Good day, ladies and gentlemen, and welcome to the Mercantile Bank Corporation First Quarter 2011 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. And now, I'll turn the call over to Michael Price, Chairman and CEO. Please begin, sir.

Thank you, Tyrone. Good morning, everyone, and welcome. We are very happy to report Mercantile Bank's return to profitability. While there is still much work to do to bring asset quality back to our desired levels, much has been accomplished during the past four quarters. The hard work of our team, the improving economy and the success of our strategic initiatives melded together to produce our first profitable quarter in some time. Looking forward, we see a very bright future for the bank, and we're very grateful that we survived this deep recession with a strong capital position and great team of bankers ready to provide West and Central Michigan with superior service and products. As usual, Chuck Christmas will cover the financials and then we will have Bob Kaminski cover the dynamics of our loan portfolio. We will remain available for questions at the end of the presentation. At this time, I'll turn it over to Chuck.

Thanks, Mike, and good morning, everybody. This morning we announced that we recorded net income of $1.1 million during the first quarter of 2011, compared to a net loss of $3 million during the first quarter of last year. This $4.1 million improvement, which expands to $5.2 million if we excluded federal income tax benefit and one-time investment and loan sales gains recorded during the first quarter of last year, results from improvement in many key areas of our financial condition and operating performance, but especially reflects a significantly lower provision expense and a record high net interest margin. We are, of course, pleased to be able to report net profit to the first quarter of 2011. Our first profitable quarter after two years of quarterly losses, reflecting improved economic conditions combined with a positive impact of numerous strategies developed and implemented over the past several years. Declining nonperforming asset levels, a pruned loan portfolio along with honed credit underwriting and administration practices, a record high net interest margin, lower controllable overhead costs and improved liquidity position through substantial local deposit growth and dramatically reduced reliance on wholesale funding and strong and improving regulatory capital ratios provide us with cautious optimism as we look to our future earnings performance and overall financial condition. Yes, much more work lies ahead and many headwinds continue to face Mercantile, the banking industry and the economy at all levels. However, we believe we are well positioned to succeed as a strong community bank and continue to play a pivotal role within the markets that we serve. During the first quarter of 2011, we saw the continuation of the very positive trends we reported during all of 2010 and throughout most of 2009 as well and I'd like to touch on some of them with…

Thank you, Chuck. As usual, my comments this morning will focus on the details of the company's asset quality. The favorable trend of declining nonperforming assets totals that started in the second quarter of 2010 continued in the first quarter of 2011. Nonperforming assets at March 31 were $76.1 million, consisting of $60.2 million in nonperforming loans and $15.9 million in ORE and repossessed assets. This compares favorably to NPA totals of $86.1 million at December 31, 2010 and $117.6 million at March 31, 2010. This is the lowest that the NPAs have been since the first quarter of 2009 when the level was $83.7 million and the reserve was at $31.9 million. The breakdown of March 31 NPA is as follows: $14.3 million, residential land development; $2.3 million, residential construction; $8.9 million residential owner-occupied and rental; $2.4 million commercial land development; $13.4 million, commercial owner-occupied; $30.1 million in commercial non-owner occupied; $4.7 million in commercial non-real estate and a small portion of consumer non-real estate. Reconciliation of nonperforming assets for the first quarter shows that we had $5.5 million in payments, $2.2 million in sales proceeds, $4.8 million in charge-offs, $600,000 in valuation write-downs and $700,000 in loans returning to performing status, which offset $3.8 million in new additions to nonperforming status. The net result of this above activity was $10 million reductions in NPAs during the first quarter. Net charge-offs for the quarter totaled $5.5 million. Of these losses, 59.6% was previously allocated in the allowance for loan losses prior to the first quarter. The allowance was $42.1 million or 3.49% of total loans compared to 3.59% at December 31 and 3.35% a year ago. Charge-offs from the first quarter were allocated as follows: $2.8 million was commercial non-real estate; $1.4 million was commercial owner-occupied real estate; $1.2…

Thanks, Bob, and also thank you, Chuck, for your presentation as well. We would like to open the lines now for any questions at this time.

[Operator Instructions] Our first question is from Stephen Geyen of Stifel, Nicolaus. Stephen Geyen - Stifel, Nicolaus & Co., Inc.: Nice to see the improvement in credit. Couple of questions, the OREO expense of $3.1 million, could you give us a breakdown of the various categories?

This is Chuck. I don't have the specific breakdowns in front of me, Steven. But it was pretty much a combination of property taxes, some write-downs and legal bills and those types of things. There was nothing abnormal in there. I can give you that breakdown later if you want. Stephen Geyen - Stifel, Nicolaus & Co., Inc.: Great. Okay, and other income was down from fourth quarter if you know the OREO -- or OREO income, excuse me, were there significant sales or shifts in the type of OREO?

Yes. It was down quite a bit because if you remember during the fourth quarter, we saw a pretty sizable reduction in our net ORE balances and a lot of the stuff that we sold which happened towards the end of that quarter was some of those properties that had some pretty good rental income with them, albeit that's why we're able to sell like we did. So it's pretty much a reflection of lower balances and therefore having less rental income off those properties, Steve. Stephen Geyen - Stifel, Nicolaus & Co., Inc.: So there wasn't anything else driving that really, it was mostly OREO?

Pretty much it, yes. Stephen Geyen - Stifel, Nicolaus & Co., Inc.: Question on the net interest margin, just curious what -- you talked a bit about what drove the increase in the fourth quarter. If you give us a little bit more color. Was it broker deposits, FHLB [Federal Home Loan Bank] advances?

It was a combination of things. I'll walk you through a little bit. The first thing and the biggest thing was if you remember in the fourth quarter, we had a lot of Fed Funds sold. And that, really at 25 basis points, that really dampened the asset yield, specifically just for that quarter alone. And the reason why the Fed Funds was so high is we got quite a bit of local deposit growth throughout the quarter. And if you remember, we did prepay some FHLB advances to try to get that balance down a little bit. So now in the first quarter, we got the Fed Funds down to where we want it to be, close to the $50 million mark, and so that had a positive impact on the margin quarter-over-quarter. We also did -- as I mentioned, the FHLB advances, the ones that we did prepay in the fourth quarter, obviously we didn't have any of those interest costs in the first quarter and certainly going forward. And then we also did revisit during the fourth quarter a little bit in our first quarter revisited our deposit rates here locally. Really what we saw was throughout 2010, we didn't do a lot of changes to our local deposit rates and we were doing the competitive shops to those in our marketplace, we found that they had actually been periodically but systematically reducing their rates pretty much throughout 2010. So we elected to reduce our rates. We're still in the top three with virtually every deposit we've got but we definitely, as part of that rate shop, were able to see that we were quite a bit higher than the market and so we did reduce those rates towards the end of the first quarter, a little bit in the first quarter. Again, we're still incredibly competitive, but that lowering certainly had a positive impact on our cost of funds. On the broker side, yes, there's a little bit of improvement as some of those products mature and we replace some of those. But one thing that we do with that portfolio is we are starting to push out the maturity date on those little bit. So the rate that's coming on to the books isn't significantly lower than what's yield in the books because we're pushing out those maturities. So as far as going forward, we don't really see any major change to our margin, up or down, especially as long as the primary stays unchanged. Stephen Geyen - Stifel, Nicolaus & Co., Inc.: Okay, that's helpful. Thank you. And I guess just last question, just curious if you had a target for the commercial real estate loans as a percent of total loans.

I don't really determine necessarily a target percent saying that's where we want to be. I think we're looking more at individual loan risk types and saying there's outfitters. Obviously, there's a lot of bad commercial real estate that has been very challenging in our portfolio and the whole market, but there's also some good commercial real estate. I think we're trying to reposition the portfolio so that we're centered around -- C&I, obviously, is a big thrust but also there is some good commercial real estate out there that will be part of our portfolio now and in the future as well. So trying to just restrike that balance between what we see as acceptable risks as opposed to saying we need to be at a certain percentage in the portfolio.

Our next question is from Terry McEvoy of Oppenheimer & Co. Terence McEvoy - Oppenheimer & Co. Inc.: Maybe just a question for each of you. I'll start with Bob. The NPA additions, $3.8 million, was that considerably below what you had modeled? I mean, that number showed a nice decline and then as you look at the 30 to 89 days past due loans that in the release somewhere, I think you said it was pretty close to 0. So would you expect that number to continue to drip lower as we move forward through the year?

Well, as you mentioned, the NPA additions for the quarter was very, very low and compared to recent quarters, we're glad to see that. I think that we've seen the preview of those metrics, the lowering additions to the NPA portfolio back even late last year and that while they were a lot higher in the fourth quarter than they were now, I think the additions that we had in the fourth quarter were just a couple of loan transactions that took that amount higher than what we ultimately would like it to have been. I think in the first quarter, we had some real good traction that the additions were smaller type transactions and the volume was very, very low. And as we look at the problem loan list in its entirety, there's been definitely a downward trend as you went through the course of 2010 that has continued into 2011 as well. So I think we're kind of saying it's about time in terms of that $3.8 million additions, that's where we want to see the numbers trending to. Still a lot of challenges out there certainly, but I think the overall dynamics of the portfolio and looking at the customers that are on the watch list, there seems to be a feel that we continue our very hard look at the portfolio to make sure we flush out any problem loans, and we've been very diligent in doing that the last couple of years, but I think now we're seeing that diligence is paying off and the loans that we're seeing pop up, and boy, this has been a struggle and they need to go on the watch list, that's really dropped and we're not seeing that nearly as much as we had in the last couple of years.

Terry, this is Mike. Before you ask your next question, I need to insert something here and that is the Safe Harbor statement that we neglected to do at the beginning, but all listeners should understand that this conference call may include the forward-looking statements. These statements may include projections, plans, objectives, assumptions and other information are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from the forward-looking statements. Some of the factors that could cause the actual results to differ are included in our most recent annual report to the SEC on Form 10-K, including the Risk Factors section. We assume no obligation to update any forward-looking statement. Thank you for letting me insert that and keep on going with your questions. Terence McEvoy - Oppenheimer & Co. Inc.: Chuck, what might have been overlooked over the last couple of years is the change in your funding profile and the increase in local deposits. Can you just go through 2, 3 years ago what the funding profile look like compared to today? And then talk about your interest rate sensitivity as we look out into next to first quarter of next year, potentially a rising rate environment?

Sure. I'm happy to do that for you, Terry. I think historically this company, and I would say probably for its first 8 or 9 years, we started out using wholesale funds and during that first 8 or 9 years, our wholesale funds, as a percent of our total funds, was about -- stayed right within 60% to 70%. Sometimes closer to 60%, sometimes closer to 70% but very, very consistent in regards to that percentage. Yet the company was growing quite rapidly and so therefore, the wholesale funding program was growing as well. But from a percentage standpoint, our balance sheet stayed very, very consistent, which as I always tried to stress whenever anybody would listen to me, is that it did show that our local deposits, while not gaining traction as far as becoming a bigger part of our funding mix, actually was keeping up with our very strong asset growth throughout that period. I think that over the last 3 years, as the regulators like to say, the world has changed in how they view wholesale funding, especially broker deposits has changed and whether we agree with that or not, or parts of it or not, it is what it is and obviously that's a framework that we need to be part of and to work with. And so a little over 2 years ago, we really made a strong push to even increase our local deposits. Not only get more local deposit growth, but actually drive down that wholesale funding reliance. We did that with a lot of new products. We did that with a lot more marketing. And we really hadn't quite frankly done a lot of marketing in the past, especially in regards to more retail deposits, but you know we did billboards and…

That's a good question and that's exactly what we've been for some time now within our strategic planning group is talking about strategies, plans, training whatever it's going to take to shift the focus back to, as you call it, offense. For the last three years, obviously, we did what we had to do to get through this thing in a very strong position. There wasn't a lot of loan demand out there anyway. We're very gratified to see that loan demand is starting to pick up. It's certainly not where it was before the recession, but it's going in the right direction. So we are spending a lot of time with -- whether it's specific job descriptions, plans, that type of thing to get people pointed towards adding loan volume, again in a very conservative way, and we expect to see those results start to really take effect later this year. Terence McEvoy - Oppenheimer & Co. Inc.: Appreciate it. Thanks a lot.

Our next question is from Daniel Cardenas of Raymond James. Daniel Cardenas - Raymond James & Associates, Inc.: Just a quick question on capital. We did see your TCE ratio improve due to a combination of profits as well as some contraction on the balance sheet. Can you give us some comments as to how comfortable you are with the current ratio?

Yes, Dan, this is Chuck. We're certainly comfortable where the ratio is at currently. We spent, obviously, a lot of time and effort and certainly made some strategic decisions along the way to make sure that we were good shepherds of our capital position not only maintaining, at least at a steady level, as we were going through the significant provision expense and other costs, which is having obviously a very significant impact on our bottom line. Not only, again, keeping it steady, but also making sure that we were increasing it. Obviously, we've been able to do that. Obviously, a very rapid increase in Tier 1 leverage ratio during the first quarter. It kind of goes back to my margin discussion before when we were able to reduce our average assets, which that ratio's based on, in the first quarter compared to the fourth quarter. So it's a pretty core number where it is now. It's approaching 10%. Again, we're comfortable with it, especially in regards to where it was and where it is now. But also you're certainly looking at the asset quality and looking at the earnings performance. Obviously, there's some big improvements there and we would expect improvements to continue. So overall, we're pretty comfortable with where the ratio is at. I think our expectation is that we'll likely see that ratio continue to improve. I think you'll see some reduction in the balance sheet, especially loan portfolio as we go forward over the next, probably at least couple of quarters. Again, that's hard to judge, but we're certainly hopeful and optimistic that we'll continue to be profitable as we go forward, which obviously has a positive impact on net ratio as well. Daniel Cardenas - Raymond James & Associates, Inc.: Ratio strong enough to support any balance sheet growth that could come later in the year?

Yes. This is Mike, Dan. Depending on what level of the balance sheet growth we're talking about but to kind of add on to Chuck's comments, we feel very positive about the profitability of the organization going forward, and we also don't see a tremendous increase in the balance sheet for 2011. What we're really focusing on is starting to slow the contraction, which is already happening and slowing that down to maybe a neutral position. And by the end of the year or first part of next year, we'll start to see some balance sheet growth and even that isn't going to be like the old days we did when we had tremendous quarters of growth, we just don't see it in the demand out there. Now if that should change, then I think we've shown in the last three years that we know how to manage our capital position through some very interesting times. But if that should change, we'll change our approach. But right now to answer your question, we feel very comfortable with the capital management of this bank. Daniel Cardenas - Raymond James & Associates, Inc.: If you can just give me your thoughts on TARP [Troubled Asset Relief Program] repayment?

Well, we've stated numerous times that our first goal is obviously using the CPP [Capital Purchase Program] program of TARP to make sure that we had a very strong balance sheet and that has done its job, and we will work very closely with all constituencies involved and with our board. Our plan is to pay the TARP back as soon as it makes sense to do so. And that's really kind of adding on to your question before and that is looking out the window to see when is the good time, what if we brought the level of profitability up and it's sustainable, the profits up, that we feel like we can pay it back either in little bits or in one big chunk.

[Operator Instructions] Our next question is from John Barber of KBW. John Barber - Keefe, Bruyette, & Woods, Inc.: So we talked a little bit about the NPA improvement and the improvement of 30 to 89 days past due. But what other leading indicators do you look at that may be indicative of future credit performance?

As I mentioned, the viable loans that are being downgraded has greatly improved. If you look at the report each month and each quarter of upgrade and downgrade, the upgrades have certainly outweighed the downgrades for some time going back into late last year. That's a very good trend. We're starting to see some customers that have been downgraded to watch list have shown and demonstrated some good sustained improvement. So they're being upgraded off the watch list and that's a very positive thing. And through all levels of the loan rating metrics, there has been improvement in more highly rated credits as well as some of the credits that have struggled, you're starting to see some turnaround there. And don't get me wrong, there still -- $76 million is still way too high for levels for NPAs, but we like the trends. We like the metrics of what we've seen in terms of downgrades and additional NPAs all going the right direction and now our job is to keep driving that down. John Barber - Keefe, Bruyette, & Woods, Inc.: Is the plan to continue to work down nonperformers organically or would you guys entertain an accelerated strategy? Maybe bulk sale or something like that?

Well we've consistently, since the beginning of this crisis, have always kept our ears and eyes open to other potential ways of reducing NPAs other than organically. However, the bulk sale happening, as you suggested, for example, has been such a discount and such a haircut that it just didn't make sense for us to go too much further down that line. We've been able to do it much better organically. Now that being said, if that market is in continual flux, we'll continue to look at those types of strategies. What I have to tell you, I've been very, very satisfied watching the last few quarters, especially the success of our internal efforts to take it down. I don't know where we were a year ago, $120-some million in NPAs, get it down to $76 million. That's pretty significant and it's been very consistent and it continues to be consistent. So I'm a great person at extrapolating. If we can keep extrapolating that type of reduction, we'll be in really, really good shape. John Barber - Keefe, Bruyette, & Woods, Inc.: Okay, and my last question was, I think at the end of the year, your valuation allowance coming from DTA was about $30 million. Can you just walk me through the process recapturing that asset and what events need to occur and any conversation you've had with your auditors about that?

That's kind of the big unknown right now, not only for us, but I think the entire industry. Certainly, the most important aspect of getting rid of that valuation allowance or having some adjustment to it right now, it's a full valuation, is the profitability of the company. And so now we have 1 quarter of profitability. As everyone tells me, 1 quarter is not a trend. So we certainly need to demonstrate that we got the profitability not just for 1 quarter but consistently, and consistently show improvement and certainly that's going to be driven by the loan portfolio and the quality and how that impacts provision expense, bad debt costs and certainly making sure that we can keep our margins upward is and control everything else. So I think it will likely be a year-end type discussion that we'll have with our auditors. We've already having some discussions with them. But as they tell me and into our talks, when they're talking to themselves, when they're talking to other CPA firms, there's not really a lot of guidance, whether it's specific accounting literature or maybe some guidance by folks such as the SEC, as to how to sort of unwind valuation allowance. There is certainly a tremendous amount of information on how to put one out there, to put a valuation allowance on the books, but not really how to unwind that. So we'll continue to have discussions and figure this all out. Certainly, a big part of getting rid of the valuation allowance or reducing it is going to be predicated on future profitability. So everybody needs to get comfortable with future projections and what those mean and have those discussions again, primarily, probably at the end of the year and assuming the profitability stays within our income statement.

Our next question is from Steve Covington of Stieven Capital.

Apologize if I missed this, but could you just touch on the nonperforming asset costs and what that $3.1 million in the first quarter. I mean, assuming that we get back to a more normalized environment at some point. Is that number more normally a couple of hundred thousand or $300,000 a quarter?

Yes, Steve. This is Chuck. We did touch on it a little bit, but that's fine. As far as what it was in the quarter, again, it is mostly property taxes, legal bills, some write-downs, some ROEs, those types of things. I think we would look at that number trending the same way that our nonperforming assets would trend. Again, given the makeup of those costs, that's a really hard number to try to project in addition to provision expense. But certainly as nonperforming assets continue to improve and obviously as you heard from our comments this morning, we think that there's going to be continued improvement. We would expect that number to decline in future quarters. As far as what is a normalized level, I think it's been so long since we've been in this current environment as to what is normalized when things get back to normal. I guess I'll just leave it at we would expect that ratio to -- or excuse me, that number to decline in future periods and I guess it's just going to be what it is. Obviously, we need to continue to use legal firms to help us out work out of the situations and continue to monitor what we've got. Collateral valuations are starting to solidify. So hopefully, we won't see a lot more write-downs. There will be some. There's no doubt about that as we continue to unwind some of the ORE that we've got on our balance sheet and certainly if we own it, we're going to have to pay the property taxes on the property. So I think a gradual, but hopefully significant decline as we go forward. And I think that would be somewhat similar to what we see in the overall nonperforming assets number.

I'm showing no further questions or comments in the queue. I'd like to turn the call over to Mr. Price for any closing remarks.

Thank you, and thanks again to all of you for your interest in our company. Again, we're very gratified to get -- return to profitability and look forward to a really strong future going forward for the rest of 2011. At this time, we'll end the call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.