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Executives

Michael H. Price - Chairman, Chief Executive Officer, President, Chairman of Mercantile Bank of Michigan and Chief Executive Officer of Mercantile Bank of Michigan

Charles E. Christmas - Chief Financial Officer, Principal Accounting Officer, Senior Vice President, Treasurer, Chief Financial Officer of Mercantile Bank of Michigan, Senior Vice President of Mercantile Bank of Michigan and Treasurer of Mercantile Bank of Michigan

Karen Keller -

Robert B. Kaminski - Chief Operating Officer, Senior Vice President, Secretary of Mercantile Bank of West Michigan, Chief Operating Officer Mercantile Bank of Michigan, Executive Vice President, President of Mercantile Bank of Michigan, Secretary and Director

Analysts

John Barber - Keefe, Bruyette, & Woods, Inc., Research Division

Stephen Geyen - Stifel, Nicolaus & Co., Inc., Research Division

Daniel E. Cardenas - Raymond James & Associates, Inc., Research Division

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Jonathan Evans

Mercantile Bank (MBWM) Q4 2011 Earnings Call January 17, 2012 10:00 AM ET

Operator

Good morning, everyone, and welcome to the fourth quarter and full year 2011 earnings results conference call. [Operator Instructions] Please also note that today's event is being recorded. I would now like to turn the conference call over to Ms. Karen Keller. Ms. Keller, please go ahead.

Karen Keller

Thank you Jamie. Good morning, everyone, and thank you for joining us today for Mercantile Bank Corp.'s conference call and webcast to discuss the company's financial results for the fourth quarter and full year 2011. I'm Karen Keller with Lambert, Edwards & Associates, Mercantile's Investor Relations firm. And joining me are members of their management team, including Michael Price, Chairman, President and Chief Executive Officer; Robert Kaminski, Executive Vice President and Chief Operating Officer; and Chuck Christmas, Senior Vice President and Chief Financial Officer.

We will begin the call with management's prepared remarks and then open the call up for questions. However, before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements, such as projections of revenue, earnings and capital structure, as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from the forward-looking statements made today due to the important factors described in the company's latest Securities and Exchange Commission filings. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the press release issued by Mercantile today, you can access it at the company's website at www.mercbank.com.

At this time, I'd like to turn the call over to Mercantile's CEO, Mike Price. Mike?

Michael H. Price

Thank you, Karen, and good morning, everyone, and thank you for joining us. Earlier today, we released our fourth quarter and 2011 full year operating results, which completed a strong year comprised of 4 consecutive quarters of positive earnings. 2011 was a turning point for Mercantile marked by several key milestones that I'm pleased to share with you today. Net profit has increased substantially, nonperforming assets have decreased significantly and our bank has continued to grow stronger each quarter.

Over the past several years, we have communicated a number of strategic initiatives that have been our focus as we have managed through the effects of the Great Recession and returned the company to sustained profitability. Mercantile's officers and employees have work relentlessly to reduce nonperforming assets, protect and improve our net interest margin and reduce controllable costs, all while maintaining our well-capitalized position. We recognize there's still work to do, but we are very pleased with our progress and Mercantile's strengthened position as a result of our achievements. It is because of this effort, our improved operating performance and our belief that Mercantile should remain profitable that we were able to reverse the net deferred tax asset valuation allowance resulting in a federal income tax benefit of $27.4 million during the fourth quarter. We entered 2012 well-positioned to continue our success as a major competitor in our markets. With the support of our customers and hard work of our associates, we have greatly reduced our problem assets, returned to solid profitability and continued to build a well-capitalized balance sheet. Our primary focus is return to building our franchise and helping our communities prosper.

On the call today, our Chief Financial Officer, Chuck Christmas, will provide some of the details of our financial results, followed by Chief Operating Officer, Bob Kaminski and his comments regarding asset quality and other operational successes for the quarter.

At this time, I'll turn it over to Chuck.

Charles E. Christmas

Thanks, Mike. Good morning, everybody. This morning we announced net income of $30 million for the fourth quarter of 2011 compared to a net loss of $5.3 million during the fourth quarter of last year. Net income totaled $36.1 million for the full year 2011 compared to a net loss of $14.6 million for all of 2010. Our 2011 fourth quarter and full year operating results were positively affected by the reversal of the previously established net deferred tax asset valuation allowance resulting in a federal income tax benefit, as Mike mentioned, of $27.4 million during the fourth quarter. Our operating results on a pretax basis, which I'll refer to as our core operating results, also showed substantial improvement during 2011. Our income before federal income tax during the fourth quarter of 2011 was $3 million compared to a loss before federal income tax expense of $3 million during the fourth quarter of 2010.

For all of 2011, our income before federal income tax benefit was $10.1 million compared to a loss before federal income tax benefit of $13.4 million for all of 2010. These operating results reflect improvements in many key areas of our financial condition and operating performance, including significantly lower provision expense and nonperforming asset costs and improved net interest margin. We are of course pleased to be able to report a net profit for the fourth quarter of 2011, our fourth consecutive profitable quarter after 2 years of quarterly losses. These improved results are a reflection of the positive impact of numerous strategies developed and implemented over the past several years, combined with the somewhat improved economic conditions. Our dedicated efforts have contributed to the significant decline of our nonperforming asset levels and a pruned loan portfolio achieved through our home credit underwriting and administration practices.

Operationally, we have strengthened our net interest margin, significantly enhanced our regulatory capital ratios, improved our liquidity position through substantial local deposit growth and dramatically reduced reliance on wholesale funding, all while lowering our overhead costs. Yes, more work lies ahead, and while economic and regulatory headwinds may continue to face Mercantile, the banking industry and the economy at all levels, we believe we are very well-positioned to succeed as a strong community bank and continue to play a pivotal role within the markets we serve.

During the fourth quarter of 2011, we saw the continuation of many positive trends, and I'd like to touch on a few of them now. An improved net interest margin has provided substantial support to net interest income that has been negatively impacted by the decline in earning assets. Net interest income during the fourth quarter of 2011 was $12.3 million or about 10% lower than the fourth quarter of 2010. Average total earning assets declined by about $278 million during the fourth quarter of 2011 compared to the fourth quarter of 2010. However, our net interest margin increased from 3.36% to 3.65%, or about 9% during these comparable periods. In comparing all of 2011 with all of 2010, our net interest income declined $5.1 million as average assets were down about $284 million, more than offsetting a 9% increase in our net interest margin. The improvement in our net interest margin is primarily due to a decline on our cost of funds, which has more than offset a decline on our yield on assets. The lower cost of funds primarily results from the maturity of higher costs and certificates of deposit and borrowed funds and reduced rates paid on local deposits. The lower yield on assets primarily results from several items, including a lower loan yield reflecting improved borrower financial performance and increased competition; lower securities yield, reflecting U.S. agency call and reinvestment activity, as well as principal pay-downs on higher-yielding mortgage-backed securities and a higher level of federal funds sold.

Provision to the reserve totaled $1.9 million during the fourth quarter of 2011, a substantial decline from the $6.8 million we expensed during the fourth quarter of 2010 and, well below the average quarterly provision amount during the past 3 years. For all of 2011, provisions to the reserve totaled $6.9 million, dramatically lower than the $31.8 million expensed during all of 2010.

Our loan loss reserve was $36.5 million at year end 2011 or about 3.41% of total loans. Despite the significant improved condition of our loan portfolio, our loan loss reserve coverage ratio remains strong and is down only 5% from the level at year end 2010. Local deposit and sweep accounts were up about $7 million during the fourth quarter of 2011, and they're up about $290 million since of the end of 2008. Combined with the reduction in our loan portfolio, we have been able to reduce our level of wholesale funds by about $1.04 billion since the end of 2008. And as a percent of total funds, wholesale funds have declined from 71% at the end of 2008 to just over 30% at the end of 2011.

Nonperforming asset administration and resolution costs remain elevated. However, the cost did decline during the fourth quarter of 2011 and for all of 2011. Nonperforming asset costs totaled $1.7 million during the fourth quarter of 2011, well below the $3 million expensed in the fourth quarter of the previous year. And for all of 2011, nonperforming asset costs totaled $8.3 million compared to $10.9 million in 2010. As with provision expense, we would expect continued reductions in nonperforming asset administration and resolution costs in future periods, if the level of nonperforming assets continued to decline.

We remain a well-capitalized banking organization. As of December 31, 2011, our bank's total risk-based capital ratio was 15.5%, and in dollars was approximately $67 million higher than the 10% minimum required to be categorized as well-capitalized. At year end 2010, our bank's total risk based [ph] capital ratio was 12.5% and the surplus was about $35 million. Our efforts to right size our balance sheet and improve our operating performance over the last few years have enhanced our regulatory capital ratios. And at the present time, we believe our capital position is sufficient to fund our operations, as well as provide for future growth opportunities.

Those are my prepared remarks. I'll now turn the call over to Bob.

Robert B. Kaminski

Thank you, Chuck. My comments this morning will give some color on new business development efforts and the asset quality of the loan portfolio.

In 2011, Mercantile advanced several initiatives to increase client acquisition and business development activity. With the new marketing strategies, as well as product development and fine-tuning, we continue to provide our staff with the best tools possible so they can execute our mission as a relationship-oriented community bank. With our historically strong menu of loan and deposit products, value added services such as payroll processing, business and consumer remote deposit capture, receivable and payable processing, plus our full electronic suite of products, Mercantile call-in officers are well equipped to generate new business opportunities for our organization. Our sales staff is energized, they're ready to share the Mercantile banking experience with their prospective clients. While numerous competitors are in the market emphasizing low priced banking, we are funding our success by combining exceptional service, cutting edge products at competitive rates. We're constantly reminded that the relationships we build with our customers are a highly valued attribute of a strong community bank.

Developing banking relationships takes time as we work to gain the mutual familiarity and trust as opposed to the approach of selling on rate or price, which is a much quicker but potentially less stable proposition. Once prospects decide to move to Mercantile, the choice is typically based on very solid relationships that have significant staying power. We are pleased with the progress made since the economic recovery has begun. While portfolio pruning is still occurring, which offset some of our gains, the relationship pipeline remains quite strong and we were able to witness some net loan growth near the end of the fourth quarter and into the first quarter of 2012.

As we have mentioned in the press release and in our earlier comments on the call, health of Mercantile's loan portfolio continues to improve, although NPAs did show a relatively small increase this quarter. NPAs would have continued to show a decline absent the proactive treatment of some totals in the nonowner occupied commercial real estate category in which we further downgraded some existing watch list loans and realized the charge in the fourth quarter. With this action, NPAs increased to $60.4 million from $56.8 million at September 30, 2011, though it showed a significant decrease from the $86.1 million at year end 2010. We continued to see good progress in the mission to reduce nonperforming assets to levels as appear to that of our peer group. Appropriate action plans are in place to drive higher risk loans to resolution either by an improvement in performance so they can be upgraded and removed from the watch list, or by movement toward a liquidation plan. While still higher than we anticipate seeing in the future, the bank's internal total problem loan list has been reduced to levels that we have not seen in over 3 years. The bank's provision for loan losses over the fourth quarter was $1.9 million, and $6.9 million for all of 2011. The reserve stands at a healthy 3.41% of total loans at December 31, 2011. One of the improvements that we continued to witness in the fourth quarter is the significant pace of loan recoveries which were $1.1 million in the fourth quarter, and $4.2 million for the full year 2011. This is reflective of the conservative practices employed by the bank in recognizing loan losses and also the diligent efforts by our loan workout staff to obtain payment on previously charged-off loans. Another indicator of the improvement in the portfolio is the 30 to 89 day past due loan measurement, which stood at $216,000 at December 31, 2011, down from $1.1 million a year earlier. Those are my prepared remarks. I'll now turn it back over to Mike.

Michael H. Price

Thanks, Bob, and thanks to you too Chuck for your comments. At this time, operator, we'd like to open the lines up for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Terry McEvoy from Oppenheimer.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Chuck, you talked about the bank having enough capital for growth opportunities, and in the press release you do talk about developing a framework for redeeming TARP. Could you just maybe expand upon kind of the TARP redemption, and is that a separate capital discussion than just what you called growth capital today?

Charles E. Christmas

Yes, I think, certainly when we look at our capital position, we're looking at everything, certainly our earnings performance, we're looking at loan opportunities and the trends that we’re seeing in our loan portfolio. As we stated when we got TARP and we continue to state, we want to get rid of TARP as soon as we can, redeem it, repay it, but we obviously want to do that prudently and looking at all those other things that are going on. So when I look at our capital position and it looks like we're starting to hold our own on the loan portfolio totals as we go through the last couple of months here. We don't see any tremendous asset growth or loan growth coming any time soon, but we think that as the economy continues to improve and as Bob was mentioning some of our marketing and calling efforts start to come to fruition, we would expect to see some loan growth. Obviously, what we need to do is overlay those expectations with earnings expectations, how that impacts the capital ratios, and then certainly look into redeeming the TARP at some point.

Michael H. Price

Terry, this is Mike. We want to make sure we're clear. We don't expect to have a capital raise to pay TARP back. Our plan has been pretty clear right from the beginning that as part of the planning that we believe that we can generate enough capital to do that. And obviously, the performance of the last year, especially we think it indicates that we're on the right track.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

And then with 2011 now behind the company and a lot of progress made on multiple initiatives and areas, do you talk about any kind of mid- to long-term targets or goals that this, I'll call it new Mercantile Bank, you think can produce whether it's our ROA, ROE, that can be helpful to kind of get inside how you guys are looking at your business model going forward?

Michael H. Price

Yes, appreciate the question, Terry. This is Mike again. I think we're really trying internally to formulate what those ROE and ROA targets would be. And the reason why I can't really give them to you right now is because we’re still trying to formulate as would the rest of the industry what the level of capital expectations are. For example, going forward, there's still a lot of noise out there as I'm sure you're aware of as to what regulators are expecting and, et cetera, et cetera. As you pointed out, 2011 was a tremendous year for us. We made so much progress in so many fronts and we did exactly what we wanted to do, which was position ourselves going into this year to be able to get back and rebuild the franchise from a growth standpoint and become that dominant player again that we have been in our markets for community banking. But I can assure you that we are constantly looking at improving all those ratios. We're glad that we've done what we've done so far. But to give you something to say, hey, 2 years out, we'd like to be here. Four years out we'd like to be here is a little premature for us right now because we also want to make sure that we have a, as we talked about, a TARP repayment plan and want to get the timing, we're getting closer and closer to that. That was kind of on our list of things to do, but it was down to the list behind some things that we've already accomplished. So once we start getting some of those things knocked out of the way, we'll be able to hone in on that for you better.

Operator

Our next question comes from John Barber from KBW.

John Barber - Keefe, Bruyette, & Woods, Inc., Research Division

Can you start by just talking some of the main considerations that went into your auditors allowing you to reverse the valuation allowance against the DTA?

Charles E. Christmas

John, this is Chuck. I think we work in concert with our auditors, as well as our tax professionals. It's something we've been talking about. I think other banks have probably been talking as well, as 2011 was going forward as exactly what are the rules, what are the guidelines, what are the expectations for reversing all or part of the valuation allowance on our deferred tax asset. And I think as we're going through those discussions, and I think the auditors were discussing amongst themselves so they could relay that to their clients and we could have those conversations, is it really came down to -- the biggest hurdle by far was what they term sustained profitability. One of the main reasons why most banks, including Mercantile originally put the valuation allowance on there was that we were looking at 3 consecutive years of operating losses, and that was kind of a negative milestone, if you will. And so we went ahead at the end of '09 and established the valuation allowance and obviously, maintained that through right up to the end of 2011. But as we obviously, became profitable in 2011, we were profitable every quarter. We were seeing improvement quarter-over-quarter in virtually all areas, and you kind of obviously layer that onto future expectations of not only just 2012, but beyond. We certainly believe, and I think Mike mentioned it in his opening remarks that, obviously, we're profitable in 2011 and we would expect to remain profitable in future periods. And taking all of that and looking at obviously, confidentially the numbers that we were producing in our forecast, we came to the conclusion, and obviously, the parties that were also helping us agreed with us that the end of the 2011 was an appropriate time to go ahead and do a full reversal of the valuation allowance. One of the things we did come through in our discussions was that it is kind of an all or nothing proposition. There is no phase-in of that. So we looked at it again, sized up where we were at, where we have come and where we expect go. And certainly sustained profitability is a hurdle that we think we overcame, and again our partners agreed and obviously, we reversed that valuation allowance.

John Barber - Keefe, Bruyette, & Woods, Inc., Research Division

Could you also talked about just your -- what a good effective tax rate is for 2012?

Michael H. Price

Yes, we would expect it to be somewhere around 29% would be our effective tax rate again obviously, that looks to us as a corporate tax rate of 35% and then backing off taxable income is primarily municipal bonds, as well as our bank-owned life insurance.

John Barber - Keefe, Bruyette, & Woods, Inc., Research Division

All right, thanks. And I know some questions were already asked about TARP repayment, but maybe I'll ask it a little differently. Can you just talk about the level of cash you have at the holding company, maybe how that compares to your annual expenses and also your ability to upstream cash from the bank to the holding company?

Charles E. Christmas

That's a great question, John. It gets kind of a too fast of an answer, I'll give you. We keep on average about $0.5 million in cash at the parent company, it sits in a deposit account here at the bank. And then we upstream dividends to the parent company on an as-needed basis, pretty much reflecting the cash needs to pay interest on the trust preferred, to pay the cash dividends, if you will, on the preferred stock, as well as pay corporate expenses. Corporate expenses run about the way that we allocate expenses between the bank and the parent company, say about $1 million a year. So you take that $1 million plus whatever we need for the trust preferred and the dividends on the preferred stock, and that's what our expectations are to go ahead and upstream that. Certainly, we're a shareholding company, it has no source of revenue other than dividends from the bank. So any decision in regards to redeeming of the TARP would require virtually dollar per dollar, cash dividend from the bank. So when we look at managing that capital position of the company, and that goes directly to our expectations and thoughts about redeeming the TARP, obviously, we need to take into account that it is going to require a cash dividend from the bank and how that's going to impact our regulatory capital ratios, how the examiners are going to react to that. I think as everyone knows, to repay that TARP you do need the "Okay" from your primary federal regulator, for us it's the FDIC. So I'm sure those are the discussions that we'll have with them. As Mike said, we put together our plan and had discussions with the FDIC. Obviously, they're going to look at asset quality trends and earnings performance trends and all that. But certainly, what our pro forma regulatory capital ratios will sure be a big part of that analysis as well. So that will blend together with all the other stuff we talked about in regards to capital management.

John Barber - Keefe, Bruyette, & Woods, Inc., Research Division

All right. And one last one. The migration of nonowner-occupied credits to nonaccrual status this quarter, was that limited to just a handful of credits or was it -- I guess could you just quantify that?

Robert B. Kaminski

As I mentioned in my comments, some of that was nothing that was systemic or anything like that. It was a handful of relationships that we had on the watch list. We felt it prudent as we approached the year end to take a good look at those and the prospects and the trends and to move those to nonaccrual status.

Michael H. Price

And John, that was Bob. This is Mike. Just to underscore the fact of how conservative the treatment was, the loans we downgraded were actually contractually current with us. But we just saw additional weakness. And as we've always said at each one of these quarterly meetings, we're very, very conservative we don't kick the can down the road. We take it whenever we think there's weakness there. And so I'll emphasize what Bob said, it's just some stuff that we saw an opportunity to do it and we did it.

Operator

Our next question comes from Stephen Geyen from Stifel, Nicolaus.

Stephen Geyen - Stifel, Nicolaus & Co., Inc., Research Division

Maybe just to start off with the net interest margin, up 15 basis points from the third quarter. I appreciate the color you gave us on the loan yield and securities, maybe just a little bit more insight to some of the changes you saw and where the benefit came from?

Charles E. Christmas

This is Chuck. If you remember back in the third quarter when our margin went down a little bit, a large percentage of that, definitely more than half, I don't know the number off the top, but it was significant, was due to the present value adjustments for the cap corridor that we entered into late second quarter. The present value adjustments from September 30 to December 31 were pretty small. I think it was around $25,000 or $30,000 net. It was significantly higher than that than in the third quarter, which brought our net interest margin down to the 350 level. I think it would've been around 3.6% had you backed out that adjustment. So I think what we really see is the continuation of a margin that certainly has improved quite a bit over the last couple of years and has held fairly steady, say, at the 360, 365 level, and we think that barring any significant changes in market interest rates, we think our margin will be relatively steady throughout 2012 as well. Again as I mentioned, our loan yield has been coming down. Kind of a good problem to have is that when our borrowers, some of our borrowers are facing financial difficulties, we were downgrading them. Certainly, we were increasing the rates on those credits along the way. Now what we see is a lot of improvement in their financial position. So quite frankly, they deserve a lower rate reflecting that because, again, we're upgrading those credits we get the benefit and the provision expense. Certainly, competition is out there. There's a lot of players out there trying to grow their balance sheets. I mean, they understand and see the same stress as we have on our income statement, net interest income and all the pressures that we're seeing with some of our income streams. Certainly, a lot of competition out there trying to grow their balance sheets, trying to help offset that. So we have certainly seen the loan yield come down. It's probably been averaging maybe a 2 to 3 basis point per month decline. We think that will continue in all or part of 2012 and have budgeted for that. Like most banks out there, we've seen quite a bit of call activity in our agency bond callable portfolio, and certainly they're calling higher coupons. And in those cases where we do have to put that money back to work in the investment portfolio, certainly the yield we're getting especially with us, we're trying to shorten that a little bit because we do think overtime rates will go up, so we're not trying to lock in a bunch of long-term stuff. We've seen the yield go down on that as well. Where the offset is coming from and one of the things that helps the asset yield, you don't see that so much in the fourth quarter or anytime during 2011, but you'll definitely see that the 2012. It is an expectation of a reduced level of fed funds sold. I think we averaged almost $90 million throughout 2011, and that was pretty consistent on a quarter-by-quarter basis, at least the last couple that I know of specifically. We're currently at about $45 million, $50 million, that's where we want to be. So just a reduction of $40 million, $50 million, and an asset that earns 25 basis points will obviously help overcome, at least in 2012, the reduced loan yield and securities yield. And then as I mentioned, we continue to see a reduction in our cost of funds. Like most banks, especially when we got into summer and early fall, with the Fed making their announcements and seeing how the market rates reacted to that, we were able to reduce our deposit rates on virtually every product. So that certainly helped. But then as we have been seeing over the last few years is we do still have some higher costs in CDs and some borrowings that are repricing and will be coming up for repricing here in 2012 that we'll be able to replace at lower rates. So blend all that together in our flood of information, but blend that together, we would look for our asset yields to continue to come down. But we think the reduction in our cost of funds and mixing in that Fed funds change will provide for a relatively steady margin fourth quarter 2011 performance.

Stephen Geyen - Stifel, Nicolaus & Co., Inc., Research Division

That's helpful. And maybe one last question for Bob. I guess it was Mike also that mentioned that the outlook from customers in the pipeline is looking a little bit better or at least remains fairly strong relative to where you're at in the third quarter. There was a comment in the press release about expanding your customer footprint, could you kind of expand on both of those as well?

Robert B. Kaminski

Well, what we spent the last year doing is, as I mentioned in my comments, some new marketing initiatives, some new products that we've rolled out because we knew that the time was going to come when we were going to get back to a mode where we wanted to pursue growth opportunities. And so it's kind of coming together as the plan called, obviously the pressure is still in the market that we'll face in terms of competition in a less than robust economy. But I think what we're looking to do is grow relationships. And that's very important to us as opposed to transactions and deals as many of our competitors are prone to do these days. And as I said, that takes some time. And as I mentioned in my third quarter conference call comments, the pipeline was building nicely. I think we started to see some of that come to fruition at the end of the fourth quarter and into the first quarter this year. And as I said, we're still doing some pruning, still some things that could offset some of those gains, but I think our folks that are out there every day on the street are excited about what they're seeing, the relationships they're engaged in and are looking very promising. That said, competition is very strong still. But I think the brand of banking that we're pursuing, relationship banking different than most of our competitors, it's something that will give us, will serve us very strongly in the long run as opposed to short-term gains and loans that are structured or priced weekly.

Stephen Geyen - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then one last question, just an accounting number. Chuck, do you have the total risk weighted assets?

Charles E. Christmas

I do. If you hang on just a quick second. $1.21 billion.

Operator

Our next question comes from Jon Evans from Edmunds White Partners.

Jonathan Evans

Obviously, you guys are -- still think your stock's cheap, but can you talk a little bit about it? It has moved up and how about acquisitions and using your stock as a currency. Can you talk about consolidating maybe Michigan and some of the opportunities there at smaller banks?

Michael H. Price

Sure. John, this is Mike again. Yes, I think as we kind of rank order some things that are on our list to do and or consider, we have thought that consolidation in the industry is pending, and we still think that's probably the case. And we talked about in previous conference calls, we wanted to do the things that we need to do internally to strengthen our balance sheet and our currency, to be able to participate if the opportunities are there. And those right opportunities, we think, maybe coming up in the latter part of this year, first part of '13. And you hit the nail on the head. I mean, one of the things to effectively do strong acquisitions, you need the currency to be stronger. We're happy and gratified to see the last couple of weeks about the increase in our stock price. You're right, we think it's still too cheap. We're doing everything we can to prove to the world that we've not only turn this place around, but we really have a lot of momentum going into 2012 and beyond. But yes, I think there is opportunity out there. I think right now, the industry is kind of sorting itself out as to who the players are going to be and who's going to stay independent. And people are still continuing to get their the loan portfolios cleaned out, but we're pretty far through that now generally as far as a banks go, especially the banks that we're aware of in Michigan.

Jonathan Evans

And 2 more questions. You talked about growing your loan portfolio at the end of the quarter. I guess that seems to be the big knock on you guys of that you haven’t been able to grow. Do you see growth in the first quarter or in the second quarter? Or how do you see the growth of the portfolio?

Michael H. Price

This is Mike again, and I'll let Bob and Chuck enhance my answer. I've got to scratch my head a little bit when someone says, well a big knock on us is that we haven't been able to grow. You have to understand, if you followed our organization a few years ago, one of the reasons -- well, one of the things we wanted to do is shrink, because when you're faced with the obstacles we're faced at, we could have done an incredibly dilutive event to our common shareholders and we held steadfastly. We didn't need to do that, we didn't want to do that. And so one of the options to -- facing us was let's shrink the bank a little bit to help the capital ratios and we did a really good job with that. The other area where shrinking the bank helps is in the area of pruning, especially high risk type of lending practices that we wanted to reduce our concentration in. We did a great job with that as well. So when people say, well the knock on your organization is you can't grow the bank. I point bank to people when we started the bank 15 years ago, and the first 10 years of the existence of this bank, we grew this bank tremendously. Same people, we didn't forget, we understand what has to be done. But we've got some disciplines that we had to go through the last few years. We also had some disciplines that Bob and Chuck and I talked about the last few quarters as far as pricing and profitability. The industry, and unfortunately, we participated a little bit more I would have liked. The industry got away from the discipline and making sure that whatever you book is going to be profitable for you. And we just kind of said we're going to go back, to making sure that to what we book is profitable not just from the standpoint is going to be good credit, but do the dynamics of pricing and structure make a lot of sense. So I think it's premature for anybody to knock this employee group, this management team or this Board saying you can't grow the bank. I think it would have been imprudent for any organization in the situation we've been in the last 3 years to go out and try to grow the balance sheet. That's just our opinion, but it worked pretty well for us so far. Now going forward, we are seeing more opportunities, as I think Bob mentioned, that we have seen in a long time. It takes time to get the kind of good quality credits and relationships in the bank that we want. We're well on the way to doing that. But there are also some uncontrollable things that are out there you might imagine, and that is the pace of the growth of the economy. We’re seeing that pick up a little bit as well. So I think what we've kind of said is while we haven't given a direct number growth of what we expect, we expect 2012 to be probably maybe a breakeven year as far as where our loan growth is. We'd like to see a little more growth in that and maybe, privately some of us think we might be able to get that. But as you know, we're a pretty conservative organization. We never like to put out things that we know that may not be achievable. So that's kind of where we're at, but going forward, we certainly feel real good '12, 2013 and '14, real good about the growth prospects. And from there, I'll turn over to Bob or Chuck if they want to enhance that or if you want to follow up on that question.

Robert B. Kaminski

All set.

Charles E. Christmas

All set.

Jonathan Evans

Then just the last question. So you did see a pickup in your nonperformers sequentially? Was that just more of a function that you guys had a phenomenal year and you just took a couple of credits at the end that maybe were suspect or potentially and you just moved them to nonperforming to clean it up or can you help us understand that or is that a new trend?

Michael H. Price

You're zeroing in on the truth. That's a pretty good guess. You're close. And basically, what we do is -- and we do this every quarter not just the end of the year. But as we look at this and we started this a few years ago when we had the spike in the nonperformers, as we look at the end of each quarter, we just thoroughly go through the portfolio. And if we see a credit or a handful of credits that a couple of years ago, a couple of handfuls of credit that showed deterioration where we started to extrapolate where we expected that credit to be 2 to 3 quarters down the road or maybe a year down the road. And if we were starting to envision it, or we ever envision that the credit probably is going to deteriorate rather than improve, we always take the conservative approach and downgrade it. So we had the same thing happen this quarter. We got to just a very few credits that we've been well aware of, had been on the watch list, took a look at the dynamics and didn't like what we're seeing. As I mentioned before, they're generally, maybe in every case, contractually current. We just didn't like what we saw in some of those. And so we took the approach that we always take, which is to attack it head on, downgrade it. If it turns out better than we thought, so be it. But we just really don't believe in kicking the can down the road and dealing with something 3 or 4 quarters down the road that we kind had maybe a funny feeling about at the end of the quarter.

Operator

[Operator Instructions] And our next question comes from Daniel Cardenas from Raymond James.

Daniel E. Cardenas - Raymond James & Associates, Inc., Research Division

Most of my questions have been answered, just a couple of cleanup questions. As I'm looking at your nonperforming asset reconciliation, you're showing charge-offs of about $890,000 but next paragraph, we see loan charge-offs of 4.7, can you kind of help me tie those 2?

Charles E. Christmas

Yes, I think one of the things you've got to remember, Dan, is that when we do that nonperforming assets reconciliation, so for the fourth quarter, what we're talking about is what happened to the credits that were NPAs as of September 30. So we're not really necessarily at -- so if we have a loan that's not a nonperforming asset as of September 30, but maybe we put it in the nonaccrual during the fourth quarter, but we also take a charge on that, that will not show up in the table, in that specific example.

Daniel E. Cardenas - Raymond James & Associates, Inc., Research Division

Okay, got you. That makes sense then. And then if you could -- as I look at your reserves, how much of that is specific and how much of that is unallocated?

Robert B. Kaminski

This is Bob. I don't have those numbers right in front of me as far as specific and unallocated. It's quite a complex calculation as you might imagine, and it's now affected by [indiscernible] that were required for TDR types of loans. And so that is a very hard to quantify moving target at any one time, but as I mentioned in my comments, the reserve is healthy 341 providing coverage as our calculation showed at the quarter end, at the year end, and we're pleased with where it sells at before year-end.

Daniel E. Cardenas - Raymond James & Associates, Inc., Research Division

Okay. And then as I look at your fee income jumping over to the income statement, sequentially you're up about $200,000, what was the driver there?

Charles E. Christmas

Which number you looking at, Dan?

Daniel E. Cardenas - Raymond James & Associates, Inc., Research Division

Your noninterest income.

Charles E. Christmas

Yes, there's nothing really specific in that. It depends on what time you're looking at. All the lumpiness that we have, I think all banks have is the mortgage banking income. Everything else is pretty consistent. So without having that detail in front of me, I would guess that that's probably where that's at.

Operator

And at this time, I'm showing no additional questions. Would like to turn the conference call back over to management for any closing remarks.

Michael H. Price

Thank you. Jamie. Again, this is Mike Price. And I just would like to finish by saying, as we look towards 2012, we remain focused on growing local deposits, diversifying our loan portfolio, limiting controllable expenses and continuing our work to enhance shareholder value. Our dedicated team is motivated to build on our success. And we remain convinced our long standing relationships and proven excellence in community banking will serve us well as we continue on the path of achieving efficient and profitable growth. Thank you to all of you for joining us this morning and for your interest in our company. We look forward to talking with you again in another quarter after we discuss our first quarter results.

Operator

That concludes today's conference call. We thank you for attending. You may now disconnect your telephone lines.

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