.61% for 2007.
Net interest income decreased $4.8 million or 18.2% for the year ended December 31, 2008 to
$21.8 million from $26.6 million for the same period in 2007. For the year ended December 31,
2008, the average yield on interest-earning assets decreased 126 basis points compared to the same
period in 2007, which was partially offset by a decrease of 81 basis points in the average rate
paid on interest-bearing liabilities, resulting in a net decrease in interest spread of 45 basis
points.
Provision for Loan Losses
2009 versus 2008. The provision for loan losses from continuing operations decreased $1.1
million to $22.1 million for the year ended December 31, 2009 from $23.8 million for the year ended
December 31, 2008, due to the Company aggressively reserving for estimated losses during 2008,
primarily offset by increases in both net charge-offs and nonperforming loans in 2009. At December
31, 2009, Royal Palm contributed approximately $14.3 million to the provision for loan loss balance
primarily due to the continued devaluation of real estate in the Florida market. The provision for
loan loss balance at December 31, 2009 was also comprised of $5.7 million at Mercantile Bank and
$2.1 million at Heartland.
Net charge-offs from continuing operations reflected $22.3 million for the year ended December
31, 2009. Total net charge-offs for the year ended December 31, 2008 were $13.2 million. Net
charge-offs from continuing operations during 2009 were $13.8 million at Royal Palm due to the
continued devaluation of the real estate market in southwest Florida; $5.4 million at Heartland,
largely related to real estate construction and development loans purchased from Integrity Bank;
and $3.1 million at Mercantile Bank, primarily related to one large commercial development loan in
southwest Florida and one large residential development loan in central Iowa. Included in net
charge-offs for 2008 was a $4 million subordinated debenture issued by Integrity Bank to
Mid-America. Integrity Bank was closed by the FDIC in August 2008.
Non-performing loans from continuing operations increased to $50.8 million as of December 31,
2009, from total non-performing loans of $38.0 million as of December 31, 2008. The ratio of
non-performing loans to total loans from continuing operations increased to 6.54% as of December
31, 2009, compared to 2.83% as of December
49
31, 2008. The increase in non-performing loans was primarily due to two large construction
real estate and development loans totaling approximately $14.7 million at Mercantile Bank and $1.4
million at Heartland with collateral properties located in Missouri. The increase in nonperforming
loans was also attributable to several large commercial real estate and construction and
development loans at Royal Palm with collateral properties located in southwest Florida. These
borrowers have experienced cash flow problems as a result of the weakened real estate market,
making it difficult to meet debt service obligations. The Company is closely monitoring these loans
and has factored the non-performing status of the loans into its determination of the adequacy of
the allowance for loan losses.
2008 versus 2007. The provision for loan losses from continuing operations increased $20.5
million to $23.2 million for the year ended December 31, 2008 from $2.7 million for the year ended
December 31, 2007, due to increases in both net charge-offs and nonperforming loans in 2008. The
increase in provision for loan losses was primarily due to increases of $1.7 million at Mercantile
Bank, $8.2 million at Royal Palm, and $10.5 million at Heartland.
Net charge-offs increased to $13.2 million for the year ended December 31, 2008 from $1.9
million for the year ended December 31, 2007. Included in net charge-offs for 2008 was a $4
million subordinated debenture issued by Integrity Bank to Mid-America. Integrity Bank, located in
the Atlanta, Georgia area was closed by the FDIC in August 2008. In addition, 2008 net charge-offs
at Royal Palm Bank were $3.7 million, due to the severe devaluation of the commercial real estate
market in Florida, $2.1 million at Heartland, largely related to a commercial real estate
development loan in Arkansas, and $2.9 million at Mercantile Bank, also primarily due to the
commercial real estate development loan in Arkansas, in which Mercantile Bank participated with
Heartland.
Total non-performing loans increased to $38.0 million as of December 31, 2008, from $23.0
million as of December 31, 2007. The ratio of non-performing loans to total loans increased to
2.83% as of December 31, 2008, compared to 1.91% as of December 31, 2007. The increase in
non-performing loans was primarily due to several large commercial real estate loans and
construction and development loans at Royal Palm and Heartland. These borrowers have experienced
cash flow problems, making it difficult to meet debt service obligations, as a result of the
weakening real estate market nation-wide, but particularly in the Southeast. Non-performing loans
increased approximately $7.5 million to $11.8 million at Royal Palm, and approximately $7.2 million
to $14.0 million at Heartland, as of December 31, 2008. Of the total non-performing loans as of
December 31, 2008, approximately $3.2 million at Royal Palm and approximately $12.0 million at
Heartland were participation loans purchased from Integrity Bank. At December 31, 2008, Royal Palm
and Heartland were carrying a combined total of approximately $16.3 million in loans purchased from
Integrity Bank, with specific reserves of approximately $5.2 million against these loans maintained
in the allowance for loan loss. Approximately $15.1 million of these loans have been transferred to
non-accrual status as of December 31, 2008. Both Royal Palm and Heartland are aggressively
pursuing collection of these loans by working with the FDIC personnel assigned to liquidate the
assets of Integrity Bank. The Company is closely monitoring these loans and has factored the
non-performing status of the loans into its determination of the adequacy of the allowance for loan
losses.
Noninterest Income
2009 versus 2008. Total noninterest income from continuing operations decreased $1.4 million
or 14.9% for the year ended December 31, 2009 to $7.8 million from $9.2 million for the year ended
December 31, 2008. The decrease in 2009 was primarily due to decreases in brokerage fees of $330
thousand, customer service charges of $246 thousand, net gains on sales of assets of $433 thousand,
and net gains on sales of available-for-sale securities of $942 thousand. These were partially
offset by increases in net gains on loan sales of $517 thousand and other noninterest income of
$110 thousand. As a percentage of total revenue, total noninterest income from continuing
operations was 13.4% and 13.5% for the years ended December 31, 2009 and 2008, respectively.
Brokerage fees decreased $330 thousand or 23.4% for the year ended December 31, 2009 to $1.1
million from $1.4 million for the year ended December 31, 2008, due to market-driven fees
decreasing with the stock market in general.
Customer service charges decreased $246 thousand or 13.1% for the year ended December 31, 2009
to $1.6 million from $1.9 million for the year ended December 31, 2008, primarily due to a decrease
in overdraft fees. The
50
sluggish economy and increase in unemployment rates caused customers to more closely monitor
their deposit balances, reducing both overdraft occurrences and the associated fees charged by the
subsidiary banks.
Net gains of sales of assets decreased $433 thousand for the year ended December 31, 2009 to a
loss of $(60) thousand from a gain of $371 thousand for the year ended December 31, 2008, was
primarily attributable to the Company recognizing a net gain of approximately $300 thousand for the
same period in 2008 related to a sale of a vacant lot.
The Company reported no gains or losses on sales of available-for-sale securities for the year
ended December 31, 2009, compared to a net gain of $942 thousand for the year ended December 31,
2008. In 2008, the Company sold its investment in First Charter Corporation in a cash deal that
generated a gain of approximately $943 thousand.
Net gains on loan sales increased $517 thousand or 74.5% for the year ended December 31, 2009
to $1.2 million from $694 thousand for the year ended December 31, 2008, primarily due to increased
residential mortgage refinancings as a result of the lower interest rate environment.
Other noninterest income increased $110 thousand to $152 thousand for the year ended December
31, 2009, compared to $42 thousand for the year ended December 31, 2008, primarily due to the
subsidiary banks receiving regulatory fee settlements in June 2009.
2008 versus 2007. Total noninterest income decreased $1.3 million or 12.3% for the year ended
December 31, 2008 to $9.2 million from $10.4 million for the year ended December 31, 2007. The
increase in 2008 was primarily due to increases in brokerage fees of $214 thousand, net gains on
sales of assets of $326 thousand, net gains on loan sales of $166 thousand, and net gains on sales
of available-for-sale securities of $243 thousand. These were primarily offset by a decrease in
net gains on sales of equity and cost method investments of $2.1 million. As a percentage of total
revenue, total noninterest income was 13.5% and 13.5% for the years ended December 31, 2008 and
2007, respectively.
Brokerage fees increased $214 thousand or 17.9% for the year ended December 31, 2008 to $1.4
million from $1.2 million for the year ended December 31, 2007, primarily due to the continued
growth of brokerage and financial advisory operations at Mercantile Bank, including the St. Joseph,
Missouri branch that was formerly part of Farmers operation prior to Farmers being merged with
Mercantile Bank in April 2008. Mercantile Bank generated $1.1 million in fees in 2008, compared to
$892 thousand in 2007.
Net gains of sales of assets increased $326 thousand for the year ended December 31, 2008 to
$373 thousand from a net loss of $47 thousand for the year ended December 31, 2007, primarily due
to the Company recognizing a gain of approximately $300 thousand in 2008 related to a sale of a
vacant lot.
Net gains on loan sales increased $166 thousand or 31.4% for the year ended December 31, 2008
to $694 thousand from $528 thousand for the year ended December 31, 2007, primarily due to an
increase in Mercantile Banks mortgage loan refinancing activity.
Net gains on sales of available-for-sale securities increased $243 thousand or 34.8% for the
year ended December 31, 2008, to $942 thousand compared to $699 thousand for the year ended
December 31, 2007. In 2008, the Company sold its investment in First Charter Corporation in a cash
deal that generated a gain of approximately $943 thousand. In 2007, the Company received
additional shares of Enterprise Financial Services, Inc. that had been held in escrow since the
2006 sale of NorthStar Bancshares, Inc., resulting in a 2007 gain of approximately $699 thousand.
Net gains on sales of equity and cost method investments decreased $2.1 million to $100
thousand for the year ended December 31, 2008, compared to $2.2 million for the year ended December
31, 2007. In 2007, the Company sold its investment in New Frontier Bancshares, Inc. in a cash deal
that generated a pre-tax gain of approximately $2.1 million.
Noninterest Expense
2009 versus 2008. Total noninterest expense from continuing operations increased $32.9
million or 85.3% for the year ended December 31, 2009 to $71.5 million from $38.6 million for the
year ended December 31, 2008. The
51
2009 increase was primarily due to goodwill impairment losses of $30.4 million, increases in
deposit insurance premiums of $2.0 million, professional fees of $1.5 million, net losses on
foreclosed assets of $1.8 million, partially offset by a decrease in other-than-temporary losses on
available-for-sale securities and cost method investments of $1.8 million and a decrease in
salaries and employee benefits of $459 thousand.
Goodwill impairment losses from continuing operations of $30.4 million were recognized during
the second quarter of 2009. Due to the decline in the Companys stock price and the additional
provision for loan losses and increased nonperforming assets at several of its subsidiaries,
particularly Royal Palm, the Company hired a valuation specialist to perform an interim valuation
of the Companys goodwill to test for impairment as of June 30, 2009. Goodwill is tested for
impairment using a two-step process. The first step is a screen for potential impairment and the
second step measures the amount of impairment, if any. The initial impairment testing indicated
potential impairment so the Company was subjected to the second step of goodwill impairment
testing. The Company experienced an operating loss in 2008 and operating losses in the first two
quarters of 2009 driven by further deterioration in the real estate market in southwest Florida and
an overall decline in bank stock valuations in the national markets. The operating losses and the
effects of the current economic environment on the valuation of financial institutions and the
capital markets had a significant, negative effect on the Companys fair value. The Companys
analysis resulted in the determination that goodwill was fully impaired on a consolidated basis.
Deposit insurance premiums increased $2.0 million for the year ended December 31, 2009 to $2.8
million, from $818 thousand for the same period in 2008, primarily due to the FDIC approving an
additional special assessment on all institutions total assets to be accrued for as of June 30,
2009, as well as the FDIC raising the regular assessment rates charged in 2009.
Professional fees increased $1.5 million for the year ended December 31, 2009 to $3.6 million,
from $2.1 million for the same period in 2008, primarily due to the Company incurring additional
legal and consulting fees for the creation and implementation of a capital restoration plan.
Net losses on foreclosed assets increased $1.8 million for the year ended December 31, 2009 to
$2.9 million from $1.0 million for the year ended December 31, 2008, primarily due to continued
declines in the valuations of real estate assets obtained by the Company in foreclosures on
defaulted loans. Approximately $1.6 million of the 2009 losses, and $712 thousand of the 2008
losses, are related to properties in the Florida market held by Royal Palm.
Other-than-temporary losses on available-for-sale securities and cost method investments was
$3.4 million for the year ended December 31, 2009 compared to $5.3 million for the year ended
December 31, 2008. The Company recognized other-than-temporary impairment charges on four of its
investments in stock of other financial institutions during the second quarter of 2009, an
additional impairment on two of its investments during the third quarter of 2009, an on one
additional investment during the fourth quarter of 2009. These impairments were determined based on
the difference between the Companys carrying value and quoted market prices or other available
financial information for the stocks as of June 30, 2009, September 30, 2009, and December 31,
2009, respectively. In making the determination of impairment for each of these investments, the
Company considered the duration of the loss, prospects for recovery in a reasonable period of time
and the significance of the loss compared to carrying value. Included in the 2009 losses was the
Companys total investment of $695 thousand in Integrity Bank of Jupiter, Florida, which was closed
by the FDIC on July 31, 2009.
Salaries and employee benefits decreased $459 thousand for the year ended December 31, 2009 to
$17.6 million, from $18.0 million for the same period in 2008, primarily due to severance payments
associated with the change in management personnel at Royal Palm in the first half of 2008, as well
as staff reductions at Royal Palm and Heartland.
2008 versus 2007. Total noninterest expense increased $10.8 million or 38.9% for the year
ended December 31, 2008 to $38.6 million from $27.8 million for the year ended December 31, 2007.
The 2008 increase was largely due to increases in salaries and employee benefits of $1.6 million,
net occupancy expense of $695 thousand, equipment expense of $631 thousand, deposit insurance
premiums of $644 thousand, net losses on foreclosed assets of $954 thousand, other-than-temporary
losses on available-for-sale securities and cost method investments of $5.3 million, and other
noninterest expense of $634 thousand.
52
Salaries and employee benefits increased $1.6 million or 9.5% for the year ended December 31,
2008 to $18.0 million, from $16.5 million for the year ended December 31, 2007. The increase was
due to higher employee medical insurance expense as inflation in health care costs continued to
surpass general inflationary trends, the establishment of a loan production office in Carmel,
Indiana, severance payments and additional salaries and benefits associated with new management
personnel at Royal Palm. As a percent of average assets, salaries and employee benefits decreased
slightly to 1.06% for the year ended December 31, 2008, compared to 1.12% for the year ended
December 31, 2007.
Net occupancy expense increased $695 thousand or 38.7% for the year ended December 31, 2008 to
$2.5 million from $1.8 million for the year ended December 31, 2007. Approximately $452 thousand of
this increase was attributable to Mercantile Bank placing a new building into service in January
2008.
Equipment expense increased $631 thousand or 31.9% for the year ended December 31, 2008 to
$2.6 million from $2.0 million for the year ended December 31, 2007. Approximately $439 thousand of
this increase was attributable to Mercantile Bank placing a new building into service in January
2008.
Deposit insurance premiums increased $644 thousand for the year ended December 31, 2008 to
$818 thousand, from $174 thousand for the same period in 2007, partially due to the expiration in
second quarter 2008 of the FDICs One-Time Assessment Credits used by the Companys banks to offset
deposit insurance assessments. These credits were authorized by the Federal Deposit Insurance
Reform Act of 2005, and were available to all eligible banks that paid assessments prior to 2006.
This increase was also partially due to the FDIC raising the assessment rates charged to all banks.
During 2008, losses from bank failures diminished the Depository Insurance Fund. Late in 2008, the
FDIC announced a multi-year restoration plan for the Fund, which included an increase in deposit
insurance rates of 7 basis points across all rate categories, effective for the first quarter of
2009. On February 27, 2009, the FDIC announced it had adopted an interim rule to impose a 20 basis
point emergency special assessment on June 30, 2009, which was collected on September 30, 2009.
Net losses on foreclosed assets increased $954 thousand for the year ended December 31, 2008
to $1.0 million from $86 thousand for the year ended December 31, 2007. Approximately $725
thousand of this increase was attributable to the recognition of impairment charges at Royal Palm
due to the decline in fair value of foreclosed properties held for sale. The Company believes the
carrying amounts of the properties included in foreclosed assets held for sale represent fair value
based on information available at this time.
Other-than-temporary losses on available-for-sale securities and cost method investments was
$5.3 million for the year ended December 31, 2008 compared to $0 for the year ended December 31,
2007. The Company recognized other-than-temporary impairment charges on five of its investments in
stock of other financial institutions. These impairments were determined based on the difference
between the Companys carrying value and quoted market prices for the stocks as of December 31,
2008. In making the determination of impairment for each of these investments, the Company
considered the duration of the loss, prospects for recovery in a reasonable period of time and the
significance of the loss compared to carrying value.
Other noninterest expense increased $634 thousand or 13.5% for the year ended December 31,
2008 to $5.3 million from $4.7 million for the year ended December 31, 2007. This increase was
largely attributable to the marketing and establishing a loan production office in Carmel, Indiana,
as well as increases in noninterest expenses at the Companys other subsidiaries.
Provision for Income Taxes
Mercantile Bank has a subsidiary, Mercantile Investments, Inc. (MII), which is a Delaware
corporation that operates off shore to manage the banks investment portfolio. MII began
operations in early 2003, and its earnings since then have been included in the Companys
consolidated financial statements. Part of managements strategy in forming this subsidiary was to
take advantage of current State of Illinois tax laws that exclude income generated by a subsidiary
that operates off shore from state taxable income. For the years ended December 31, 2009, 2008 and
2007, the Companys Illinois income taxes decreased by an average of approximately $149 thousand
each year as a result of MIIs operations off shore. If the state tax law is changed in the future
to no longer exclude offshore investment income from taxable income, the Companys income tax
expense, as a percentage of income before tax, would increase.
53
2009 versus 2008. Income tax benefit from continuing operations for the year ended December
31, 2009 increased to $12.1 million compared to $11.4 million for the year ended December 31, 2008,
primarily due to additional losses before income taxes (net of non-deductible goodwill impairment
charges).
2008 versus 2007. Income tax benefit from continuing operations for the year ended December
31, 2008 was $11.4 million compared to income tax expense of $1.0 million for the year ended
December 31, 2007, primarily due to the Company generating a net benefit for 2008 as a result of
losses before income taxes and non-taxable income from tax-exempt loans and securities and earnings
from cash surrender value of life insurance.
Financial Condition
Summary
Due to the exchange for debt of HNB in December 2009, the assets and liabilities of that bank
are not included in the Companys consolidated balance sheet as of December 31, 2009. Due to the
sales of Marine Bank and Brown County in February 2010, the assets and liabilities of those banks
are included in the Companys consolidated balance sheet as of December 31, 2009, but are reflected
as Discontinued operations, assets held for sale and Discontinued operations, liabilities held
for sale.
Total assets as of December 31, 2009 were $1.4 billion, a decrease of $385 million or 21.7%
from $1.8 billion as of December 31, 2008. Cash and cash equivalents increased 35.0% to $121.3
million as of December 31, 2009 as compared to $89.8 million as of December 31, 2008. Total
investment securities decreased 32.8% to $130.4 million as of December 31, 2009 as compared to
$194.1 million as of December 31, 2008. Total loans, including loans held for sale, decreased
42.2% to $776.7 million as of December 31, 2009 as compared to $1.3 billion as of December 31,
2008. Foreclosed assets held for sale increased to $16.4 million as compared to $10.0 million as
of December 31, 2008. Cost method investments in common stock decreased 60.0% to $1.4 million as
of December 31, 2009 as compared to $3.3 million as of December 31, 2008. Deferred income taxes
increased to $10.2 million as compared to $9.2 million as of December 31, 2008. Cash surrender
value of life insurance decreased 40.6% to $15.0 million as of December 31, 2009 as compared to
$25.3 million as of December 31, 2008. There was no goodwill reported as of December 31, 2009
compared to $44.7 as of December 31, 2008. Other assets increased by $3.0 million to $17.4 million
as of December 31, 2009 as compared to $14.4 million as of December 31, 2008. Discontinued
operations, assets held for sale of $286.0 million at December 31, 2009 represents the assets of
Marine Bank and Brown County, which were sold in February 2010.
Total deposits decreased $507.7 million or 34.7% to $954.5 million as of December 31, 2009 as
compared to $1.5 billion as of December 31, 2008. Non-interest bearing demand deposits decreased
$31.1 million or 22.3% during 2009, while interest-bearing deposits decreased $476.5 million or
36.0% during 2009. Short-term borrowings decreased by $18.5 million to $30.7 million as of
December 31, 2009 from $49.2 million as of December 31, 2008. Long-term debt decreased by $59.5
million to $25.2 million as of December 31, 2009 from $84.7 million as of December 31, 2008. Junior
subordinated debentures remained constant at $61.9 million as of December 31, 2009 and 2008.
Discontinued operations, liabilities held for sale of $264.0 million at December 31, 2009
represents the liabilities of Marine Bank and Brown County, which were sold in February 2010.
Noncontrolling interest decreased $1.8 million, from $5.7 million as of December 31, 2008 to
$3.9 million as of December 31, 2009 due to Mid-Americas net loss for 2009.
Total Mercantile Bancorp, Inc. stockholders equity decreased to $41.3 million as of December
31, 2009 as compared to $99.0 million as of December 31, 2008. The decrease in equity is due
primarily to the $58.5 million net loss for 2009, partially offset by an increase of $892 thousand
in accumulated other comprehensive income.
Earning Assets
The average interest-earning assets of the Company were 60.9%, 58.3% and 63.1%, of average
total assets for the years ended December 31, 2009, 2008, and 2007, respectively. The increase in
this percentage from 2008 to 2009 was primarily attributable to the decreases in cash and due from
banks, premises and equipment, and goodwill during 2009. The decrease in this percentage from 2007
to 2008 was primarily attributable to the increases in cash and due from banks, premises and
equipment, cash surrender value, and goodwill during 2008.
54
Investment Securities
The Company uses its securities portfolio to ensure liquidity for cash requirements, to manage
interest rate risk, to provide a source of income, to ensure collateral is available for municipal
pledging requirements and to manage asset quality.
The Company has classified securities as both available-for-sale and held-to-maturity as of
December 31, 2009. Available-for-sale securities are held with the option of their disposal in the
foreseeable future to meet investment objectives, liquidity needs or other operational needs.
Securities available-for-sale are carried at fair value. Held-to-maturity securities are those
securities for which the Company has the positive intent and ability to hold until maturity, and
are carried at historical cost adjusted for amortization of premiums and accretion of discounts.
As of December 31, 2009, the fair value of the available-for-sale securities from continuing
operations was $128.1 million and the amortized cost was $124.8 million for a net unrealized gain
of $3.3 million. The after-tax effect of this unrealized gain was $2.2 million and has been
included in stockholders equity. The after-tax unrealized gain from total operations was $1.7
million as of December 31, 2008. There was an after-tax unrealized gain of $287 thousand from
total operations at December 31, 2007. Fluctuations in net unrealized gain or loss on
available-for-sale securities are due primarily to increases or decreases in prevailing interest
rates for the types of securities held in the portfolio.
The following table sets forth information relating to the amortized cost and fair value of
the Companys available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009* |
|
|
2008 |
|
|
2007 |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
|
(dollars in thousands) |
|
U.S. Treasury |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
993 |
|
|
$ |
999 |
|
U.S. government agencies |
|
|
|
|
|
|
|
|
|
|
4,697 |
|
|
|
4,787 |
|
|
|
16,517 |
|
|
|
16,726 |
|
Mortgage-backed securities: GSE residential |
|
|
92,710 |
|
|
|
95,354 |
|
|
|
125,691 |
|
|
|
128,445 |
|
|
|
108,129 |
|
|
|
108,799 |
|
State and political subdivision |
|
|
28,525 |
|
|
|
29,539 |
|
|
|
44,892 |
|
|
|
45,666 |
|
|
|
53,708 |
|
|
|
53,798 |
|
Equity securities |
|
|
3,603 |
|
|
|
3,257 |
|
|
|
6,500 |
|
|
|
6,294 |
|
|
|
12,232 |
|
|
|
11,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
124,838 |
|
|
$ |
128,150 |
|
|
$ |
181,780 |
|
|
$ |
185,192 |
|
|
$ |
191,579 |
|
|
$ |
192,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amounts represented are from continuing operations. |
The maturities, fair values and weighted average yields of securities available-for-sale
from continuing operations as of December 31, 2009, are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in 1 year |
|
|
Due after 1 year |
|
|
Due after 5 years |
|
|
Due after |
|
|
|
|
|
|
|
|
|
or less |
|
|
through 5 years |
|
|
through 10 years |
|
|
10 years |
|
|
Equity Securities |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Fair |
|
|
Average |
|
|
Fair |
|
|
Average |
|
|
Fair |
|
|
Average |
|
|
Fair |
|
|
Average |
|
|
Fair |
|
|
Average |
|
|
|
|
|
|
Value |
|
|
Yield |
|
|
Value |
|
|
Yield |
|
|
Value |
|
|
Yield |
|
|
Value |
|
|
Yield |
|
|
Value |
|
|
Yield |
|
|
Total |
|
|
|
(dollars in thousands) |
|
Mortgage-backed securities: GSE
residential (1) |
|
$ |
17,765 |
|
|
|
4.75 |
% |
|
$ |
77,425 |
|
|
|
4.08 |
% |
|
$ |
|
|
|
|
0.00 |
% |
|
$ |
164 |
|
|
|
3.32 |
% |
|
$ |
|
|
|
|
0.00 |
% |
|
$ |
95,354 |
|
States and political subdivisions |
|
|
4,520 |
|
|
|
5.13 |
% |
|
|
19,316 |
|
|
|
5.18 |
% |
|
|
2,057 |
|
|
|
5.89 |
% |
|
|
3,646 |
|
|
|
3.55 |
% |
|
|
|
|
|
|
0.00 |
% |
|
|
29,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,285 |
|
|
|
|
|
|
|
96,741 |
|
|
|
|
|
|
|
2,057 |
|
|
|
|
|
|
|
3,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,257 |
|
|
|
|
|
|
|
3,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
22,285 |
|
|
|
|
|
|
$ |
96,741 |
|
|
|
|
|
|
$ |
2,057 |
|
|
|
|
|
|
$ |
3,810 |
|
|
|
|
|
|
$ |
3,257 |
|
|
|
|
|
|
$ |
128,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The maturities for mortgage-backed securities are based on prepayment speed assumptions
and the constant prepayment rate estimated by management based on the current interest rate
environment. The assumption rates vary by the individual security. |
The following table sets forth information relating to the amortized cost and fair value
of the Companys held-to-maturity securities:
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
|
(dollars in thousands) |
|
Mortgage-backed securities: GSE residential |
|
$ |
2,334 |
|
|
$ |
2,411 |
|
|
$ |
5,992 |
|
|
$ |
6,140 |
|
|
$ |
8,329 |
|
|
$ |
8,401 |
|
State and political subdivision |
|
|
|
|
|
|
|
|
|
|
2,913 |
|
|
|
2,961 |
|
|
|
5,189 |
|
|
|
5,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,334 |
|
|
$ |
2,411 |
|
|
$ |
8,905 |
|
|
$ |
9,101 |
|
|
$ |
13,518 |
|
|
$ |
13,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amounts represented are from continuing operations. |
The maturities, amortized cost and weighted average yields of securities held-to-maturity
from continuing operations as of December 31, 2009, are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in 1 year |
|
|
Due after 1 year |
|
|
Due after 5 years |
|
|
Due after |
|
|
|
|
|
|
or less |
|
|
through 5 years |
|
|
through 10 years |
|
|
10 years |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Amortized |
|
|
Average |
|
|
Amortized |
|
|
Average |
|
|
Amortized |
|
|
Average |
|
|
Amortized |
|
|
Average |
|
|
|
|
|
|
Cost |
|
|
Yield |
|
|
Cost |
|
|
Yield |
|
|
Cost |
|
|
Yield |
|
|
Cost |
|
|
Yield |
|
|
Total |
|
|
|
(dollars in thousands) |
|
Mortgage-backed securities: GSE residential (1) |
|
$ |
|
|
|
|
0.00 |
% |
|
$ |
2,334 |
|
|
|
4.87 |
% |
|
$ |
|
|
|
|
0.00 |
% |
|
$ |
|
|
|
|
0.00 |
% |
|
$ |
2,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
|
|
|
|
$ |
2,334 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
2,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The maturities for mortgage-backed securities are based on prepayment speed assumptions and
the constant prepayment rate estimated by management based on the current interest rate
environment. The assumption rates vary by the individual security. |
The Company also uses its investment portfolio to manage its tax position. Depending upon
projected levels of taxable income for the Company, periodic changes are made in the mix of
tax-exempt and taxable securities to achieve optimum yields on a tax-equivalent basis. Average
balances of obligations of state and political subdivisions (tax-exempt obligations) as a
percentage of average total securities from continuing operations were 22.3%, 24.3% and 26.3% at
December 31, 2009, 2008 and 2007, respectively. Mercantile Investments, Inc. (MII), a Delaware
corporation and subsidiary of Mercantile Bank, operates off shore to manage Mercantile Banks
investment portfolio. MII began operations in 2003, and its earnings for the years ended December
31, 2009, 2008 and 2007 are included in the Companys consolidated financial statements. Part of
managements strategy in forming this subsidiary was to take advantage of current state tax laws
that exclude income generated by offshore subsidiaries from state taxable income. During 2009, the
Company recognized other-than-temporary impairment charges of $1.5 on two of its investments in
stock of other financial institutions, which are carried as available-for-sale securities. These
impairments were determined based on the difference between the Companys carrying value and quoted
market prices for the stocks as of December 31, 2009. In making the determination of impairment
for each of these investments, the Company considered the duration of the loss, prospects for
recovery in a reasonable period of time and the significance of the loss compared to carrying
value.
Loan Portfolio
Although the Company provides full service banking, including deposits, safekeeping, trust and
investment services, its core business is loans, as evidenced by approximately 78% of total revenue
derived on average annually from lending activities. The Companys business strategy is to be a
significant competitor in the markets it serves by providing a broad range of products, competitive
pricing, convenient locations and state-of-the-art technology, while emphasizing superior customer
service to establish long-term customer relationships. The primary lending focus is on loans to
small- and medium-sized businesses, as well as residential mortgage loans.
The Company offers a full range of lending products, including commercial, real estate and
consumer loans to individuals, businesses and professional organizations. The Companys banking
locations, other than those of Mid-America and Royal Palm, are located in predominantly rural areas
of the Midwest, and most of the commercial loans are made to small- and medium-sized businesses,
many in the agricultural industry or dependent on the agricultural economy. The Company also has a
substantial investment in loans secured by real estate, both commercial and residential.
The principal economic risk associated with each category of loans is the creditworthiness of
the borrower. General economic factors affecting a borrowers ability to repay include interest,
inflation and employment rates, as
56
well as other factors affecting a borrowers assets, clients,
suppliers and employees. Many of the Companys loans are made to small- and medium-sized
businesses that generally have fewer financial resources in terms of capital or borrowing capacity
and are sometimes less able to withstand competitive, economic and financial pressures than
larger borrowers. During periods of economic weakness, these businesses may be more adversely
affected than larger enterprises. In addition, the financial condition of individual borrowers
employed by these businesses can be negatively impacted. This may cause the Company to experience
increased levels of nonaccrual or other problem loans, loan charge-offs and higher provision for
loan losses.
The Companys loan approval policy provides for various levels of officer lending authority.
When the amount of loans to a borrower exceeds the officers lending limit, the loan request goes
to either an officer with a higher limit or the Board of Directors loan committee for approval.
Loan amounts are also subject to a variety of lending limits imposed by state and federal
regulation. In general, a loan to any one borrower cannot exceed 25% of the subsidiary banks
statutory capital, with exceptions for loans that meet certain collateral guidelines. In addition
to these regulatory limits, the Companys subsidiary banks impose upon themselves internal lending
limits, which are less than the prescribed legal limits, thus further reducing exposure to any
single borrower.
In 2008, the Company created a credit administration position within the holding company to
provide guidance and direction to its subsidiary banks regarding lending matters.
As part of the Companys overall risk management process, a quarterly review of each
subsidiary banks loan portfolio is performed by a team of employees independent of the lending
function. The primary objective of this review is to monitor adherence to loan policies, both
regulatory and internal, and to measure the adequacy of the allowance for loan losses. This
process helps to identify any problem areas, either in a particular borrowers financial condition,
or in the banks underwriting function, and assists the Board of Directors and management in
focusing resources to address the problems in order to minimize any financial loss to the Company.
2009 versus 2008. Total loans, including loans held for sale, decreased $567.1 million or
42.2% to $776.7 million as of December 31, 2009 from $1.3 billion as of December 31, 2008. This
decrease was the result of reclassifying loans from Marine Bank and Brown County as discontinued
operations, assets held for sale. The Companys subsidiary banks from continuing operations
experienced a decrease in loan volume in 2009 due to the stagnant economy and the fear of recession
causing potential borrowers to reduce their spending. The Company has seen its most significant
reduction in loans from continuing operations in construction real estate mortgages, decreasing
$55.8 million or 26.7% to $153.6 million as of December 31, 2009 from $209.4 million as of December
31, 2008; commercial and financial loans, decreasing $8.1 million or 4.7% to $161.7 million as of
December 31, 2009 from $169.8 million as of December 31, 2008; residential real estate mortgages,
decreasing $18.5 million or 8.7% to $193.8 million as of December 31, 2009 from $212.3 million as
of December 31, 2008; and installment loans to individuals, decreasing $8.8 million or 10.5% to
$74.8 million as of December 31, 2009 from $83.5 million as of December 31, 2008. These decreases
in loans from continuing operations were partially offset by an increase in commercial real estate
loans of $18.8 million, or 18.8% to $163.3 million as of December 31, 2009 from $144.5 million as
of December 31, 2008. The Companys goal is to maintain a relatively balanced mix of loans in its
portfolio.
2008 versus 2007. Total loans from continuing and discontinued operations, including loans
held for sale, increased $128 million or 10.6% to $1.3 billion as of December 31, 2008 from $1.2
billion as of December 31, 2007. This increase was the result of internal growth at the Companys
subsidiary banks, including approximately $45 million generated at Mercantile Banks loan
production office opened in February 2008 in Carmel, Indiana. The Companys subsidiary banks
experienced moderate loan growth in 2008 despite the stagnant economy and the fear of recession
causing potential borrowers to reduce their spending. The Company has seen its most significant
growth in commercial and financial loans, increasing $51.1 million or 27.7% to $235.4 million as of
December 31, 2008 from $184.3 million as of December 31, 2007; farmland real estate mortgages,
increasing $19.8 million or 21.6% to $111.2 million as of December 31, 2008 from $91.5 million as
of December 31, 2007; construction real estate mortgages, increasing $23.1 million or 10.7% to
$238.9 million as of December 31, 2008 from $215.9 million as of December 31, 2007; commercial real
estate mortgages, increasing $10.0 million or 4.9% to $214.3 million as of December 31, 2008 from
$204.3 million as of December 31, 2007; and residential real estate mortgages, increasing $19.7
million or 6.1% to $343.6 million as of December 31, 2008 from $323.9 million as of December 31,
2007. The Companys goal is to maintain a relatively balanced mix of loans in its portfolio, and
these increases for 2008 reflect continued success in that effort.
57
The loan portfolio from continuing operations includes a concentration of loans for commercial
real estate amounting to approximately $336.5 million as of December 31, 2009. The commercial real
estate loans are included in the real estate - farmland, real
estate - construction and real
estate - commercial amounts on the following table. The commercial real estate loans as of
December 31, 2009, 2008 and 2007 include approximately $48 million, $55.0 million, and $57.0
million, respectively in loans that are collateralized by commercial real estate
in the Quincy, Illinois geographic market. The Company does not have a dependence on a single
customer or group of related borrowers. Generally, these loans are collateralized by assets of the
borrowers. The loans are expected to be repaid from cash flows or from proceeds from the sale of
selected assets of the borrowers. Credit losses arising from lending transactions for commercial
real estate entities are comparable with the Companys credit loss experience on its loan portfolio
as a whole.
The Companys executive officers and directors and their associates have been and, the Company
anticipates will continue to be, customers of the Companys subsidiary banks in the ordinary course
of business, which has included maintaining deposit accounts and trust and other fiduciary accounts
and obtaining loans. Specifically, the Companys banks, principally Mercantile Bank, have granted
various types of loans to the Companys executive officers and directors and entities controlled by
them. As of December 31, 2009, the loans (a) were consistent with similar practices in the banking
industry generally, (b) were made in the ordinary course of business and on substantially the same
terms, including interest rates and collateral, as those prevailing at the time for comparable
transactions with the banks other customers, and (c) did not involve more than the normal risk of
collectibility or present other unfavorable features.
The following table summarizes the loan portfolio by type of loan as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing |
|
|
Discontinued |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
(dollars in thousands) |
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
|
|
Commercial and financial |
|
$ |
161,702 |
|
|
|
20.74 |
% |
|
$ |
31,269 |
|
|
|
14.75 |
% |
|
$ |
235,438 |
|
|
|
17.52 |
% |
|
$ |
184,317 |
|
|
|
15.17 |
% |
|
$ |
167,687 |
|
|
|
16.24 |
% |
|
$ |
180,906 |
|
|
|
21.00 |
% |
Agricultural |
|
|
9,832 |
|
|
|
1.26 |
% |
|
|
33,088 |
|
|
|
15.61 |
% |
|
|
68,192 |
|
|
|
5.07 |
% |
|
|
64,399 |
|
|
|
5.30 |
% |
|
|
57,393 |
|
|
|
5.55 |
% |
|
|
59,325 |
|
|
|
6.89 |
% |
Real estate
farmland |
|
|
19,655 |
|
|
|
2.52 |
% |
|
|
41,213 |
|
|
|
19.44 |
% |
|
|
111,244 |
|
|
|
8.28 |
% |
|
|
91,488 |
|
|
|
7.53 |
% |
|
|
72,999 |
|
|
|
7.06 |
% |
|
|
66,172 |
|
|
|
7.68 |
% |
Real estate construction |
|
|
153,578 |
|
|
|
19.92 |
% |
|
|
7,851 |
|
|
|
3.70 |
% |
|
|
238,922 |
|
|
|
17.78 |
% |
|
|
215,850 |
|
|
|
17.76 |
% |
|
|
152,553 |
|
|
|
14.76 |
% |
|
|
66,812 |
|
|
|
7.76 |
% |
Real estate commercial |
|
|
163,292 |
|
|
|
21.00 |
% |
|
|
12,792 |
|
|
|
6.04 |
% |
|
|
214,317 |
|
|
|
15.95 |
% |
|
|
204,338 |
|
|
|
16.81 |
% |
|
|
190,724 |
|
|
|
18.46 |
% |
|
|
154,132 |
|
|
|
17.90 |
% |
Real estate residential (1) |
|
|
193,818 |
|
|
|
24.97 |
% |
|
|
53,588 |
|
|
|
25.29 |
% |
|
|
343,627 |
|
|
|
25.58 |
% |
|
|
323,936 |
|
|
|
26.65 |
% |
|
|
267,237 |
|
|
|
25.86 |
% |
|
|
219,644 |
|
|
|
25.50 |
% |
Installment loans to individuals |
|
|
74,793 |
|
|
|
9.59 |
% |
|
|
32,157 |
|
|
|
15.17 |
% |
|
|
132,000 |
|
|
|
9.82 |
% |
|
|
131,061 |
|
|
|
10.78 |
% |
|
|
124,723 |
|
|
|
12.07 |
% |
|
|
114,292 |
|
|
|
13.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (1) |
|
|
776,670 |
|
|
|
100.00 |
% |
|
|
211,958 |
|
|
|
100.00 |
% |
|
|
1,343,740 |
|
|
|
100.00 |
% |
|
|
1,215,389 |
|
|
|
100.00 |
% |
|
|
1,033,316 |
|
|
|
100.00 |
% |
|
|
861,283 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss |
|
|
18,851 |
|
|
|
|
|
|
|
1,820 |
|
|
|
|
|
|
|
23,467 |
|
|
|
|
|
|
|
12,794 |
|
|
|
|
|
|
|
10,613 |
|
|
|
|
|
|
|
8,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, including loans
held for sale, net of allowance
for loan loss |
|
$ |
757,819 |
|
|
|
|
|
|
$ |
210,138 |
|
|
|
|
|
|
$ |
1,320,273 |
|
|
|
|
|
|
$ |
1,202,595 |
|
|
|
|
|
|
$ |
1,022,703 |
|
|
|
|
|
|
$ |
853,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes loans held for sale |
The following table sets forth remaining maturities of selected loans (excluding real
estate-farmland, real estate-commercial, real estate-mortgage loans and installment loans to
individuals) from continuing operations at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year or Less |
|
|
1 to 5 Years |
|
|
Over 5 Years |
|
|
Total |
|
|
|
(dollars in thousands) |
|
Commercial, financial, and agricultural |
|
$ |
82,026 |
|
|
$ |
52,768 |
|
|
$ |
36,741 |
|
|
$ |
171,534 |
|
Real estate - construction |
|
|
19,655 |
|
|
|
|
|
|
|
|
|
|
|
19,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
101,681 |
|
|
$ |
52,768 |
|
|
$ |
36,741 |
|
|
$ |
191,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate sensitivity of selected loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
30,609 |
|
|
$ |
24,737 |
|
|
$ |
1,480 |
|
|
$ |
56,826 |
|
Adjustable rate |
|
|
71,072 |
|
|
|
28,031 |
|
|
|
35,260 |
|
|
|
134,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
101,681 |
|
|
$ |
52,768 |
|
|
$ |
36,741 |
|
|
$ |
191,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
In originating loans, the Company recognizes that loan losses will be experienced and the risk
of loss will vary with, among other things, general economic conditions, the type of loan being
made, the creditworthiness of the borrower over the term of the loan and, in the case of a
collateralized loan, the quality of the collateral for such loan. Management has established an
allowance for loan losses, which it believes is adequate to cover probable losses
58
inherent in the
loan portfolio. Loans are charged off against the allowance for loan losses when the loans are
deemed to be uncollectible. Although the Company believes the allowance for loan losses is
adequate to cover probable losses inherent in the loan portfolio, the amount of the allowance is based upon the judgment of management, and future adjustments may be necessary if economic or other
conditions differ from the assumptions used by management in making the determinations.
Based on an evaluation of the loan portfolio, management presents a quarterly review of the
allowance for loan losses to the board of directors, indicating any change in the allowance since
the last review and any recommendations as to adjustments in the allowance. In making its evaluation, management
considers the diversification by industry of the commercial loan portfolio, the effect of changes
in the local real estate market on collateral values, the results of recent regulatory
examinations, the effects on the loan portfolio of current economic indicators and their probable
impact on borrowers, the amount of charge-offs for the period, the amount of nonperforming loans
and related collateral security, and the present level of the allowance for loan losses.
A model is utilized to determine the specific and general portions of the allowance for loan
losses. Through the loan review process, management assigns one of six loan grades to each loan,
according to payment history, collateral values and financial condition of the borrower. The loan
grades aid management in monitoring the overall quality of the loan portfolio. Specific reserves
are allocated for loans in which management has determined that deterioration has occurred. In
addition, a general allocation is made for each loan category in an amount determined based on
general economic conditions, historical loan loss experience, and amount of past due loans.
Management maintains the allowance based on the amounts determined using the procedures set forth
above.
Loans internally categorized as watch list loans, which are the same as potential problem
loans noted later, show warning elements where the present status portrays one or more deficiencies
that require attention in the short-term or where pertinent ratios of the loan account have
weakened to a point where more frequent monitoring is warranted. These loans do not have all of the
characteristics of a classified loan (substandard or doubtful) but do show weakened elements as
compared with those of a satisfactory credit. These loans are reviewed to assist in assessing the
adequacy of the allowance for loan losses. As of December 31, 2009, watch list loans totaled $34
million from continuing operations and $133 thousand from discontinued operations, while watch list
loans totaled, $68.6 million, and $56.7 million at December 31, 2008 and 2007, respectively. The
decrease in watch list loans was primarily due to the reclassification of loans to substandard or
doubtful during 2009 as reflected in the increase in total nonperforming loans from continuing
operations.
Loans internally classified as substandard or in the more severe categories of doubtful or
loss are those loans that at a minimum have clear and defined weaknesses such as a
highly-leveraged position, unfavorable financial ratios, uncertain repayment sources or poor
financial condition which may jeopardize recoverability of the debt. As of December 31, 2009,
loans of $105.6 million, or 13.6% from continuing operations, and loans of $5.3 million, or 2.50%
of loans from discontinued operations were classified as substandard. At December 31, 2009, loans
of $6.0 million, or 0.6% of total loans from continuing operations were classified as doubtful. No
loans from discontinued operations were classified as doubtful at the end of 2009. As of December
31, 2008, loans of $65.4 million, or 4.9% of total loans were classified as substandard, and $6.7
million, or 0.5% of total loans were classified as doubtful. As of December 31, 2007, loans of
$29.6 million were classified as substandard and no loans were classified as doubtful, or 1.1% and
0.02%, respectively, of total loans. As of December 31, 2009, 2008 and 2007, there were no loans
classified as loss.
The allowance for loan losses decreased $4.6 million to $18.9 million as of December 31, 2009
from $23.5 million as of December 31, 2008. Provision for loan losses was $22.1 million while net
charge-offs were also $22.3 million for year ended December 31, 2009. The allowance for loan
losses as a percent of total loans increased to 2.43% as of December 31, 2009 from 1.75% as of
December 31, 2008. As a percent of nonperforming loans, the allowance for loan losses decreased to
37.09% as of December 31, 2009 from 61.74% as of December 31, 2008. The changes in these ratios
from 2008 to 2009 were significantly impacted by the exchange for debt of HNB in December 2009 and
the sales of Marine Bank and Brown County in February 2010. HNB is no longer included in the
consolidated financial statements of the Company, and Marine Bank and Brown County are reflected as
discontinued operations. Because the levels of non-performing loans at those three banks were low
relative to the banks included in continuing operations (Mercantile Bank, Royal Palm Bank and
Heartland), the allowance for loan loss ratios were negatively impacted as of December 31, 2009.
59
The allowance for loan losses increased $10.7 million to $23.5 million as of December 31,
2008 from $12.8 million as of December 31, 2007. Provision for loan losses was $23.8 million and
net charge-offs were $13.2 million for year ended December 31, 2008. The allowance for loan losses
as a percent of total loans increased to 1.75% as of December 31, 2008 from 1.06% as of December
31, 2007. As a percent of nonperforming loans, the allowance for loan losses increased to 61.74%
as of December 31, 2008 from 55.62% as of December 31, 2007.
The fluctuation in the allowance for loan losses for the years ended December 31, 2009, 2008,
and 2007 were the result of managements estimates of the amounts necessary to provide an adequate
reserve against possible future charge-offs. The provision for loan losses represents the amount
charged against earnings for each period that management determines based on growth and credit
quality of the loan portfolio, and the volume of net charge-offs during the period. For the year
ended December 31, 2009, the decrease in the allowance for loan losses was due to the Company
aggressively reserving for potential losses during 2008, primarily offset by increases in both net
charge-offs and nonperforming loans in 2009.
Total non-performing loans from continuing operations increased to $50.8 million as of
December 31, 2009, from total non-performing loans of $38.0 million as of December 31, 2008. The
ratio of non-performing loans to total loans from continuing operations increased to 6.54% as of
December 31, 2009, compared to 2.83% as of December 31, 2008. The increase in non-performing
loans was primarily due to two large construction real estate and development loans totaling
approximately $14.7 million at Mercantile Bank and $1.4 million at Heartland with collateral
properties located in Missouri. The increase in nonperforming loans was also attributable to
several large commercial real estate and construction and development loans at Royal Palm with
collateral properties located in southwest Florida. These borrowers have experienced cash flow
problems as a result of the weakened real estate market, making it difficult to meet debt service
obligations. The Company is closely monitoring these loans and has factored the non-performing
status of the loans into its determination of the adequacy of the allowance for loan losses.
Net charge-offs reflected $22.3 million from continuing operations and $754 thousand from
discontinued operations for the year ended December 31, 2009. Total net charge-offs for the year
ended December 31, 2008 were $13.2 million. Net charge-offs during 2009 were $13.8 million at
Royal Palm due to the continued devaluation of the real estate market in southwest Florida; $5.4
million at Heartland, largely related to real estate construction and development loans purchased
from Integrity Bank; and $3.1 million at Mercantile Bank, primarily related to one large commercial
development loan in southwest Florida and one large residential development loan in central Iowa.
Included in net charge-offs for 2008 was a $4 million subordinated debenture issued by Integrity
Bank to Mid-America. Integrity Bank was closed by the FDIC in August 2008
The following table shows activity affecting the allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
(dollars in thousands) |
|
Continuing |
|
|
Discontinued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans outstanding during year |
|
$ |
830,740 |
|
|
$ |
462,977 |
|
|
$ |
1,274,660 |
|
|
$ |
1,097,481 |
|
|
$ |
907,671 |
|
|
$ |
806,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
19,038 |
|
|
$ |
4,429 |
|
|
$ |
12,794 |
|
|
$ |
10,613 |
|
|
$ |
8,082 |
|
|
$ |
7,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and financial |
|
|
927 |
|
|
|
200 |
|
|
|
5,447 |
|
|
|
493 |
|
|
|
1,833 |
|
|
|
429 |
|
Agricultural |
|
|
438 |
|
|
|
6 |
|
|
|
147 |
|
|
|
75 |
|
|
|
85 |
|
|
|
54 |
|
Real estate farmland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80 |
|
Real estate construction |
|
|
10,938 |
|
|
|
|
|
|
|
4,082 |
|
|
|
284 |
|
|
|
|
|
|
|
|
|
Real estate commercial |
|
|
2,055 |
|
|
|
|
|
|
|
2,276 |
|
|
|
18 |
|
|
|
139 |
|
|
|
50 |
|
Real estate residential |
|
|
7,218 |
|
|
|
273 |
|
|
|
823 |
|
|
|
399 |
|
|
|
139 |
|
|
|
172 |
|
Installment loans to individuals |
|
|
899 |
|
|
|
521 |
|
|
|
901 |
|
|
|
906 |
|
|
|
1,129 |
|
|
|
956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
22,475 |
|
|
|
1,000 |
|
|
|
13,676 |
|
|
|
2,175 |
|
|
|
3,325 |
|
|
|
1,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and financial |
|
|
|
|
|
|
26 |
|
|
|
296 |
|
|
|
55 |
|
|
|
47 |
|
|
|
112 |
|
Agricultural |
|
|
13 |
|
|
|
36 |
|
|
|
15 |
|
|
|
15 |
|
|
|
20 |
|
|
|
26 |
|
Real estate farmland |
|
|
|
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction |
|
|
34 |
|
|
|
|
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
Real estate commercial |
|
|
7 |
|
|
|
4 |
|
|
|
43 |
|
|
|
1 |
|
|
|
1 |
|
|
|
36 |
|
Real estate residential |
|
|
8 |
|
|
|
22 |
|
|
|
46 |
|
|
|
38 |
|
|
|
12 |
|
|
|
24 |
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
(dollars in thousands) |
|
Continuing |
|
|
Discontinued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment loans to individuals |
|
|
143 |
|
|
|
78 |
|
|
|
103 |
|
|
|
150 |
|
|
|
136 |
|
|
|
140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
205 |
|
|
|
246 |
|
|
|
504 |
|
|
|
261 |
|
|
|
217 |
|
|
|
340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
22,270 |
|
|
|
754 |
|
|
|
13,172 |
|
|
|
1,914 |
|
|
|
3,108 |
|
|
|
1,401 |
|
Provision for loan losses |
|
|
22,083 |
|
|
|
1,261 |
|
|
|
23,845 |
|
|
|
2,969 |
|
|
|
3,914 |
|
|
|
2,368 |
|
Purchased allowance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,126 |
|
|
|
1,725 |
|
|
|
|
|
Exchange of HNB |
|
|
|
|
|
|
3,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
18,851 |
|
|
$ |
1,820 |
|
|
$ |
23,467 |
|
|
$ |
12,794 |
|
|
$ |
10,613 |
|
|
$ |
8,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a percent of
total loans outstanding at year end (1) |
|
|
2.43 |
% |
|
|
|
|
|
|
1.75 |
% |
|
|
1.06 |
% |
|
|
1.03 |
% |
|
|
0.94 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a percent of
total nonperforming loans |
|
|
37.09 |
% |
|
|
|
|
|
|
61.74 |
% |
|
|
55.6 |
% |
|
|
165.98 |
% |
|
|
162.29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs to average total loans |
|
|
2.68 |
% |
|
|
|
|
|
|
1.03 |
% |
|
|
0.18 |
% |
|
|
0.34 |
% |
|
|
0.17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes loans held for sale |
The following table sets forth the allowance for loan losses by loan categories as of
December 31 for each of the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
Continuing |
|
|
% to Total |
|
|
Discontinued |
|
|
% to Total |
|
|
|
|
|
|
% to Total |
|
|
|
|
|
|
% to Total |
|
|
|
|
|
|
% to Total |
|
|
|
|
|
|
% to Total |
|
|
|
|
|
|
|
operations amount |
|
|
Allowance |
|
|
operations amount |
|
|
Allowance |
|
|
Amount |
|
|
Allowance |
|
|
Amount |
|
|
Allowance |
|
|
Amount |
|
|
Allowance |
|
|
Amount |
|
|
Allowance |
|
|
|
|
|
|
|
|
Commercial and financial |
|
$ |
3,023,18 |
|
|
|
16.04 |
% |
|
$ |
279,227 |
|
|
|
15.34 |
% |
|
$ |
3,218,644 |
|
|
|
13.72 |
% |
|
$ |
2,848,584 |
|
|
|
22.26 |
% |
|
$ |
2,767,535 |
|
|
|
26.07 |
% |
|
$ |
2,721,029 |
|
|
|
33.67 |
% |
|
|
|
|
Agricultural |
|
|
200,118 |
|
|
|
1.06 |
% |
|
|
372,267 |
|
|
|
20.45 |
% |
|
|
619,069 |
|
|
|
2.64 |
% |
|
|
149,926 |
|
|
|
1.17 |
% |
|
|
164,176 |
|
|
|
1.55 |
% |
|
|
161,417 |
|
|
|
2.00 |
% |
|
|
|
|
Real estate farmland |
|
|
300,177 |
|
|
|
1.59 |
% |
|
|
243,424 |
|
|
|
13.38 |
% |
|
|
663,180 |
|
|
|
2.83 |
% |
|
|
795,329 |
|
|
|
6.22 |
% |
|
|
649,073 |
|
|
|
6.12 |
% |
|
|
673,040 |
|
|
|
8.33 |
% |
|
|
|
|
Real estate construction |
|
|
5,839,652 |
|
|
|
30.97 |
% |
|
|
193,216 |
|
|
|
10.62 |
% |
|
|
10,859,399 |
|
|
|
46.27 |
% |
|
|
2,413,365 |
|
|
|
18.86 |
% |
|
|
1,910,323 |
|
|
|
18.00 |
% |
|
|
460,234 |
|
|
|
5.69 |
% |
|
|
|
|
Real estate commercial |
|
|
2,974,083 |
|
|
|
15.78 |
% |
|
|
104,994 |
|
|
|
5.77 |
% |
|
|
2,388,605 |
|
|
|
10.18 |
% |
|
|
3,937,425 |
|
|
|
30.78 |
% |
|
|
2,182,023 |
|
|
|
20.56 |
% |
|
|
1,517,846 |
|
|
|
18.78 |
% |
|
|
|
|
Real estate residential |
|
|
4,955,809 |
|
|
|
26.29 |
% |
|
|
491,289 |
|
|
|
26.99 |
% |
|
|
4,025,323 |
|
|
|
17.15 |
% |
|
|
1,312,475 |
|
|
|
10.26 |
% |
|
|
1,174,936 |
|
|
|
11.07 |
% |
|
|
817,301 |
|
|
|
10.11 |
% |
|
|
|
|
Installment loans consumer |
|
|
1,558,397 |
|
|
|
8.27 |
% |
|
|
135,575 |
|
|
|
7.45 |
% |
|
|
1,245,898 |
|
|
|
5.31 |
% |
|
|
1,146,659 |
|
|
|
8.96 |
% |
|
|
1,306,972 |
|
|
|
12.31 |
% |
|
|
1,335,151 |
|
|
|
16.52 |
% |
|
|
|
|
Unallocated |
|
|
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
0.00 |
% |
|
|
446,629 |
|
|
|
1.90 |
% |
|
|
190,237 |
|
|
|
1.49 |
% |
|
|
457,962 |
|
|
|
4.32 |
% |
|
|
395,982 |
|
|
|
4.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,851,417 |
|
|
|
100.00 |
% |
|
$ |
1,819,992 |
|
|
|
100.00 |
% |
|
$ |
23,466,747 |
|
|
|
100.00 |
% |
|
$ |
12,794,000 |
|
|
|
100.00 |
% |
|
$ |
10,613,000 |
|
|
|
100.00 |
% |
|
$ |
8,082,000 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Assets
It is managements policy to place loans on non-accrual status when interest or principal is
90 days or more past due. Such loans may continue on accrual status only if they are both well
secured and in the process of collection.
The following table sets forth information concerning non-performing assets from continuing
operations at December 31 for each of the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
(dollars in thousands) |
|
Continuing |
|
|
Discontinued |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and financial |
|
$ |
1,439 |
|
|
$ |
19 |
|
|
$ |
762 |
|
|
$ |
581 |
|
|
$ |
429 |
|
|
$ |
1,504 |
|
Agricultural |
|
|
248 |
|
|
|
60 |
|
|
|
234 |
|
|
|
308 |
|
|
|
473 |
|
|
|
223 |
|
Real estate farmland |
|
|
62 |
|
|
|
123 |
|
|
|
|
|
|
|
296 |
|
|
|
12 |
|
|
|
105 |
|
Real estate construction |
|
|
33,946 |
|
|
|
|
|
|
|
25,948 |
|
|
|
6,716 |
|
|
|
1,147 |
|
|
|
|
|
Real estate commercial |
|
|
7,378 |
|
|
|
|
|
|
|
1,361 |
|
|
|
3,152 |
|
|
|
2,083 |
|
|
|
417 |
|
Real estate residential |
|
|
6,803 |
|
|
|
680 |
|
|
|
5,455 |
|
|
|
8,571 |
|
|
|
1,040 |
|
|
|
839 |
|
Installment loans to individuals |
|
|
154 |
|
|
|
37 |
|
|
|
337 |
|
|
|
195 |
|
|
|
213 |
|
|
|
544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans (1) |
|
|
50,030 |
|
|
|
919 |
|
|
|
34,097 |
|
|
|
19,819 |
|
|
|
5,397 |
|
|
|
3,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans 90 days past due and still accruing |
|
|
393 |
|
|
|
597 |
|
|
|
3,856 |
|
|
|
3,184 |
|
|
|
993 |
|
|
|
1,342 |
|
Restructured loans |
|
|
397 |
|
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
4 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
50,820 |
|
|
|
1,516 |
|
|
|
38,011 |
|
|
|
23,003 |
|
|
|
6,394 |
|
|
|
4,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repossessed assets |
|
|
16,409 |
|
|
|
535 |
|
|
|
10,015 |
|
|
|
3,273 |
|
|
|
361 |
|
|
|
494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets acquired in satisfaction of
debts previously contracted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming other assets |
|
|
16,409 |
|
|
|
535 |
|
|
|
10,015 |
|
|
|
3,273 |
|
|
|
361 |
|
|
|
494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans and
nonperforming other assets |
|
$ |
67,229 |
|
|
$ |
2,051 |
|
|
$ |
48,026 |
|
|
$ |
26,276 |
|
|
$ |
6,755 |
|
|
$ |
5,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to loans, before
allowance for loan losses |
|
|
6.54 |
% |
|
|
|
|
|
|
2.83 |
% |
|
|
1.91 |
% |
|
|
0.62 |
% |
|
|
0.58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans and nonperforming
other assets to loans, before allowance
for loan losses |
|
|
8.66 |
% |
|
|
|
|
|
|
3.57 |
% |
|
|
2.18 |
% |
|
|
0.65 |
% |
|
|
0.64 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest income that would have been recorded in 2009 related to nonaccrual loans was $2.3
million, none of which is included in interest income or net income for 2009. |
61
Total non-performing loans from continuing operations increased to $50.8 million as of
December 31, 2009 from total non-performing loans of $38.0 million as of December 31, 2008, while
total non-performing loans and non-performing other assets from continuing operations increased to
$67.2 million as of December 31, 2009 from total non-performing loans and non-performing other
assets of $48.0 million as of December 31, 2008. The ratio of non-performing loans to total loans
from continuing operations increased to 6.54% as of December 31, 2009, compared to 2.83% as of
December 31, 2008. The ratio of non-performing loans and non-performing other assets to total
loans increased to 8.66% as of December 31, 2009 from 3.57% as of December 31, 2008. The changes in
these ratios from 2008 to 2009 were significantly impacted by the exchange for debt of HNB in
December 2009 and the sales of Marine Bank and Brown County in February 2010. HNB is no longer
included in the consolidated financial statements of the Company, and Marine Bank and Brown County
are reflected as discontinued operations. Because the levels of non-performing loans at those
three banks were low relative to the banks included in continuing operations (Mercantile Bank,
Royal Palm Bank and Heartland), the non-performing loan ratios were negatively impacted as of
December 31, 2009.
The increase in non-performing loans was primarily due to two large construction real estate
and development loans totaling approximately $14.7 million at Mercantile Bank and $1.4 million at
Heartland with collateral properties located in Missouri. The increase in nonperforming loans was
also attributable to several large commercial real estate and construction and development loans at
Royal Palm with collateral properties located in Southwest Florida. These borrowers have
experienced cash flow problems as a result of the weakened real estate market, making it difficult
to meet debt service obligations. The Company is closely monitoring these loans and has factored
the non-performing status of the loans into its determination of the adequacy of the allowance for
loan losses.
Total non-performing loans increased to $38.0 million as of December 31, 2008 from $23.0
million as of December 31, 2007, while total non-performing loans and non-performing other assets
increased to $48.0 million as of December 31, 2008 from $26.3 million as of December 31, 2007. The
ratio of non-performing loans to total loans increased to 2.83% as of December 31, 2008, compared
to 1.91% as of December 31, 2007. The ratio of non-performing loans and non-performing other
assets to total loans increased to 3.57% as of December 31, 2008 from 2.18% as of December 31,
2007.
A loan is considered to be impaired when, based on current information and events, it is
probable the Company will not be able to collect all amounts due. The accrual of interest income on
impaired loans is discontinued when there is reasonable doubt as to the borrowers ability to meet
contractual payments of interest or principal. Impaired loans are defined as all loans classified
as substandard, doubtful or loss by the Company. All non-performing loans were included in
impaired loans as of December 31, 2009, 2008 and 2007. The amount of impairment for impaired loans
is measured on a loan-by-loan basis to determine exposure, if any, to be included in the allowance
for loan losses. The amount of the impairment, if any, included in the allowance for loan losses
is calculated either by the present value of expected future cash flows discounted at the loans
effective interest rate, the loans obtainable market price or the fair value of the collateral if
the loan is collateral dependent.
Impaired loans increased $44.5 million to $111.3 million from continuing operations and $5.3
million from discontinued operations as of December 31, 2009 compared to $72.1 million as of
December 31, 2008, primarily due to continued deterioration of economic conditions and continued
devaluation of real estate in the Companys markets, particularly in Florida. During 2009, Royal
Palms impaired loans increased by approximately $14.9 million; Mercantile Banks impaired loans
increased by approximately $24.2 million, primarily due to participation loans from the Florida
market; and Heartlands impaired loans increased by approximately $5.2 million, primarily due to
subordinated debentures at two troubled financial institutions, one of which is located in Florida,
the other in
62
Missouri. Impaired loans increased $42.5 million to $72.1 million as of December 31,
2008 compared to $29.6 million as of December 31, 2007, primarily due to the deteriorating credit
quality in certain commercial and construction real estate borrowers at Heartland and Royal Palm.
Included in this increase was approximately $12.0 million at Heartland and approximately $3.2
million at Royal Palm related to the purchase of participation loans from Integrity Bank, as well
as approximately $10.4 million related to Mercantile Banks purchase of a loan on a commercial real
estate development in Missouri originated by Heartland. The remaining increase was due to
deteriorating economic conditions and devaluation of real estate in the Companys markets,
particularly in Florida. Royal Palms impaired loans in 2008, in addition to the Integrity Bank participation loans,
increased by approximately $13.3 million.
As of December 31, 2009, the Company believes that it has adequately reserved for any
potential loss on impaired loans, based on current information available. Interest income of $4.4
million from continuing operations and $233 thousand from discontinued operations was recognized on
impaired loans on an accrual basis in 2009. Interest income of $4.1 million, and $2.2 million was
recognized on impaired loans on an accrual basis in 2008, and 2007, respectively. Interest income
of $3.9 million from continuing operations and $298 thousand from discontinued operations was
recognized on a cash basis for 2009, and $4.1 million, and $2.3 million was recognized on a cash
basis for 2008 and 2007, respectively.
Potential Problem Loans
Potential problem loans, which are also referred to as watch list loans, are those loans which
are not categorized as impaired, non-accrual, past due or restructured, but where current
information indicates that the borrower may not be able to comply with present loan repayment
terms. Further deterioration of the borrowers financial condition or the economy in general could
cause such a loan to develop into a non-performing loan. Identification as a potential problem
loan is managements first level of warning, and provides for increased scrutiny and frequency of
reviews by internal loan review personnel. While most non-performing loans were previously
classified as potential problem loans, management believes that the increased attention devoted to
these borrowers will allow for most to continue performing according to the original terms of the
loans. Management assesses the potential for loss on such loans as it would with other problem
loans. Management feels that these loans are substantially collateralized and has considered the
effect of any potential loss in determining its allowance for possible loan losses. Potential
problem loans totaled $33.9 million from continuing operations and $133 thousand from discontinued
operations at December 31, 2009, and $68.6 million, and $56.7 million at December 31, 2008 and
2007, respectively. The decrease in potential problem loans was primarily due to the
reclassification of loans to substandard or doubtful during 2009 as reflected in the increase in
total nonperforming loans from continuing operations. There are no other credits identified about
which management is aware of any information which causes management to have serious doubts as to
the ability of such borrower(s) to comply with the loan repayment terms.
Other Interest-Bearing Assets
There are no other interest-bearing assets that are categorized as impaired.
Other Assets
Foreclosed assets held for sale increased to $16.4 million as of December 31, 2009 as compared
to $10.0 million as of December 31, 2008. The balance is primarily due to the default of several of
Royal Palms loans in the Florida market, several of Heartlands purchased participation loans in
the Georgia and Arkansas markets, and a Mercantile purchased participation in the Iowa market that
resulted in foreclosure on the properties collateralizing the loans.
Federal Home Loan Bank stock is stated at cost and is a required investment for
institutions that are members of the Federal Home Loan Bank system. The required investment in the
common stock is based on a predetermined formula. The Company owned approximately $3.5 million of
Federal Home Loan Bank of Chicago (FHLB) stock as of December 31, 2009 and 2008. Approximately
$1.9 million of that total is derived from continuing operations, while approximately $1.6 million
is from discontinued operations at December 31, 2009. During the third quarter of 2007, FHLB
received a Cease and Desist Order from their regulator, the Federal Housing Finance Board. The
order prohibits capital stock repurchases and redemptions until a time to be determined by the
Federal Housing Finance
63
Board. The FHLB will continue to provide liquidity and funding through
advances and purchase loans through the Mortgage Partnership Facility program. With regard to
dividends, the FHLB will continue to assess its dividend capacity each quarter and may make
appropriate request for approval from its regulator. Since the FHLB did not pay a dividend during
the calendar year of 2008 or 2009, the stock is considered a non-performing asset as of December
31, 2009 and 2008. Management performed an analysis and, based on currently available information,
determined the investment in this FHLB stock was not impaired as of December 31, 2009 and 2008.
Cost method investments in common stock decreased $1.9 million to $1.4 million as of December
31, 2009 as compared to $3.3 million as of December 31, 2008, due to the Company recognizing an
impairment charges on four of the Companys cost method investments, based on the difference between the Companys cost
and the investees book value, which was determined to be a reasonable estimate of fair value.
Deferred income taxes consisted of $10.2 million from continuing operations and $496 thousand
from discontinued operations as of December 31, 2009, and $9.2 million as of December 31, 2008.
This increase was primarily due to the creation of capital loss carryforwards stemming from both a
loss on the exchange of HNB and other-than-temporary impairment charges on investments. An
increase in allowance for loan losses and write-downs of other real estate owned also contributed
to the increase in deferred income taxes as of December 31, 2009. These increases were partially
offset by the elimination of certain deferred tax assets from the exchange of HNB and the Companys
recorded valuation allowance of approximately $5.6 million against the consolidated deferred tax
asset balance subsequent to performing an internal valuation of the deferred income tax inventory.
In evaluating the need for a valuation allowance, management estimated future taxable income based
on forecasts and tax planning strategies that are available to the Company. Based on the
evaluation, the Company believes it is more likely than not that the net deferred income taxes of
$10.2 million as of December 31, 2009 will be realized.
Cash surrender value of life insurance decreased $10.3 million or 40.6% to $15.0 million as of
December 31, 2009 compared to $25.3 million as of December 31, 2008, due to the Company recognizing
assets of both Marine and Brown as discontinued operations on a separate line item of the financial
statements pursuant to the sales agreement with United Community Bank of Chatham, Illinois.
Goodwill was written down to zero during 2009 compared to $44.7 million as of December 31,
2008. In accordance with ASC 340 (formerly SFAS No. 142), the Companys goodwill is tested
annually for potential impairment and more frequently if events or changes in circumstances
indicate the asset might be impaired. Due to the decline in the Companys stock price and the
additional provision for loan losses and increased nonperforming assets at several of its
subsidiaries, particularly Royal Palm, the Company hired a valuation specialist to perform an
interim valuation of the Companys goodwill to test for impairment at June 30, 2009. ASC 340 has a
two-step process to test goodwill for impairment. The first step is to compare, the estimated fair
value, including goodwill, of the reporting unit (the Company) to its net book value. If the
estimated fair value is less than the net book value, a second step is required. The Company
evaluated the first step by utilizing three valuation methodologies including the Comparable
Transactions approach, the Control Premium approach, and the Discounted Cash Flow approach. The
Comparable Transactions approach is based on pricing ratios recently paid in the sale or merger of
reasonably comparable banking franchises; the Control Premium approach is based on the Companys
trading price and application of industry based control premiums; and the Discounted Cash Flow
approach is estimated based on the present value of projected dividends and a terminal value, based
on a five-year forward-looking operating scenario. Based on the three approaches, it was determined
the fair value, including goodwill, was lower than its net book value. This was primarily due to
the Companys continued stock price decline, the additional provisions for loan losses, and
increased nonperforming assets at several of its subsidiaries, particularly Royal Palm. Therefore,
the Company performed the second step as required by ASC 340. In the second step of the process,
the implied fair value of the Companys goodwill was compared with the carrying value of goodwill
in order to determine the amount of impairment. As a result of the second step of the process, the
Company determined that the goodwill was fully impaired and recorded an impairment charge of $30.4
from continuing operations, and $14.2 million from discontinued operations in the second quarter of
2009.
Other assets increased to $17.4 million from continuing operations as of December 31, 2009
from total other assets of $14.4 million as of December 31, 2008, primarily due to an increase of
income tax refunds receivable related to the net loss in 2009.
64
Deposits
The Companys lending and investing activities are funded primarily by deposits. A variety of
deposit accounts are available, with a wide range of interest rates, terms and product features.
Deposits consist of noninterest-bearing demand, interest-bearing demand, savings, money market and
time accounts. The Company relies primarily on competitive pricing policies and customer service to
attract and retain these deposits.
Average total deposits (both interest-bearing and demand) from continuing operations increased
$45.4 million or 5.0% as of December 31, 2009 to $952.6 million from $907.1 million as of December
31, 2008. This increase was attributable to moderate growth at the Companys subsidiary banks.
As a percentage of average total deposits from continuing operations, there were increases in
interest-bearing demand deposits and noninterest-bearing demand deposits, and decreases in savings
deposits, money market deposits, and time and brokered time deposits. Average interest-bearing demand deposits
increased to 6.78% for 2009 from 6.49% for 2008 and average noninterest-bearing demand deposits
increased to 9.05% for 2009 from 7.21% for 2008. Average savings deposits decreased slightly to
4.91% for 2009 from 5.26% for 2008, average money market deposits decreased to 15.54% for 2009 from
17.18% for 2008 and average time and brokered time deposits slightly decreased to 63.72% for 2009
from 63.86% for 2008. To attract both new deposit customers as well as new balances from existing
customers, management continually researches its local markets to identify customer-banking needs
in order to develop new and re-designed products to meet those needs. Marketing campaigns are
created to promote products from all categories of deposits and include new features on demand
deposit accounts as well as revised rates and terms on interest-bearing accounts. The primary
objective of these promotions is to provide funding for loan growth, reduce overall funding costs
through growth of lower-priced savings and money market accounts (relative to time deposits) and
generate a larger customer base from which to cross-sell other banking services. Management
believes that the Company will continue to attract new customers and new deposit balances in the
future by monitoring its customer needs to determine what products and services are required to
stay competitive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009* |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Average Balance |
|
|
% Total |
|
|
Rate |
|
|
Average Balance |
|
|
% Total |
|
|
Rate |
|
|
Average Balance |
|
|
% Total |
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
deposits |
|
$ |
86,185 |
|
|
|
9.0 |
% |
|
|
0.00 |
% |
|
$ |
127,694 |
|
|
|
9.1 |
% |
|
|
0.00 |
% |
|
$ |
112,091 |
|
|
|
9.4 |
% |
|
|
0.00 |
% |
Interest bearing demand deposit |
|
|
64,587 |
|
|
|
6.8 |
% |
|
|
0.31 |
% |
|
|
135,406 |
|
|
|
9.7 |
% |
|
|
0.99 |
% |
|
|
116,908 |
|
|
|
9.8 |
% |
|
|
1.62 |
% |
Savings/Money market |
|
|
194,854 |
|
|
|
20.5 |
% |
|
|
0.82 |
% |
|
|
309,348 |
|
|
|
22.3 |
% |
|
|
1.95 |
% |
|
|
266,287 |
|
|
|
22.3 |
% |
|
|
3.47 |
% |
Time deposits |
|
|
606,967 |
|
|
|
63.7 |
% |
|
|
3.29 |
% |
|
|
820,908 |
|
|
|
58.9 |
% |
|
|
4.19 |
% |
|
|
696,542 |
|
|
|
58.5 |
% |
|
|
4.83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
952,593 |
|
|
|
100.0 |
% |
|
|
2.29 |
% |
|
$ |
1,393,356 |
|
|
|
100.00 |
% |
|
|
3.30 |
% |
|
$ |
1,191,828 |
|
|
|
100.00 |
% |
|
|
4.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amounts represent balances from continuing operations. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009* |
|
2008 |
|
2007 |
|
2006 |
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
High month-end balance of total deposits |
|
$ |
983,224 |
|
|
$ |
1,477,141 |
|
|
$ |
1,319,459 |
|
|
$ |
1,166,814 |
|
Low month-end balance of total deposits |
|
|
904,628 |
|
|
|
1,320,853 |
|
|
|
1,120,863 |
|
|
|
973,258 |
|
|
|
|
* |
|
Amounts represent balances from continuing operations. |
Time and brokered time deposits and other deposits of $100,000 and over from continuing
operations at December 31, 2009 had the following maturities:
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
(dollars in thousands) |
|
Under 3 months |
|
$ |
64,362 |
|
3 months to 6 months |
|
|
96,629 |
|
6 months to 12 months |
|
|
88,826 |
|
Over 12 months |
|
|
14,589 |
|
|
|
|
|
|
|
$ |
264,406 |
|
|
|
|
|
65
While a majority of the time and brokered time deposits in amounts of $100,000 or more will
mature within 12 months, management expects that a significant portion of these deposits will be
renewed. Historically, large time deposits have been stable and management is confident it can
offer interest rates at the time of renewal that are competitive with other financial institutions.
Total brokered time deposits were $173.8 million at December 31, 2009 and $218.4 million at
December 31, 2008. Brokered time deposits are part of the Companys overall liability management
strategy, and provide a reliable source for meeting specific funding needs in an efficient and
timely manner. Due to the cease and desist orders imposed upon Royal Palm Bank and Heartland, those
banks are prohibited from acquiring new brokered deposits without the consent of the regulatory
agencies. Mercantile Banks memorandum of understanding requires the bank to formulate a plan to
reduce its dependency on brokered deposits and other potentially volatile liabilities. For further
discussion of these regulatory enforcement actions, see the Regulatory Matters section of this
filing.
Short-term Borrowings
The following table sets forth the distribution of short-term borrowings and weighted average
interest rates thereon at the end of each of the last three years. Federal funds purchased and
securities sold under agreements to repurchase generally represent overnight borrowing
transactions. Other short-term borrowings consist of various demand notes and notes with
maturities of less than one year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal fund |
|
|
|
|
|
|
|
|
purchased and |
|
|
|
|
|
|
|
|
securities sold |
|
|
|
|
|
Short-term Federal |
|
|
under agreements to |
|
Other short-term |
|
Home Loan Bank |
|
|
repurchase |
|
borrowings |
|
borrowings |
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009, from continuing
operations |
|
$ |
17,258 |
|
|
$ |
13,482 |
|
|
$ |
|
|
Weighted average interest rate at end of year |
|
|
1.67 |
% |
|
|
6.53 |
% |
|
|
0.00 |
% |
Maximum amount outstanding at any month end |
|
$ |
15,568 |
|
|
$ |
65,917 |
|
|
$ |
|
|
Average daily balance |
|
$ |
29,738 |
|
|
$ |
28,406 |
|
|
$ |
59 |
|
Weighted average interest rate during year (1) |
|
|
0.85 |
% |
|
|
7.82 |
% |
|
|
0.59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
$ |
18,523 |
|
|
$ |
28,704 |
|
|
$ |
2,000 |
|
Weighted average interest rate at end of year |
|
|
2.71 |
% |
|
|
3.77 |
% |
|
|
.95 |
% |
Maximum amount outstanding at any month end |
|
$ |
28,002 |
|
|
$ |
24,397 |
|
|
$ |
15,440 |
|
Average daily balance |
|
$ |
26,196 |
|
|
$ |
9,961 |
|
|
$ |
7,490 |
|
Weighted average interest rate during year (1) |
|
|
3.01 |
% |
|
|
2.29 |
% |
|
|
1.66 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
$ |
29,936 |
|
|
$ |
2,763 |
|
|
$ |
12,890 |
|
Weighted average interest rate at end of year |
|
|
4.48 |
% |
|
|
4.00 |
% |
|
|
4.43 |
% |
Maximum amount outstanding at any month end |
|
$ |
29,936 |
|
|
$ |
4,006 |
|
|
$ |
34,581 |
|
Average daily balance |
|
$ |
25,093 |
|
|
$ |
1,162 |
|
|
$ |
23,291 |
|
Weighted average interest rate during year (1) |
|
|
4.24 |
% |
|
|
4.80 |
% |
|
|
3.54 |
% |
|
|
|
(1) |
|
The weighted average interest rate is computed by dividing total interest for the year by the
average daily balance outstanding. |
Included in other short-term borrowings were three notes payable at December 31, 2008:
|
1. |
|
A demand note with Great River Bancshares, Inc. (Great
River), owned by R. Dean Phillips (Phillips), a significant shareholder of
the Company, with a principal balance of approximately $7,.6 million and
interest payable monthly at an annual interest rate of 7.5%. The principal
balance, together with accrued interest, was payable immediately upon Great |
66
|
|
|
Rivers written demand. The note was secured by 100% of the outstanding shares
of the subsidiary banks. During 2009, the Company borrowed an additional $4
million from Great River with terms consistent with the first note. Principal
and interest on both notes were paid in full in December 2009 as part of the
Exchange Agreement with Phillips, wherein Phillips acquired HNB National Bank
(HNB) in exchange for the repayment of $28 million of the Great River debt. |
|
|
2. |
|
A note payable by Mid-America Bancorp, Inc. to First Community
Bank of Lees Summit, Missouri. The note had a principal balance of $4 million
and an annual interest rate of 7.0%. Both the principal balance and accrued
interest were payable on demand. As of February 5, 2009, the Company assumed
this note from First Community Bank by issuance of an inter-company convertible
debenture to Mid-America. The debentures are eliminated on a consolidated basis
and therefore excluded in the Companys financial statements. |
|
|
3. |
|
A note payable resulting from HNB foreclosing on a loan where
HNB was the secondary lien-holder on the property. As of December 31, 2008,
HNB owed the primary lien-holder $345 thousand, which was paid during January
2009. |
At December 31, 2009, other short-term borrowings consisted of $1.5 million in U.S. Treasury
demand notes, $1.0 million in short-term notes payable to various individuals, and a term note
payable to Great River with a principal balance of $11 million, a maturity date of January 31, 2010
and an annual interest rate of 7.5%. Both principal and interest were paid in full in February
2010 from the proceeds of the sale of Marine Bank and Trust and Brown County State Bank.
Long-Term Debt and Junior Subordinated Debentures
Long-term debt and junior subordinated debentures consisted of the following components at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
Continuing |
|
|
Discontinued |
|
|
|
|
|
Federal Home Loan Bank advances, fixed rates from 3.15% to 5.30%
from continuing operations due at various dates through 2013, and
fixed rates from 4.52% to 5.30% from discontinued operations due
at various dates through 2016 |
|
$ |
18,000 |
|
|
$ |
13,500 |
|
|
$ |
60,500 |
|
Note payable, fixed rate of 7.50%, due August 31, 2010 |
|
|
5,037 |
|
|
|
|
|
|
|
5,037 |
|
Note payable, fixed rate of 7.50%, due August 31, 2010 |
|
|
135 |
|
|
|
|
|
|
|
2,015 |
|
Note payable, fixed rate of 7.50%, due November 10, 2009 |
|
|
|
|
|
|
|
|
|
|
15,109 |
|
Junior subordinated debenture, variable rate, due June 30, 2013 |
|
|
2,000 |
|
|
|
|
|
|
|
2,000 |
|
Junior subordinated debentures owed to unconsolidated subsidiaries |
|
|
61,858 |
|
|
|
|
|
|
|
61,858 |
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
87,030 |
|
|
$ |
13,500 |
|
|
$ |
146,519 |
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the Company had $18 million of Federal Home Loan Bank advances from
continuing operations, and $13.5 million from discontinued operations. At December 31, 2008, the
Company had $60.5 million of Federal Home Loan Bank advances. These advances are secured by U.S.
Government agency and mortgage-backed securities, residential real estate mortgage loans and all
stock in the Federal Home Loan Bank owned by the Company. Interest rates on these advances at
December 31, 2009 vary from 3.15% to 5.30%. Maturities begin in 2010 and continue through 2016. Of
the total FHLB advances outstanding as of December 31, 2009, $5 million from continuing operations,
and $10.5 million from discontinuing operations are callable beginning in 2010.
During December 2008, Great River assumed three notes payable from US Bank (USB) with
principal balances of $15,109,000, $5,037,000, and $2,015,000. The terms of the assumed notes were
the same as the terms with USB, including the various covenants.
The $15,109,000 note payable was secured by 100% of the outstanding shares of the subsidiary
banks. Interest was payable quarterly at a fixed annual rate of 6.09% until amended in November
2009 to a fixed annual rate of
67
7.5%. Principal was due in three payments as follows: $375,000 due
March 31, 2009, $375,000 due June 30, 2009, and $14,359,000 due on November 10, 2009. Both
principal and interest pertaining to this note were paid in full in December 2009 as part of the
Exchange Agreement with Phillips.
The $5,037,000 and $2,015,000 notes payable were secured by 100% of the outstanding shares of
the subsidiary banks. Interest was payable quarterly at fixed annual rates of 6.13% and 6.27%,
respectively, until amended in November 2009 to fixed annual rates of 7.5%. Principal was due in
four payments as follows: $125,000 each due December 31, 2009, $125,000 each due March 31, 2010,
$125,000 each due June 30, 2009, and the remaining principal of $4,662,000 and $1,640,000,
respectively, due August 31, 2010. Principal of $1,880,000 and interest pertaining to the
$2,015,000 note were also paid down as part of the Exchange Agreement with Phillips, leaving a
principal balance due of $135,000 at December 31, 2009. This balance, along with both principal
and interest pertaining to the $5,037,000 note, was paid in full in February 2010 from the proceeds
of the sale of Marine Bank and Brown County.
The notes payable had various covenants including ratios relating to the Companys capital,
allowance for loan losses, return on assets, non-performing assets and debt service coverage. At
December 31, 2008, the Companys non-performing assets to primary capital ratio of 26% was in
noncompliance with the non-performing assets covenant requiring an 18% maximum. Also at December
31, 2008, the Companys fixed charge coverage ratio of (.72)% ratio was in noncompliance with the
covenant requiring a minimum ratio of 1.10%. The notes payable were due upon demand because of the
debt covenant noncompliance and Great River could have required repayment at its
discretion before maturity. In April 2009, the Company received a waiver from Great River
relating to the debt covenant violations at December 31, 2008.
On November 21, 2009, the Company entered into a Second Waiver and Amendment (the Second
Waiver) to the Fourth Amended and Restated Loan Agreement by and between the Company and Great
River. The Second Waiver waived the Companys breaches of, and amended, certain financial and
other covenants, extended the principal payment and maturity dates on certain of the notes payable,
and provided that all principal and interest related to the notes payable would be repaid from the
proceeds of the sale of Marine Bank and Brown County. As of December 31, 2009, the Company was in
compliance with all debt covenants related to the notes payable with Great River. In February
2010, the sale of Marine Bank and Trust and Brown County State Bank was consummated, and all
principal and interest due to Great River was paid in full.
On August 15, 2007, Mercantile Bank assigned its debenture with affiliate Heartland to
Security Bank of Pulaski Co. in the amount of $2,000,000. This debenture was originally issued
June 30, 2005 with a maturity date of June 30, 2013. Interest is payable semi-annually on June 30
and December 31 at the prime rate of interest. At December 31, 2009, this rate was 3.25%.
Principal is payable in full on June 30, 2013.
In August 2005, the Company issued $10.3 million of junior subordinated debentures to
Mercantile Bancorp Capital Trust I (Trust I). Trust I was formed for the sole purpose of issuing
its own non-voting cumulative preferred securities to one or more investors. The Company owns all
of the voting securities of Trust I. Trust I issued $10 million of its cumulative preferred
securities through a private placement offering on August 25, 2005 and invested the proceeds of its
issuance in the Companys junior subordinated debentures. Consistent with the FRBs capital
adequacy guidelines, the proceeds of Trust Is sale of its preferred securities will qualify as
Tier I capital of the Company. The junior subordinated debentures have a fixed interest rate for
approximately 10 years of 6.10%, which was the rate on December 31, 2006. Commencing November 25,
2015, the rate is equal to 3 month LIBOR plus 144 basis points. The junior subordinated debentures
mature on August 25, 2035 and are callable, at the option of the Company, at par on or after
November 23, 2010. Trust Is sole asset is the Companys junior subordinated debt. The Companys
obligations with respect to the issuance of the preferred securities constitute a full and
unconditional guarantee of the Trust Is obligations with respect to the preferred securities.
Interest on the junior subordinated debentures and distributions on the preferred securities are
payable quarterly in arrears. Distributions on the preferred securities are cumulative. The Company
has the right, at any time, so long as no event of default has occurred and is continuing, to defer
payments of interest on the junior subordinated debentures, which will require deferral of
distribution of the preferred securities, for a period not exceeding 20 consecutive quarterly
periods, provided that such deferral may not extend beyond the stated maturity of the junior
subordinated debentures. The preferred securities are subject to mandatory redemption, in whole or
in part, upon repayment of the junior subordinated debentures at maturity or their earlier
redemption.
68
In July 2006, the Company issued $20.6 million of junior subordinated debentures to Mercantile
Bancorp Capital Trust II (Trust II). Trust II was formed for the sole purpose of issuing its own
non-voting cumulative preferred securities to one or more investors. The Company owns all of the
voting securities of Trust II. Trust II issued $20 million of its cumulative preferred securities
through a private placement offering on July 13, 2006 and invested the proceeds of its issuance in
the Companys junior subordinated debentures. Consistent with the FRBs capital adequacy
guidelines, the proceeds of Trust IIs sale of its preferred securities will qualify as Tier I
capital of the Company. The junior subordinated debentures have a variable interest rate of LIBOR
plus 1.65%, which was 7.02% on December 31, 2006. The rate resets quarterly. The junior
subordinated debentures mature on July 13, 2036 and are callable, at the option of the Company, at
par on or after July 13, 2011. Trust IIs sole asset is the Companys junior subordinated debt. The
Companys obligations with respect to the issuance of the preferred securities constitute a full
and unconditional guarantee of Trust IIs obligations with respect to the preferred securities.
Interest on the junior subordinated debentures and distributions on the preferred securities are
payable quarterly in arrears. Distributions on the preferred securities are cumulative. The Company
has the right, at any time, so long as no event of default has occurred and is continuing, to defer
payments of interest on the junior subordinated debentures, which will require deferral of
distribution of the preferred securities, for a period not exceeding 20 consecutive quarterly
periods, provided that such deferral may not extend beyond the stated maturity of the junior
subordinated debentures. The preferred securities are subject to mandatory redemption, in whole or
in part, upon repayment of the junior subordinated debentures at maturity or their earlier
redemption. The Company used the proceeds of the junior subordinated debentures as partial
financing for the acquisition of Royal Palm.
In July 2006, the Company issued $10.3 million of junior subordinated debentures to Mercantile
Bancorp Capital Trust III (Trust III). Trust III was formed for the sole purpose of issuing its
own non-voting cumulative preferred securities to one or more investors. The Company owns all of
the voting securities of Trust III. Trust III issued $10 million of its cumulative preferred securities through a private placement offering
on July 13, 2006 and invested the proceeds of its issuance in the Companys junior subordinated
debentures. Consistent with the FRBs capital adequacy guidelines, the proceeds of Trust IIIs
sale of its preferred securities will qualify as Tier I capital of the Company. The junior
subordinated debentures have a fixed interest rate for approximately 5 years of 7.17%, which was
the rate on December 31, 2006. Commencing September 13, 2011, the rate is equal to 3 month LIBOR
plus 153 basis points. The junior subordinated debentures mature on July 13, 2036 and are callable,
at the option of the Company, at par on or after July 13, 2011. Trust IIIs sole asset is the
Companys junior subordinated debt. The Companys obligations with respect to the issuance of the
preferred securities constitute a full and unconditional guarantee of the Trust IIIs obligations
with respect to the preferred securities. Interest on the junior subordinated debentures and
distributions on the preferred securities are payable quarterly in arrears. Distributions on the
preferred securities are cumulative. The Company has the right, at any time, so long as no event of
default has occurred and is continuing, to defer payments of interest on the junior subordinated
debentures, which will require deferral of distribution of the preferred securities, for a period
not exceeding 20 consecutive quarterly periods, provided that such deferral may not extend beyond
the stated maturity of the junior subordinated debentures. The preferred securities are subject to
mandatory redemption, in whole or in part, upon repayment of the junior subordinated debentures at
maturity or their earlier redemption. The Company used the proceeds of the junior subordinated
debentures as partial financing for the acquisition of Royal Palm.
In August 2007, the Company issued $20.6 million of junior subordinated debentures to
Mercantile Bancorp Capital Trust IV (Trust IV). Trust IV was formed for the sole purpose of
issuing its own non-voting cumulative preferred securities to one or more investors. The Company
owns all of the voting securities of Trust IV. Trust IV issued $20 million of its cumulative
preferred securities through a private placement offering on August 30, 2007 and invested the
proceeds of its issuance in the Companys junior subordinated debentures. Consistent with the
FRBs capital adequacy guidelines, the proceeds of Trust IVs sale of its preferred securities will
qualify as Tier I capital of the Company. The junior subordinated debentures have a fixed interest
rate of 6.84% until October 2017 then LIBOR plus 1.58%. This rate will reset quarterly. The junior
subordinated debentures mature on October 31, 2037 and are callable, at the option of the Company,
at par on or after October 30, 2017. Trust IVs sole asset is the Companys junior subordinated
debt. The Companys obligations with respect to the issuance of the preferred securities constitute
a full and unconditional guarantee of Trust IVs obligations with respect to the preferred
securities. Interest on the junior subordinated debentures and distributions on the preferred
securities are payable quarterly in arrears. Distributions on the preferred securities are
cumulative. The Company has the right, at any time, so long as no event of default has occurred and
is continuing, to defer payments of interest on the junior subordinated debentures, which will
require deferral of distribution of the preferred securities, for a period not exceeding 20
consecutive quarterly periods, provided that such deferral may not extend beyond the stated
maturity
69
of the junior subordinated debentures. The preferred securities are subject to mandatory
redemption, in whole or in part, upon repayment of the junior subordinated debentures at maturity
or their earlier redemption. The Company used the proceeds of the junior subordinated debentures
as partial financing for the acquisition of HNB Financial.
On March 1, 2005, the Federal Reserve Board adopted a final rule that allowed the continued
limited inclusion of trust-preferred securities in the calculation for Tier 1 capital for
regulatory purposes. The final rule provided a five-year transition period ending March 30, 2009,
for application of the quantitative limits. The rule limits the Companys amount of junior
subordinated debt to 25% of Tier 1 capital net of goodwill, with any excess includable in Tier 2,
subject to a limit of 50% of total Tier 1 and Tier 2 capital. However, there will be no impact to
the Companys total risk-based capital as the excess of the 25% Tier 1 limit will be includable in
Tier 2 capital, based on the Companys current debt and capital structure.
Beginning in June 2009 the Company elected to defer regularly scheduled interest payments on
all of its outstanding junior subordinated debentures relating to its trust preferred securities.
The terms of the debentures and the trust documents allow the Company to defer payments of interest
for up to 20 consecutive quarterly periods without default or penalty. During the deferral period,
the respective trusts will likewise suspend the declaration and payment of dividends on the trust
preferred securities. Also during the deferral period, the Company may not, among other things and
with limited exceptions, pay cash dividends on or repurchase its common stock nor make any payment
on outstanding debt obligations that rank equally with or junior to the debentures. At December
31, 2009 unpaid deferred interest on the debentures totaled approximately $2.3 million. Although
the interest payments are being deferred, the Company continues to record accrued interest on the
debentures in its financial statements. The interest expense was approximately $3.3 million, $3.9
million and $3.3 million for the years ended December 31, 2009, 2008, and 2007 respectively.
Subsequent to the voluntary election to defer interest payments on subordinated debentures,
the Company entered into an MOU with the Federal Reserve Bank of St. Louis, prohibiting such
interest payments without the regulators consent. For further discussion, see the Regulatory
Matters section of this filing.
Liquidity
Liquidity management is the process by which the Company ensures that adequate liquid funds
are available to meet the present and future cash flow obligations arising in the daily operations
of the business. These financial obligations consist of needs for funds to meet commitments to
borrowers for extensions of credit, funding capital expenditures, withdrawals by customers,
maintaining deposit reserve requirements, servicing debt, paying dividends to shareholders, and
paying operating expenses.
The Company achieves a satisfactory degree of liquidity through actively managing both assets
and liabilities. Asset management guides the proportion of liquid assets to total assets, while
liability management monitors future funding requirements and prices liabilities accordingly.
Parent Company Liquidity. As noted in the Short-Term Borrowings and Long-Term Debt and
Junior Subordinated Debentures sections of this filing, the Company had $22.2 million in term debt
and a demand note of $7.5 million as of December 31, 2008 with Great River. In 2009, Great River
advanced another demand note of $4.0 million and another term note of $11.0 million. The demand
notes and $17.0 million of the term debt were repaid in 2009 as part of the Exchange Agreement with
R. Dean Phillips. The remaining $16.2 million of term debt was repaid in February 2010 from the
proceeds of the sale of Marine Bank and Brown County.
The Great River debt was secured by all outstanding shares of common stock of the subsidiary
banks. The notes payable have various covenants including ratios relating to the Companys capital,
allowance for loan losses, return on assets, non-performing assets and debt service coverage. As of
December 31, 2009, the Company was in compliance with all debt covenants related to the notes
payable with Great River. The Company is developing and executing a plan to raise additional
equity. The Company received shareholder approval on February 23, 2009 authorizing the Company to
create and issue up to 100,000 shares in one or more classes of preferred stock, and adding
2,000,000 shares to the number of shares of common stock authorized to be issued. The Company has
also engaged an investment banker to assist in formulating details of the capital raising plan. The
Company expects to have developed and implemented additional steps in the plan by September 30,
2010.
70
If the capital raising plan is unsuccessful, and issues pertaining to liquidity develop,
the Company has various options, which could include selling or closing certain branches or
subsidiary banks, package and sell high-quality commercial loans, execute sale/leaseback agreements
on its banking facilities, and other options. If executed, these transactions would decrease the
various banks assets and liabilities, generate taxable income, improve capital ratios, and reduce
general, administrative and other expense. In addition, the affected subsidiary banks could
dividend the funds to the Company to provide liquidity assuming they receive regulatory approval.
Subsidiary Bank Liquidity. The Companys most liquid assets are cash and due from banks,
interest-bearing demand deposits, and federal funds sold. The balances of these assets are
dependent on the Companys operating, investing, lending, and financing activities during any given
period.
Average liquid assets are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009* |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
(dollars in thousands) |
|
Cash and due from banks |
|
$ |
12,042 |
|
|
$ |
34,518 |
|
|
$ |
26,511 |
|
Interest-bearing demand deposits |
|
|
82,557 |
|
|
|
21,952 |
|
|
|
16,887 |
|
Federal funds sold |
|
|
11,842 |
|
|
|
21,465 |
|
|
|
23,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
106,441 |
|
|
$ |
77,935 |
|
|
$ |
66,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of average total assets |
|
|
6.15 |
% |
|
|
4.58 |
% |
|
|
4.52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amounts represented are from continuing operations. |
Liquid assets as of the dates noted are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2009* |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
Cash and due from banks |
|
$ |
8,606 |
|
|
$ |
67,595 |
|
|
$ |
38,172 |
|
Interest-bearing demand deposits |
|
|
94,623 |
|
|
|
16,812 |
|
|
|
18,259 |
|
Federal funds sold |
|
|
18,038 |
|
|
|
5,414 |
|
|
|
19,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
121,267 |
|
|
$ |
89,821 |
|
|
$ |
76,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total assets |
|
|
8.79 |
% |
|
|
5.06 |
% |
|
|
4.64 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amounts represented are from continuing operations. |
As indicated in the table above, average liquid assets from continuing operations
increased 36.6% to $106.4 million as of December 31, 2009 from $77.9 million in 2008, which
increased 17.1% from $66.6 million in 2007. As a percent of average total assets, average liquid
assets increased to 6.15% in 2009 from 4.58% in 2008, which had increased from 4.52% in 2007. The
increase in average liquid assets during 2009 was attributable to weak loan demand coupled with the
low interest rate environment, which led to the Company investing in shorter-term deposits until
yields improve on longer-term options.
The Companys primary sources of funds consist of deposits, investment maturities and sales,
loan principal repayment, sales of loans, and capital funds. Additional liquidity is provided by
bank lines of credit and term debt, repurchase agreements, issuance of trust preferred securities
and the ability to borrow from the Federal Reserve Bank and Federal Home Loan Bank.
The Company uses Federal Home Loan Bank advances primarily for funding loans at each of the
Companys subsidiary banks as a lower-cost alternative to certain categories of time deposits and
to fit various time intervals within the Companys overall rate-sensitivity position. If a
substantial portion of the FHLB advances were called, it would have an adverse effect on liquidity.
However, the Company has the ability to replace those borrowings with
71
new advances, at the prevailing interest rates and terms established by the FHLB. Other options would include
additional federal funds borrowings, additional utilization of brokered time deposits, seasonal
lines of credit at the
Federal Reserve Bank and pledging unencumbered investment securities as collateral for FHLB
borrowings. Based on the Companys internal policy limits, these other options provide an
additional borrowing capacity of approximately $317 million as of December 31, 2009.
The Company has utilized derivative instruments to manage interest rate risk in prior years,
but has none outstanding as of December 31, 2009.
An additional source of liquidity that can be managed for short-term and long-term needs is
the Companys ability to securitize or package loans (primarily mortgage loans) for sale. The
Company sold $100.7 million in mortgage loans from continuing operations during 2009, $92.5 million
during 2008, and $46.8 million during 2007. As of December 31, 2009 and 2008 the Company carried
$681 thousand and $4.4 million, respectively, in loans held for sale that management intends to
sell during the next 12 months.
The Companys deposit base is stable, and has demonstrated consistent growth. While a
majority of the time deposits in amounts of $100,000 or more will mature within 12 months,
management expects that a significant portion of these deposits will be renewed. Historically,
large time deposits have been stable and management is confident it can offer interest rates at the
time of renewal that are competitive with other financial institutions. If a significant portion of
the certificates of deposit were not renewed, it would have an adverse effect on liquidity.
However, the Company has other available funding sources, including purchased funds from
correspondent banks and Federal Home Loan Bank advances, to mitigate this risk.
As of December 31, 2009, the total amount of time and brokered time deposits from continuing
operations scheduled to mature in the following 12 months was approximately $279.8 million.
Long-term debt and related interest payments from continuing operations due in the following 12
months were approximately $14.2 million. Operating lease payments from continuing operations due
in the next 12 months total approximately $363 thousand. The Company believes that it has adequate
resources to fund all of its commitments and that it can adjust the rate on time and brokered time
deposits to retain deposits in changed interest environments. If the Company requires funds beyond
its internal funding capabilities, advances from the Federal Home Loan Bank are available as an
additional source of funds.
The following table presents additional information about contractual obligations from
continuing operations as of December 31, 2009, which by their terms have contractual maturity and
termination dates subsequent to December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Next 12 |
|
|
13-36 |
|
|
37-60 |
|
|
More than |
|
|
|
|
|
|
Months |
|
|
Months |
|
|
Months |
|
|
60 Months |
|
|
Totals |
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
Contractual obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
$ |
279,744 |
|
|
$ |
213,425 |
|
|
$ |
70,669 |
|
|
$ |
31,338 |
|
|
$ |
595,176 |
|
Short-term borrowings |
|
|
30,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,740 |
|
Long-term borrowing (1) |
|
|
10,172 |
|
|
|
10,000 |
|
|
|
5,000 |
|
|
|
61,858 |
|
|
|
87,030 |
|
Interest payments on
long-term borrowings |
|
|
4,059 |
|
|
|
5,774 |
|
|
|
2,912 |
|
|
|
5,406 |
|
|
|
18,151 |
|
Minimum operating
lease commitments |
|
|
363 |
|
|
|
653 |
|
|
|
498 |
|
|
|
312 |
|
|
|
1,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
325,078 |
|
|
$ |
229,852 |
|
|
$ |
79,079 |
|
|
$ |
98,914 |
|
|
$ |
732,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The long-term borrowings from continuing operations include: Federal Home Loan Bank advances
totaling $18.0 million at fixed rates ranging from 3.15% to 5.3%; bank notes payable totaling
$5.2 million at a fixed rate of interest of 7.50% at December 31, 2009; junior subordinated
debentures totaling $2.0 million at a variable rate of interest due June 2013; junior
subordinated debentures totaling $10.3 million at a fixed rate of 6.10% until November 2015;
junior subordinated debentures totaling $10.3 million at a fixed rate of 7.17% until July
2011; junior subordinated debentures totaling $20.6 million at a variable rate of 1.90% at
December 31,2009; and junior subordinated debentures totaling $20.6 million at a fixed rate of
6.84% until October 2017. |
72
As of December 31, 2009, the Company had open-end lines of credit from continuing
operations with approximately $143 million available to be drawn upon and approximately $13 million
in unfunded letters of credit. The following table presents additional information about unfunded
commitments from continuing operations as of December 31, 2009, which by their terms have
contractual maturity dates subsequent to December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Next 12 |
|
|
13-36 |
|
|
37-60 |
|
|
More than |
|
|
|
|
|
|
Months |
|
|
Months |
|
|
Months |
|
|
60 Months |
|
|
Totals |
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
Unfunded commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit |
|
$ |
12,762 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
12,762 |
|
Lines of credit |
|
|
37,843 |
|
|
|
78,328 |
|
|
|
16,630 |
|
|
|
10,430 |
|
|
|
143,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
50,605 |
|
|
$ |
78,328 |
|
|
$ |
16,630 |
|
|
$ |
10,430 |
|
|
$ |
155,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the total outstanding unused lines of credit of $143 million as of December
31, 2009 were commercial lines of $131 million and consumer lines of $12 million.
The Companys banking subsidiaries routinely enter into commitments to extend credit in the
normal course of their business. At December 31, 2009, the Company had outstanding commitments to
originate loans aggregating approximately $2.3 million. The commitments extended over varying
periods of time with the majority being disbursed within a one-year period. Loan commitments at
fixed rates of interest amounted to $1.5 million at December 31, 2009. The balance of commitments
to extend credit represents future cash requirement and some of these commitments may expire
without being drawn upon. The Company anticipates it will have sufficient funds available to meet
its current loan commitments, including loan applications received and in process prior to the
issuance of firm commitments.
Rate Sensitive Assets and Liabilities
Interest rate sensitivity is a measure of the volatility of the net interest margin as a
consequence of changes in market rates. The rate-sensitivity chart shows the interval of time in
which given volumes of rate-sensitive earning assets and rate-sensitive interest-bearing
liabilities would be responsive to changes in market interest rates based on their contractual
maturities or terms for repricing. It is, however, only a static, single-day depiction of the
Companys rate sensitivity structure, which can be adjusted in response to changes in forecasted
interest rates.
The following table sets forth the static rate-sensitivity analysis from continuing operations
of the Company as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Sensitive Within |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
|
1 year |
|
|
1-2 years |
|
|
2-3 years |
|
|
3-4 years |
|
|
4-5 years |
|
|
Thereafter |
|
|
Total |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits |
|
$ |
94,623 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
94,623 |
|
|
$ |
94,623 |
|
Federal funds sold |
|
|
18,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,038 |
|
|
|
18,038 |
|
Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities: GSE residential |
|
|
17,765 |
|
|
|
31,676 |
|
|
|
27,520 |
|
|
|
13,284 |
|
|
|
7,279 |
|
|
|
164 |
|
|
|
97,688 |
|
|
|
97,765 |
|
State and political subdivisions |
|
|
4,520 |
|
|
|
5,172 |
|
|
|
5,577 |
|
|
|
4,888 |
|
|
|
3,679 |
|
|
|
5,703 |
|
|
|
29,539 |
|
|
|
29,539 |
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,257 |
|
|
|
3,257 |
|
|
|
3,257 |
|
Loans and loans held for sale |
|
|
287,385 |
|
|
|
72,934 |
|
|
|
80,015 |
|
|
|
75,311 |
|
|
|
69,854 |
|
|
|
191,171 |
|
|
|
776,670 |
|
|
|
777,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rate-sensitive assets |
|
$ |
422,331 |
|
|
$ |
109,782 |
|
|
$ |
113,112 |
|
|
$ |
93,483 |
|
|
$ |
80,812 |
|
|
$ |
200,295 |
|
|
$ |
1,019,815 |
|
|
$ |
1,000,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing transaction deposits |
|
$ |
332 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
72,120 |
|
|
$ |
72,452 |
|
|
$ |
72,452 |
|
Savings deposits |
|
|
377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,639 |
|
|
|
48,016 |
|
|
|
48,016 |
|
Money market deposits |
|
|
130,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,562 |
|
|
|
130,562 |
|
Time and brokered time deposits |
|
|
279,744 |
|
|
|
154,863 |
|
|
|
58,562 |
|
|
|
56,034 |
|
|
|
14,635 |
|
|
|
31,338 |
|
|
|
595,176 |
|
|
|
593,262 |
|
Short-term borrowings |
|
|
30,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,740 |
|
|
|
30,740 |
|
Long-term debt and junior subordinated debentures |
|
|
10,172 |
|
|
|
8,000 |
|
|
|
2,000 |
|
|
|
5,000 |
|
|
|
|
|
|
|
61,858 |
|
|
|
87,030 |
|
|
|
56,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rate-sensitive liabilities |
|
$ |
451,927 |
|
|
$ |
162,863 |
|
|
$ |
60,562 |
|
|
$ |
61,034 |
|
|
$ |
14,635 |
|
|
$ |
212,955 |
|
|
$ |
963,976 |
|
|
$ |
931,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate sensitive assets rate sensitive liabilities |
|
$ |
(29,596 |
) |
|
$ |
(53,081 |
) |
|
$ |
52,550 |
|
|
$ |
32,449 |
|
|
$ |
66,177 |
|
|
$ |
(12,660 |
) |
|
$ |
55,839 |
|
|
$ |
69,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Sensitive Within |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
|
1 year |
|
|
1-2 years |
|
|
2-3 years |
|
|
3-4 years |
|
|
4-5 years |
|
|
Thereafter |
|
|
Total |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Gap |
|
$ |
(29,596 |
) |
|
$ |
(82,677 |
) |
|
$ |
(30,127 |
) |
|
$ |
2,322 |
|
|
$ |
68,499 |
|
|
$ |
55,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative amounts as % of total rate-sensitive
assets |
|
|
-2.90 |
% |
|
|
-8.11 |
% |
|
|
-2.95 |
% |
|
|
0.23 |
% |
|
|
6.72 |
% |
|
|
5.48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Ratio |
|
|
|
|
|
|
.87 |
|
|
|
.96 |
|
|
|
1.00 |
|
|
|
1.09 |
|
|
|
1.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The foregoing table shows a negative (liability-sensitive) rate-sensitivity gap for the 1
and 1-2 year repricing category, with a positive (asset-sensitive) gap for all other categories
until the beyond 4-5 year category. The negative gaps in the 1 and 1-2 year categories result from
having more liabilities subject to repricing during that particular time period than assets subject
to repricing during the same time period. Beyond the 1-2 year category and prior to the beyond 4-5
year category, the volume of assets subject to repricing exceeds the volume of liabilities subject
to repricing, resulting in a positive gap. On a cumulative basis, which assumes that as assets and
liabilities are repriced, they are either retained in the same category or replaced by instruments
with similar characteristics, the gap is liability-sensitive in all categories except that beyond
4-5 years. The Companys cumulative liability-sensitive gap structure in the 1-year and 1-2 year
categories (which are the time frames the Company devotes most of its attention to in its funds
management function) will allow net interest margin to grow if interest rates decrease during the
respective time frames as costs on interest-bearing liabilities would decline at a faster pace than
the yields on interest-bearing liabilities.
The funds management policies of the Company require the subsidiary banks to monitor their
rate-sensitivity positions so that net interest income over the next twelve months will not be
reduced by more than 10% given a change in interest rates of up to 200 basis points (plus or
minus). As of December 31, 2009, management feels that the banks and the Company, on a
consolidated basis, are within those guidelines.
Capital Resources
Other than the issuance of common stock, the Companys primary source of capital is net income
retained by the Company. During the year ended December 31, 2009, the Company incurred a net loss
of $58.5 million and paid no dividends. During the year ended December 31, 2008, the Company had a
net loss of $8.8 million and paid dividends to stockholders of $2.1 million. During the year ended
December 31, 2007, the Company earned $10.0 million and paid dividends to stockholders of $2.1
million, resulting in a retention of current earnings of $7.9 million. At a special meeting on
February 23, 2009, the Company received shareholder approval authorizing the Company to create and
issue up to 100,000 shares in one or more classes of preferred stock, and adding 2,000,000 shares
to the number of shares of common stock authorized to be issued. The Company is executing steps
towards a capital-raising plan that would consider both existing shareholder and outside investor
options. The Companys subsidiary banks are currently well-capitalized by regulatory definitions,
and have various options to maintain adequate or well-capitalized status if the capital raising
plan is not successful.
The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation
of bank holding companies and their subsidiary banks. Risk-based capital ratios are established by
allocating assets and certain off-balance sheet commitments into four risk-weighted categories.
These balances are then multiplied by the factor appropriate for that risk-weighted category. The
guidelines require bank holding companies and their subsidiary banks to maintain a total capital to
total risk-weighted asset ratio of not less than 8.00%, of which at least one half must be Tier 1
capital, and a Tier 1 leverage ratio of not less than 4.00%. As of December 31, 2009 and 2008,
the Company exceeded these regulatory capital guidelines, except for its Tier 1 leverage ratio as
of December 31, 2009, which was 3.32%. The Tier 1 leverage ratio fell below the 4% adequately
capitalized level due to the goodwill impairment charge of $44.6 million in the second quarter of
2009, which reduced the amount of trust preferred securities includible in Tier 1 capital. The
Company anticipates that its Tier 1 leverage ratio will return to adequately capitalized by June
30, 2010, based on projected earnings combined with down-sizing as a result of the sales of Marine
Bank and Brown County in February 2010, along with paydowns and maturities on existing loans and
investment securities.
The Companys Tier 1 risk-based capital ratio of 5.33% and total risk-based capital ratio of
10.66% as of December 31, 2009 both exceeded the regulatory minimums. Likewise, the individual
ratios for each of the Companys bank subsidiaries also exceed the regulatory guidelines as of
December 31, 2009. See the Regulatory
74
Matters section of this filing for more information on the
capital adequacy of the Company and its subsidiary banks.
Without prior approval, the subsidiary banks are restricted as to the amount of dividends that
they may declare to the balance of the retained earnings account, adjusted for defined bad debts.
In addition, the FDIC has authority to prohibit or to limit the payment of dividends by a bank if,
in the banking regulators opinion, payment of a dividend would constitute an unsafe or unsound
practice in light of the financial condition of the banking organization. The Company, Mercantile
Bank, Royal Palm Bank and Heartland Bank are each prohibited from paying any dividends without
regulatory consent, pursuant to various regulatory enforcement actions taken at each bank. For
further discussion, see the Regulatory Matters section in Part II, Item 7 of this filing.
The Company has generated net losses in each of the last two years, with $58.5 million in 2009
and $8.8 million in 2008, largely due to the operating losses at two of its subsidiary banks, Royal
Palm Bank in Naples, Florida, and Heartland Bank in Leawood, Kansas. Both banks have experienced
significant increases in non-performing assets, impaired loans and loan loss provisions, resulting
in each banks primary regulator imposing a cease and desist order. For further discussion of
these regulatory enforcement actions, see the Regulatory Matters section in Part II, Item 7 of
this filing.
Royal Palm Banks operating loss (excluding goodwill impairment) in 2009 was primarily
attributable to the severe decline in real estate values in its southwest Florida market, creating
both loan losses and write-downs of foreclosed assets. Heartlands loss was largely due to
purchased participations from a bank in Georgia that was closed by the FDIC. Although both banks
are confident that they have identified the bulk of their asset quality issues and will see
improved operating performance in 2010, there can be no assurance that they wont experience
results similar to 2009. The Company has projected 2010 and 2011 operating results for each bank
assuming an improving economy and reduced loan losses compared to 2009. Those projections indicate
each bank returning to profitability by the end of 2011 while maintaining compliance with all
regulatory mandates per the cease and desist orders.
To address a scenario where actual losses in 2010 exceed those projected by the Company, an
alternate projection was performed to determine Mercantile Banks ability to provide sufficient
liquidity to the Company, in order to maintain sufficient capital at Royal Palm Bank and Heartland.
Mercantile Bank is the Companys flagship bank, representing approximately 75% of total
consolidated assets at December 31, 2009, and although operating under a regulatory memorandum of
understanding due to elevated levels of impaired loans, its actual loan losses have been much lower
than the other two subsidiaries and it retains significant earnings capacity. The result of that
alternate projection was a determination that Mercantile Bank could provide the necessary
liquidity, through generation of earnings, sales of assets or lines of business, and closing of
branches. While the Company does not believe it to be likely, there is a risk that the FDIC would
close Royal Palm Bank or Heartland (or both), which could produce significantly worse results than
those in the Companys projection. In that event, the Company would resort to various capital
raising and asset liquidation options discussed below.
In November 2009 the Company reached agreements to exchange for debt or sell three of its
subsidiary banks. The first of these transactions closed in December 2009, and the other two in
February 2010, serving to reduce debt and provide liquidity to support the capital requirements of
its remaining subsidiaries.
The Companys Board of Directors has initiated a process to identify and evaluate a broad
range of strategic alternatives to further strengthen the Companys capital base and enhance
shareholder value. These strategic alternatives may include asset sales, rationalization of
non-business operations, consolidation of operations, closing of branches, mergers of subsidiaries,
capital raising and other recapitalization transactions. As part of this process, the Board has
created a special committee (the Special Committee) of independent directors to develop, evaluate
and oversee any strategic alternatives that the Company may pursue. The Special Committee has
retained outside financial and legal advisors to assist it with its evaluation and oversight.
The Special Committee is developing and executing a plan to raise additional equity. The
Company received shareholder approval on February 23, 2009 authorizing the Company to create and
issue up to 100,000 shares in one or more classes of preferred stock, and adding 2,000,000 shares
to the number of shares of common stock authorized to be issued. The Company has also engaged an
investment banker to assist in formulating details of the capital raising plan. The Company expects
to have developed and implemented additional steps in the plan by September 30, 2010.
75
If the capital raising plan is unsuccessful, and issues pertaining to liquidity develop, the
Company has various options, which could include selling or closing certain branches or subsidiary
banks, package and sell high-quality commercial loans, execute sale/leaseback agreements on its
banking facilities, and other options. If executed, these transactions would decrease the various
banks assets and liabilities, generate taxable income, improve capital ratios, and reduce general,
administrative and other expense. In addition, the affected subsidiary banks could dividend the
funds to the Company to provide liquidity assuming they receive regulatory approval.
Regulatory Matters
In connection with regular examinations of the Company, Mercantile Bank, Royal Palm Bank,
Royal Palm Bancorp, Heartland Bank and Mid-America Bancorp by the Federal Reserve Bank of St. Louis
(FRB), the FDIC,
the Illinois Department of Financial and Professional Regulation (IDFPR) and Florida Office
of Financial Regulation (FOFR), various actions were taken by the regulatory agencies.
A cease and desist order (CDO) is a formal action by the FDIC requiring a bank to take
corrective measures to address deficiencies identified by the FDIC. The bank can continue to serve
its customers in all areas including making loans, establishing lines of credit, accepting deposits
and processing banking transactions. All customer deposits remain fully insured to the maximum
limits set by the FDIC.
A Memorandum of Understanding (MOU) agreement is characterized by regulatory authorities as
an informal action that is neither published nor made publicly available by the agencies and is
used when circumstances warrant a milder form of action than a formal supervisory action, such as a
cease and desist order.
A Written Agreement (WA) is a formal enforcement action by the FRB, similar in nature to an
MOU, but is legally binding and will be published and made public.
The Company. On March 10, 2009, the Company received a notice from the FRB of its intent to
issue an MOU, which was signed by the Companys Board of Directors on March 17, 2009. Under the
terms of the MOU, the Company is expected to, among other things, provide its subsidiary banks with
financial and managerial resources as needed, submit capital and cash flow plans to the FRB and
provide periodic performance updates to the FRB. In addition, the Company is prohibited from
paying any special salaries or bonuses to insiders, paying dividends, paying interest related to
trust preferred securities, or incur any additional debt, without the prior written approval of the
FRB. On July 31, 2009, the Company submitted to the FRB a three-year strategic and capital plan
designed to strengthen the Companys and its subsidiaries operations and capital position going
forward. The plan reflects the current challenges with respect to capital and the difficulties in
projecting the impact of the economic weakness in the Companys markets on its loan portfolio, as
well as strategies to maintain the financial strength of the Company and its subsidiaries. A
significant part of the plan was the initiative by the Company to sell one or more subsidiary banks
in order to generate liquidity to reduce debt, improve capital ratios and provide necessary capital
contributions to its remaining subsidiary banks. The result of this initiative was the exchange
for debt of HNB in December 2009 and the sale of Marine Bank and Brown County in February 2010.
On February 16, 2010, the Company executed a WA with the FRB. The terms of the WA are
generally consistent with the MOU, with a requirement that an updated capital and cash flow plan be
submitted to the FRB within sixty days. The Company is working with its legal advisors to submit
the revised plan.
Mercantile Bank. On March 8, 2010, Mercantile Bank entered into a MOU with the FDIC and the
IDFPR. Under the terms of the MOU, Mercantile Bank agreed, among other things, to provide certain
information to each supervisory authority including, but not limited to, financial performance
updates, loan performance updates, written plan for reducing classified assets and concentrations
of credit, written plan to improve liquidity and reduce dependency on volatile liabilities, written
capital plan, and written reports of progress. In addition, the bank agreed not to declare any
dividends or make any distributions of capital without the prior approval of the supervisory
authorities, and within 30 days of the date of the MOU, to maintain its Tier 1 leverage capital
ratio at no less than 8.0% and total risk based capital ratio at no less than 12.0%.
Royal Palm Bank. On October 3, 2008, Royal Palm Bank entered into a MOU with the FDIC and
FOFR. Under the terms of the MOU, Royal Palm Bank agreed, among other things, to provide certain
information to each supervisory authority including, but not limited to, financial performance
updates, loan performance updates, written
76
plan for improved earnings, written capital plan, review
and assessment of all officers who head departments of the bank, and written reports of progress.
In addition, Royal Palm Bank agreed not to declare any dividends or make any distributions of
capital without the prior approval of the supervisory authorities, and to maintain its Tier 1
leverage capital ratio at no less than 8.0%, the Tier 1 risk based capital ratio at no less than
10.0%, and total risk based capital ratio at no less than 12.0%.
In May 2009, Royal Palm Bank entered into a stipulation and consent to the issuance of a CDO
with the FDIC and FOFR. The CDO was issued and became effective May 30, 2009. Under the CDO,
Royal Palm agreed, among other things, to provide certain information to each supervisory authority
including, but not limited to, notification of plans to add any individual to the board of
directors or employ any individual as a senior executive officer, financial performance updates,
loan performance updates, written plan for improved earnings, written capital plan, written
contingency funding plan, written strategic plan, and written reports of progress. In addition,
Royal Palm agreed not to declare any dividends or make any distributions of capital without the
prior approval of the supervisory authorities, and to maintain its Tier 1 leverage capital ratio at
no less than 8.0%, the Tier 1 risk based capital ratio at no less than 10.0%, and total risk based
capital ratio at no less than 12.0%.
At September 30, 2009, Royal Palm Banks Tier 1 leverage ratio was 1.51% and total risk based
capital ratio was 3.61%. As specified in the CDO, Royal Palm Bank notified the supervisory
authorities within 10 days of the determination of the ratios. As a result of these capital
ratios, Royal Palm Bank was not in compliance with the CDO requirements for capital ratios on
September 30, 2009. On October 7, 2009, Royal Palm Bank received a letter from the FDIC informing
it that the FDIC has preliminarily determined that Royal Palm Bank was critically undercapitalized
and was subject to certain mandatory requirements under the Federal Deposit Insurance Act (FDIA).
The letter also required Royal Palm Bank to submit a capital restoration plan to the FDIC by
October 30, 2009, along with certain other disclosures related to the mandatory requirements under
FDIA for critically undercapitalized banks. On October 9, 2009, the Company injected $2 million of
additional capital into Royal Palm Bank and as a result, as of that date, Royal Palm Bank had a
Tier 1 leverage capital ratio of 2.69%, a Tier 1 risk based capital ratio of 4.24% and a total risk
based capital ratio of 5.58%.
On October 23, 2009, Royal Palm Bank received a letter from the FOFR demanding that Royal Palm
Bank inject sufficient capital into Royal Palm Bank by November 30, 2009, such that as of November
30, 2009, Royal Palm Bank has a Tier 1 leverage capital ratio of at least 6%. In addition, Royal
Palm Bank was required by this FOFR letter to submit a plan to the FOFR demonstrating how Royal
Palm Bank will have a Tier 1 leverage capital ratio of at least 8% and a total risk based capital
ratio of at least 12% as of December 31, 2009.
The Company injected $11.0 million of capital into Royal Palm Bank on December 1, 2009, with
the proceeds from a short term debt from Great River pursuant to the Second Waiver (for further
discussion, see the Short-Term Borrowings section of this filing). As of December 31, 2009,
Royal Palm Bank had a Tier 1 leverage capital ratio of 8.90%, Tier 1 risk based capital ratio of
13.79% and a total risk based capital ratio of 15.11%, and was in compliance with all requirements
of the CDO.
Royal Palm Bancorp. In September 2009, Royal Palm Bancorp entered into a MOU with the FRB.
As a one-bank holding company, this MOU primarily reflected regulatory concerns related to Royal
Palm Bancorps subsidiary (Royal Palm Bank). Under the terms of the MOU, Royal Palm Bancorp
agreed, among other things, to provide certain information to the FRB including, but not limited
to, financial performance updates and written reports of progress. In addition, Royal Palm Bancorp
agreed to assist Royal Palm Bank in addressing weaknesses identified in the bank examination, and
not to pay any salaries or bonuses to insiders, incur any debt, declare any dividends or make any
distributions of capital without the prior approval of the supervisory authorities.
Heartland Bank. On March 9, 2009, Heartland Bank signed a CDO with the FDIC. Under the terms
of the CDO, Heartland Bank agreed to, among other things, prepare and submit plans and reports to
the FDIC regarding certain matters including, but not limited to, progress reports detailing
actions taken to secure compliance with all provisions of the order, loan performance updates as
well as a written plan for the reduction of adversely classified assets, a revised comprehensive
strategic plan, and a written profit plan and comprehensive budget. In addition, Heartland Bank
agreed not to declare any dividends without the prior consent of the FDIC and to maintain its Tier
1 leverage capital ratio at no less than 8.0% and maintain its total risk based capital at no less
than 12.0%. As of December 31, 2009, Heartland Bank had a Tier 1 leverage capital ratio of 8.08%
and total risk based capital ratio of 12.88%, and was in compliance with all requirements of the
CDO.
77
Mid-America Bancorp. In September 2009, Mid-America Bancorp entered into a MOU with the FRB.
As a one-bank holding company, this MOU primarily reflected regulatory concerns related to
Mid-Americas subsidiary (Heartland Bank). Under the terms of the MOU, Mid-America Bancorp agreed,
among other things, to provide certain information to the FRB including, but not limited to,
financial performance updates and written reports of progress. In addition, Mid-America Bancorp
agreed to assist Heartland Bank in addressing weaknesses identified in the bank examination, and
not to pay any salaries or bonuses to insiders, incur any debt, declare any dividends or make any
distributions of capital without the prior approval of the supervisory authorities.
No fines or penalties were imposed as a result of any of the regulatory enforcement actions.
The Company, Mercantile Bank, Royal Palm Bank, Royal Palm Bancorp, Heartland Bank and
Mid-America Bancorp are committed to ensuring that the requirements of the regulatory agreements
are met in a timely manner.
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 168, The FASB Accounting Standards Codification TM and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162.
Effective for financial statements
issued for interim and annual periods ending after September 15, 2009, the FASB Accounting
Standards Codification TM (ASC) is now the source of authoritative U.S. GAAP recognized by the
FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities
and Exchange Commission (SEC) under the authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. The ASC superseded all then-existing non-SEC accounting
and reporting standards. Al other non-grandfathered non-SEC accounting literature not included in
the ASC became non-authoritative. Following this Statement, the FASB will no longer issue new
standards in the form of Statements, FASB Staff Positions (FSP) or Emerging Issues Task Force
Abstracts. Instead, it will issue Accounting Standards Updates. The FASB will not consider
Accounting Standards Updates as authoritative in their own right. Accounting Standards Updates
will serve only to update the ASC, provide background information about the guidance, and provide
the bases for conclusions on the change(s) in the ASC. This SFAS was codified within ASC 105. The
impact of adoption was not material.
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly, which was codified into ASC 820. This FSP provides additional
guidance for estimating fair value in accordance with SFAS No. 157, Fair Value Measurements, when
the volume and level of activity for the asset or liability have significantly decreased. This FSP
also includes guidance on identifying circumstances that indicate a transaction is not orderly.
In April 2009, the FASB issued FSP FAS 115-2 and FSP FAS 124-2, Recognition and Presentation
of Other-Than-Temporary Impairments, which were codified into ASC 320. This FSP amends the
other-than-temporary-impairment (OTTI) guidance in U.S. GAAP for debt securities to make the
guidance more operational and to improve the presentation and disclosure of OTTI on debt and equity
securities in the financial statements. This FSP does not amend existing recognition and
measurement guidance related to OTTI of equity securities. FSP FAS 115-2 and 124-2 was effective
for interim and annual periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009 if FSP FAS 157-4 was adopted early as well. The Company
adopted FSP FAS 115-2 and 124-2 and FSP FAS 157-4 during 2009 and there was no material impact to
the financial statements.
In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies which was codified
into ASC 805. This FSP amends and clarifies SFAS No. 141(R), Business Combinations, to address
application issues raised by preparers, auditors, and members of the legal profession on initial
recognition and measurement, subsequent measurement and accounting , and disclosure of assets or
liabilities from contingencies in a business combination. This FSP was effective for assets or
liabilities arising from contingencies in business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or after December 31,
2008. There has been no impact during 2009 from adoption of FSP FAS 141(R)-1 on January 1, 2009.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets
an amendment of FASB Statement No. 140 which was codified into ASC Topic 860. Topic 860 seeks to
improve the relevance,
78
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash flows; and a
transferors continuing involvement, if any, in transferred financial assets. Topic 860 addresses
(1) practices that have developed since the issuance of SFAS No. 140 Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, that are not consistent with the
original intent and key requirements of that Statement and (2) concerns of financial statement
users that many of the financial assets (and related obligations) that have been derecognized
should continue to be reported in the financial statements of transferors. This standard must be
applied as of the beginning of each reporting entitys first annual reporting period and for
interim and annual reporting periods thereafter. Earlier application is prohibited. This standard
must be applied to transfers occurring on or after the effective date. The impact of adoption is
not expected to be material.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R),
which was codified into ASC Topic 810. Topic 810 seeks to improve financial reporting by
enterprises involved with variable interest entities by addressing (1) the effects on certain
provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable
Interest Entities, as a result of the elimination of the qualifying special-purpose entity concept
in SFAS No. 166, and (2) constituent concerns about the application or certain key provisions of
Interpretation 46(R), including those in which the accounting and disclosures under the
Interpretation do not always provide timely and useful information about an enterprises
involvement in a variable interest entity. This Statement shall be effective as of the beginning
of each reporting entitys first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. Earlier application is prohibited. The impact of
adoption is not expected to be material.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For information regarding the market risk of Mercantile Bancorp, Inc.s financial instruments,
see Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations
Rate Sensitive Assets and Liabilities. Mercantile Bancorp, Inc.s principal market risk exposure
is to interest rates.
Item 8. Financial Statements and Supplementary Data
The financial statements, the reports thereon, and the notes thereto commence at page 93 of
this Annual Report on Form 10-K.
Consolidated Quarterly Financial Data
|
|
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|
|
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|
|
|
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|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
September 30 |
|
|
June 30 |
|
|
March 31 |
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, except per share data) |
|
|
|
|
|
Interest income |
|
$ |
12,169 |
|
|
$ |
12,471 |
|
|
$ |
12,765 |
|
|
$ |
12,912 |
|
Interest expense |
|
|
6,710 |
|
|
|
6,767 |
|
|
|
7,542 |
|
|
|
8,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
5,459 |
|
|
|
5,704 |
|
|
|
5,223 |
|
|
|
4,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
4,439 |
|
|
|
5,341 |
|
|
|
9,518 |
|
|
|
2,785 |
|
Noninterest income |
|
|
3,876 |
|
|
|
1,400 |
|
|
|
636 |
|
|
|
1,879 |
|
Noninterest expense |
|
|
11,942 |
|
|
|
8,903 |
|
|
|
42,491 |
|
|
|
8,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(7,046 |
) |
|
|
(7,140 |
) |
|
|
(46,150 |
) |
|
|
(4,223 |
) |
Income tax benefit |
|
|
2,165 |
|
|
|
2,865 |
|
|
|
5,546 |
|
|
|
1,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
|
(4,881 |
) |
|
|
(4,275 |
) |
|
|
(40,604 |
) |
|
|
(2,662 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
197 |
|
|
|
2,428 |
|
|
|
(12,369 |
) |
|
|
1,786 |
|
Noncontrolling interest |
|
|
(418 |
) |
|
|
(488 |
) |
|
|
(506 |
) |
|
|
(421 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,266 |
) |
|
$ |
(1,359 |
) |
|
$ |
(52,467 |
) |
|
$ |
(455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share continuing operations |
|
$ |
(0.51 |
) |
|
$ |
(0.43 |
) |
|
$ |
(4.61 |
) |
|
$ |
(0.26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share discontinued
operations |
|
$ |
0.02 |
|
|
$ |
0.28 |
|
|
$ |
(1.42 |
) |
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
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|
|
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|
|
2008 |
|
|
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|
|
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|
|
|
|
|
|
December 31 |
|
|
September 30 |
|
|
June 30 |
|
|
March 31 |
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, except per share data) |
|
|
|
|
|
Interest income |
|
$ |
13,839 |
|
|
$ |
14,832 |
|
|
$ |
14,615 |
|
|
$ |
15,620 |
|
Interest expense |
|
|
8,974 |
|
|
|
8,723 |
|
|
|
9,029 |
|
|
|
10,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
4,865 |
|
|
|
6,109 |
|
|
|
5,586 |
|
|
|
5,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
12,626 |
|
|
|
4,220 |
|
|
|
1,702 |
|
|
|
4,628 |
|
Noninterest income |
|
|
1,910 |
|
|
|
2,427 |
|
|
|
2,759 |
|
|
|
2,061 |
|
Noninterest expense |
|
|
8,240 |
|
|
|
14,217 |
|
|
|
8,277 |
|
|
|
7,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(14,091 |
) |
|
|
(9,901 |
) |
|
|
(1,634 |
) |
|
|
(5,213 |
) |
Income tax benefit |
|
|
4,471 |
|
|
|
4,476 |
|
|
|
827 |
|
|
|
1,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
|
(9,620 |
) |
|
|
(5,425 |
) |
|
|
(807 |
) |
|
|
(3,616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
1,640 |
|
|
|
2,069 |
|
|
|
1,967 |
|
|
|
1,650 |
|
Noncontrolling interest |
|
|
(1,267 |
) |
|
|
(1,662 |
) |
|
|
(103 |
) |
|
|
(289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(6,713 |
) |
|
$ |
(1,694 |
) |
|
$ |
1,263 |
|
|
$ |
(1,677 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share continuing operations |
|
$ |
(0.96 |
) |
|
$ |
(0.43 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share discontinued
operations |
|
$ |
0.19 |
|
|
$ |
0.23 |
|
|
$ |
.23 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no disagreements with accountants on any matter of accounting principles or
practices or financial statement disclosures during the three years ended December 31, 2009.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Companys management carried out an evaluation, under the supervision and with the
participation of the chief executive officer and the chief financial officer, of the effectiveness
of the design and operation of the Companys disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2009.
Based upon that evaluation, the chief executive officer along with the chief financial officer
concluded that the Companys disclosure controls and procedures as of December 31, 2009, are
effective in timely alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Companys periodic filings under the
Exchange Act.
Management Report on Internal Control Over Financial Reporting
The management of Mercantile Bancorp, Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). The Companys internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the financial statements for external purposes in accordance with generally accepted
accounting principles. The Companys internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted in the United
States of America, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and (iii) provide
80
reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the Companys assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. All internal control systems, no matter how well designed, have inherent
limitations, including the possibility of human error and the circumvention of overriding controls.
Accordingly, even an effective system of internal control over financial reporting can provide only
reasonable assurance with respect to financial statement preparations. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that degree of compliance with the policies or
procedures may deteriorate.
Management has assessed the effectiveness of the Companys internal control over financial
reporting as of December 31, 2009, based on the framework set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework. Based
on that assessment, management concludes that, as of December 31, 2009, the Companys internal
control over financial reporting is effective.
The annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to provide only
managements report in the annual report.
April 7, 2010
|
|
|
|
|
/s/ Ted T. Awerkamp |
|
Ted T. Awerkamp
President and Chief Executive Officer |
|
|
|
|
|
|
/s/ Michael P. McGrath |
|
Michael P. McGrath
Executive Vice President, Treasurer, Secretary and Chief Financial Officer |
|
Changes in Internal Control Over Financial Reporting
There were no changes in the Companys internal control over financial reporting that occurred
during the Companys fourth fiscal quarter of 2009 that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.
Item 9B. Other Information
None.
81
PART III
Item 10. Directors and Executive Officers of the Company and Corporate Governance
For information on the executive officers of the Company, please see Part I of this Form 10-K
under the caption Item 4A Executive Officers of Registrant which is incorporated herein by
reference in response to this item. Also, the Company incorporates herein by reference the
information set forth under the captions Election of Directors, Ratification of Selection of
Independent Auditors, Section 16(a) Beneficial Ownership Reporting Compliance and Corporate
Governance in the Companys definitive proxy statement for its 2010 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission (2010 Proxy Statement). The Companys
Board of Directors has adopted a Code of Ethics for senior executive, financial and accounting
officers, among other persons, which was filed as Exhibit 14.1 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 2004.
Item 11. Executive Compensation
The information under the captions Executive Compensation and Other Information,
Compensation Committee Interlocks and Insider Participation and Compensation Committee Report
in the 2010 Proxy Statement are incorporated herein by reference in response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information under the caption Ownership of Common Stock by Management and Principal
Shareholders in the 2010 Proxy Statement is incorporated herein by reference in response to this
item.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information under the captions Interests of Directors and Officers in Certain
Transactions and Corporate Governance Director Independence in the 2010 Proxy Statement are
incorporated herein by reference in response to this item.
Item 14. Principal Accounting Fees and Services
The information under the caption Principal Accounting Fees and Services in the 2010 Proxy
Statement is incorporated herein by reference in response to this item.
82
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Financial Statements
Reference is made to the consolidated financial statements, reports thereon, and notes thereto
commencing at page 93 of this Annual Report on Form 10-K. A list of such consolidated financial
statements is set forth below:
(b) Exhibits See Exhibit Index
(c) There are no financial statement schedules filed herewith.
83
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
MERCANTILE BANCORP, INC.
(Registrant)
|
|
|
By: |
/s/ Ted T. Awerkamp
|
|
|
|
Name: |
Ted T. Awerkamp |
|
|
|
Title: |
President and Chief Executive
Officer
|
|
|
Dated: April 7, 2010 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Ted T. Awerkamp
Ted T. Awerkamp
|
|
President and Chief Executive Officer
(principal executive officer)
|
|
April 7, 2010 |
|
|
|
|
|
/s/ Michael P. McGrath
Michael P. McGrath
|
|
Executive Vice President, Treasurer,
Secretary and Chief Financial
Officer
(principal financial
officer/principal accounting
officer)
|
|
April 7, 2010 |
|
|
|
|
|
/s/ Ted T. Awerkamp
Ted T. Awerkamp
|
|
Director
|
|
April 7, 2010 |
|
|
|
|
|
/s/ Lee R. Keith
Lee R. Keith
|
|
Director
|
|
April 7, 2010 |
|
|
|
|
|
/s/ Michael J. Foster
Michael J. Foster
|
|
Chairman/Director
|
|
April 7, 2010 |
|
|
|
|
|
/s/ William G. Keller
William G. Keller, Jr.
|
|
Director
|
|
April 7, 2010 |
|
|
|
|
|
/s/ John R. Spake
John R. Spake
|
|
Director
|
|
April 7, 2010 |
|
|
|
|
|
/s/ Dennis M. Prock
Dennis M. Prock
|
|
Director
|
|
April 7, 2010 |
|
|
|
|
|
/s/ Alexander J. House
Alexander J. House
|
|
Director
|
|
April 7, 2010 |
|
|
|
|
|
/s/ James W. Tracy
James W. Tracy
|
|
Director
|
|
April 7, 2010 |
|
|
|
|
|
/s/ Julie A. Brink
Julie A. Brink
|
|
Director
|
|
April 7, 2010 |
84
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Mercantile Bancorp, Inc.
Quincy, Illinois
We have audited the accompanying consolidated balance sheets of Mercantile Bancorp, Inc. as of
December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders
equity and cash flows for each of the years in the three-year period ended December 31, 2009. The
Companys management is responsible for these financial statements. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits include consideration of internal control over financial
reporting as a basis for designing auditing procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Companys internal
control over financial reporting. Accordingly, we express no such opinion. Our audits also
include examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Mercantile Bancorp, Inc. as of December 31, 2009 and
2008, and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2009, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 1, in 2009 the Company changed its method of accounting for noncontrolling
interests in accordance with Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) 810-10-65, Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51.
/s/ BKD, LLP
Decatur, Illinois
April 7, 2010
85
Mercantile Bancorp, Inc.
Consolidated Balance Sheets
December 31, 2009 and 2008
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
8,606 |
|
|
$ |
67,595 |
|
Interest-bearing demand deposits |
|
|
94,623 |
|
|
|
16,812 |
|
Federal funds sold |
|
|
18,038 |
|
|
|
5,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
121,267 |
|
|
|
89,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
|
|
128,150 |
|
|
|
185,192 |
|
|
|
|
|
|
|
|
|
|
Held-to-maturity securities (fair value of $2,411 and $9,101) |
|
|
2,334 |
|
|
|
8,905 |
|
|
|
|
|
|
|
|
|
|
Loans held for sale |
|
|
681 |
|
|
|
4,366 |
|
|
|
|
|
|
|
|
|
|
Loans, net of allowance for loan losses of $18,851 and
$23,467 at December 31, 2009 and 2008 |
|
|
757,138 |
|
|
|
1,315,907 |
|
|
|
|
|
|
|
|
|
|
Interest receivable |
|
|
3,962 |
|
|
|
10,240 |
|
|
|
|
|
|
|
|
|
|
Foreclosed assets held for sale, net |
|
|
16,409 |
|
|
|
9,959 |
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank stock |
|
|
2,900 |
|
|
|
8,213 |
|
|
|
|
|
|
|
|
|
|
Cost method investments in common stock |
|
|
1,392 |
|
|
|
3,314 |
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
10,212 |
|
|
|
9,181 |
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights |
|
|
885 |
|
|
|
959 |
|
|
|
|
|
|
|
|
|
|
Cash surrender value of life insurance |
|
|
15,011 |
|
|
|
25,278 |
|
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
25,670 |
|
|
|
40,616 |
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
44,653 |
|
|
|
|
|
|
|
|
|
|
Core deposit and other intangibles |
|
|
1,066 |
|
|
|
4,002 |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
17,413 |
|
|
|
14,377 |
|
|
|
|
|
|
|
|
|
|
Discontinued operations, assets held for sale |
|
|
285,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,390,482 |
|
|
$ |
1,774,983 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
86
Mercantile Bancorp, Inc.
Consolidated Balance Sheets
December 31, 2009 and 2008
(in thousands, except share data)
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
Demand |
|
$ |
108,318 |
|
|
$ |
139,486 |
|
Savings, NOW and money market |
|
|
251,030 |
|
|
|
431,596 |
|
Time |
|
|
421,412 |
|
|
|
672,763 |
|
Brokered time |
|
|
173,764 |
|
|
|
218,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
954,524 |
|
|
|
1,462,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
|
30,740 |
|
|
|
49,227 |
|
Long-term debt |
|
|
25,172 |
|
|
|
84,661 |
|
Junior subordinated debentures |
|
|
61,858 |
|
|
|
61,858 |
|
Interest payable |
|
|
4,114 |
|
|
|
4,280 |
|
Other |
|
|
4,827 |
|
|
|
7,989 |
|
Discontinued operations, liabilities held for sale |
|
|
264,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,345,279 |
|
|
|
1,670,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingent Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Mercantile Bancorp, Inc. stockholders equity
Common stock, $0.42 par value; authorized 14,000,000 shares; |
|
|
|
|
|
|
|
|
Issued 8,887,113 shares
Outstanding 8,703,330 shares at December 31, 2009 and
2008 |
|
|
3,629 |
|
|
|
3,629 |
|
Additional paid-in capital |
|
|
11,919 |
|
|
|
11,919 |
|
Retained earnings |
|
|
25,095 |
|
|
|
83,642 |
|
Accumulated other comprehensive income |
|
|
2,954 |
|
|
|
2,062 |
|
|
|
|
|
|
|
|
|
|
|
43,597 |
|
|
|
101,252 |
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost
Common; 183,783 shares at December 31, 2009 and 2008 |
|
|
(2,295 |
) |
|
|
(2,295 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mercantile Bancorp, Inc. stockholders equity |
|
|
41,302 |
|
|
|
98,957 |
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest |
|
|
3,901 |
|
|
|
5,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
45,203 |
|
|
|
104,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,390,482 |
|
|
$ |
1,774,983 |
|
|
|
|
|
|
|
|
87
Mercantile Bancorp, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2009, 2008 and 2007
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Interest and Dividend Income |
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
44,066 |
|
|
$ |
51,725 |
|
|
$ |
57,251 |
|
Tax exempt |
|
|
678 |
|
|
|
632 |
|
|
|
798 |
|
Securities |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
4,346 |
|
|
|
4,551 |
|
|
|
5,562 |
|
Tax exempt |
|
|
944 |
|
|
|
1,149 |
|
|
|
1,314 |
|
Federal funds sold |
|
|
18 |
|
|
|
343 |
|
|
|
1,060 |
|
Dividends on Federal Home Loan Bank stock |
|
|
14 |
|
|
|
64 |
|
|
|
124 |
|
Deposits with financial institutions and other |
|
|
251 |
|
|
|
442 |
|
|
|
966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income |
|
|
50,317 |
|
|
|
58,906 |
|
|
|
67,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
21,766 |
|
|
|
30,039 |
|
|
|
33,141 |
|
Short-term borrowings |
|
|
2,475 |
|
|
|
797 |
|
|
|
1,546 |
|
Long-term debt and junior subordinated debentures |
|
|
4,860 |
|
|
|
6,316 |
|
|
|
5,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
29,101 |
|
|
|
37,152 |
|
|
|
40,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
|
21,216 |
|
|
|
21,754 |
|
|
|
26,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses |
|
|
22,083 |
|
|
|
23,176 |
|
|
|
2,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income After Provision for Loan Losses |
|
|
(867 |
) |
|
|
(1,422 |
) |
|
|
23,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income |
|
|
|
|
|
|
|
|
|
|
|
|
Fiduciary activities |
|
|
2,224 |
|
|
|
2,238 |
|
|
|
2,230 |
|
Brokerage fees |
|
|
1,082 |
|
|
|
1,412 |
|
|
|
1,198 |
|
Customer service fees |
|
|
1,636 |
|
|
|
1,882 |
|
|
|
2,186 |
|
Other service charges and fees |
|
|
494 |
|
|
|
501 |
|
|
|
399 |
|
Net gains (losses) on sales of assets |
|
|
(60 |
) |
|
|
373 |
|
|
|
47 |
|
Net gains on loan sales |
|
|
1,211 |
|
|
|
694 |
|
|
|
528 |
|
Net gains on sale of available-for-sale securities |
|
|
|
|
|
|
942 |
|
|
|
699 |
|
Net gains on equity and cost method investments |
|
|
|
|
|
|
100 |
|
|
|
2,203 |
|
Loan servicing fees |
|
|
475 |
|
|
|
432 |
|
|
|
403 |
|
Net increase in cash surrender value of life
insurance |
|
|
577 |
|
|
|
541 |
|
|
|
491 |
|
Other |
|
|
152 |
|
|
|
42 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
7,791 |
|
|
|
9,157 |
|
|
|
10,445 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
88
Mercantile Bancorp, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2009, 2008 and 2007
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Noninterest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
$ |
17,561 |
|
|
$ |
18,020 |
|
|
$ |
16,463 |
|
Net occupancy expense |
|
|
2,374 |
|
|
|
2,491 |
|
|
|
1,796 |
|
Equipment expense |
|
|
2,371 |
|
|
|
2,608 |
|
|
|
1,977 |
|
Deposit insurance premium |
|
|
2,834 |
|
|
|
818 |
|
|
|
174 |
|
Professional fees |
|
|
3,593 |
|
|
|
2,077 |
|
|
|
1,751 |
|
Postage and supplies |
|
|
600 |
|
|
|
698 |
|
|
|
693 |
|
Losses on foreclosed assets, net |
|
|
2,867 |
|
|
|
1,040 |
|
|
|
86 |
|
Other than temporary loss on
available-for-sale securities and cost
method investments |
|
|
3,426 |
|
|
|
5,270 |
|
|
|
|
|
Goodwill impairment loss |
|
|
30,388 |
|
|
|
|
|
|
|
|
|
Amortization of mortgage servicing rights |
|
|
433 |
|
|
|
226 |
|
|
|
134 |
|
Other |
|
|
5,036 |
|
|
|
5,326 |
|
|
|
4,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
71,483 |
|
|
|
38,574 |
|
|
|
27,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
Before Income Taxes |
|
|
(64,559 |
) |
|
|
(30,839 |
) |
|
|
6,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense (Benefit) |
|
|
(12,137 |
) |
|
|
(11,371 |
) |
|
|
952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations |
|
|
(52,422 |
) |
|
|
(19,468 |
) |
|
|
5,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations (including loss on exchange in
2009 of $2,367), net of income tax
expense of $2,233, $2,822, and $2,483,
respectively |
|
|
(7,958 |
) |
|
|
7,326 |
|
|
|
5,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
|
(60,380 |
) |
|
|
(12,142 |
) |
|
|
10,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income (loss) attributable to
noncontrolling interest |
|
|
(1,833 |
) |
|
|
(3,321 |
) |
|
|
622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) attributable to Mercantile
Bancorp, Inc. |
|
$ |
(58,547 |
) |
|
$ |
(8,821 |
) |
|
$ |
10,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
8,703,330 |
|
|
|
8,705,452 |
|
|
|
8,727,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(5.81 |
) |
|
$ |
(1.85 |
) |
|
$ |
.57 |
|
Discontinued operations |
|
|
(.91 |
) |
|
|
.84 |
|
|
|
.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(6.72 |
) |
|
$ |
(1.01 |
) |
|
$ |
1.15 |
|
|
|
|
|
|
|
|
|
|
|
89
Mercantile Bancorp, Inc.
Consolidated Statements of Stockholders Equity
Years Ended December 31, 2009, 2008 and 2007
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mercantile Bancorp, Inc. |
|
|
|
Common Stock |
|
|
Additional Paid-In |
|
|
|
Shares Outstanding |
|
|
Amount |
|
|
Capital |
|
Balance, January 1, 2007 |
|
|
8,747,617 |
|
|
$ |
3,629 |
|
|
$ |
11,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized appreciation on available-for-sale
securities, net of taxes and reclassification adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss of equity method
investee |
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit postretirement plan transition obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income ($10,283 and $624
attributable to Mercantile Bancorp, Inc. and
noncontrolling interest, respectively) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock to minority shareholders of Mid-America |
|
|
|
|
|
|
|
|
|
|
76 |
|
Dividends on common stock, $0.24 per share |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
(37,962 |
) |
|
|
|
|
|
|
(69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
8,709,655 |
|
|
|
3,629 |
|
|
|
11,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized appreciation on available-for-sale
securities, net of taxes and reclassification adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit postretirement plan transition obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss (($7,064) and ($3,320)
attributable to Mercantile Bancorp, Inc. and
noncontrolling interest, respectively) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock to minority shareholders of Mid-America |
|
|
|
|
|
|
|
|
|
|
39 |
|
Dividends on common stock, $0.24 per share |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
(6,325 |
) |
|
|
|
|
|
|
(109 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
8,703,330 |
|
|
|
3,629 |
|
|
|
11,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized appreciation on available-for-sale
securities, net of taxes and reclassification adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit postretirement plan transition obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss (($57,655) and ($1,834)
attributable to Mercantile Bancorp, Inc. and
non-controlling interest, respectively.) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
|
8,703,330 |
|
|
$ |
3,629 |
|
|
$ |
11,919 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
90
Mercantile Bancorp, Inc.
Consolidated Statements of Stockholders Equity
Years Ended December 31, 2009, 2008 and 2007
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
|
|
Noncontrolling |
|
|
|
|
|
|
Earnings |
|
|
Income |
|
|
Treasury Stock |
|
|
Interest |
|
|
Total |
|
Balance, January 1, 2007 |
|
$ |
86,648 |
|
|
$ |
23 |
|
|
$ |
(1,624 |
) |
|
$ |
9,198 |
|
|
$ |
109,856 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
10,001 |
|
|
|
|
|
|
|
|
|
|
|
622 |
|
|
|
10,623 |
|
Change in unrealized appreciation on
available-for-sale securities, net of taxes and
reclassification adjustment |
|
|
|
|
|
|
240 |
|
|
|
|
|
|
|
2 |
|
|
|
242 |
|
Accumulated other comprehensive loss of equity
method investee |
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
28 |
|
Defined benefit postretirement plan transition
obligation |
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income ($10,283 and $624
attributable to Mercantile Bancorp, Inc. and
noncontrolling interest, respectively) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,907 |
|
Issuance of stock to minority shareholders of Mid-America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170 |
|
|
|
246 |
|
Dividends on common stock, $0.24 per share |
|
|
(2,097 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,097 |
) |
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
(569 |
) |
|
|
(546 |
) |
|
|
(1,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
94,552 |
|
|
|
305 |
|
|
|
(2,193 |
) |
|
|
9,446 |
|
|
|
117,728 |
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(8,821 |
) |
|
|
|
|
|
|
|
|
|
|
(3,321 |
) |
|
|
(12,142 |
) |
Change in unrealized appreciation on available-for-sale
securities, net of taxes and reclassification adjustment |
|
|
|
|
|
|
1,737 |
|
|
|
|
|
|
|
1 |
|
|
|
1,738 |
|
Defined benefit postretirement plan transition obligation |
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss (($7,064) and ($3,320) attributable to
Mercantile Bancorp, Inc. and noncontrolling interest,
respectively) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,384 |
) |
Issuance of stock to minority shareholders of Mid-America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
71 |
|
Dividends on common stock, $0.24 per share |
|
|
(2,089 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,089 |
) |
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
(102 |
) |
|
|
(423 |
) |
|
|
(634 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
83,642 |
|
|
|
2,062 |
|
|
|
(2,295 |
) |
|
|
5,735 |
|
|
|
104,692 |
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(58,547 |
) |
|
|
|
|
|
|
|
|
|
|
(1,833 |
) |
|
|
(60,380 |
) |
Change in unrealized appreciation on
available-for-sale securities, net of taxes and
reclassification adjustment |
|
|
|
|
|
|
872 |
|
|
|
|
|
|
|
(1 |
) |
|
|
871 |
|
Defined benefit postretirement plan transition
obligation |
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss (($57,655) and ($1,834) attributable to
Mercantile Bancorp, Inc. and non-controlling interest,
respectively.) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
$ |
25,095 |
|
|
$ |
2,954 |
|
|
$ |
(2,295 |
) |
|
$ |
3,901 |
|
|
$ |
45,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
Mercantile Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008 and 2007
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before attribution of noncontrolling
interest |
|
$ |
(60,380 |
) |
|
$ |
(12,142 |
) |
|
$ |
10,623 |
|
Net income (loss) attributable to noncontrolling interest |
|
|
(1,833 |
) |
|
|
(3,221 |
) |
|
|
622 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Mercantile Bancorp, Inc. |
|
|
(58,547 |
) |
|
|
(8,921 |
) |
|
|
10,001 |
|
Items not requiring (providing) cash |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
2,626 |
|
|
|
2,845 |
|
|
|
1,898 |
|
Provision for loan losses |
|
|
23,363 |
|
|
|
23,845 |
|
|
|
2,969 |
|
Amortization (accretion) of premiums and discounts on
securities |
|
|
(15 |
) |
|
|
(2 |
) |
|
|
(28 |
) |
Amortization (accretion) of core deposit intangibles
and other purchase accounting adjustments |
|
|
441 |
|
|
|
80 |
|
|
|
(970 |
) |
Mortgage servicing rights impairment |
|
|
|
|
|
|
404 |
|
|
|
|
|
Deferred income taxes |
|
|
(2,305 |
) |
|
|
(7,752 |
) |
|
|
(482 |
) |
Net realized gains on sales of available-for-sale
securities |
|
|
|
|
|
|
(942 |
) |
|
|
(699 |
) |
Other than temporary losses on available-for-sale and
cost method investments |
|
|
3,426 |
|
|
|
5,270 |
|
|
|
|
|
Losses on sales of foreclosed assets |
|
|
2,988 |
|
|
|
1,113 |
|
|
|
86 |
|
Net gains on loan sales |
|
|
(2,027 |
) |
|
|
(1,010 |
) |
|
|
(698 |
) |
Recovery of mortgage servicing rights |
|
|
(244 |
) |
|
|
|
|
|
|
|
|
Amortization of mortgage servicing rights |
|
|
458 |
|
|
|
253 |
|
|
|
134 |
|
Net (gains) losses on sale of premises and equipment |
|
|
65 |
|
|
|
(371 |
) |
|
|
23 |
|
Gain on sale of equity and cost method investments |
|
|
|
|
|
|
(100 |
) |
|
|
(2,209 |
) |
(Income) loss on equity method investments in common
stock |
|
|
|
|
|
|
|
|
|
|
6 |
|
Federal Home Loan Bank stock dividends |
|
|
(11 |
) |
|
|
(32 |
) |
|
|
(56 |
) |
Net increase in cash surrender value of life insurance |
|
|
(1,093 |
) |
|
|
(1,039 |
) |
|
|
(926 |
) |
Goodwill
impairment: |
|
|
44,650 |
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
|
|
|
|
|
|
|
Loan originated for sale |
|
|
(104,568 |
) |
|
|
(92,921 |
) |
|
|
(48,113 |
) |
Proceeds from sales of loans |
|
|
108,530 |
|
|
|
92,483 |
|
|
|
46,842 |
|
Interest receivable |
|
|
1,780 |
|
|
|
1,103 |
|
|
|
(188 |
) |
Other assets |
|
|
(7,909 |
) |
|
|
(7,004 |
) |
|
|
(1,068 |
) |
Interest payable |
|
|
1,124 |
|
|
|
(1,760 |
) |
|
|
(607 |
) |
Other liabilities |
|
|
(1,391 |
) |
|
|
1,500 |
|
|
|
61 |
|
Noncontrolling interest in subsidiary |
|
|
(1,833 |
) |
|
|
(3,221 |
) |
|
|
622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
9,508 |
|
|
|
3,821 |
|
|
|
6,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Cash (paid) received in acquisition of HNB Financial, net of
cash received |
|
|
3 |
|
|
|
(719 |
) |
|
|
(24,790 |
) |
Cash paid on exchange of HNB Bank |
|
|
(11,692 |
) |
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities |
|
|
(66,043 |
) |
|
|
(54,326 |
) |
|
|
(44,091 |
) |
Proceeds from maturities of available-for-sale securities |
|
|
56,735 |
|
|
|
57,300 |
|
|
|
47,015 |
|
Proceeds from the sales of available-for-sale securities |
|
|
|
|
|
|
4,954 |
|
|
|
|
|
Purchases of held-to-maturity securities |
|
|
|
|
|
|
|
|
|
|
(1,000 |
) |
Proceeds from maturities of held-to-maturity securities |
|
|
3,607 |
|
|
|
4,606 |
|
|
|
3,368 |
|
Net change in loans |
|
|
51,041 |
|
|
|
(151,478 |
) |
|
|
(58,888 |
) |
Purchases of premises and equipment |
|
|
(769 |
) |
|
|
(1,901 |
) |
|
|
(11,504 |
) |
Proceeds from sales of premises and equipment |
|
|
|
|
|
|
799 |
|
|
|
25 |
|
Purchases of Federal Home Loan Bank stock |
|
|
(80 |
) |
|
|
(1,228 |
) |
|
|
(710 |
) |
Proceeds from sales of Federal Home Loan Bank stock |
|
|
718 |
|
|
|
838 |
|
|
|
449 |
|
Proceeds from the sales of foreclosed assets |
|
|
2,660 |
|
|
|
3,557 |
|
|
|
275 |
|
Purchase of cost method investment in common stock |
|
|
|
|
|
|
|
|
|
|
(3,234 |
) |
Proceeds from sale of cost method investments |
|
|
|
|
|
|
495 |
|
|
|
513 |
|
Proceeds from sales of equity method investments |
|
|
|
|
|
|
|
|
|
|
6,791 |
|
Purchase of bank-owned life insurance |
|
|
(1,000 |
) |
|
|
|
|
|
|
(1,887 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
35,180 |
|
|
|
(137,103 |
) |
|
|
(87,668 |
) |
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
92
Mercantile Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008 and 2007
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in demand deposits, money market, NOW and
savings accounts |
|
$ |
63,970 |
|
|
$ |
16,798 |
|
|
$ |
22,064 |
|
Net increase (decrease) in time and brokered time deposits |
|
|
(46,559 |
) |
|
|
126,099 |
|
|
|
1,641 |
|
Net increase (decrease) in short-term borrowings |
|
|
(9,528 |
) |
|
|
3,638 |
|
|
|
18,361 |
|
Proceeds from long-term debt |
|
|
500 |
|
|
|
49,161 |
|
|
|
27,650 |
|
Repayment of long-term debt |
|
|
(19,500 |
) |
|
|
(46,000 |
) |
|
|
(29,160 |
) |
Proceeds from issuance of junior subordinated debentures |
|
|
|
|
|
|
|
|
|
|
20,619 |
|
Purchase of stock from minority interest of Mid America |
|
|
|
|
|
|
(555 |
) |
|
|
(612 |
) |
Proceeds from issuance of stock to minority interest of
Mid-America |
|
|
|
|
|
|
94 |
|
|
|
103 |
|
Purchase of intangible assets |
|
|
|
|
|
|
|
|
|
|
(18 |
) |
Purchase of treasury stock |
|
|
|
|
|
|
(102 |
) |
|
|
(569 |
) |
Dividends paid |
|
|
|
|
|
|
(2,089 |
) |
|
|
(2,097 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(11,117 |
) |
|
|
147,044 |
|
|
|
57,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and Cash Equivalents |
|
|
33,571 |
|
|
|
13,762 |
|
|
|
(23,088 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, Beginning of Year |
|
|
89,821 |
|
|
|
76,059 |
|
|
|
99,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Year, including $2,125
of cash and cash equivalents held for sale in 2009 |
|
$ |
123,392 |
|
|
$ |
89,821 |
|
|
$ |
76,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flows Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
38,679 |
|
|
$ |
52,415 |
|
|
$ |
54,398 |
|
Income taxes paid (net of refunds) |
|
$ |
(4,573 |
) |
|
$ |
2,087 |
|
|
$ |
2,164 |
|
Real estate acquired in settlement of loans |
|
$ |
13,579 |
|
|
$ |
11,456 |
|
|
$ |
3,082 |
|
Increase (decrease) in additional paid-in-capital due to
issuance (purchase) of stock to minority interest of
Mid-America at a price over book |
|
$ |
|
|
|
$ |
(70 |
) |
|
$ |
7 |
|
Assets transferred to held for sale, plus related allowance
for loan losses of $1,820 |
|
$ |
287,812 |
|
|
$ |
|
|
|
$ |
|
|
Liabilities transferred to held for sale |
|
$ |
264,044 |
|
|
$ |
|
|
|
$ |
|
|
Short-term and long-term debt exchanged for Hannibal National
Bank |
|
$ |
28,000 |
|
|
$ |
|
|
|
$ |
|
|
Increase in core deposit intangibles due to purchase of
Mid-America at a price over book |
|
$ |
|
|
|
$ |
|
|
|
$ |
99 |
|
Available-for-sale securities received in sale of equity and
cost method investments |
|
$ |
|
|
|
$ |
|
|
|
$ |
700 |
|
Capitalized interest |
|
$ |
|
|
|
$ |
|
|
|
$ |
330 |
|
93
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Mercantile Bancorp, Inc. (Company) is a multi-state bank holding company whose principal
activity is the ownership and management of its wholly and majority owned subsidiaries. As
of December 31, 2009, those subsidiaries were: Mercantile Bank; Marine Bank and Trust; Brown
County State Bank; Mid-America Bancorp, Inc., the sole shareholder of Heartland Bank; Royal
Palm Bancorp, Inc., the sole shareholder of the Royal Palm Bank of Florida (Banks), and HNB
Financial Services, Inc. Mercantile Bancorp Capital Trust I, Trust II, Trust III, and Trust
IV (Trusts) are unconsolidated wholly-owned subsidiaries of the Company. The Trusts were
formed to issue cumulative preferred securities. The Company owns all of the securities of
the Trusts that possess general voting powers. During 2008, two of the Companys
wholly-owned subsidiaries were merged with other subsidiaries. Farmers State Bank of
Northern Missouri and Mercantile Bank were merged, with the survivor being Mercantile Bank.
Also, Perry State Bank and HNB National Bank (HNB) were merged, with HNB National Bank
being the survivor. See Note 24 for the disclosure regarding the treatment of Brown County
State Bank, Marine Bank and Trust, and Hannibal National Bank as discontinued operations.
The Banks are primarily engaged in providing a full range of banking and financial services
to individual and corporate customers in Western Illinois, Northern Missouri, suburban Kansas
City, Missouri, Southwestern Florida, and Central Indiana. The Banks are subject to
competition from other financial institutions. The Company and Banks are also subject to
regulation by certain federal and state agencies and undergo periodic examinations by those
regulatory authorities.
Investment Subsidiary
Mercantile Bank (MB) has a subsidiary, Mercantile Investments, Inc. (MII), that manages
the majority of MBs investment portfolio. MII, located in the Cayman Islands, is included
in the consolidation of the Companys financial statements. As of December 31, 2009, MII had
approximately $122,964,000 in total assets.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly and
majority-owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
94
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Effective January 1, 2009, the Company adopted the guidance in Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) 810-10-65, Transition Related
to FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51. Upon adoption, minority interest previously presented in the
mezzanine section of the balance sheet has been retrospectively reclassified as
noncontrolling interest within equity. In addition, the consolidated net income (loss) and
comprehensive income (loss) presented in the statements of operations and stockholders
equity have been retrospectively revised to include the net income (loss) attributable to the
noncontrolling interest. Beginning January 1, 2009, losses attributable to the
noncontrolling interest will be allocated to the noncontrolling interest even if the carrying
amount of the noncontrolling interest is reduced below zero. Any changes in ownership after
January 1, 2009, that do not result in a loss of control will be prospectively accounted for
as equity transactions.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses, goodwill, core deposit and other intangibles,
Federal Home Loan Bank stock recoverability, mortgage servicing rights, valuation of deferred
tax assets, other-than-temporary impairment on available-for-sale and cost method bank
stocks, fair values of financial instruments and valuation of foreclosed assets held for
sale.
In connection with the determination of the allowance for loan losses and foreclosed assets
held for sale, management generally obtains independent appraisals for significant
properties. The Company utilizes valuations to determine mortgage servicing rights, goodwill
and core deposit and other intangibles. The Company also reviews goodwill and core deposit
and other intangibles annually for impairment. In connection with the determination of
Federal Home Loan Bank stock recoverability, management performs an analysis based on the
Federal Home Loan Banks current activities. The Company also reviews the quoted stock
prices and underlying financial statements on the available-for-sale and cost method bank
stocks with comparisons to the original cost and considering the duration of any loss,
prospects for recovery, and significance of the loss to determine any impairment. The
Company determines future taxable income and current tax law to determine the valuation of
deferred tax assets.
Cash Equivalents
The Company considers all liquid investments with original maturities of three months or less
to be cash equivalents. At December 31, 2009 and 2008, cash equivalents consisted primarily
of other interest-bearing accounts.
95
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
The financial institutions holding the Companys cash accounts are participating in the
FDICs Transaction Account Guarantee Program. Under that program, through June 30, 2010, all
noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire
amount in the account.
Effective October 3, 2008, the FDICs insurance limits increased to $250,000. The increase
in federally insured limits is currently set to expire December 31, 2013. At December 31,
2009, the Companys interest-bearing cash accounts exceeded federally insured limits by
approximately $1,477,000.
Securities
Certain debt securities that management has the positive intent and ability to hold to
maturity are classified as held to maturity and recorded at amortized cost. Securities not
classified as held to maturity, including equity securities with readily determinable fair
values, are classified as available for sale and recorded at fair value, with unrealized
gains and losses excluded from earnings and reported in other comprehensive income (loss).
Purchase premiums and discounts are recognized in interest income using the interest method
over the terms of the securities. Gains and losses on the sale of securities are recorded on
the trade date and are determined using the specific identification method.
Effective April 1, 2009, the Company adopted new accounting guidance related to recognition
and presentation of other-than-temporary impairment (ASC 320-10). When the Company does not
intend to sell a debt security, and it is more likely than not, the Company will not have to
sell the security before recovery of its cost basis, it recognizes the credit component of an
other-than-temporary impairment of a debt security in earnings and the remaining portion in
other comprehensive income. For held-to-maturity debt securities, the amount of an
other-than-temporary impairment recorded in other comprehensive income for the noncredit
portion of a previous other-than-temporary impairment is amortized prospectively over the
remaining life of the security on the basis of the timing of future estimated cash flows of
the security.
For equity securities, when the Company has decided to sell an impaired available-for-sale
security and the entity does not expect the fair value of the security to fully recover
before the expected time of sale, the security is deemed other-than-temporarily impaired in
the period in which the decision to sell is made. The Company recognizes an impairment loss
when the impairment is deemed other than temporary even if a decision to sell has not been
made.
96
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Equity Method Investments
The Company had investments in common stock of companies recorded under the equity method of
accounting. The equity method is used whenever the Company lacks control, but exercises
significant influence over the operating and financial policies of an investee. Under the
equity method, the Company increases (decreases) its carrying amount of its investment in the
investees to reflect the Companys share of income (losses) and reduces its investment to
reflect dividends received. The Companys share of the income (losses) in the investees is
included in the Companys net income (loss). The Company sold its remaining equity method
investments in 2007. There were no equity method investments as of December 31, 2009 and
2008.
Cost Method Investments
The Company has investments in common stock of companies recorded under the cost method of
accounting. The Company owns less than 20% of the investees common stock and does not have
the ability to exercise significant influence over the operating and financial policies of
the investees. Under the cost method, the Companys carrying amount of its investment
represents the cost paid initially for the stock which is periodically reviewed for
impairment.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the
lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized
through a valuation allowance by charges to noninterest income. Gains and losses on loan
sales are recorded in noninterest income, and direct loan origination costs and fees are
deferred at origination of the loan and are recognized in noninterest income upon the sale of
the loan.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until
maturity or payoffs are reported at their outstanding principal balances adjusted for
unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or
costs on originated loans and unamortized premiums or discounts on purchased loans.
For loans amortized at cost, interest income is accrued based on the unpaid principal
balance. Loan origination fees, net of certain direct origination costs, as well as premiums
and discounts, are deferred and amortized as a level yield adjustment over the respective
term of the loan.
The accrual of interest on mortgage and commercial loans is discontinued at the time the loan
is 90 days past due unless the credit is well-secured and in process of collection. Past due
status is based on contractual terms of the loan. In all cases, loans are placed on
nonaccrual or charged off at an earlier date if collection of principal or interest is
considered doubtful.
97
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
All interest accrued but not collected for loans that are placed on nonaccrual or
charged off are reversed against interest income. The interest on these loans is accounted
for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans
are returned to accrual status when all the principal and interest amounts contractually due
are brought current and future payments are reasonably assured.
Discounts and premiums on purchased loans are amortized to income using the interest method
over the remaining period to contractual maturity, adjusted for anticipated prepayments.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through
a provision for loan losses charged to income. Loan losses are charged against the allowance
when management believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon
managements periodic review of the collectibility of the loans in light of historical
experience, the nature and volume of the loan portfolio, adverse situations that may affect
the borrowers ability to repay, estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective as it requires estimates that
are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates
to loans that are classified as impaired. For those loans that are classified as impaired,
an allowance is established when the discounted cash flows (or collateral value or observable
market price) of the impaired loan is lower than the carrying value of that loan. The
general component covers nonclassified loans and is based on historical charge-off experience
and expected loss given default derived from the Companys internal risk rating process.
Other adjustments may be made to the allowance for pools of loans after an assessment of
internal or external influences on credit quality that are not fully reflected in the
historical loss or risk rating data.
A loan is considered impaired when, based on current information and events, it is probable
that the Company will be unable to collect the scheduled payments of principal or interest
when due according to the contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral value and the
probability of collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for the delay, the
borrowers prior payment record and the amount of the shortfall in relation to the principal
and interest owed. Impairment is measured on a loan-by-loan basis for commercial and
agricultural, construction and land development, and commercial and agricultural real estate
loans by either the present value of expected future cash flows discounted at
98
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
the loans effective interest rate, the loans observable market price or the fair value
of the collateral if the loan is collateral dependent.
Groups of loans with similar risk characteristics, including individually evaluated loans not
determined to be impaired, are collectively evaluated for impairment based on the groups
historical loss experience adjusted for changes in trends, conditions and other relevant
factors that affect repayment of the loans. Accordingly, the Company does not separately
identify individual consumer and residential loans for impairment measurements unless such
loans are the subject of a restructuring agreement due to financial difficulties of the
borrower.
Premises and Equipment
Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged
to expense using accelerated and straight-line methods over the estimated useful lives of the
assets. Leasehold improvements are capitalized and depreciated using the straight-line
method over the terms of the respective leases or the estimated useful lives of the
improvements, whichever is shorter.
The estimated useful lives for each major depreciable classification of premises and
equipment are as follows:
|
|
|
|
|
|
|
Buildings and improvements
|
|
35-40 years |
|
|
Leasehold improvements
|
|
5-10 years |
|
|
Equipment
|
|
3-5 years |
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is stated at cost and is a required investment for institutions
that are members of the Federal Home Loan Bank system. The required investment in the common
stock is based on a predetermined formula, carried at cost and evaluated for impairment.
The Company owned approximately $1,931,000 and $3,506,000 of Federal Home Loan Bank of
Chicago (FHLB) stock as of December 31, 2009 and 2008, respectively. The Company has also
recognized $1,575,000 of FHLB stock of Chicago in discontinued operations. During the third
quarter of 2007, FHLB received a Cease and Desist Order from their regulator, the Federal
Housing Finance Board. The order prohibits capital stock repurchases and redemptions until a
time to be determined by the Federal Housing Finance Board. The FHLB will continue to
provide liquidity and funding through advances and purchase loans through the MPF program.
With regard to dividends, the FHLB will continue to assess their dividend capacity each
quarter and may make appropriate request for approval from their regulator. Since the FHLB
did not pay a dividend during the fourth quarter of 2007 or the calendar years of 2009 and
2008, the stock is considered a non-performing asset as of December 31, 2009 and 2008.
Management performed an analysis and determined the cost method investment in this FHLB stock
was recoverable as of December 31, 2009 and 2008.
99
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Foreclosed Assets Held for Sale
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially
recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent
to foreclosure, valuations are periodically performed by management and the assets are
carried at the lower of carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are included in net expense
from foreclosed assets.
Goodwill
Goodwill is tested annually for impairment. If the implied fair value of goodwill is lower
than its carrying amount, a goodwill impairment is indicated and goodwill is written down to
its implied fair value. Subsequent increases in goodwill value are not recognized in the
financial statements.
Core Deposit Intangibles
Core deposit intangibles are being amortized on the straight-line basis over periods ranging
from five to ten years. Such assets and intangible assets with indefinite lives are
periodically evaluated as to the recoverability of their carrying value.
Mortgage Servicing Rights
Mortgage servicing assets are recognized separately when rights are acquired through purchase
or through sale of financial assets. Under the servicing assets and liabilities accounting
guidance (ASC 860-50), servicing rights resulting from the sale or securitization of loans
originated by the Company are initially measured at fair value at the date of transfer. The
Company subsequently measures each class of servicing asset using the amortization method.
Under the amortization method, servicing rights are amortized in proportion to and over the
period of estimated net servicing income. The amortized assets are assessed for impairment
or increased obligation based on fair value at each reporting date.
Fair value is based on market prices for comparable mortgage servicing contracts, when
available, or alternatively, is based on a valuation model that calculates the present value
of estimated future net servicing income. The valuation model incorporates assumptions that
market participants would use in estimating future net servicing income, such as the cost to
service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income,
prepayment speeds and default rates and losses. These variables change from quarter to
quarter as market conditions and projected interest rates change, and may have an adverse
impact on the value of the mortgage servicing right and may result in a reduction to
noninterest income.
100
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Each class of separately recognized servicing assets subsequently measured using the
amortization method are evaluated and measured for impairment. Impairment is determined by
stratifying rights into tranches based on predominant characteristics, such as interest rate,
loan type and investor type. Impairment is recognized through a valuation allowance for an
individual tranche, to the extent that fair value is less than the carrying amount of the
servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in
the measurement of impairment after the initial measurement of impairment. Changes in
valuation allowances are reported separately on the income statement. Fair value in excess
of the carrying amount of servicing assets for that stratum is not recognized.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on
a contractual percentage of the outstanding principal or a fixed amount per loan and are
recorded as income when earned. The amortization of mortgage servicing rights is netted
against loan servicing fee income.
Treasury Stock
Treasury stock is stated at cost. Cost is determined by the first-in, first-out method.
Assets and Liabilities Held for Sale
Assets and liabilities held for sale are related to the sale of Brown County State Bank and
Marine Bank. The Board of Directors has approved a plan to sell the two subsidiary banks
and have entered into an agreement to sell the banks in their present condition. Assets
and liabilities held for sale are carried at the lower of cost or fair value in the
aggregate. See Note 24 for the disclosure regarding the treatment of Brown County and
Marine Bank and Trust as discontinued operations.
Income Taxes
The Company accounts for income taxes in accordance with income tax accounting guidance (ASC
740, Income Taxes). The income tax accounting guidance results in two components of income
tax expense: current and deferred. Current income tax expense reflects taxes to be paid or
refunded for the current period by applying the provisions of the enacted tax law to the
taxable income or excess of deductions over revenues. The Company determines deferred income
taxes using the liability (or balance sheet) method. Under this method, the net deferred tax
asset or liability is based on the tax effects of the differences between the book and tax
bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in
the period in which they occur.
101
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
|
|
Deferred income tax expense results from changes in deferred tax assets and liabilities
between periods. Deferred tax assets are recognized if it is more likely than not, based on
the technical merits, that the tax position will be realized or sustained upon examination.
The term more likely than not means a likelihood of more than 50 percent; the terms examined
and upon examination also include resolution of the related appeals or litigation processes,
if any. A tax position that meets the more-likely-than-not recognition threshold is
initially and subsequently measured as the largest amount of tax benefit that has a greater
than 50 percent likelihood of being realized upon settlement with a taxing authority that has
full knowledge of all relevant information. The determination of whether or not a tax
position has met the more-likely-than-not recognition threshold considers the facts,
circumstances and information available at the reporting date and is subject to managements
judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight
of evidence available, it is more likely than not that some portion or all of a deferred tax
asset will not be realized. |
|
|
The Company recognizes interest and penalties on income taxes as a component of income tax
expense. |
|
|
The Company files consolidated income tax returns in the U.S. federal jurisdiction and
various states with its subsidiaries, with the exception of Mid-America Bancorp, Inc. The
Companys ownership of Mid-America Bancorp, Inc. was 55.5% at December 31, 2009, which does
not meet the requirements to be included in the Companys consolidated tax returns. The
Company is no longer subject to the U.S. federal or state income tax examinations by tax
authorities for years before 2006. |
Self Insurance
|
|
The Company has elected to self-insure certain costs related to employee health benefit
programs. Costs resulting from uninsured losses are charged to income when incurred. The
Company has purchased insurance that limits its exposure to individual and aggregate amounts
in any given year. |
Earnings Per Share
|
|
Earnings per share have been computed for continuing and discontinued operations based upon
the weighted-average common shares outstanding during each year. |
Comprehensive Income (Loss)
|
|
Comprehensive income (loss) consists of net income (loss) and other comprehensive income
(loss), net of applicable income taxes. Other comprehensive income (loss) includes
unrealized appreciation (depreciation) on available-for-sale securities, and changes in the
funded status of defined benefit pension plans. |
102
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Trust Assets
|
|
Assets held in fiduciary or agency capacities are not included in the consolidated balance
sheets since such items are not assets of the Company. Fees from trust activities are
recorded on an accrual basis over the period in which the service is provided. Fees are a
function of the market value of assets managed and administered, the volume of transactions,
and fees for other services rendered, as set forth in the underlying client agreement with
the Companys Trust Department. This revenue recognition involves the use of estimates and
assumptions, including components that are calculated based on estimated asset valuations and
transaction volumes. Generally, the actual trust fee is charged to each account on a monthly
prorated basis. Any out of pocket expenses or services not typically covered by the fee
schedule for trust activities are charged directly to the trust account on a gross basis as
trust revenue is incurred. The Company manages or administers 601 trust accounts with assets
totaling approximately $597,344,000 and $605,928,000 at December 31, 2009 and 2008,
respectively. |
Reclassifications
|
|
Certain reclassifications have been made to the 2008 and 2007 financial statements to conform
to the 2009 financial statement presentation. These reclassifications had no effect on net
income (loss). |
Note 2: Securities
|
|
The amortized cost and approximate fair values, together with gross unrealized gains and
losses of securities are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Discontinued |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Operations |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
Fair Value |
|
Available-for-sale Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities: GSE
residential |
|
$ |
92,710 |
|
|
$ |
2,789 |
|
|
$ |
(145 |
) |
|
$ |
95,354 |
|
|
$ |
38,460 |
|
State and
political
subdivisions |
|
|
28,525 |
|
|
|
1,019 |
|
|
|
(5 |
) |
|
|
29,539 |
|
|
|
2,889 |
|
Equity securities |
|
|
3,603 |
|
|
|
162 |
|
|
|
(508 |
) |
|
|
3,257 |
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
124,838 |
|
|
$ |
3,970 |
|
|
$ |
(658 |
) |
|
$ |
128,150 |
|
|
$ |
41,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
Available-for-sale Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
and federal
agencies |
|
$ |
4,697 |
|
|
$ |
90 |
|
|
$ |
|
|
|
$ |
4,787 |
|
Mortgage-backed
securities: GSE
residential |
|
|
125,691 |
|
|
|
2,783 |
|
|
|
(29 |
) |
|
|
128,445 |
|
State and
political
subdivisions |
|
|
44,892 |
|
|
|
808 |
|
|
|
(34 |
) |
|
|
45,666 |
|
Equity securities |
|
|
6,500 |
|
|
|
|
|
|
|
(206 |
) |
|
|
6,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
181,780 |
|
|
$ |
3,681 |
|
|
$ |
(269 |
) |
|
$ |
185,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Operations |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Amortized |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
Cost |
|
Held-to-maturity Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSE
residential |
|
$ |
2,334 |
|
|
$ |
77 |
|
|
$ |
|
|
|
$ |
2,411 |
|
|
$ |
1,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSE
residential |
|
$ |
5,992 |
|
|
$ |
149 |
|
|
$ |
(1 |
) |
|
$ |
6,140 |
|
|
|
|
|
State and
political
subdivisions |
|
|
2,913 |
|
|
|
48 |
|
|
|
|
|
|
|
2,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,905 |
|
|
$ |
197 |
|
|
$ |
(1 |
) |
|
$ |
9,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
|
|
The amortized cost and fair value of available-for-sale securities and held-to-maturity
securities held in continuing operations at December 31, 2009, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment penalties. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
Held-to-maturity |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
Within one year |
|
$ |
4,473 |
|
|
$ |
4,520 |
|
|
$ |
|
|
|
$ |
|
|
One to five years |
|
|
18,451 |
|
|
|
19,316 |
|
|
|
|
|
|
|
|
|
Five to ten years |
|
|
1,955 |
|
|
|
2,057 |
|
|
|
|
|
|
|
|
|
After ten years |
|
|
3,646 |
|
|
|
3,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,525 |
|
|
|
29,539 |
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities: GSE
residential |
|
|
92,710 |
|
|
|
95,354 |
|
|
|
2,334 |
|
|
|
2,411 |
|
Equity securities |
|
|
3,603 |
|
|
|
3,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
124,838 |
|
|
$ |
128,150 |
|
|
$ |
2,334 |
|
|
$ |
2,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The available-for-sale and held-to-maturity securities included in discontinued operations
had a majority of its maturities within one to five years. |
|
|
The carrying value of securities pledged as collateral, to secure public deposits, Federal
Home Loan Bank advances, repurchase agreements and for other purposes, amounted to
$47,427,000 for continuing operations and $26,373,000 for discontinued operations at December
31, 2009 and $103,797,000 at December 31, 2008. |
|
|
In May 2008, the Company sold its investment in the common stock of First Charter
Corporation, an available-for-sale security, recognizing a gain of $942,000. Income tax
expense of $358,000 was recognized on the sale of available-for-sale securities during 2008.
There were no sales of available-for-sale securities during 2009 or 2007. |
|
|
The Company also owned shares of NorthStar Bancshares, Inc. (NorthStar), as an equity
method investment in prior years. On July 5, 2006, Enterprise Financial Services Corp.
(Enterprise) acquired the outstanding common stock of NorthStar, (including the Companys
19.6% equity interest in NorthStar) in a stock and cash transaction. The Company was
entitled to receive for
each of its 228,392 shares of NorthStar, $5.895 in cash and .918 share of Enterprise common
stock, less .231 share of Enterprise placed in escrow as a reserve against potential losses
incurred by Enterprise resulting from certain NorthStar loans as well as breach of contract
by NorthStar (the contingency). The balance of the Companys equity method investment of
$3,208,000 and related unamortized core deposit intangible of $702,000 totaled $3,910,000 as
of the date of the sale. The Company received $1,347,000 in cash and 156,964 shares of
Enterprise, valued at $4,032,000 in 2006. In addition, 52,670 shares of Enterprise were
placed in escrow and allocated to the Company
|
105
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
|
|
in 2006. The amount of the cash and value of Enterprise stock received in the
transaction, excluding the stock placed in escrow, in excess of the unamortized cost totaled
approximately $1,469,000 and was recorded as a gain in 2006. In 2007, the contingency was
resolved, and the Enterprise shares held in escrow, less the shares liquidated to satisfy
losses incurred on certain NorthStar loans, were distributed to the former NorthStar
shareholders. As part of the distribution, the Company received 28,122 shares of Enterprise,
valued at $699,000, which was recorded as a gain in 2007. During 2008, the Company sold 362
shares of Enterprise, recording a loss on the sale of $1,000. As of December 31, 2009 and
2008, the Company owned 184,724 shares of Enterprise, representing approximately 1.8% of the
outstanding common stock of Enterprise, and was recorded as an available-for-sale investment
of the Company. |
|
|
With the exception of U.S. governmental agencies and corporations, the Company did not hold
any securities of a single issuer, payable from and secured by the same source of revenue or
taxing authority, the book value of which exceeded 10% of stockholders equity at December
31, 2009. |
|
|
During 2009, the Company recognized other-than-temporary impairment charges of $1,504,000 on
two of its investments in stock of other financial institutions, which are carried as
available-for-sale securities. During 2008, the Company recognized other-than-temporary
impairment charges of $4,024,000 on four of its investments in stock of other financial
institutions, which are carried as available-for-sale securities. These impairments were
determined based on the difference between the Companys carrying value and quoted market
prices for the stocks as of December 31, 2009 and 2008, respectively. In making the
determination of impairment for each of these investments, the Company considered the
duration of the loss, prospects for recovery in a reasonable period of time and the
significance of the loss compared to carrying value. |
|
|
Certain investments in debt and marketable equity securities are reported in the consolidated
financial statements at an amount less than their historical cost. Total fair value of these
investments held in continuing operations at December 31, 2009 and 2008, was $17,462,000 and
$12,967,000, which is approximately 13% and 7% of the Companys available-for-sale and held-
to-maturity investment portfolios. These declines primarily resulted from recent changes in
market interest rates and recent volatility in the stock market for equities. |
|
|
Based on evaluation of available evidence, including recent changes in market interest rates,
stock market performance, credit rating information and information obtained from regulatory
filings, management believes the declines in fair value for these securities are temporary. |
|
|
Should the impairment of any of these securities become other-than-temporary, the cost basis
of the investment will be reduced and the resulting loss recognized in net income in the
period the other-than-temporary impairment is identified. |
106
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
|
|
The following table shows the Companys gross unrealized losses and fair value,
aggregated by investment category and length of time that individual securities have been in
a continuous unrealized loss position at December 31, 2009 and 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
Description of |
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
Securities |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities |
|
$ |
12,518 |
|
|
$ |
(145 |
) |
|
$ |
92 |
|
|
$ |
|
|
|
$ |
12,610 |
|
|
$ |
(145 |
) |
State and political
subdivisions |
|
|
1,831 |
|
|
|
(5 |
) |
|
|
182 |
|
|
|
|
|
|
|
2,013 |
|
|
|
(5 |
) |
Equity securities |
|
|
2,839 |
|
|
|
(508 |
) |
|
|
|
|
|
|
|
|
|
|
2,839 |
|
|
|
(508 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily
impaired
securities |
|
$ |
17,188 |
|
|
$ |
(658 |
) |
|
$ |
274 |
|
|
$ |
|
|
|
$ |
17,462 |
|
|
$ |
(658 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities |
|
$ |
7,594 |
|
|
$ |
(28 |
) |
|
$ |
106 |
|
|
$ |
(2 |
) |
|
$ |
7,700 |
|
|
$ |
(30 |
) |
State and political
subdivisions |
|
|
3,406 |
|
|
|
(30 |
) |
|
|
1,021 |
|
|
|
(4 |
) |
|
|
4,427 |
|
|
|
(34 |
) |
Equity securities |
|
|
840 |
|
|
|
(206 |
) |
|
|
|
|
|
|
|
|
|
|
840 |
|
|
|
(206 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily
impaired
securities |
|
$ |
11,840 |
|
|
$ |
(264 |
) |
|
$ |
1,127 |
|
|
$ |
(6 |
) |
|
$ |
12,967 |
|
|
$ |
(270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The debt securities included in discontinued operations did not have any significant
unrealized losses exceeding twelve (12) months or more as of December 31, 2009. |
Note 3: Equity and Cost Method Investments in Common Stock
|
|
The Company has no equity method investments in common stock as of December 31, 2009 and
2008. The Company owned shares of New Frontier Bancshares, Inc. (New Frontier) as an
equity method investment in prior years. On September 27, 2007, the Company completed the
sale of its 36.4% equity position in New Frontier for $6,790,576. New Frontier repurchased
32,647 shares of its common stock, valued at $208 per share, and paid the Company in cash.
The Company had made incremental investments in New Frontier since 2000 totaling $4,716,032,
net of amortization
of core deposit intangibles, at an average cost of approximately $144 per share. The Company
recorded a gain on the sale of $2,074,544. |
|
|
The Company has minority investments in the common stock of other community banks which are
not publicly traded that are recorded under the cost method of accounting. The Company had
investments in three community banks at December 31, 2009 totaling $1,392,000 and in five
community banks at December 31, 2008 totaling $3,314,000. |
107
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
The Companys cost method investments are reviewed annually for impairment based on each
investees earnings performance, asset quality, changes in the economic environment, and
current and projected future cash flows. Based on this review in 2009, the Company
determined three investments to be other-than-temporarily impaired due to poor earnings and
asset quality. Two of the banks were closed by the FDIC and the Companys investment was
reduced to $0. The Company recognized an impairment charge of $1,922,000 on these cost
method investments based on the difference between the Companys cost and the investees book
value, which were determined to be a reasonable estimate of fair value.
During 2008, one of the Companys cost method investments was reclassified to an
available-for-sale security due to the investee becoming publicly traded in 2008.
Note 4: Loans and Allowance for Loan Losses
Categories of loans at December 31, include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
Continuing Operations |
|
|
Discontinued Operations |
|
|
2008 |
|
|
|
|
Commercial and agricultural |
|
$ |
167,390 |
|
|
$ |
64,357 |
|
|
$ |
296,265 |
|
Commercial real estate |
|
|
336,525 |
|
|
|
61,856 |
|
|
|
564,483 |
|
Residential real estate |
|
|
193,136 |
|
|
|
53,588 |
|
|
|
339,261 |
|
Consumer |
|
|
74,793 |
|
|
|
32,157 |
|
|
|
132,000 |
|
Floor plan loans |
|
|
4,145 |
|
|
|
|
|
|
|
7,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
775,989 |
|
|
|
211,958 |
|
|
|
1,339,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
18,851 |
|
|
|
1,820 |
|
|
|
23,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans |
|
$ |
757,138 |
|
|
$ |
210,138 |
|
|
$ |
1,315,907 |
|
|
|
|
|
|
|
|
|
|
|
108
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Activity in the allowance for loan losses was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued |
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
Operations |
|
|
2008 |
|
|
2007 |
|
|
|
|
Balance, beginning of year |
|
$ |
19,038 |
|
|
$ |
4,429 |
|
|
$ |
12,794 |
|
|
$ |
10,613 |
|
Purchased allowance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,126 |
|
Provision charged to expense |
|
|
22,083 |
|
|
|
1,261 |
|
|
|
23,845 |
|
|
|
2,969 |
|
Losses charged off, net of
recoveries of $205
(continuing operations) and
$33 (discontinued
operations) for 2009, $504
for 2008, and $261 for 2007 |
|
|
(22,270 |
) |
|
|
(754 |
) |
|
|
(13,172 |
) |
|
|
(1,914 |
) |
Disposal of HNB |
|
|
|
|
|
|
(3,116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
18,851 |
|
|
$ |
1,820 |
|
|
$ |
23,467 |
|
|
$ |
12,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The loan portfolio includes a concentration of loans to agricultural and agricultural-related
industries amounting to $9,832,000 (continuing operations) and $33,088,000 (discontinued
operations) as of December 31, 2009 and $68,192,000 as of December 31, 2008. Generally,
those loans are collateralized by assets of the borrower. The loans are expected to be
repaid from cash flows or from proceeds of sale of selected assets of the borrowers.
At December 31, 2009, the Company held a concentration in commercial real estate loans
amounting to $336,525,000 (continuing operations) and $61,856,000 (discontinued operations)
and $564,483,000 at December 31, 2008.
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC
310-10-35-16), when based on current information and events, it is probable the Company will
be unable to collect all amounts due from the borrower in accordance with the contractual
terms of the loan. Impaired loans include nonperforming commercial loans but also include
loans modified in troubled debt restructurings where concessions have been granted to
borrowers experiencing financial difficulties. These concessions could include a reduction
in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance
or other actions intended to maximize collection.
109
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Impaired loans totaled $111,249,000 (continuing operations) and $72,090,000 at December
31, 2009 and 2008, respectively. An allowance for loan losses of $7,242,000 (continuing
operations) and $9,636,000 relates to impaired loans of $51,384,000 (continuing operations)
and $39,041,000 at December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008,
impaired loans of $59,866,000 (continuing operations) and $33,049,000 had no related
allowance for loan losses. The amount of impairment recorded through the allowance for loan
losses is measured on a loan-by-loan basis by either the present value of expected future
cash flows, the loans observable market price or the fair value of collateral if the loan is
collateral dependent. Interest of approximately $4,425,000 (continuing operations),
$4,106,000, and $2,207,000 was recognized on average impaired loans of $89,217,000
(continuing operations), $76,532,000, and $20,815,000 for 2009, 2008, and 2007, respectively.
Interest of approximately $3,946,000 (continuing operations), $4,074,000, and $2,303,000 was
received on impaired loans on a cash basis during 2009, 2008, and 2007, respectively.
The impaired loans total $5,325,000 (discontinued operations) at December 31, 2009. An
allowance for loan loss of $158,000 (discontinued operations) relates to impaired loans of
$512,000 (discontinued operations). At December 31, 2009, impaired loans of $4,813,000
(discontinued operations) had no related allowance for loan losses. Interest of
approximately $233,000 (discontinued operations) was recognized on average impaired loans of
$3,859,000 (discontinued operations) for 2009. Interest of approximately $298,000
(discontinued operations) was received on impaired loans on a cash basis during 2009.
At December 31, 2009 and 2008, accruing loans delinquent 90 days or more totaled $393,000
(continuing operations) and $3,856,000, respectively. Non-accruing loans at December 31,
2009 and 2008 were $50,030,000 (continuing operations) and $34,097,000, respectively. At
December 31, 2009, accruing loans delinquent 90 days or more totaled $597,000 (discontinued
operations). Non-accruing loans at December 31, 2009 were $919,000 (discontinued
operations).
See Note 20 for the Companys concentration of credit risk related to certain loan groups.
110
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Note 5: Premises and Equipment
Major classifications of premises and equipment, stated at cost, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
Continuing Operations |
|
|
Discontinued Operations |
|
|
2008 |
|
|
|
|
Land |
|
$ |
3,554 |
|
|
$ |
476 |
|
|
$ |
6,730 |
|
Buildings and improvements |
|
|
23,163 |
|
|
|
3,913 |
|
|
|
35,258 |
|
Leasehold improvements |
|
|
1,758 |
|
|
|
|
|
|
|
1,952 |
|
Equipment |
|
|
13,109 |
|
|
|
2,532 |
|
|
|
19,603 |
|
Construction in progress |
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,584 |
|
|
|
6,921 |
|
|
|
63,573 |
|
Less accumulated depreciation |
|
|
15,914 |
|
|
|
3,232 |
|
|
|
22,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premises and equipment |
|
$ |
25,670 |
|
|
$ |
3,689 |
|
|
$ |
40,616 |
|
|
|
|
|
|
|
|
|
|
|
The Company completed construction of its corporate headquarters in Quincy, Illinois during
the first quarter of 2008. Total capital expenditures for the project were approximately
$14,424,000.
Note 6: Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2009 and
2008 were:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
Balance as of January 1 |
|
$ |
44,653 |
|
|
$ |
43,934 |
|
Goodwill acquired in Royal Palm acquisition |
|
|
|
|
|
|
|
|
Goodwill acquired in HNB acquisition |
|
|
|
|
|
|
719 |
|
Goodwill impairment |
|
|
(44,653 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31 |
|
$ |
|
|
|
$ |
44,653 |
|
|
|
|
|
|
|
|
At the date of the Companys acquisition of HNB Financial in 2007, HNB Financial had
contracts with its data service provider requiring early termination fees if the contracts
were cancelled before their maturity. During 2008, HNB Financial terminated the contracts
and converted to the Companys system. The contracts were terminated within one year of the
acquisition. The Company recognized the termination fees of $719,000 as goodwill.
111
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
In accordance with ASC 350, formerly SFAS No. 142, the Companys goodwill is tested annually
for potential impairment and more frequently if events or changes in circumstances indicate
the asset might be impaired. Due to the decline in the Companys stock price and the
additional provision for loan losses and increased nonperforming assets at several of its
subsidiaries, particularly Royal Palm, the Company hired a valuation specialist to perform an
interim valuation of the Companys goodwill to test for impairment during 2009.
ASC 350 has a two-step process to test goodwill for impairment. The first step is to compare
the estimated fair value, including goodwill, of the reporting unit (the Company) to its net
book value. If the estimated fair value is less than the net book value, a second step is
required. The Company evaluated the first step by utilizing three valuation methodologies
including the Comparable Transactions approach, the Control Premium approach, and the
Discounted Cash Flow approach. The Comparable Transactions approach is based on pricing
ratios recently paid in the sale or merger of reasonably comparable banking franchises; the
Control Premium approach is based on the Companys trading price and application of industry
based control premiums; and the Discounted Cash Flow approach is estimated based on the
present value of projected dividends and a terminal value, based on a five-year
forward-looking operating scenario. Based on the three approaches, it was determined the
fair value, including goodwill, was lower than its net book value. This was primarily due to
the Companys continued stock price decline, the additional provisions for loan losses, and
increased nonperforming assets at several of its subsidiaries, particularly Royal Palm.
Therefore, the Company performed the second step as required by ASC 350. In the second step
of the process, the implied fair value of the Companys goodwill (determined by comparing the
estimated fair value of the Company to the sum of the fair values of the Companys tangible
and separately identifiable intangible net assets as determined by ASC 805, formerly SFAS No.
141R) was compared with the carrying value of goodwill in order to determine the amount of
impairment. As a result of the second step of the process, the Company determined that the
goodwill was fully impaired during the second quarter of 2009, and recorded an impairment
charge of $44.6 million ($30.4 million in continuing operations and $14.2 million in
discontinued operations).
112
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Note 7: Core Deposit and Other Intangible Assets
The carrying basis and accumulated amortization of recognized intangible assets at
December 31, was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
|
|
Core deposits |
|
$ |
1,498 |
|
|
$ |
846 |
|
|
$ |
4,681 |
|
|
$ |
1,093 |
|
Intangible
asset with
indefinite
life |
|
|
414 |
|
|
|
|
|
|
|
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,912 |
|
|
$ |
846 |
|
|
$ |
5,095 |
|
|
$ |
1,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of core deposit and other intangibles for the period is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
Carrying Values |
|
|
Amortization |
|
|
Carrying Values |
|
|
Amortization |
|
|
Carrying Values |
|
|
Amortization |
|
|
|
|
Balance as of January 1 |
|
$ |
5,095 |
|
|
$ |
1,093 |
|
|
$ |
5,095 |
|
|
$ |
581 |
|
|
$ |
2,558 |
|
|
$ |
448 |
|
Acquisition of HNB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,183 |
|
|
|
|
|
Purchase of additional Mid America stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99 |
|
|
|
|
|
Disposal of New Frontier |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(762 |
) |
|
|
(227 |
) |
Acquisition with intangible with indefinite life |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
Amortization of core deposit intangibles |
|
|
|
|
|
|
496 |
|
|
|
|
|
|
|
512 |
|
|
|
|
|
|
|
360 |
|
Disposal of HNB |
|
|
(3,183 |
) |
|
|
(743 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31 |
|
$ |
1,912 |
|
|
$ |
846 |
|
|
$ |
5,095 |
|
|
$ |
1,093 |
|
|
$ |
5,095 |
|
|
$ |
581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Amortization expense for the years ended December 31, 2009, 2008 and 2007 was $178,000,
$193,000, and $254,000, respectively for continuing operations. Estimated amortization
expense for each of the following five years is:
|
|
|
|
|
2010 |
|
$ |
160,000 |
|
2011 |
|
|
131,000 |
|
2012 |
|
|
122,000 |
|
2013 |
|
|
107,000 |
|
2014 |
|
|
77,000 |
|
The Company recognized amortization expense of $318,000, $318,000, and $106,000 related to
discontinued operations for the years ended December 31, 2009, 2008 and 2007.
Note 8: Loan Servicing
Mortgage loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balances of mortgage loans serviced for others was
approximately $200,229,000 and $239,628,000 at December 31, 2009 and 2008, respectively.
Custodial escrow balances maintained in connection with the foregoing loan servicing, and
included in demand deposits, were approximately $1,199,000 and $1,173,000 at December 31,
2009 and 2008, respectively.
The aggregate estimated fair value of capitalized mortgage servicing rights at December 31,
2009, 2008 and 2007 totaled $961,000, $959,000, and $1,630,000, respectively. Comparable
market values and a valuation model that calculates the present value of future cash flows
were used to estimate fair value. For purposes of measuring impairment, risk characteristics
including product type, investor type, and interest rates, were used to stratify the
originated mortgage servicing rights.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
Mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
959 |
|
|
$ |
1,307 |
|
|
$ |
994 |
|
Servicing rights capitalized |
|
|
935 |
|
|
|
309 |
|
|
|
171 |
|
Servicing rights from HNB acquisition |
|
|
|
|
|
|
|
|
|
|
276 |
|
Recovery of MSR income |
|
|
244 |
|
|
|
|
|
|
|
|
|
Amortization of servicing rights |
|
|
(458 |
) |
|
|
(253 |
) |
|
|
(134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,680 |
|
|
|
1,363 |
|
|
|
1,307 |
|
Valuation allowance |
|
|
(366 |
) |
|
|
(404 |
) |
|
|
|
|
Disposal of HNB |
|
|
(429 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
885 |
|
|
$ |
959 |
|
|
$ |
1,307 |
|
|
|
|
|
|
|
|
|
|
|
114
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Activity in the valuation allowance for mortgage servicing rights was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
Balance, beginning of year |
|
$ |
404 |
|
|
$ |
|
|
|
$ |
|
|
Additions |
|
|
|
|
|
|
404 |
|
|
|
|
|
Reductions |
|
|
(244 |
) |
|
|
|
|
|
|
|
|
Direct write-downs |
|
|
|
|
|
|
|
|
|
|
|
|
Disposal of HNB |
|
|
206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
366 |
|
|
$ |
404 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Note 9: Interest-Bearing Deposits
Interest-bearing deposits in denominations of $100,000 or more were approximately
$264,406,000 (continuing operations) and $24,678,000 (discontinued operations) at December
31, 2009 and $254,956,000 at December 31, 2008.
At December 31, 2009, the scheduled maturities of time deposits, including brokered deposits,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
Continuing |
|
|
Discontinued |
|
|
|
Operations |
|
|
Operations |
|
|
|
|
2010 |
|
$ |
279,744 |
|
|
$ |
71,810 |
|
2011 |
|
|
154,863 |
|
|
|
14,910 |
|
2012 |
|
|
58,562 |
|
|
|
8,263 |
|
2013 |
|
|
56,034 |
|
|
|
10,793 |
|
2014 |
|
|
14,635 |
|
|
|
6,494 |
|
Thereafter |
|
|
31,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
595,176 |
|
|
$ |
112,270 |
|
|
|
|
|
|
|
|
115
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Note 10: Short-Term Borrowings
Short-term borrowings included the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
Continuing Operations |
|
|
Discontinued Operations |
|
|
2008 |
|
|
|
|
Federal funds purchased |
|
$ |
6,999 |
|
|
$ |
|
|
|
$ |
1,158 |
|
Securities sold under agreements to repurchase |
|
|
10,259 |
|
|
|
5,062 |
|
|
|
17,365 |
|
U.S. Treasury demand notes |
|
|
1,482 |
|
|
|
|
|
|
|
4,307 |
|
Short-term Federal Home Loan Bank borrowings |
|
|
|
|
|
|
|
|
|
|
2,000 |
|
Short-term Federal Reserve Bank borrowings |
|
|
|
|
|
|
|
|
|
|
12,500 |
|
Short-term note payable |
|
|
1,000 |
|
|
|
|
|
|
|
|
|
Other short-term borrowings |
|
|
11,000 |
|
|
|
|
|
|
|
11,897 |
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings |
|
$ |
30,740 |
|
|
$ |
5,062 |
|
|
$ |
49,227 |
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase consist of obligations of the Company to other
parties. The obligations are secured by mortgage-backed securities and such collateral is
held by Wilmington Trust and United Missouri Bank. The maximum amount of outstanding
agreements at any month end during 2009 and 2008 totaled $21,429,000 and $27,097,000 and the
monthly average of such agreements was $12,582,000 and $24,405,000, respectively. All of the
agreements at December 31, 2009 mature within 12 months.
Short-term notes payable at December 31, 2009 consist of obligations due to various
individuals, all with maturity dates of June 30, 2010 and interest payable quarterly at an
annual rate of 5.5%. These notes are secured by the common stock of Heartland Bank.
Other short-term borrowings consisted of three notes payable at December 31, 2008:
|
1. |
|
A demand note with Great River Bancshares, Inc. (Great River), owned by
R. Dean Phillips (Phillips), a significant shareholder of the Company, with a
principal balance of $7,552,000 and an annual interest rate of 7.5%. The principal
balance, together with accrued interest, was payable immediately upon Great Rivers
written demand. The note was secured by 100% of the outstanding shares of the
Banks. During 2009, the Company borrowed an additional $4,000,000 from Great River
with terms consistent with the first note. Principal and interest on both notes
were paid in full in December 2009 as part of the Exchange Agreement with Phillips,
wherein Phillips acquired HNB National Bank (HNB) in exchange for the repayment of
$28 million of the Great River debt. |
116
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
|
2. |
|
A note payable by Mid-America Bancorp, Inc. to First Community Bank of Lees
Summit, Missouri. The note had a principal balance of $4,000,000 and an annual
interest rate of 7.0%. Both the principal balance and accrued interest were payable
on demand. As of February 5, 2009, the Company assumed this note from First
Community Bank by issuance of an inter-company convertible debenture to Mid-America.
The debentures are eliminated on a consolidated basis and therefore excluded in the
Companys financial statements. |
|
|
3. |
|
A note payable resulting from HNB foreclosing on a loan where HNB was the
secondary lien-holder on the property. As of December 31, 2008, HNB owed the
primary lien-holder $345,000, which was paid during January 2009. |
At December 31, 2009, other short-term borrowings consisted of a term note payable to Great
River with a principal balance of $11,000,000, a maturity date of January 31, 2010 and an
annual interest rate of 7.5%. Both principal and interest were paid in full in February
2010 from the proceeds of the sale of Marine Bank and Trust and Brown County State Bank (see
Note 24).
Note 11: Long-Term Debt and Junior Subordinated Debentures
Long-term debt and junior subordinated debentures consisted of the following components
at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
Continuing |
|
|
Discontinued |
|
|
|
|
|
|
Operations |
|
|
Operations |
|
|
2008 |
|
|
|
|
Federal Home Loan Bank
advances, fixed rates from
3.15% to 5.30% (continuing
operations) and 4.52% to
5.30% (discontinued
operations), due at various
dates through 2013
(continuing operations) and
2016 (discontinued
operations) |
|
$ |
18,000 |
|
|
$ |
13,500 |
|
|
$ |
60,500 |
|
Note payable, fixed rate of
7.50%, due August 31, 2010 |
|
|
5,037 |
|
|
|
|
|
|
|
5,037 |
|
Note payable, fixed rate of
7.50%, due August 31, 2010 |
|
|
135 |
|
|
|
|
|
|
|
2,015 |
|
Note payable, fixed rate of
7.50%, due November 10, 2009 |
|
|
|
|
|
|
|
|
|
|
15,109 |
|
Junior subordinated
debenture, variable rate, due
June 30, 2013 |
|
|
2,000 |
|
|
|
|
|
|
|
2,000 |
|
Junior subordinated
debentures owed to
unconsolidated subsidiaries |
|
|
61,858 |
|
|
|
|
|
|
|
61,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
87,030 |
|
|
$ |
13,500 |
|
|
$ |
146,519 |
|
|
|
|
|
|
|
|
|
|
|
117
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
The Federal Home Loan Bank (FHLB) advances are secured by U.S. Government agency and
mortgage-backed securities, first-mortgage loans, and all stock in the FHLB owned by the
Company. The advances are subject to restrictions or penalties in the event of prepayments.
The Company has $18,000,000 (continuing operations) and $13,500,000 (discontinued operations)
in FHLB borrowings having a weighted average rate of 4.91% which are subject to being called
beginning in 2010.
During December 2008, Great River assumed three notes payable from US Bank (USB) with
principal balances of $15,109,000, $5,037,000, and $2,015,000. The terms of the assumed
notes were the same as the terms with USB, including the various covenants.
The $15,109,000 note payable was secured by 100% of the outstanding shares of the Banks.
Interest was payable quarterly at a fixed annual rate of 6.09% until amended in November 2009
to a fixed annual rate of 7.5%. Principal was due in three payments as follows: $375,000
due March 31, 2009, $375,000 due June 30, 2009, and $14,359,000 due on November 10, 2009.
Both principal and interest pertaining to this note were paid in full in December 2009 as
part of the Exchange Agreement with Phillips.
The $5,037,000 and $2,015,000 notes payable were secured by 100% of the outstanding shares of
the Banks. Interest was payable quarterly at fixed annual rates of 6.13% and 6.27%,
respectively, until amended in November 2009 to fixed annual rates of 7.5%. Principal was
due in four payments as follows: $125,000 each due December 31, 2009, $125,000 each due
March 31, 2010, $125,000 each due June 30, 2009, and the remaining principal of $4,662,000
and $1,640,000, respectively, due August 31, 2010. Principal of $1,880,000 and interest
pertaining to the $2,015,000 note were paid as part of the Exchange Agreement with Phillips
leaving a principal balance due of $135,000 at December 31, 2009. This balance, along with
both principal and interest pertaining to the $5,037,000 note, was paid in full in February
2010 from the proceeds of the sale of Marine Bank and Trust and Brown County State Bank (see
Note 24).
The notes payable had various covenants including ratios relating to the Companys capital,
allowance for loan losses, return on assets, non-performing assets and debt service coverage.
At December 31, 2008, the Companys non-performing assets to primary capital ratio of 26%
was in noncompliance with the covenant requiring an 18% maximum. Also at December 31, 2008,
the Companys fixed charge coverage ratio of (.72)% was in noncompliance with the covenant
requiring a minimum of 1.10%. The notes payable were due upon demand due to the debt
covenant noncompliance and Great River could have required repayment at its discretion before
maturity. In April 2009, the Company received a waiver from Great River relating to the debt
covenant violations at December 31, 2008.
On November 21, 2009, the Company entered into a Second Waiver and Amendment (the Second
Waiver) to the Fourth Amended and Restated Loan Agreement by and between the Company and
Great River. The Second Waiver waived the Companys breaches of, and amended, certain
financial and other covenants, extended the principal payment and maturity dates on certain
of the notes payable, and provided that all principal and interest related to the notes
payable would be repaid from the proceeds of the sale of Marine Bank and Trust and Brown
County State Bank (see Note 24). As of December 31, 2009, the Company was in compliance with
all debt covenants
118
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
related to the notes payable with Great River. In February 2010, the sale
of Marine Bank and Trust and Brown County State Bank was consummated, and all principal and
interest due to Great River was paid in full. On August 15, 2007, Mercantile Bank assigned
its debenture with affiliate Heartland Bank to Security Bank of Pulaski Co. in the amount of
$2,000,000. This debenture was originally issued June 30, 2005 with a maturity date of June
30, 2013. Interest is payable semi-annually on June 30 and December 31 at the prime rate of
interest. At December 31, 2009, this rate was 3.25%. Principal is payable in full on June
30, 2013.
During 2005, the Company issued $10,310,000 of junior subordinated debt owed to Mercantile
Bancorp Capital Trust I (Trust). The Trust is a wholly-owned unconsolidated subsidiary,
which was formed on August 25, 2005, to issue cumulative preferred securities. The Company
owns all of the securities of the Trust that possess general voting powers. The Company
issued shares of the preferred securities through a private placement offering on August 25,
2005 through the Trust. The Trust invested the proceeds in the Companys junior subordinated
debentures. The junior subordinated debentures have a fixed interest rate for approximately
10 years of 6.10%, which was the rate on December 31, 2009 and 2008. Commencing November 25,
2015, the rate is equal to 3 month LIBOR plus 144 basis points. The junior subordinated
debentures mature on August 25, 2035 and are callable, at the option of the Company, at par
on or after November 23, 2010. The Trusts sole asset is the Companys junior subordinated
debt. The Companys obligations with respect to the issuance of the preferred securities
constitute a full and unconditional guarantee of the Trusts obligations with respect to the
preferred securities. Interest on the junior subordinated debentures and distributions on
the preferred securities are payable quarterly in arrears. Distributions on the preferred
securities are cumulative. The Company has the right, at any time, so long as no event of
default has occurred and is continuing, to defer payments of interest on the junior
subordinated debentures, which will require deferral of distribution of the preferred
securities, for a period not exceeding 20 consecutive quarterly periods, provided that such
deferral may not extend beyond the stated maturity of the junior subordinated debentures.
The preferred securities are subject to mandatory redemption, in whole or in part, upon
repayment of the junior subordinated debentures at maturity or their earlier redemption.
During 2006, the Company issued $20,619,000 of junior subordinated debt owed to Mercantile
Bancorp Capital Trust II (Trust). The Trust is a wholly-owned unconsolidated subsidiary,
which was formed on July 13, 2006, to issue cumulative preferred securities. The Company
owns all of the securities of the Trust that possess general voting powers. The Company
issued shares of the preferred securities through a private placement offering on July 13,
2006 through the Trust. The Trust invested the proceeds in the Companys junior subordinated
debentures. The junior subordinated debentures have a variable interest rate of LIBOR plus
165 basis points, which was 1.90% on December 31, 2009. The rate resets quarterly. The
junior subordinated debentures mature on July 13, 2036 and are callable, at the option of the
Company, at par on or after July 13, 2011. The Trusts sole asset is the Companys junior
subordinated debt. The Companys obligations with respect to the issuance of the preferred
securities constitute a full and unconditional guarantee of the Trusts obligations with
respect to the preferred securities. Interest on the junior subordinated debentures and
distributions on the preferred securities are payable quarterly in arrears. Distributions on
the preferred securities are cumulative. The Company has the right, at any time, so long as
no event of default has occurred and is continuing, to defer payments
119
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
of interest on the
junior subordinated debentures, which will require deferral of distribution of the preferred
securities, for a period not exceeding 20 consecutive quarterly periods, provided that such
deferral may not extend beyond the stated maturity of the junior subordinated debentures.
The preferred securities are subject to mandatory redemption, in whole or in part, upon
repayment of the junior subordinated debentures at maturity or their earlier redemption.
During 2006, the Company issued $10,310,000 of junior subordinated debt owed to Mercantile
Bancorp Capital Trust III (Trust). The Trust is a wholly-owned unconsolidated subsidiary,
which was formed on July 13, 2006, to issue cumulative preferred securities. The Company
owns all of the securities of the Trust that possess general voting powers. The Company
issued shares of the preferred securities through a private placement offering on July 13,
2006 through the Trust. The Trust invested the proceeds in the Companys junior subordinated
debentures. The junior subordinated debentures have a fixed interest rate for approximately
5 years, which was 7.17% on December 31, 2009. Commencing September 2011, the rate is equal
to 3 month LIBOR plus 153 basis points. The junior subordinated debentures mature on July
13, 2036 and are callable, at the option of the Company, at par on or after July 13, 2011.
The Trusts sole asset is the Companys junior subordinated debt. The Companys obligations
with respect to the issuance of the preferred
securities constitute a full and unconditional guarantee of the Trusts obligations with
respect to the preferred securities. Interest on the junior subordinated debentures and
distributions on the preferred securities are payable quarterly in arrears. Distributions on
the preferred securities are cumulative. The Company has the right, at any time, so long as
no event of default has occurred and is continuing, to defer payments of interest on the
junior subordinated debentures, which will require deferral of distribution of the preferred
securities, for a period not exceeding 20 consecutive quarterly periods, provided that such
deferral may not extend beyond the stated maturity of the junior subordinated debentures.
The preferred securities are subject to mandatory redemption, in whole or in part, upon
repayment of the junior subordinated debentures at maturity or their earlier redemption.
During 2007, the Company issued $20,619,000 of junior subordinated debt owed to Mercantile
Bancorp Capital Trust IV (Trust). The Trust is a wholly-owned unconsolidated subsidiary,
which was formed on August 30, 2007, to issue cumulative preferred securities. The Company
owns all of the securities of the Trust that possess general voting powers. The Company
issued shares of the preferred securities through a private placement offering on August 30,
2007 through the Trust. The Trust invested the proceeds in the Companys junior subordinated
debentures. The junior subordinated debentures have a fixed interest rate for approximately
10 years, which was 6.84% on December 31, 2009. Commencing November 2017, the rate is equal
to 3 month LIBOR plus 158 basis points. The junior subordinated debentures mature on October
30, 2037 and are callable, at the option of the Company, at par on or after October 30, 2017.
The Trusts sole asset is the Companys junior subordinated debt. The Companys obligations
with respect to the issuance of the preferred securities constitute a full and unconditional
guarantee of the Trusts obligations with respect to the preferred securities. Interest on
the junior subordinated debentures and distributions on the preferred securities are payable
quarterly in arrears. Distributions on the preferred securities are cumulative. The Company
has the right, at any time, so long as no event of default has occurred and is continuing, to
defer payments of interest on the junior subordinated debentures, which will require deferral
of distribution of the preferred securities, for a period not
120
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
exceeding 20 consecutive
quarterly periods, provided that such deferral may not extend beyond the stated maturity of
the junior subordinated debentures. The preferred securities are subject to mandatory
redemption, in whole or in part, upon repayment of the junior subordinated debentures at
maturity or their earlier redemption.
Beginning in June 2009 the Company elected to defer regularly scheduled interest payments on
all of its outstanding junior subordinated debentures relating to its trust preferred
securities. The terms of the debentures and the trust documents allow the Company to defer
payments of interest for up to 20 consecutive quarterly periods without default or penalty.
During the deferral period, the respective trusts will likewise suspend the declaration and
payment of dividends on the trust preferred securities. Also during the deferral period, the
Company may not, among other things and with limited exceptions, pay cash dividends on or
repurchase its common stock nor make any payment on outstanding debt obligations that rank
equally with or junior to the debentures. At December 31, 2009 unpaid deferred interest on
the debentures totaled approximately $2.3 million.
Although the interest payments are being deferred, the Company continues to record accrued
interest on the debentures in its financial statements. The interest expense was
approximately $3.3 million, $3.9 million and $3.3 million for the years ended December 31,
2009, 2008, and 2007 respectively.
The trust preferred securities issued by Trust I, Trust II, Trust III, and Trust IV are
included as Tier I capital of the Company for regulatory capital purposes. On March 1, 2005,
the Federal Reserve Board adopted a final rule that allows the continued limited inclusion of
trust preferred securities in the calculation for Tier I capital for regulatory purposes.
The final rule provided a five-year transition period ending September 30, 2009, for
application of the quantitative limits.
Per regulation, 25% of Tier I capital (see Note 14) can be comprised of the junior
subordinated debt owed to the Trusts.
Aggregate annual maturities of long-term debt and junior subordinated debentures at December
31, 2009, are:
|
|
|
|
|
|
|
|
|
|
|
Continuing |
|
|
Discontinued |
|
|
|
Operations |
|
|
Operations |
|
|
|
|
2010 |
|
$ |
10,172 |
|
|
$ |
|
|
2011 |
|
|
8,000 |
|
|
|
3,000 |
|
2012 |
|
|
2,000 |
|
|
|
3,000 |
|
2013 |
|
|
5,000 |
|
|
|
|
|
2014 |
|
|
|
|
|
|
|
|
Thereafter |
|
|
61,858 |
|
|
|
7,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
87,030 |
|
|
$ |
13,500 |
|
|
|
|
|
|
|
|
121
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Note 12: Income Taxes
The provision for income tax expense (benefit) includes these components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
Continuing Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxes currently payable |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(10,094 |
) |
|
$ |
(4,246 |
) |
|
$ |
801 |
|
State |
|
|
|
|
|
|
161 |
|
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(261 |
) |
|
|
(6,446 |
) |
|
|
68 |
|
State |
|
|
(1,782 |
) |
|
|
(840 |
) |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) on continuing operations |
|
$ |
(12,137 |
) |
|
$ |
(11,371 |
) |
|
$ |
952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxes currently payable |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
2,495 |
|
|
$ |
3,476 |
|
|
$ |
2,466 |
|
State |
|
|
|
|
|
|
(188 |
) |
|
|
472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
159 |
|
|
|
(454 |
) |
|
|
(444 |
) |
State |
|
|
(421 |
) |
|
|
(12 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense on discontinued operations |
|
$ |
2,233 |
|
|
$ |
2,822 |
|
|
$ |
2,483 |
|
|
|
|
|
|
|
|
|
|
|
122
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
A reconciliation of income tax expense (benefit) on continuing operations at the statutory
rate to the Companys actual income tax expense (benefit) is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
Computed at the statutory rate (35%) |
|
$ |
(22,594 |
) |
|
$ |
(10,794 |
) |
|
$ |
2,057 |
|
Increase (decrease) resulting from |
|
|
|
|
|
|
|
|
|
|
|
|
Graduated tax rates |
|
|
646 |
|
|
|
308 |
|
|
|
(59 |
) |
Tax exempt income |
|
|
(529 |
) |
|
|
(577 |
) |
|
|
(718 |
) |
State income taxes |
|
|
(1,176 |
) |
|
|
(448 |
) |
|
|
55 |
|
Increase in cash surrender value of life insurance |
|
|
(196 |
) |
|
|
(184 |
) |
|
|
(184 |
) |
Goodwill impairment |
|
|
10,332 |
|
|
|
|
|
|
|
|
|
Gain on sale of BOLI policies |
|
|
694 |
|
|
|
|
|
|
|
|
|
Changes in the deferred tax asset valuation allowance |
|
|
5,590 |
|
|
|
|
|
|
|
|
|
Tax basis difference on exchange of HNB |
|
|
(5,009 |
) |
|
|
246 |
|
|
|
|
|
Other |
|
|
105 |
|
|
|
77 |
|
|
|
(199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual tax expense (benefit) |
|
$ |
(12,137 |
) |
|
$ |
(11,371 |
) |
|
$ |
952 |
|
|
|
|
|
|
|
|
|
|
|
123
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
The tax effects of temporary differences related to deferred taxes shown on the balance
sheets were:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
6,885 |
|
|
$ |
8,467 |
|
Accrued compensated absences |
|
|
115 |
|
|
|
236 |
|
Deferred compensation |
|
|
759 |
|
|
|
1,349 |
|
Accrued postretirement benefits |
|
|
125 |
|
|
|
156 |
|
Deferred loss on investments |
|
|
2,050 |
|
|
|
825 |
|
Capital loss carryforward on disposal of HNB |
|
|
5,773 |
|
|
|
|
|
Net operating loss carryforward of Mid-America Bancorp, Inc. |
|
|
2,395 |
|
|
|
962 |
|
Stock options |
|
|
111 |
|
|
|
111 |
|
Deferred loan fees |
|
|
80 |
|
|
|
79 |
|
Alternative minimum tax credits |
|
|
149 |
|
|
|
441 |
|
Other |
|
|
1,029 |
|
|
|
468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,471 |
|
|
|
13,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Federal Home Loan Bank stock dividends |
|
|
277 |
|
|
|
416 |
|
Depreciation |
|
|
522 |
|
|
|
413 |
|
State taxes |
|
|
452 |
|
|
|
382 |
|
Mortgage servicing rights |
|
|
334 |
|
|
|
183 |
|
Deferred gain on sale of BOLI policies |
|
|
770 |
|
|
|
|
|
Unrealized gains on available-for-sale securities |
|
|
1,161 |
|
|
|
1,205 |
|
Purchase accounting adjustments |
|
|
35 |
|
|
|
1,151 |
|
Other |
|
|
118 |
|
|
|
163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,669 |
|
|
|
3,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset before valuation allowance |
|
$ |
15,802 |
|
|
$ |
9,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
|
|
|
$ |
|
|
(Increase) decrease during the period |
|
|
(5,590 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
|
(5,590 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
10,212 |
|
|
$ |
9,181 |
|
|
|
|
|
|
|
|
As of December 31, 2009, the Company had $7,043,000 of net operating loss carryforwards
relating to Mid-America Bancorp, Inc. The carryforwards expire in 15-20 years.
As of December 31, 2009, the Company had $149,000 of alternative minimum tax credits
available to offset future federal income taxes. The credits have no expiration date.
124
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Note 13: Other Comprehensive Income (Loss)
|
|
Other comprehensive income (loss) components and related taxes were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Unrealized appreciation
(depreciation) on
available-for-sale
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation
(depreciation) on
available-for-sale
securities, net of tax
expense (benefit) of
$(115) (Continuing
operations) and $412
(Discontinued
operations) for 2009,
$(354) for 2008, and $73
for 2007 |
|
$ |
449 |
|
|
$ |
(497 |
) |
|
$ |
240 |
|
Less reclassification
adjustment for the
disposal of HNB, net of
tax expense of $106 for
2009, $0 for 2008 and $0
for 2009 |
|
|
509 |
|
|
|
|
|
|
|
|
|
Less reclassification
adjustment for realized
gains (losses) included
in income net of tax
expense (benefit) of $0
for 2009, $358 for 2008
and $0 for 2007 |
|
|
|
|
|
|
584 |
|
|
|
|
|
Less reclassification
adjustment for
other-than-temporary
gains (losses) included
in income net of tax
expense (benefit) of
$(571) (Continuing
operations) for 2009,
$(1,727) for 2008 and $0
for 2007 |
|
|
(932 |
) |
|
|
(2,818 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrealized
appreciation on
available-for-sale
securities, net of
tax expense of $456
(Continuing
operations) and
$306 (Discontinued
operations) for
2009, $1,015 for
2008, and $73 for
2007 |
|
$ |
872 |
|
|
$ |
1,737 |
|
|
$ |
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other
comprehensive loss of equity
method investee |
|
$ |
|
|
|
$ |
|
|
|
$ |
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit
post-retirement liability,
net of tax expense (benefit)
of ($10) (Continuing
operations) and ($2)
(Discontinued operations) for
2009, ($12) for 2008, and $0
for 2007 |
|
$ |
20 |
|
|
$ |
20 |
|
|
$ |
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive
income (loss), net of tax |
|
$ |
892 |
|
|
$ |
1,757 |
|
|
$ |
282 |
|
|
|
|
|
|
|
|
|
|
|
125
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
|
|
The components of accumulated other comprehensive income, included in stockholders
equity, are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
Continuing |
|
|
Discontinued |
|
|
|
|
|
|
Operations |
|
|
Operations |
|
|
2008 |
|
Net unrealized gain on
securities
available-for-sale |
|
$ |
3,401 |
|
|
$ |
1,645 |
|
|
$ |
3,412 |
|
Net unrealized loss on
defined benefit
post-retirement
liability |
|
|
(168 |
) |
|
|
(29 |
) |
|
|
(230 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,233 |
|
|
|
1,616 |
|
|
|
3,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect |
|
|
(1,097 |
) |
|
|
(798 |
) |
|
|
(1,120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net-of-tax amount |
|
$ |
2,136 |
|
|
$ |
818 |
|
|
$ |
2,062 |
|
|
|
|
|
|
|
|
|
|
|
Note 14: Regulatory Matters
|
|
On February 26, 2009, the Companys shareholders voted to authorize the Companys Board
of Directors to create and issue up to 100,000 shares in one or more classes of preferred
stock, and to add 2,000,000 shares to its then base of 12,000,000 shares of common stock. |
|
|
The Company and Banks are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Companys financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Company and Banks must meet specific capital guidelines that involve quantitative measures of
assets, liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors. |
|
|
Quantitative measures established by regulation to ensure capital adequacy require the
Company and Banks to maintain minimum amounts and ratios (set forth in the table below) of
total and Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital (as defined) to average assets (as defined). As discussed
below, the Company and Banks are operating under various regulatory agreements that require
certain minimum capital requirements as specified in the table below. |
126
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
|
|
Per regulation, 25% of Tier I capital can be comprised of the junior subordinated debt
owed to the Trusts (see Note 12). |
|
|
The Company and Banks actual capital amounts and ratios are presented in the following
table. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Requirement Per |
|
|
Minimum To Be Considered |
|
|
|
|
|
|
|
|
|
|
|
Regulation For Capital |
|
|
Adequately Capitalized Per |
|
|
|
Actual |
|
|
Adequacy Purposes |
|
|
Formal Agreement |
|
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
110,356 |
|
|
|
10.6 |
% |
|
$ |
83,111 |
|
|
|
8.0 |
% |
|
|
N/A |
|
|
|
N/A |
|
Mercantile Bank |
|
|
66,682 |
|
|
|
11.2 |
% |
|
|
47,719 |
|
|
|
8.0 |
% |
|
$ |
59,649 |
|
|
|
N/A |
|
Marine Bank and Trust |
|
|
15,548 |
|
|
|
10.8 |
% |
|
|
11,474 |
|
|
|
8.0 |
% |
|
|
14,342 |
|
|
|
N/A |
|
Brown County State Bank |
|
|
7,486 |
|
|
|
11.3 |
% |
|
|
5,322 |
|
|
|
8.0 |
% |
|
|
6,653 |
|
|
|
N/A |
|
Heartland Bank |
|
|
17,504 |
|
|
|
12.9 |
% |
|
|
10,873 |
|
|
|
8.0 |
% |
|
|
13,591 |
|
|
|
12.0 |
% |
Royal Palm Bank of Florida |
|
|
14,456 |
|
|
|
15.1 |
% |
|
|
7,652 |
|
|
|
8.0 |
% |
|
|
9,565 |
|
|
|
12.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
55,178 |
|
|
|
5.3 |
% |
|
|
41,556 |
|
|
|
4.0 |
% |
|
|
N/A |
|
|
|
N/A |
|
Mercantile Bank |
|
|
59,216 |
|
|
|
9.9 |
% |
|
|
23,860 |
|
|
|
4.0 |
% |
|
|
35,790 |
|
|
|
N/A |
|
Marine Bank and Trust |
|
|
14,279 |
|
|
|
10.0 |
% |
|
|
5,737 |
|
|
|
4.0 |
% |
|
|
8,605 |
|
|
|
N/A |
|
Brown County State Bank |
|
|
6,935 |
|
|
|
10.4 |
% |
|
|
2,661 |
|
|
|
4.0 |
% |
|
|
3,992 |
|
|
|
N/A |
|
Heartland Bank |
|
|
14,579 |
|
|
|
10.7 |
% |
|
|
5,437 |
|
|
|
4.0 |
% |
|
|
8,155 |
|
|
|
N/A |
|
Royal Palm Bank of Florida |
|
|
13,192 |
|
|
|
13.8 |
% |
|
|
3,826 |
|
|
|
4.0 |
% |
|
|
5,739 |
|
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital
(to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
55,178 |
|
|
|
3.3 |
% |
|
|
66,611 |
|
|
|
4.0 |
% |
|
|
N/A |
|
|
|
5.0 |
% |
Mercantile Bank |
|
|
59,216 |
|
|
|
7.4 |
% |
|
|
32,033 |
|
|
|
4.0 |
% |
|
|
40,042 |
|
|
|
N/A |
|
Marine Bank and Trust |
|
|
14,279 |
|
|
|
7.3 |
% |
|
|
7,855 |
|
|
|
4.0 |
% |
|
|
9,819 |
|
|
|
N/A |
|
Brown County State Bank |
|
|
6,935 |
|
|
|
8.3 |
% |
|
|
3,362 |
|
|
|
4.0 |
% |
|
|
4,203 |
|
|
|
N/A |
|
Heartland Bank |
|
|
14,579 |
|
|
|
8.1 |
% |
|
|
7,217 |
|
|
|
4.0 |
% |
|
|
9,022 |
|
|
|
8.0 |
% |
Royal Palm Bank of Florida |
|
|
13,192 |
|
|
|
8.9 |
% |
|
|
5,932 |
|
|
|
4.0 |
% |
|
|
7,415 |
|
|
|
8.0 |
% |
127
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
|
|
Brown County State Bank and Marine Bank and Trust were not operating under any formal
agreements as of December 31, 2009. As of December 31, 2009, the most recent notification
from Brown County State Bank and Marine Bank and Trusts regulatory authorities categorized
the Banks as well capitalized under the regulatory framework for prompt corrective action.
Additionally, as of December 31, 2009, Mercantile Bank was considered to be well capitalized
under the regulatory framework for prompt corrective action; however, as noted below,
subsequent to December 31, 2009, Mercantile Bank received a Memorandum of Understanding
requiring the Bank to maintain its Tier I leverage capital ratio at no less than 8.0% and
total risk-based capital ratio of no less than 12.0% by April 7, 2010. To be categorized as
well capitalized, the Banks must maintain capital ratios as follows: Total capital to
risk-weighted assets 10.0%, Tier I capital to risk-weighted assets 6.0% and Tier I capital to
average assets of 5.0%. There are no conditions or events since that notification that
management believes have changed the Banks category. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well Capitalized |
|
|
|
|
|
|
|
|
|
|
|
For Capital Adequacy |
|
|
Under Prompt Corrective |
|
|
|
Actual |
|
|
Purposes |
|
|
Action Provisions |
|
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
133,489 |
|
|
|
9.3 |
% |
|
$ |
115,431 |
|
|
|
8.0 |
% |
|
|
N/A |
|
|
|
N/A |
|
Mercantile Bank |
|
|
65,654 |
|
|
|
10.1 |
% |
|
|
51,753 |
|
|
|
8.0 |
% |
|
$ |
64,691 |
|
|
|
10.0 |
% |
Marine Bank and Trust |
|
|
14,967 |
|
|
|
10.1 |
% |
|
|
11,834 |
|
|
|
8.0 |
% |
|
|
14,792 |
|
|
|
10.0 |
% |
Brown County State Bank |
|
|
7,078 |
|
|
|
10.0 |
% |
|
|
5,664 |
|
|
|
8.0 |
% |
|
|
7,080 |
|
|
|
10.0 |
% |
Heartland Bank |
|
|
16,812 |
|
|
|
10.3 |
% |
|
|
13,111 |
|
|
|
8.0 |
% |
|
|
16,388 |
|
|
|
10.0 |
% |
Royal Palm Bank of Florida |
|
|
15,043 |
|
|
|
12.0 |
% |
|
|
10,063 |
|
|
|
8.0 |
% |
|
|
12,579 |
|
|
|
10.0 |
% |
HNB Bank |
|
|
28,701 |
|
|
|
10.4 |
% |
|
|
22,147 |
|
|
|
8.0 |
% |
|
|
27,684 |
|
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
87,954 |
|
|
|
6.1 |
% |
|
|
57,716 |
|
|
|
4.0 |
% |
|
|
N/A |
|
|
|
N/A |
|
Mercantile Bank |
|
|
59,916 |
|
|
|
9.3 |
% |
|
|
25,876 |
|
|
|
4.0 |
% |
|
|
38,815 |
|
|
|
6.0 |
% |
Marine Bank and Trust |
|
|
13,845 |
|
|
|
9.4 |
% |
|
|
5,917 |
|
|
|
4.0 |
% |
|
|
8,875 |
|
|
|
6.0 |
% |
Brown County State Bank |
|
|
6,587 |
|
|
|
9.3 |
% |
|
|
2,832 |
|
|
|
4.0 |
% |
|
|
4,248 |
|
|
|
6.0 |
% |
Heartland Bank |
|
|
13,101 |
|
|
|
8.0 |
% |
|
|
6,555 |
|
|
|
4.0 |
% |
|
|
9,833 |
|
|
|
6.0 |
% |
Royal Palm Bank of Florida |
|
|
13,414 |
|
|
|
10.7 |
% |
|
|
5,031 |
|
|
|
4.0 |
% |
|
|
7,547 |
|
|
|
6.0 |
% |
HNB Bank |
|
|
25,883 |
|
|
|
9.4 |
% |
|
|
11,074 |
|
|
|
4.0 |
% |
|
|
16,610 |
|
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital
(to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
87,954 |
|
|
|
5.1 |
% |
|
|
69,216 |
|
|
|
4.0 |
% |
|
|
N/A |
|
|
|
N/A |
|
Mercantile Bank |
|
|
59,916 |
|
|
|
7.7 |
% |
|
|
31,110 |
|
|
|
4.0 |
% |
|
|
38,887 |
|
|
|
5.0 |
% |
Marine Bank and Trust |
|
|
13,845 |
|
|
|
7.6 |
% |
|
|
7,259 |
|
|
|
4.0 |
% |
|
|
9,074 |
|
|
|
5.0 |
% |
Brown County State Bank |
|
|
6,589 |
|
|
|
7.6 |
% |
|
|
3,473 |
|
|
|
4.0 |
% |
|
|
4,341 |
|
|
|
5.0 |
% |
Heartland Bank |
|
|
13,101 |
|
|
|
7.0 |
% |
|
|
7,480 |
|
|
|
4.0 |
% |
|
|
9,350 |
|
|
|
5.0 |
% |
Royal Palm Bank of Florida |
|
|
13,414 |
|
|
|
8.9 |
% |
|
|
6,033 |
|
|
|
4.0 |
% |
|
|
7,542 |
|
|
|
5.0 |
% |
HNB Bank |
|
|
25,883 |
|
|
|
7.7 |
% |
|
|
13,513 |
|
|
|
4.0 |
% |
|
|
16,891 |
|
|
|
5.0 |
% |
128
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
|
|
Without prior approval, the subsidiary banks are restricted as to the amount of
dividends that they may declare to the balance of the retained earnings account, adjusted for
defined bad debts. In addition, the FDIC has authority to prohibit or to limit the payment
of dividends by a bank if, in the banking regulators opinion, payment of a dividend would
constitute an unsafe or unsound practice in light of the financial condition of the banking
organization. The Company, Mercantile Bank, Royal Palm Bank and Heartland Bank are each
prohibited from paying any dividends without regulatory consent, pursuant to various
regulatory enforcement actions taken at each bank. For further discussion, see Note 22
Operating and Liquidity Matters. |
|
|
In connection with regular examinations of the Company, Mercantile Bank, Royal Palm Bank,
Royal Palm Bancorp, Heartland Bank and Mid-America Bancorp by the Federal Reserve Bank of St.
Louis (FRB), the FDIC, the Illinois Department of Financial and Professional Regulation
(IDFPR) and Florida Office of Financial Regulation (FOFR), various actions were taken by
the regulatory agencies. |
|
|
A cease and desist order (CDO) is a formal action by the FDIC requiring a bank to take
corrective measures to address deficiencies identified by the FDIC. The bank can continue to
serve its customers in all areas including making loans, establishing lines of credit,
accepting deposits and processing banking transactions. All customer deposits remain fully
insured to the maximum limits set by the FDIC. |
|
|
A Memorandum of Understanding (MOU) agreement is characterized by regulatory authorities as
an informal action that is neither published nor made publicly available by the agencies and
is used when circumstances warrant a milder form of action than a formal supervisory action,
such as a cease and desist order. |
|
|
A Written Agreement (WA) is a formal enforcement action by the FRB, similar in nature to an
MOU, but is legally binding and will be published and made public. |
|
|
On March 10, 2009, the Company received a notice from the FRB of its intent to issue an MOU,
which was signed by the Companys Board of Directors on March 17, 2009. Under the terms of
the MOU, the Company is expected to, among other things, provide its subsidiary banks with
financial and managerial resources as needed, submit capital and cash flow plans to the FRB
and provide periodic performance updates to the FRB. In addition, the Company is prohibited
from paying any special salaries or bonuses to insiders, paying dividends, paying interest
related to trust preferred securities, or incur any additional debt, without the prior
written approval of the FRB. On July 31, 2009, the Company submitted to the FRB a three-year
strategic and capital plan designed to strengthen the Companys and its subsidiaries
operations and capital position going forward. The plan reflects the current challenges with
respect to capital and the difficulties in projecting the impact of the economic weakness in
the Companys markets on its loan portfolio, as well as strategies to maintain the financial
strength of the Company and its subsidiaries. A significant part of the plan was the
initiative by the Company to sell one or more subsidiary banks in order to generate liquidity
to reduce debt, improve capital ratios and provide necessary capital contributions to its
remaining subsidiary banks. The result of this initiative was the exchange for debt of HNB
in December 2009 and the sale of Marine Bank and Brown County in February 2010. |
129
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
|
|
On February 16, 2010, the Company executed a WA with the FRB. The terms of the WA are
generally consistent with the MOU, with a requirement that an updated capital and cash flow
plan be submitted to the FRB within sixty days. The Company is working with its legal
advisors to submit the revised plan. As of December 31, 2009, the Company was required to
have 4.0% Tier I capital to average assets to be considered adequately capitalized. The
Company was below the 4% requirement at December 31, 2009. The Company expects to be in
compliance by June 30, 2010 of this requirement as a result of the sale of Brown County State
Bank and Marine Bank in addition to further reduction of the Companys total assets. |
|
|
On March 8, 2010, Mercantile Bank entered into a MOU with the FDIC and the IDFPR. Under the
terms of the MOU, Mercantile Bank agreed, among other things, to provide certain information
to each supervisory authority including, but not limited to, financial performance updates,
loan performance updates, written plan for reducing classified assets and concentrations of
credit, written plan to improve liquidity and reduce dependency on volatile liabilities,
written capital plan, and written reports of progress. In addition, the bank agreed not to
declare any dividends or make any distributions of capital without the prior approval of the
supervisory authorities, and within 30 days of the date of the MOU, to maintain its Tier I
leverage capital ratio at no less than 8.0% and total risk based capital ratio at no less
than 12.0% by April 7, 2010. The MOU did not list a requirement for Tier I capital to
risk-weighted assets. The Company is expected to inject capital by April 7, 2010 to
Mercantile Bank to exceed the required ratios. |
|
|
On October 3, 2008, Royal Palm Bank entered into a MOU with the FDIC and FOFR. Under the
terms of the MOU, Royal Palm Bank agreed, among other things, to provide certain information
to each supervisory authority including, but not limited to, financial performance updates,
loan performance updates, written plan for improved earnings, written capital plan, review
and assessment of all officers who head departments of the bank, and written reports of
progress. In addition, Royal Palm Bank agreed not to declare any dividends or make any
distributions of capital without the prior approval of the supervisory authorities, and to
maintain its Tier I leverage capital ratio at no less than 8.0%, the Tier I risk based
capital ratio at no less than 10.0%, and total risk based capital ratio at no less than
12.0%. |
|
|
In May 2009, Royal Palm Bank entered into a stipulation and consent to the issuance of a CDO
with the FDIC and FOFR. The CDO was issued and became effective May 30, 2009. Under the
CDO, Royal Palm agreed, among other things, to provide certain information to each
supervisory authority including, but not limited to, notification of plans to add any
individual to the board of directors or employ any individual as a senior executive officer,
financial performance updates, loan performance updates, written plan for improved earnings,
written capital plan, written contingency funding plan, written strategic plan, and written
reports of progress. In addition, Royal Palm agreed not to declare any dividends or make any
distributions of capital without the prior approval of the supervisory authorities, and to
maintain its Tier I leverage capital ratio at no less than 8.0%, the Tier I risk based
capital ratio at no less than 10.0%, and total risk based capital ratio at no less than
12.0%. |
130
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
|
|
At September 30, 2009, Royal Palm Banks Tier I leverage ratio was 1.5% and total risk
based capital ratio was 3.6%. As specified in the CDO, Royal Palm Bank notified the
supervisory authorities within 10 days of the determination of the ratios. As a result of
these capital ratios, Royal Palm Bank was not in compliance with the CDO requirements for
capital ratios on September 30, 2009. On October 7, 2009, Royal Palm Bank received a letter
from the FDIC informing it that the FDIC has preliminarily determined that Royal Palm Bank
was critically undercapitalized and was subject to certain mandatory requirements under the
Federal Deposit Insurance Act (FDIA). The letter also required Royal Palm Bank to submit a
capital restoration plan to the FDIC by October 30, 2009, along with certain other
disclosures related to the mandatory requirements under FDIA for critically undercapitalized
banks. On October 9, 2009, the Company injected $2 million of additional capital into Royal
Palm Bank and as a result, as of that date, Royal Palm Bank had a Tier I leverage capital
ratio of 2.7%, a Tier I risk based capital ratio of 4.2% and a total risk based capital ratio
of 5.6%. |
|
|
On October 23, 2009, Royal Palm Bank received a letter from the FOFR demanding that Royal
Palm Bank inject sufficient capital into Royal Palm Bank by November 30, 2009, such that as
of November 30, 2009, Royal Palm Bank has a Tier I leverage capital ratio of at least 6%. In
addition, Royal Palm Bank was required by this FOFR letter to submit a plan to the FOFR
demonstrating how Royal Palm Bank will have a Tier I leverage capital ratio of at least 8%
and a total risk based capital ratio of at least 12% as of December 31, 2009. |
|
|
The Company injected $11.0 million of capital into Royal Palm Bank on December 1, 2009, with
the proceeds from a short term debt from Great River pursuant to the Second Waiver (for
further discussion at Note 10). As of December 31, 2009, Royal Palm Bank had a Tier I
leverage capital ratio of 8.9%, Tier I risk based capital ratio of 13.8% and a total risk
based capital ratio of 15.1%, and was in compliance with all requirements of the CDO. |
|
|
In September 2009, Royal Palm Bancorp entered into a MOU with the FRB. As a one-bank holding
company, this MOU primarily reflected regulatory concerns related to Royal Palm Bancorps
subsidiary (Royal Palm Bank). Under the terms of the MOU, Royal Palm Bancorp agreed, among
other things, to provide certain information to the FRB including, but not limited to,
financial performance updates and written reports of progress. In addition, Royal Palm
Bancorp agreed to assist Royal Palm Bank in addressing weaknesses identified in the bank
examination, and not to pay any salaries or bonuses to insiders, incur any debt, declare any
dividends or make any distributions of capital without the prior approval of the supervisory
authorities, |
|
|
On March 9, 2009, Heartland Bank signed a CDO with the FDIC. Under the terms of the CDO,
Heartland Bank agreed to, among other things, prepare and submit plans and reports to the
FDIC regarding certain matters including, but not limited to, progress reports detailing
actions taken to secure compliance with all provisions of the order, loan performance updates
as well as a written plan for the reduction of adversely classified assets, a revised
comprehensive strategic plan, and a written profit plan and comprehensive budget. In
addition, Heartland Bank agreed not to declare any dividends without the prior consent of the
FDIC and to maintain its Tier I leverage capital ratio at no less than 8.0% and maintain its
total risk based capital at no less than 12.0%. The CDO did not list a requirement for Tier
I capital to risk-weighted assets. As of December 31, 2009, |
131
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Heartland Bank had a Tier I leverage capital ratio of 8.1% and total risk based capital
ratio of 12.9%, and was in compliance with all requirements of the CDO.
In September 2009, Mid-America Bancorp entered into a MOU with the FRB. As a one-bank
holding company, this MOU primarily reflected regulatory concerns related to Mid-Americas
subsidiary (Heartland Bank). Under the terms of the MOU, Mid-America Bancorp agreed, among
other things, to provide certain information to the FRB including, but not limited to,
financial performance updates and written reports of progress. In addition, Mid-America
Bancorp agreed to assist Heartland Bank in addressing weaknesses identified in the bank
examination, and not to pay any salaries or bonuses to insiders, incur any debt, declare any
dividends or make any distributions of capital without the prior approval of the supervisory
authorities.
No fines or penalties were imposed as a result of any of the regulatory enforcement actions.
The Company, Mercantile Bank, Royal Palm Bank, Royal Palm Bancorp, Heartland Bank and
Mid-America Bancorp are committed to ensuring that the requirements of the regulatory
agreements are met in a timely manner.
Note 15: Related Party Transactions
At December 31, 2009 and 2008, the Company had loans outstanding to executive officers,
directors, significant stockholders and their affiliates (related parties).
The aggregate amount of loans, as defined, to such related parties were as follows:
|
|
|
|
|
Balances, January 1, 2009 |
|
$ |
14,907,525 |
|
Change in composition of related parties |
|
|
(8,423,697 |
) |
New loans, including renewals |
|
|
1,447,639 |
|
Payments, including renewals |
|
|
(2,110,376 |
) |
|
|
|
|
|
|
|
|
|
Balances, December 31, 2009 |
|
$ |
5,821,901 |
|
|
|
|
|
In managements opinion, such loans and other extensions of credit were made in the ordinary
course of business and were made on substantially the same terms (including interest rates
and collateral) as those prevailing at the time for comparable transactions with other
persons. Further, in managements opinion, these loans did not involve more than normal risk
of collectibility or present other unfavorable features.
During December 2008, Great River Bancshares, Inc. (Great River), owned by a significant
shareholder of the Company, assumed three notes payable by the Company to U.S. Bank National
Association (USB) with principal balances of $15,109,000, $5,037,000, and $2,015,000. The
terms of the assumed notes were the same as the terms with USB including the various
covenants. Also in 2008, the Company entered into an agreement with Great River for a demand
note with a principal balance of $7,552,000 and interest payable monthly at an annual rate of
7.5%. The
132
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
principal balance, together with accrued interest, is payable immediately upon Great
Rivers written demand. The note is secured by 100% of the outstanding shares of the Banks.
On November 21, 2009, the Company entered into an Exchange Agreement with R. Dean Phillips.
The Exchange Agreement provided for the sale of HNB National Bank, one of the Companys
subsidiary banks, to R. Dean Phillips, the sole shareholder and Chairman of Great River, in
exchange for the repayment of $28 million of the Great River debt. R. Dean Phillips owned,
through participations from Great River, more than $28 million of the Great River debt. The
Company finalized the debt exchange transaction eliminating $28 million of debt owed to Great
River Bancshares, Inc., and transferred control of HNB National Bank to R. Dean Phillips.
The exchange of debt for all issued and outstanding stock of HNB National Bank, headquartered
in Hannibal, Missouri, left approximately $16 million in outstanding debt owed to R. Dean
Phillips and Great River. The Company anticipated the remainder of this debt would be repaid
following the closing of a definitive agreement to sell its two smallest banks, Brown County
State Bank and Marine Bank & Trust, both based in Illinois, to United Community Bancorp,
Inc., of Chatham, Illinois for approximately $25.6 million. These sales closed in the first
quarter of 2010, extinguishing the remaining debt owed to R. Dean Phillips and Great River.
Note 16: Leases
The Company has several noncancellable operating leases, primarily for facilities, that
expire over the next six years. These leases generally contain renewal options for periods
ranging from one to five years. Rental expense for these leases was $456,000, $473,000, and
$391,000 for the years ended December 31, 2009, 2008, and 2007, respectively.
Future minimum lease payments under operating leases are:
|
|
|
|
|
|
|
Operating |
|
|
|
Leases |
|
2010 |
|
$ |
363,431 |
|
2011 |
|
|
325,946 |
|
2012 |
|
|
326,638 |
|
2013 |
|
|
261,124 |
|
2014 |
|
|
236,708 |
|
Thereafter |
|
|
312,390 |
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
1,826,237 |
|
|
|
|
|
133
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Note 17: Acquisitions
On September 7, 2007, the Company completed the acquisition of 100% of the outstanding
common stock of HNB Financial Services, Inc. (HNB Financial), the sole shareholder of HNB
National Bank (HNB), located in Hannibal, Missouri. The results of HNB Financials
operations were included in the consolidated financial statements until HNB was sold in 2009
(See Note 15). The aggregate purchase price was $31,301,000 (includes $864,783 of direct
costs of the acquisition).
The following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date the Company acquired HNB Financial:
|
|
|
|
|
Cash and cash equivalents |
|
$ |
6,511 |
|
Available-for-sale securities |
|
|
27,392 |
|
Held-to-maturity securities |
|
|
4,500 |
|
Loans, net of allowance for loan losses of $1,126 |
|
|
114,095 |
|
Interest receivable |
|
|
878 |
|
Federal Home Loan Bank stock |
|
|
1,775 |
|
Premises and equipment |
|
|
6,785 |
|
Core deposit intangibles |
|
|
3,183 |
|
Goodwill |
|
|
12,569 |
|
Other assets |
|
|
4,034 |
|
|
|
|
|
|
|
|
|
|
Total assets acquired |
|
|
181,722 |
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
129,603 |
|
Short-term borrowings |
|
|
889 |
|
Deferred income taxes |
|
|
748 |
|
Long-term debt |
|
|
17,000 |
|
Interest payable |
|
|
608 |
|
Other liabilities |
|
|
854 |
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed |
|
|
149,702 |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
32,020 |
|
|
|
|
|
The Company performed a core deposit intangible study and, as a result of the study, the
Company recorded the core deposit intangibles based on the determined fair value. The core
deposit intangible was being amortized over 10 years. In addition, other purchase accounting
adjustments were made and are reflected in the table above. The $12,569,000 of goodwill was
assigned entirely to the banking segment of the business and was written off in 2009. None
of the goodwill was deductible for tax purposes.
134
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
HNB Financial had contracts with its data service provider requiring early termination
fees if the contracts were cancelled before their maturity. HNB Financial terminated the
contracts and converted to the Companys system during 2008. The conversion was completed
within one year of the acquisition and the early termination fee of $719,000 was recognized
as goodwill during 2008.
HNB Financials results of operations have been reflected in the Companys consolidated
statements of operations beginning as of the acquisition date. The results of operations for
2009 and 2008 are entirely included in the consolidated statements of operations as either
continuing or discontinued operations; therefore, only 2007 is depicted in the following pro
forma disclosures. These disclosures include the effect of the purchase accounting
adjustments and depict the results of operations as though the merger had taken place at the
beginning of the period presented.
|
|
|
|
|
|
|
Year Ended |
|
|
December 31, |
|
|
2007 |
Net interest income |
|
$ |
44,739 |
|
Net income |
|
|
9,664 |
|
Basic earnings per share |
|
|
1.11 |
|
Note 18: Employee Benefits
The Company has a defined contribution 401(k) profit sharing plan covering substantially
all employees with the exception of Mid-America Bancorp, Inc. Employer contributions charged
to expense for 2009, 2008 and 2007 were $709,000 (continuing operations), $291,000
(continuing operations), and $644,000 (continuing operations), respectively. Employer
contributions charged to expense were $138,000 (discontinued operations), $66,000
(discontinued operations), and $336,000 (discontinued operations) for 2009, 2008 and 2007,
respectively.
Postretirement Benefits
The Company has a noncontributory defined benefit postretirement plan covering all employees
who meet the eligibility requirements. Eligible employees who retired on or before December
31, 1995, and elected individual or family medical coverage, share the cost of the coverage
with the Company. Eligible employees who retire after December 31, 1995, may elect to
continue both their life insurance and medical coverage, excluding prescription drug
benefits, by paying the full cost of the coverage. The plan is unfunded with actual premium
payments being paid as incurred.
The transition obligation is being recognized over the employees future service period as a
component of net periodic postretirement benefit cost. The net periodic postretirement
benefit cost was $83,000 for 2009, $69,000 for 2008, and $70,000 for 2007. The accumulated
postretirement benefit obligation was immaterial as of December 31, 2009 and 2008.
135
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
The Company has salary continuation agreements with certain executives. The agreements
provide monthly payments upon retirement for life, but for not less than 15 years. The
charges to expense for the agreements were $93,000 (continuing operations) and $23,000
(discontinued operations) for 2009, $193,000 for 2008, and $275,000 for 2007. Such charges
reflect the straight-line accrual over the period until full eligibility of the present value
of benefits due each participant on the full eligibility date, using a 6.25% discount factor.
Note 19: Disclosures about Fair Value of Financial Instruments
ASC 820 defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the
measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that may be used to
measure fair value:
In accordance with ASC 820, the Company groups its financial assets and financial liabilities
measured at fair value in three levels, based on the markets in which the assets and
liabilities are traded and the reliability of the assumptions used to determine fair value.
These levels are:
|
Level 1 |
|
Quoted prices in active markets for identical assets or liabilities |
|
|
Level 2 |
|
Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities |
|
|
Level 3 |
|
Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or liabilities |
Following is a description of the valuation methodologies used for assets measured at fair
value on a recurring basis and recognized in the accompanying balance sheets, as well as the
general classification of such assets pursuant to the valuation hierarchy.
136
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Available-for-Sale Securities
Where quoted market prices are available in an active market, securities are classified
within Level 1 of the valuation hierarchy. Level 1 securities include publicly traded stocks. If quoted market prices are not available, then fair values are estimated by using pricing
models, quoted prices of securities with similar characteristics or discounted cash flows.
For these investments, the inputs used by the pricing service to determine fair value may
include one or a combination of observable inputs such as benchmark yields, reported trades,
broker/dealer quotes, issuer spreads, two-sided markets, bench mark securities, bids, offers
and reference data market research publications and are classified within Level 2 of the
valuation hierarchy. Level 2 securities include mortgage-backed securities: GSE residential,
and state and political subdivisions. In certain cases where Level 1 or Level 2 inputs are
not available, securities are classified within Level 3 of the hierarchy and include local
state and political subdivisions and other illiquid equity securities.
The following table presents the fair value measurements of assets recognized in the
accompanying balance sheets measured at fair value on a recurring basis and the level within
the fair value hierarchy in which the fair value measurements fall at December 31, 2009 and
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
December 31, 2009 |
|
Fair Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
(Continuing Operations) |
|
Mortgage-backed securities: GSE residential |
|
$ |
95,354 |
|
|
$ |
|
|
|
$ |
95,354 |
|
|
$ |
|
|
State and political subdivisions |
|
|
29,539 |
|
|
|
|
|
|
|
29,500 |
|
|
|
39 |
|
Equity securities |
|
|
3,257 |
|
|
|
3,161 |
|
|
|
|
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
128,150 |
|
|
$ |
3,161 |
|
|
$ |
124,854 |
|
|
$ |
135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Discontinued Operations) |
|
Mortgage-backed securities: GSE residential |
|
$ |
38,460 |
|
|
$ |
|
|
|
$ |
38,460 |
|
|
$ |
|
|
State and political subdivisions |
|
|
2,889 |
|
|
|
|
|
|
|
2,405 |
|
|
|
484 |
|
Equity securities |
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
41,454 |
|
|
$ |
|
|
|
$ |
40,865 |
|
|
$ |
589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
|
Quotes Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
December 31, 2008 |
|
Fair Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
U.S. government agencies |
|
$ |
4,787 |
|
|
$ |
|
|
|
$ |
4,787 |
|
|
$ |
|
|
Mortgage-backed securities: GSE
residential |
|
|
128,445 |
|
|
|
|
|
|
|
128,445 |
|
|
|
|
|
State and political subdivisions |
|
|
45,666 |
|
|
|
|
|
|
|
45,143 |
|
|
|
523 |
|
Equity securities |
|
|
6,294 |
|
|
|
4,811 |
|
|
|
|
|
|
|
1,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
185,192 |
|
|
$ |
4,811 |
|
|
$ |
178,375 |
|
|
$ |
2,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the beginning and ending balances of recurring fair
value measurements recognized in the accompanying balance sheet using significant
unobservable (Level 3) inputs:
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
Balance, January 1 |
|
$ |
2,006 |
|
|
$ |
1,900 |
|
|
|
|
|
|
|
|
|
|
Total realized and unrealized gains and losses |
|
|
|
|
|
|
|
|
Included in net income |
|
|
|
|
|
|
|
|
Included in other comprehensive income |
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
(1,756 |
) |
|
|
|
|
Settlements |
|
|
(115 |
) |
|
|
|
|
Issuances |
|
|
|
|
|
|
2,738 |
|
Transfers out of Level 3 |
|
|
|
|
|
|
(2,632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31 |
|
$ |
135 |
|
|
$ |
2,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains or losses for the period included
in net income (loss) attributable to the
change in unrealized gains or losses related
to assets and liabilities still held at the
reporting date |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
138
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Following is a description of the valuation methodologies used for assets measured at fair
value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets,
as well as the general classification of such assets pursuant to the valuation hierarchy.
Mortgage Servicing Rights
Mortgage servicing rights do not trade in an active, open market with readily observable
prices. Accordingly, fair value is estimated using discounted cash flow models. Due to the
nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of
the hierarchy.
Impaired Loans (Collateral Dependent)
Loans for which it is probable that the Company will not collect all principal and interest
due according to contractual terms are measured for impairment. Allowable methods for
determining the amount of impairment include estimating fair value using the fair value of
the collateral for collateral dependent loans.
If the impaired loan is identified as collateral dependent, then the fair value method of
measuring the amount of impairment is utilized. This method requires obtaining a current
independent appraisal of the collateral and applying a discount factor to the value.
Impaired loans that are collateral dependent are classified within Level 3 of the fair value
hierarchy.
Cost Method Investments
Cost method investments do not trade in an active, open market with readily observable
prices. The cost method investments are periodically reviewed for impairment based on each
investees earnings performance, asset quality, changes in the economic environment, and
current and projected future cash flows. Due to the nature of the valuation inputs, cost
method investments are classified within Level 3 of the hierarchy.
Foreclosed Assets Held For Sale
Other real estate owned acquired though loan foreclosures are initially recorded at fair
value less costs to sell when acquired, establishing a new cost basis. The adjustment at the
time of foreclosure is recorded through the allowance for loan losses. Due to the subjective
nature of establishing the fair value when the asset is acquired, the actual fair value of
the other real estate owned or foreclosed asset could differ from the original estimate. If
it is determined that fair value declines subsequent to foreclosure, a valuation allowance is
recorded through noninterest expense. Foreclosed assets held for sale are classified within
Level 3 of the fair value hierarchy.
139
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Goodwill
Goodwill is evaluated based on a two-step process. The first step is to compare the
estimated fair value, including goodwill, of the reporting unit (the Company) to its net book
value. If the estimated fair value is less than the net book value, a second step is
required. The valuation in the first step is determined by utilizing three valuation
methodologies including the Comparable Transactions approach, the Control Premium approach,
and the Discounted Cash Flow approach. The Comparable Transactions approach is based on
pricing ratios recently paid in the sale or merger of reasonably comparable banking
franchises; the Control Premium approach is based on the Companys trading price and
application of industry based control premiums; and the Discounted Cash Flow approach is
estimated based on the present value of projected dividends and a terminal value, based on a
five-year forward-looking operating scenario. The valuation as determined by the three
approaches is compared to the Companys net book value. A second step analysis is performed
if the fair value as determined in step one is below the Companys net book value. Under the
second step of the process, the implied fair value of the Companys goodwill (determined by
comparing the estimated fair value of the Company to the sum of the fair values of the
Companys tangible and separately identifiable intangible net assets as determined by ASC
805, formerly SFAS No. 141R) is compared with the carrying value of goodwill in order to
determine the amount of impairment. The second step requires valuation techniques pursuant
to ASC 805 which include valuations of the Companys assets and liabilities based on market
rates for comparable assets and liabilities. Due to the nature of the valuation inputs,
goodwill is classified within Level 3 of the hierarchy.
|
|
The following table presents the fair value measurement of assets measured at fair value on a
nonrecurring basis during the period and the level within the ASC 820 fair value hierarchy in
which the fair value measurements fall at December 31, 2009 and 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
in Active |
|
Significant |
|
|
|
|
|
|
|
|
Markets for |
|
Other |
|
Significant |
|
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
|
|
|
|
Assets |
|
Inputs |
|
Inputs |
|
|
Fair Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
|
|
December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
|
$ |
44,142 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
44,142 |
|
Mortgage servicing rights |
|
|
885 |
|
|
|
|
|
|
|
|
|
|
|
885 |
|
Cost method investments |
|
|
1,331 |
|
|
|
|
|
|
|
|
|
|
|
1,331 |
|
Foreclosed assets held for sale |
|
|
5,409 |
|
|
|
|
|
|
|
|
|
|
|
5,409 |
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
in Active |
|
Significant |
|
|
|
|
|
|
|
|
Markets for |
|
Other |
|
Significant |
|
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
|
|
|
|
Assets |
|
Inputs |
|
Inputs |
|
|
Fair Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
|
|
December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
|
$ |
30,966 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
30,966 |
|
Mortgage servicing rights |
|
|
959 |
|
|
|
|
|
|
|
|
|
|
|
959 |
|
Cost method investments |
|
|
3,314 |
|
|
|
|
|
|
|
|
|
|
|
3,314 |
|
Foreclosed assets held for sale |
|
|
1,108 |
|
|
|
|
|
|
|
|
|
|
|
1,108 |
|
141
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
The following table presents estimated fair values of the Companys other financial
instruments at December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
December 31, 2008 |
|
|
Carrying |
|
|
|
|
|
Carrying |
|
|
|
|
|
Carrying |
|
|
|
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
|
|
(Continuing Operations) |
|
(Discontinued Operations) |
|
|
|
|
|
|
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
121,267 |
|
|
$ |
121,267 |
|
|
$ |
5,197 |
|
|
$ |
5,197 |
|
|
$ |
89,821 |
|
|
$ |
89,821 |
|
Held-to-maturity securities |
|
|
2,334 |
|
|
|
2,411 |
|
|
|
1,120 |
|
|
|
1,120 |
|
|
|
8,905 |
|
|
|
9,101 |
|
Loans held for sale |
|
|
681 |
|
|
|
681 |
|
|
|
|
|
|
|
|
|
|
|
4,366 |
|
|
|
4,366 |
|
Loans, net of allowance for loan losses |
|
|
757,138 |
|
|
|
757,721 |
|
|
|
210,138 |
|
|
|
208,620 |
|
|
|
1,315,907 |
|
|
|
1,325,196 |
|
Federal Home Loan Bank stock |
|
|
2,900 |
|
|
|
2,900 |
|
|
|
1,574 |
|
|
|
1,574 |
|
|
|
8,213 |
|
|
|
8,213 |
|
Cost method investments in common stock |
|
|
1,392 |
|
|
|
1,392 |
|
|
|
|
|
|
|
|
|
|
|
3,314 |
|
|
|
3,314 |
|
Interest receivable |
|
|
3,962 |
|
|
|
3,962 |
|
|
|
2,321 |
|
|
|
2,321 |
|
|
|
10,240 |
|
|
|
10,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
954,524 |
|
|
|
952,611 |
|
|
|
242,363 |
|
|
|
242,355 |
|
|
|
1,462,276 |
|
|
|
1,460,654 |
|
Short-term borrowings |
|
|
30,740 |
|
|
|
30,740 |
|
|
|
5,062 |
|
|
|
5,062 |
|
|
|
49,227 |
|
|
|
49,227 |
|
Long-term debt and junior subordinated debentures |
|
|
87,030 |
|
|
|
56,368 |
|
|
|
13,500 |
|
|
|
14,349 |
|
|
|
146,519 |
|
|
|
141,317 |
|
Interest payable |
|
|
4,114 |
|
|
|
4,114 |
|
|
|
564 |
|
|
|
564 |
|
|
|
4,280 |
|
|
|
4,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized financial instruments (net of
contract amount) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to originate loans |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Letters of credit |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Lines of credit |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
142
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments.
Cash and Cash Equivalents, Federal Home Loan Bank Stock, and Cost Method Investments in Common
Stock
The carrying amount approximates fair value.
Held-to-Maturity Securities
Fair values equal quoted market prices, if available. If quoted market prices are not
available, fair value is estimated based on quoted market prices of similar securities.
Loans Held for Sale
For homogeneous categories of loans, such as mortgage loans held for sale, fair value is
estimated using the quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics.
Loans
The fair value of loans is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit ratings and for
the same remaining maturities. Loans with similar characteristics were aggregated for
purposes of the calculations. The carrying amount of accrued interest approximates its fair
value.
Deposits
For demand deposits, savings accounts, NOW accounts, and money market deposits, the carrying
amount approximates fair value. The fair value of fixed-maturity time and brokered time
deposits is estimated using a discounted cash flow calculation that applies the rates
currently offered for deposits of similar remaining maturities.
Short-Term Borrowings and Interest Payable
The carrying amount approximates fair value.
Long-Term Debt and Junior Subordinated Debentures
Rates currently available to the Company for debt with similar terms and remaining maturities
are used to estimate fair value of existing debt.
143
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Commitments to Originate Loans, Letters of Credit, and Lines of Credit
The fair value of commitments to originate loans is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels of interest
rates and the committed rates. The fair value of forward sale commitments is estimated based
on current market prices for loans of similar terms and credit quality. The fair values of
letters of credit and lines of credit are based on fees currently charged for similar
agreements or on the estimated cost to terminate or otherwise settle the obligations with the
counterparties at the reporting date.
Note 20: Significant Estimates and Concentrations
Accounting principles generally accepted in the United States of America require
disclosure of certain significant estimates and current vulnerabilities due to certain
concentrations. Estimates related to the allowance for loan losses, goodwill, core deposit
and other intangibles, Federal Home Loan Bank stock impairment, other-than-temporary
impairment on available-for-sale and cost method bank stocks, and foreclosed assets held for
sale are described in Note 1. Current vulnerabilities due to certain concentrations of
credit risk are discussed in the footnote on commitments and credit risk.
Concentration of Credit Risk
The Companys loan portfolio includes a concentration of loans for commercial real estate
amounting to $336,525,000 (continuing operations) and $61,856,000 (discontinuing operations)
and $564,483,000 as of December 31, 2009 and 2008, respectively. The commercial real estate
loans include loans that are collateralized by commercial real estate in the Quincy, Illinois
geographic market totaling $48,234,000 and $55,006,000 as of December 31, 2009 and 2008,
respectively. The commercial real estate loans, including land and construction development
loans totaled $60,786,000 and $82,836,000 as of December 31, 2009 and 2008, respectively at
Heartland Bank and $61,014,000 and $68,586,000 as of December 31, 2009 and 2008,
respectively, at Royal Palm Bank (Naples, Florida).
Included in the loans above are approximately $24.5 million of purchased participation loans
to borrowers located in areas outside the Companys normal markets. Although the Company
applies the same underwriting standards to these loans, there may be additional risk
associated with those out of the Companys normal territory.
144
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
At December 31, 2009, Heartland Bank had approximately $5.4 million in loans with various
customers collateralized by stock in a troubled financial institution. The Company is
currently working with customers to increase collateral to acceptable levels. Both Heartland
Bank and Royal Palm had three subordinated debentures at troubled financial institutions
totaling approximately $6.0 million. At December 31, 2009, the Company believes there are
adequate reserves placed against these loans and debentures, however if the loan customers
are unable to provide additional collateral, or if the bank issuing the subordinated
debentures fail, there could be additional losses above the amounts currently reserved.
Due to national, state, and local economic conditions, values for commercial and development
real estate have declined significantly and the market for these properties is depressed.
Foreclosed Assets Held for Sale, Net
The balance in foreclosed assets as of December 31, 2009 was $16 million. The balance is
primarily due to the default of several of Royal Palms loans in the Florida market, several
of Heartlands purchased participation loans in the Georgia and Arkansas markets, and a
Mercantile purchased participation in the Iowa market that resulted in foreclosure on the
properties collateralizing the loans. The carrying value reflects managements best estimate
of the amount to be realized from the sale of the properties. The amounts that the Company
realize from the sales of these properties could differ materially in the near term from the
carrying value reflected in these financial statements.
Investments
The Company invests in various debt and equity securities, including bank stocks. The bank
stocks are included in available-for-sale securities and cost method investments with an
approximate carrying value of $4,458,00 and $7,581,000 at December 31, 2009 and 2008,
respectively. Investment securities including the bank stocks are exposed to various risks
such as deterioration of the overall economy, market risks and credit risks. Due to the
level of risk associated with certain investment securities, it is at least reasonably
possible that changes in the values of investment securities will occur in the near term and
that such change could materially affect the amounts reported in the accompanying balance
sheets.
Current Economic Conditions
The current protracted economic decline continues to present financial institutions with
circumstances and challenges, which in some cases have resulted in large unanticipated
declines in the fair values of investments and other assets, constraints on liquidity and
capital and significant credit quality problems, including severe volatility in the valuation
of real estate and other collateral supporting loans.
145
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Given the volatility of current economic conditions, the values of assets and liabilities
recorded in the financial statements could change rapidly, resulting in material future
adjustments in asset values, the allowance for loan losses, and capital that could negatively
impact the Companys ability to meet regulatory capital requirements and maintain sufficient
liquidity.
Note 21: Commitments and Credit Risk
The Company grants commercial, mortgage and consumer loans and receives deposits from
customers located primarily in Western Illinois, Northern Missouri, suburban Kansas City,
Missouri, Southwestern Florida, and Central Indiana. The Companys loans are generally
secured by specific items of collateral including real property, consumer assets and business
assets. Although the Company has a diversified loan portfolio, a substantial portion of its
debtors ability to honor their contracts is dependent upon economic conditions and the
agricultural economy in Western Illinois, Northern Missouri, suburban Kansas City, Missouri,
Southwestern Florida, and Central Indiana.
Commitments to Originate Loans
Commitments to originate loans are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since a
portion of the commitments may expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. Each customers creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary,
is based on managements credit evaluation of the counterparty. Collateral held varies, but
may include accounts receivable, inventory, property, plant and equipment, commercial real
estate and residential real estate.
At December 31, 2009 and 2008, the Company had outstanding commitments to originate loans
aggregating approximately $2,305,000 and $8,611,000, respectively. The commitments extend
over varying periods of time with the majority being disbursed within a one-year period.
Loan commitments at fixed rates of interest amounted to $1,508,000 and $6,745,000 at December
31, 2009 and 2008, respectively, with the remainder at floating market rates.
146
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Standby Letters of Credit
Standby letters of credit are irrevocable conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Financial standby letters of
credit are primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. Performance standby letters of
credit are issued to guarantee performance of certain customers under non-financial
contractual obligations. The credit risk involved in issuing standby letters of credit is
essentially the same as that involved in extending loans to customers. Should the Company be
obligated to perform under the standby letters of credit, the Company may seek recourse from
the customer for reimbursement of amounts paid.
The Company had total outstanding standby letters of credit amounting to $12,762,000 and
$20,712,000, at December 31, 2009 and 2008, respectively, with terms ranging from 1 day to 22
years. At December 31, 2009 and 2008, the Companys deferred revenue under standby letter of
credit agreements was nominal.
Lines of Credit
Lines of credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Lines of credit generally have fixed expiration
dates. Since a portion of the line may expire without being drawn upon, the total unused
lines do not necessarily represent future cash requirements. Each customers
creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if
deemed necessary, is based on managements credit evaluation of the counterparty. Collateral
held varies but may include accounts receivable, inventory, property, plant and equipment,
commercial real estate and residential real estate. Management uses the same credit policies
in granting lines of credit as it does for on-balance-sheet instruments.
At December 31, 2009, the Company had granted unused lines of credit to borrowers aggregating
approximately $131,411,000 and $11,820,000 for commercial lines and open-end consumer lines,
respectively. At December 31, 2008, unused lines of credit to borrowers aggregated
approximately $228,557,000 for commercial lines and $14,918,000 for open-end consumer lines.
General Litigation
In the normal course of business, the Company and its subsidiaries are subject to pending and
threatened legal actions, some for which the relief or damage sought are substantial. After
reviewing pending and threatened litigation with counsel, management believes at this time
that the outcome of such litigation will not have a material adverse effect on the results of
operations or stockholders equity. We are not able to predict at this time whether the
outcome of such actions may or may not have a material adverse effect on the results of
operations in a particular future period as the timing and amount of any resolution of such
actions and its relationship to the future results of operations are not known.
147
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Note 22: Operating and Liquidity Matters
The Company has generated net losses in each of the last two years, with $58.5 million in
2009 and $8.8 million in 2008, largely due to the operating losses at two of its subsidiary
banks, Royal Palm Bank in Naples, Florida, and Heartland Bank in Leawood, Kansas. Both banks
have experienced significant increases in non-performing assets, impaired loans and loan loss
provisions, resulting in each banks primary regulator imposing a cease and desist order. For
further discussion of these regulatory enforcement actions, see Note 14.
Royal Palm Banks operating loss (excluding goodwill impairment) in 2009 was primarily
attributable to the severe decline in real estate values in its southwest Florida market,
creating both loan losses and write-downs of foreclosed assets. Heartlands loss was largely
due to purchased participations from a bank in Georgia that was closed by the FDIC. Although
both banks are confident that they have identified the bulk of their asset quality issues and
will see improved operating performance in 2010, there can be no assurance that they wont
experience results similar to 2009. The Company has projected 2010 and 2011 operating results
for each bank assuming an improving economy and reduced loan losses compared to 2009. Those
projections indicate each bank returning to profitability by the end of 2011 while maintaining
compliance with all regulatory mandates per the cease and desist orders.
To address a scenario where actual losses in 2010 exceed those projected by the Company, an
alternate projection was performed to determine Mercantile Banks ability to provide
sufficient liquidity to the Company, in order to maintain sufficient capital at Royal Palm
Bank and Heartland. Mercantile Bank is the Companys flagship bank, representing
approximately 75% of total consolidated assets at December 31, 2009, and although operating
under a regulatory memorandum of understanding due to elevated levels of impaired loans, its
actual losses have been much lower than the other two subsidiaries and it retains significant
earnings capacity. The result of that alternate projection was a determination that
Mercantile Bank could provide the necessary liquidity, through generation of earnings, sales
of assets or lines of business, and closing of branches. While the Company does not believe
it to be likely, there is a risk that the FDIC would close Royal Palm Bank or Heartland (or
both), which could produce significantly worse results than those in the Companys projection.
In that event, the Company would resort to various capital raising and asset liquidation
options discussed below.
In November 2009 the Company reached agreements to exchange for debt or sell three of its
subsidiary banks. The first of these transactions closed in December 2009, and the other two
in February 2010, serving to reduce debt and provide liquidity to support the capital
requirements of its remaining subsidiaries.
The Companys Board of Directors has initiated a process to identify and evaluate a broad
range of strategic alternatives to further strengthen the Companys capital base and enhance
shareholder value. These strategic alternatives may include asset sales, rationalization of
non-business operations, consolidation of operations, closing of branches, mergers of
subsidiaries, capital raising and other recapitalization transactions. As part of this
process, the Board has created a special committee (the Special Committee) of independent
directors to develop, evaluate and oversee any
148
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
strategic alternatives that the Company may pursue. The Special Committee has retained
outside financial and legal advisors to assist it with its evaluation and oversight.
The Special Committee is developing and executing a plan to raise additional equity. The
Company received shareholder approval on February 23, 2009 authorizing the Company to create
and issue up to 100,000 shares in one or more classes of preferred stock, and adding 2,000,000
shares to the number of shares of common stock authorized to be issued. The Company has also
engaged an investment banker to assist in formulating details of the capital raising plan.
The Company expects to have developed and implemented the plan by September 30, 2010.
If the capital raising plan is unsuccessful, and if a liquidity crisis would develop, the
Company has various options, which could include selling or closing certain branches or
subsidiary banks, package and sell high-quality commercial loans, execute sale/leaseback
agreements on its banking facilities, and other options. If executed, these transactions
would decrease the various banks assets and liabilities, generate taxable income, improve
capital ratios, and reduce general, administrative and other expense. In addition, the
affected subsidiary banks would dividend the funds to the Company to provide liquidity
assuming they receive regulatory approval.
Note 23: Stock Split
In November 2007, the Companys Board of Directors approved a three-for-two stock split.
Share and per share data in the consolidated financial statements and notes have been
retroactively restated for the earliest financial statements presented to reflect the stock
split.
Note 24: Discontinued Operations and Assets Held for Sale
On November 21, 2009, the Company entered into an Exchange Agreement with R. Dean
Phillips. The Exchange Agreement provided for the sale of HNB National Bank, one of the
Companys subsidiary banks, to R. Dean Phillips, the sole shareholder and Chairman of Great
River, in exchange for the repayment of $28 million of the Great River debt. R. Dean
Phillips owned, through participations from Great River, more than $28 million of the Great
River debt. The Company finalized the debt exchange transaction eliminating $28 million of
debt owed to Great River Bancshares, Inc., and transferred control of HNB National Bank to R.
Dean Phillips. On December 16, 2009, the Company recognized a loss of $2.4 million related
to the exchange. The loss included professional fees of $400,000. The exchange of debt for
all issued and outstanding stock of HNB National Bank, headquartered in Hannibal, Missouri,
left approximately $16 million in outstanding debt owed to R. Dean Phillips and Great River.
The Company anticipated the remainder of this debt would be repaid following the closing of a
definitive agreement to sell its two smallest banks, Brown County State Bank and Marine Bank
& Trust, both based in Illinois, to United Community Bancorp, Inc., of Chatham, Illinois for
approximately $25.6 million. These sales closed in the first quarter of 2010, extinguishing
the remaining debt owed to R. Dean Phillips and Great River.
149
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
The following table summarizes the estimated fair values of the assets and liabilities
at the date the Company exchanged HNB National Bank:
|
|
|
|
|
Cash and cash equivalents |
|
$ |
9,646 |
|
Available-for-sale securities |
|
|
25,072 |
|
Held-to-maturity securities |
|
|
1,840 |
|
Loans, net of allowance for loan losses of $1,126 |
|
|
262,288 |
|
Interest receivable |
|
|
2,177 |
|
Federal Home Loan Bank stock |
|
|
3,113 |
|
Premises and equipment |
|
|
9,301 |
|
Core deposit intangibles |
|
|
2,440 |
|
Goodwill |
|
|
|
|
Other assets |
|
|
11,082 |
|
|
|
|
|
|
|
|
|
|
Total assets disposed |
|
|
326,959 |
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
285,847 |
|
Short-term borrowings |
|
|
|
|
Deferred income taxes |
|
|
|
|
Long-term debt |
|
|
10,000 |
|
Interest payable |
|
|
518 |
|
Other liabilities |
|
|
615 |
|
|
|
|
|
|
|
|
|
|
Total liabilities released |
|
|
296,980 |
|
|
|
|
|
|
|
|
|
|
Net assets disposed |
|
$ |
29,979 |
|
|
|
|
|
Subsequent to December 31, 2009, the Company completed the sale of Brown County State Bank
and Marine Bank & Trust to United Community Bancorp, Inc., of Chatham, Illinois for
approximately $25.8 million. The transaction, which closed on February 26, 2010 following
regulatory approval, resulted in a pre-tax gain of approximately $4.0 million. The proceeds
of the sale, which will be reported in first quarter 2010 earnings, will be used to further
strengthen the Companys capital position and strategically reduce its outstanding debt
obligations. This sale, announced in November 2009, was a stage in the Companys
multi-tiered recapitalization plan.
150
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
The following table summarizes assets and liabilities held for sale at December 31,
2009:
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,197 |
|
Investments, including FHLB stock |
|
|
44,151 |
|
Federal funds sold and reverse repurchase agreements |
|
|
7,936 |
|
Loans, net of allowance for loan losses |
|
|
210,138 |
|
Premises and equipment |
|
|
3,689 |
|
Cash surrender value life insurance |
|
|
6,398 |
|
Other assets |
|
|
8,483 |
|
|
|
|
|
|
|
|
|
|
Total assets held for sale |
|
$ |
285,992 |
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
242,363 |
|
Repurchase agreements |
|
|
5,062 |
|
FHLB advances |
|
|
13,500 |
|
Other liabilities |
|
|
3,119 |
|
|
|
|
|
|
|
|
|
|
Total liabilities held for sale |
|
$ |
264,044 |
|
|
|
|
|
Operations for 2008 and 2007 have been reclassified to include all income and expense into
discontinued operations. The following table summarizes the income and expenses of the
discontinued operations for the years ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Interest and dividend income |
|
$ |
32,519 |
|
|
|
35,225 |
|
|
|
29,333 |
|
Interest expense |
|
|
9,978 |
|
|
|
13,625 |
|
|
|
13,132 |
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
22,541 |
|
|
|
21,600 |
|
|
|
16,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan loss |
|
|
1,280 |
|
|
|
669 |
|
|
|
245 |
|
Noninterest income |
|
|
5,292 |
|
|
|
5,062 |
|
|
|
3,494 |
|
Noninterest expense |
|
|
32,278 |
|
|
|
15,845 |
|
|
|
11,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before taxes |
|
|
(5,725 |
) |
|
|
10,148 |
|
|
|
7,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
2,233 |
|
|
|
2,822 |
|
|
|
2,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(7,958 |
) |
|
$ |
7,326 |
|
|
$ |
5,034 |
|
|
|
|
|
|
|
|
|
|
|
151
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Note 25: Recent and Future Accounting Requirements
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards Codification
TM and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB
Statement No. 162. Effective for financial statements issued for interim and annual periods
ending after September 15, 2009, the FASB Accounting Standards Codification TM (ASC) is now
the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC)
under the authority of federal securities laws are also sources of authoritative GAAP for SEC
registrants. The ASC superseded all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not included in the ASC
became non-authoritative. Following this Statement, the FASB will no longer issue new
standards in the form of Statements, FASB Staff Positions (FSP) or Emerging Issues Task
Force Abstracts. Instead, it will issue Accounting Standards Updates. The FASB will not
consider Accounting Standards Updates as authoritative in their own right. Accounting
Standards Updates will serve only to update the ASC, provide background information about the
guidance, and provide the bases for conclusions on the change(s) in the ASC. This SFAS was
codified within ASC 105. The impact of adoption was not material.
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly, which was codified into ASC 820. This FSP provides
additional guidance for estimating fair value in accordance with SFAS No. 157, Fair Value
Measurements, when the volume and level of activity for the asset or liability have
significantly decreased. This FSP also includes guidance on identifying circumstances that
indicate a transaction is not orderly.
In April 2009, the FASB issued FSP FAS 115-2 and FSP FAS 124-2, Recognition and Presentation
of Other-Than-Temporary Impairments, which were codified into ASC 320. This FSP amends the
other-than-temporary-impairment (OTTI) guidance in U.S. GAAP for debt securities to make
the guidance more operational and to improve the presentation and disclosure of OTTI on debt
and equity securities in the financial statements. This FSP does not amend existing
recognition and measurement guidance related to OTTI of equity securities. FSP FAS 115-2 and
124-2 was effective for interim and annual periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009 if FSP FAS 157-4 was adopted early
as well. The Company adopted FSP FAS 115-2 and 124-2 and FSP FAS 157-4 during 2009 and there
was no material impact to the financial statements.
152
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies which was
codified into ASC 805. This FSP amends and clarifies SFAS No. 141(R), Business
Combinations, to address application issues raised by preparers, auditors, and members of
the legal profession on initial recognition and measurement, subsequent measurement and
accounting , and disclosure of assets or liabilities from contingencies in a business
combination. This FSP was effective for assets or liabilities arising from contingencies in
business combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 31, 2008. There has been no
impact during 2009 from adoption of FSP FAS 141(R)-1 on January 1, 2009.
Newly Issued But Not Yet Effective Accounting Standards
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial
Assets an amendment of FASB Statement No. 140 which was codified into ASC Topic 860.
Topic 860 seeks to improve the relevance, representational faithfulness, and comparability of
the information that a reporting entity provides in its financial statements about a transfer
of financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferors continuing involvement, if any, in
transferred financial assets. Topic 860 addresses (1) practices that have developed since
the issuance of SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, that are not consistent with the original intent and key
requirements of that Statement and (2) concerns of financial statement users that many of the
financial assets (and related obligations) that have been derecognized should continue to be
reported in the financial statements of transferors. This standard must be applied as of the
beginning of each reporting entitys first annual reporting period and for interim and annual
reporting periods thereafter. Earlier application is prohibited. This standard must be
applied to transfers occurring on or after the effective date. The impact of adoption is not
expected to be material.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R),
which was codified into ASC Topic 810. Topic 810 seeks to improve financial reporting by
enterprises involved with variable interest entities by addressing (1) the effects on certain
provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable
Interest Entities, as a result of the elimination of the qualifying special-purpose entity
concept in SFAS No. 166 , and (2) constituent concerns about the application or certain key
provisions of Interpretation 46(R), including those in which the accounting and disclosures
under the Interpretation do not always provide timely and useful information about an
enterprises involvement in a variable interest entity. This Statement shall be effective as
of the beginning of each reporting entitys first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. Earlier application is prohibited. The
impact of adoption is not expected to be material.
153
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Note 26: Subsequent Events
In connection with the Stock Purchase Agreement entered into between the Company and
United Community Bancorp, Inc., the entities concurrently entered into a letter agreement
regarding principal loan repayments on two specified loan participations to both Marine Bank
and Brown County State Bank. Immediately following the consummation of the sale of the
banks, one or both banks would pay the Company 50% of any principal amount paid on one or
both of the participated loans that was received by either or both of the banks at any time
following the sale. In March 2010, partial principal payments were received on both loan
participations of which the Company was entitled to receive approximately $263 thousand.
The Company completed the sale of Brown County State Bank and Marine Bank & Trust to United
Community Bancorp, Inc., of Chatham, Illinois for approximately $25.8 million. The
transaction, which closed on February 26, 2010 following regulatory approval, resulted in a
pre-tax gain of approximately $4.0 million. The proceeds of the sale, which will be reported
in first quarter 2010 earnings, will be used to further strengthen the Companys capital
position and strategically reduce its outstanding debt obligations. This sale, announced in
November 2009, was a stage in the Companys multi-tiered recapitalization plan.
During March 2010, the Company received regulatory approval and liquidated HNB Financial
Services, Inc.
154
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Note 27: Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position, results of
operations and cash flows of the Company:
Condensed Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
Cash |
|
$ |
3,612 |
|
|
$ |
2,172 |
|
Investment in common stock of subsidiaries |
|
|
108,308 |
|
|
|
175,701 |
|
Available-for-sale securities |
|
|
3,128 |
|
|
|
4,740 |
|
Note receivable |
|
|
9,325 |
|
|
|
1,325 |
|
Cost method investments in common stock |
|
|
1,331 |
|
|
|
2,841 |
|
Core deposit intangibles |
|
|
594 |
|
|
|
712 |
|
Other |
|
|
2,167 |
|
|
|
5,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
128,465 |
|
|
$ |
192,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Other short-term borrowings |
|
$ |
11,000 |
|
|
$ |
7,552 |
|
Long-term debt |
|
|
5,172 |
|
|
|
22,161 |
|
Junior subordinated debentures |
|
|
61,858 |
|
|
|
61,858 |
|
Deferred income taxes |
|
|
680 |
|
|
|
1,579 |
|
Accrued tax payable |
|
|
5,154 |
|
|
|
|
|
Other |
|
|
3,299 |
|
|
|
697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
87,163 |
|
|
|
93,847 |
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
41,302 |
|
|
|
98,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
128,465 |
|
|
$ |
192,804 |
|
|
|
|
|
|
|
|
155
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Condensed Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries |
|
$ |
9,220 |
|
|
$ |
5,000 |
|
|
$ |
15,679 |
|
Income (loss) on equity
method investments |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
Other-than-temporary loss
on available-for-sale
securities and cost method
investments |
|
|
(3,014 |
) |
|
|
(4,545 |
) |
|
|
|
|
Net gains on sale of
equity and cost method
investments |
|
|
|
|
|
|
942 |
|
|
|
2,775 |
|
Other income |
|
|
3,760 |
|
|
|
2,515 |
|
|
|
449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income |
|
|
9,966 |
|
|
|
3,912 |
|
|
|
18,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses |
|
|
15,001 |
|
|
|
9,984 |
|
|
|
6,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
15,001 |
|
|
|
9,984 |
|
|
|
6,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Tax
and Equity in Undistributed
Income of Subsidiaries |
|
|
(5,035 |
) |
|
|
(6,072 |
) |
|
|
11,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense (Benefit) |
|
|
(2,211 |
) |
|
|
(3,980 |
) |
|
|
(1,510 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Equity in
Undistributed Income of
Subsidiaries |
|
|
(2,824 |
) |
|
|
(2,092 |
) |
|
|
13,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in Undistributed Income
(Loss) of Subsidiaries |
|
|
(55,723 |
) |
|
|
(6,729 |
) |
|
|
(3,449 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
(58,547 |
) |
|
$ |
(8,821 |
) |
|
$ |
10,001 |
|
|
|
|
|
|
|
|
|
|
|
156
Mercantile Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(Table dollar amounts in thousands)
Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(58,547 |
) |
|
$ |
(8,821 |
) |
|
$ |
10,001 |
|
Items not requiring (providing) cash |
|
|
|
|
|
|
|
|
|
|
|
|
(Income) loss on equity method investment |
|
|
|
|
|
|
|
|
|
|
6 |
|
Amortization of core deposit intangibles |
|
|
118 |
|
|
|
118 |
|
|
|
161 |
|
Depreciation expense |
|
|
17 |
|
|
|
6 |
|
|
|
|
|
Equity in undistributed (income) loss of
subsidiaries |
|
|
55,723 |
|
|
|
6,729 |
|
|
|
3,449 |
|
Deferred income taxes |
|
|
2,127 |
|
|
|
(2,989 |
) |
|
|
(250 |
) |
Other-than-temporary loss on
available-for-sale and cost method
investments |
|
|
3,014 |
|
|
|
4,545 |
|
|
|
|
|
Gain on sale of equity and cost method
investments |
|
|
|
|
|
|
(942 |
) |
|
|
(2,775 |
) |
Goodwill impairment |
|
|
1,539 |
|
|
|
|
|
|
|
|
|
Net change in |
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
(4,221 |
) |
|
|
(261 |
) |
|
|
(354 |
) |
Other liabilities |
|
|
2,362 |
|
|
|
142 |
|
|
|
1,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities |
|
|
2,132 |
|
|
|
(1,473 |
) |
|
|
11,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for additional shares of Mid-America |
|
|
|
|
|
|
|
|
|
|
(611 |
) |
Purchase of property and equipment |
|
|
(52 |
) |
|
|
(38 |
) |
|
|
|
|
Proceeds from sales of equity method investments |
|
|
|
|
|
|
|
|
|
|
6,791 |
|
Proceeds from sales of available-for-sale securities |
|
|
|
|
|
|
4,954 |
|
|
|
|
|
Purchase of cost method investments in common stock |
|
|
|
|
|
|
|
|
|
|
(2,217 |
) |
Payments for investments and advances to
subsidiaries |
|
|
(14,888 |
) |
|
|
(7,070 |
) |
|
|
(1,750 |
) |
Purchase of available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
(1,240 |
) |
Cash paid in acquisition of HNB |
|
|
|
|
|
|
|
|
|
|
(31,301 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(14,940 |
) |
|
|
(2,154 |
) |
|
|
(30,328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in demand deposits |
|
|
(2 |
) |
|
|
27 |
|
|
|
|
|
Net increase in short-term borrowings |
|
|
14,250 |
|
|
|
7,552 |
|
|
|
|
|
Proceeds from long-term debt |
|
|
|
|
|
|
22,161 |
|
|
|
15,650 |
|
Repayment of long-term debt |
|
|
|
|
|
|
(22,000 |
) |
|
|
(14,835 |
) |
Proceeds from issuance of junior subordinated
debentures |
|
|
|
|
|
|
|
|
|
|
20,619 |
|
Purchase of treasury stock |
|
|
|
|
|
|
(102 |
) |
|
|
(569 |
) |
Dividends received |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid |
|
|
|
|
|
|
(2,089 |
) |
|
|
(2,097 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
14,248 |
|
|
|
5,549 |
|
|
|
18,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash |
|
|
1,440 |
|
|
|
1,922 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at Beginning of Year |
|
|
2,172 |
|
|
|
250 |
|
|
|
214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at End of Year |
|
$ |
3,612 |
|
|
$ |
2,172 |
|
|
$ |
250 |
|
|
|
|
|
|
|
|
|
|
|
157
Exhibit Index
|
|
|
Exhibit Number |
|
Description of Exhibit |
|
3.1
|
|
Certificate of Incorporation of Mercantile Bancorp, Inc., as amended, filed with the Registration
Statement on Form 10 dated May 12, 2004 (File No. 000-50757) (the Registration Statement), under the
same exhibit number. |
|
|
|
3.2
|
|
Certificate of Amendment to the Certificate of Incorporation of Mercantile Bancorp, Inc., filed as
Exhibit 3.3 to the Annual Report on Form 10-K for the year ended December 31, 2008 (the 2008 Form
10-K). |
|
|
|
3.3
|
|
Bylaws of Mercantile Bancorp, inc. restated and adopted June 16, 2009, filed as Exhibit 3.1 to the
Periodic Report on Form 10-Q for the quarter ended June 30, 2009 (the 2009 Second Quarter 10-Q). |
|
|
|
4.1
|
|
Shareholder Rights Agreement dated July 9, 1999 between the Company and Mercantile Trust & Savings
Bank, filed under same exhibit number with the Registration Statement. |
|
|
|
4.2
|
|
Amendment to Shareholder Rights Agreement dated May 15, 2000 between the Company and
Mercantile Trust & Savings Bank, filed under same exhibit number with the
Registration Statement. |
|
|
|
10.1
|
|
Executive Employee Salary Continuation Agreement dated December 8, 1994 between
Mercantile Trust & Savings Bank and Dan S. Dugan, filed as Exhibit 10.3 with the
Registration Statement. |
|
|
|
10.2
|
|
Amendment to Dugan Executive Employee Salary Continuation Agreement dated April
26, 2004, filed as Exhibit 10.4 with the Registration Statement. |
|
|
|
10.3
|
|
Second Amendment to Dugan Executive Employee Salary Continuation Agreement dated
December 29, 2006, filed as Exhibit 10.1 to a Current Report on Form 8-K filed
January 5, 2007. |
|
|
|
10.4
|
|
Executive Employee Salary Continuation Agreement, as amended and restated
effective January 1, 2009 between Mercantile Bank and Ted T. Awerkamp, filed as
Exhibit 10.4 to the 2008 Form 10-K. |
|
|
|
10.5
|
|
Employment Agreement dated January 1, 2008, between the Company and Ted T.
Awerkamp, filed as Exhibit 10.8 to the Annual Report on Form 10-K for the year ended
December 31, 2007 (the 2007 Form 10-K). |
|
|
|
10.6
|
|
Amendment to Employment Agreement dated July 15, 2008, between the Company and
Ted T. Awerkamp, filed as Exhibit 10.1 to the Periodic Report on Form 10-Q for the
quarter ended September 30, 2008 (the 2008 Third Quarter Form 10-Q). |
|
|
|
10.7
|
|
Employment Agreement dated January 1, 2008, between the Company and Michael P.
McGrath, filed as Exhibit 10.9 to the 2007 Form 10-K. |
|
|
|
10.8
|
|
Amendment to Employment Agreement dated July 15, 2008, between the Company and
Michael P. McGrath, filed as Exhibit 10.2 to the 2008 Third Quarter Form 10-Q. |
|
|
|
10.9
|
|
Employment Agreement dated January 1, 2008, between the Company and Daniel J.
Cook, filed as Exhibit 10.10 to the 2007 Form 10-K. |
|
|
|
10.10
|
|
Amendment to Employment Agreement dated July 15, 2008, between the Company and
Daniel J. Cook, filed as Exhibit 10.3 to the 2008 Third Quarter Form 10-Q. |
|
|
|
10.11
|
|
Mercantile Bancorp, Inc. Profit Sharing Plan and Trust, filed as Exhibit 10.7 with
the Registration Statement. |
|
|
|
10.12
|
|
401(k) Plan Adoption Agreement, filed as Exhibit 10.8 with the Registration Statement. |
158
|
|
|
Exhibit Number |
|
Description of Exhibit |
|
10.13
|
|
Amendment to the Profit Sharing Plan and Trust, filed as Exhibit 10.9 with the
Registration Statement. |
|
|
|
10.14
|
|
Consulting Agreement dated March 2, 2007 between Mercantile Bancorp, Inc. and Dan S.
Dugan, filed as Exhibit 10.1 to a Current Report on Form 8-K filed March 7, 2007. |
|
|
|
10.15
|
|
Consulting Agreement dated January 15, 2008 between Mercantile Bancorp, Inc. and Dan
S. Dugan, filed as Exhibit 10.16 to the 2007 Form 10-K. |
|
|
|
10.16
|
|
Consulting Agreement dated March 1, 2009 between Mercantile Bancorp, Inc. and Dan S.
Dugan, filed as Exhibit 10.16 to the 2008 Form 10-K. |
|
|
|
10.17
|
|
Third Amended and Restated Term Loan Agreement dated November 10, 2006 by and between
Mercantile Bancorp, Inc., Borrower, and U.S. Bank National Association, formerly
known as Firstar Bank, N.A., Lender, filed as Exhibit 10.1 with the Periodic Report
on Form 10-Q for the quarter ended September 30, 2006 (the 2006 Third Quarter Form
10-Q). |
|
|
|
10.18
|
|
First Amendment to Third Amended and Restated Loan Agreement between Mercantile
Bancorp, Inc. and U.S. Bank National Association, dated March 20, 2007, filed as
Exhibit 10.1 to a Current Report on Form 8-K filed March 24, 2007. |
|
|
|
10.19
|
|
Second Amendment to Third Amended and Restated Loan Agreement between Mercantile
Bancorp, Inc. and U.S. Bank National Association, dated as of June 30, 2007, filed as
Exhibit 10.1 to a Current Report on Form 8-K filed July 19, 2007. |
|
|
|
10.20
|
|
Third Amendment to Third Amended and Restated Loan Agreement between Mercantile
Bancorp, Inc. and U.S. Bank National Association, dated September 7, 2007, filed as
Exhibit 10.1 to a Current Report on Form 8-K filed September 12, 2007. |
|
|
|
10.21
|
|
Assignment Agreement among U.S. Bank National Association, Great River Bancshares,
Inc. and Mercantile Bancorp, Inc., dated December 23, 2008, filed as Exhibit 10.21 to
the 2008 Form 10-K. |
|
|
|
10.22
|
|
Secured Demand Promissory Note made by Mercantile Bancorp, Inc. to Great River
Bancshares, Inc., dated December 31, 2008, filed as Exhibit 10.22 to the 2008 10-K. |
|
|
|
10.23
|
|
Secured Demand Promissory Note made by Mercantile Bancorp, Inc. to Great River
Bancshares, Inc., dated February 5, 2009, filed as Exhibit 10.23 to the 2008 10-K. |
|
|
|
10.24
|
|
Waiver and Agreement by and between Mercantile Bancorp, Inc., and Great River
Bancshares, Inc., dated March 13, 2009, regarding certain loan covenants of the
Company, filed as Exhibit 10.24 to the 2008 10-K. |
|
|
|
10.25
|
|
Construction Agreement dated August 24, 2006 by and between Mercantile Trust &
Savings Bank, Owner, and Clayco, Inc., Contractor, filed as Exhibit 10.2 with the
2006 Third Quarter Form 10-Q. |
|
|
|
10.26
|
|
General Conditions of the Contract for Construction by and between Mercantile Trust &
Savings Bank, Owner, and Clayco, Inc., Contractor, filed as Exhibit 10.3 with the
2006 Third Quarter Form 10-Q. |
|
|
|
10.27
|
|
Indenture dated August 25, 2005 between Mercantile Bancorp, Inc. and Wilmington Trust
Company, as trustee, filed as Exhibit 10.1 to the 2009 Second Quarter 10-Q. |
|
|
|
10.28
|
|
Junior Subordinated Indenture dated July 13, 2006 between Mercantile Bancorp, Inc.
and Wilmington Trust Company, as trustee, filed as Exhibit10.2 to the 2009 Second
Quarter 10-Q. |
|
|
|
10.29
|
|
Indenture dated July 13, 2006 (Fixed/Floating Rate Junior Subordinated Debt
Securities Due 2036) between Mercantile Bancorp, Inc. and Wilmington Trust Company,
as trustee, filed as Exhibit10.3 to the 2009 Second Quarter 10-Q. |
159
|
|
|
Exhibit Number |
|
Description of Exhibit |
|
10.30
|
|
Junior Subordinated Indenture dated August 30, 2007 between Mercantile Bancorp, Inc.
and Wilmington Trust Company, as trustee, filed as Exhibit10.4 to the 2009 Second
Quarter 10-Q. |
|
|
|
10.31
|
|
Fourth Amended and Restated Loan Agreement dated April 30, 2009 between Mercantile
Bancorp, Inc. and Great River Bancshares, Inc. as assignee of U.S. Bank National
Association, filed as Exhibit 99.1 to a Current Report on Form 8-K filed on May 6,
2009. |
|
|
|
10.32
|
|
First Amendment to Waiver and Agreement dated April 20, 2009 between Mercantile
Bancorp, Inc. and Great River Bancshares, Inc., filed as Exhibit 99.2 to a Current
Report on Form 8-K filed on May 6, 2009. |
|
|
|
10.33
|
|
Fourth Amended and Restated Loan Agreement Waiver and Amendment dated August 10,
2009, filed as Exhibit10.5 to the 2009 Second Quarter 10-Q. |
|
|
|
10.34
|
|
Stock Purchase Agreement dated as of November 22, 2009 by and between Mercantile
Bancorp, Inc. and United Community Bancorp, Inc., filed as Exhibit 10.1 to a Current
Report on Form 8-K filed on November 25, 2009 (the November 2009 Form 8-K). |
|
|
|
10.35
|
|
Exchange Agreement dated as of November 21, 2009 by and between Mercantile Bancorp,
Inc. and R. Dean Phillips, filed as Exhibit 10.2 to the November 2009 Form 8-K. |
|
|
|
10.36
|
|
Second Waiver and Amendment dated November 21, 2009 by and between Mercantile
Bancorp, Inc. and Great River Bancshares, Inc., filed as Exhibit 10.3 on the November
2009 Form 8-K. |
|
|
|
10.37
|
|
Mercantile Bancorp, Inc. Company and Bank Executive and Senior Officer Incentive
Compensation Plan December 2006, amended and restated as of January 1, 2010, filed
herewith. |
|
|
|
14.1
|
|
Code of Ethics, filed under same exhibit number with Annual Report on Form 10-K for
fiscal year ended December 31, 2004. |
|
|
|
21
|
|
Subsidiaries of registrant, filed herewith. |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, filed herewith. |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, filed herewith. |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
|
32.2
|
|
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
|
|
|
Management contract or compensatory plan or arrangement. |
160