Mercantile Bank Corp (MBWM) 2003 Q1 法說會逐字稿

Welcome to the Mercantile Bank Corporation first quarter earnings conference call. There will be a question and answer period at the end of the presentation. If you have a question at that time, please press star then the number one on your touch-tone telephone.

Before we begin today's call I would like to remind everyone 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 or its management, statements on economic performance and statements regarding the underlying assumptions of the company's business. The company's actual results could differ materially from any forward-looking statements made today due to several important factors described in the company's latest Securities and Exchange Commission filings. The company assumes no obligation to update forward-looking statements made during this 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 web site, www.mercbank.com.

On the conference today from Mercantile Bank Corporation, we have Jerry Johnson, Chairman and Chief Executive Officer, Chuck Christmas, Chief Financial Officer, and Bob Kaminski, SVP.

We will begin the conference with managements prepared remarks and then will open the call up to questions. At this point I would like to turn the call over to Mr. Johnson.

Thank you very much and thank all of you for joining us this morning. Good morning. I would also mention that Mike Price, the president of the company, is on vacation with his family this week but he is dialed into our conference call and therefore is available to answer any questions if you have any particular inquiries that you would like to make of Mike specifically. So he is out there with all of you and available to answer your questions.

Before Chuck and Bob begin, I would like to say that many of us at Mercantile Bank Corporation have been managing banks together for over sixteen years and this is arguably the best first quarter we ever had. This is due, I think, to a couple of things. It's due to the collective experience that we've derived from working together for so many years. And this experience has been immeasurably augmented by the highly qualified, entrepreneurial and talented individuals that have joined the Mercantile team subsequent to our opening for business a little over five years ago. The noteworthy accomplishments of our first quarter have been achieved notwithstanding a continued stagnant economy, a less than advantageous interest rate environment and uncertainties created by the situation in the Middle East. That uncertainty is reflected certainly in the volatility of the equity and bond markets continued deterioration in employment and consumer confidence indices and other negative economic data. We are hopeful, however, that we will be seeing some improvement here in the near term and, as the economic and geopolitical situation improves over the coming months, we are hopeful that our performance will remain strong.

I will now turn the call over to Chuck Christmas, our CFO regarding his comment for the quarter.

Thanks, Jerry, and good morning, everybody. What I would like to do this morning is give an overview of Mercantile's financial condition and operating results for the first quarter of 2003, highlighting major financial condition, performance, balances and ratios. I think what you will see throughout my comments is an underlying theme of Mercantile's continued successful implementation of our strategy, that being our concentration on business lending, strong asset growth led by growth in our commercial loan portfolio, very strong asset quality, improved fee income and controlled overhead costs.

First, our overall earnings performance as you have seen in our press release, our first quarter net income totaled $2.2 million. That's annual increase of 600,000 or 39% over the $1.6 million we earned in the first quarter last year, Our diluted EPS were 40 cents first quarter 2003, an increase of 38% over the 29 cents that we earned in the first quarter last year. Those increases of net income or EPS continued to be achieved despite our continued significant loan loss provision expense due to continued strong loan growth. Our net interest income, our overall profitability is driven by our continued strong earning asset growth which is translated into increased net interest income as well as an improved net interest margin. In the first quarter of this year, our net interest income totaled $6.8 million. That is an increase of $1.8 million, or 35% over the first quarter last year. With regards to our earning asset growth, earning assets at the end of the first quarter totaled $914 million. That is up $214 million, or 31% from where we were at the end of the first quarter last year. Of that $214 million in earning asset growth, $191 million, or 89% of that growth, is in our loan portfolio.

Our net interest margin in the first quarter of this year was 3.17%. That is a 14 basis point increase, or 5% overall growth from the first quarter last year of when our net interest margin was 3.03%. The 3.17% is a slight decline from the 3.21% that we earned in the fourth quarter last year, and that basically reflects the full impact or the full quarter impact of the 50 basis point cut by the Federal Reserve in early November. Basically since that point in time our margin has been relatively steady. Again, as you saw from the previous year our net interest margin did increase and that's due to two primary things. One is continued replacement of our CD portfolio and certainly our common stock sales that we did in 2001 certainly augmented that margin as well.

Looking forward, with regards to our net interest margin. As in the past we do not provide specific guidance. However, there are certainly some main issues that impacted Mercantile's net interest margin, again as have been in the past, that being loan yields, any action or inaction by the Federal Reserve and brokered CD rates.

With regards to the lending portfolio, as has been happening really since the beginning of last year if not earlier, most of the new loans that we are booking, the borrowers are electing variable rates over fixed rates. Basically what we are looking at is booking most of our loans at anywhere between 4-4.5% versus the fixed rate which is traditionally a five-year balloons at 6-6.5%. Our first year loan yield was flat at 5.90%. That was down from the 6.19% that we earned in the fourth quarter last year. Again, primarily because of new loans coming on to the books and with our strong loan growths, those loans being lower than our overall loan portfolio, thereby driving down the overall yield. Variable rate loans continued to comprise the majority of our loan portfolio, actually on an increasing trend. At March 31, at the end of the first quarter here our loan portfolio, 67% of it was floating rate loans. However, I will add to that that about one-third of those loans are actually at their floors. That's 67% compared to 65% at the end of last year, and two years ago it was only one-third of our portfolio. So you can certainly see that the variable rate loans comprise a much more significant portion of our loan portfolio.

With regard to our brokered CD portfolio, our cost of funds continued to decline especially because of the decline in our cost of funds of our CD portfolio. With regards to our brokered CD portfolio, specifically at the end of the first quarter here, our CD costs, 3.15% was our average rate. That is down 15 basis points from the 3.3% at the end of last year, and at the end of 2001 it was 4.6%. So obviously rates have declined and as our CDs mature we were able to refinance those at significantly lowered rates, obviously offsetting, as you can see in our margin, offsetting the decline in our loan portfolio and overall asset yield. Given the current rate environment, we still have significant reprising opportunities within our brokered CD portfolio. For the remainder of 2003 we have $320 million maturing that have an average rate of 2.90%. To put that in perspective, right now the twelve-month CD rate is about 1.80% and the eighteen-month rate is 2.10%. What we are doing right now with the overall maturity of our portfolio is somewhere in between the 12 and 18 months. So you can see there's some significant reprising opportunities continue.

With regard to our loan loss provision expense, in the first quarter we expensed $625,000. That's an increase of $165,000 of what we expensed in the first quarter last year. As has been in the past, the majority of the provision expense was related to loan growth and not replenishment because of charge offers. Of this $625,000 expense, only 17% of that reflects a replenishment of the reserve due to charge off. Our asset quality remains very strong. Our net charge offs for the first quarter of 2003 total only 109,000, or just six basis points of average loans and that's actually, even though that's very strong it's even lower than what we did in the fourth quarter of last year where we charged off 283,000 or 15 basis points over average loans. So, again, as it has been in the past very, very strong numbers with regard to our charge off.

Nonperforming loans at the end of the first quarter total 533,000 or just seven basis points of total loans. At the end of the year last year it was just under 800,000 or ten basis points of total loans. Looking over the last five quarter ends, we have averaged just ten basis points total loans of nonperforming assets.

With regard to net interest income and my numbers will exclude some security gains that we took in the first quarter of last year, first quarter of this year we earned $1 million. That's a $600,000 or 132% increase over the 400,000 we earned last year, again excluding securities gains. Many reasons for the increases, one is our service charges on deposit accounts. That is up $75,000 quarter over quarter, or 39%, primarily new accounts, some modest increases in fee structure and a decline in the earnings credit rate these past 12 months.

Mortgage referral fees, like most banks we continue to get strong income there, and increased income on our first part. In the first quarter of 2003 we earned $281,000 in mortgage referral fees. That's an increase of 185,000 or 193% of what we earned in the first quarter last year. Internet banking and wire fees, which is becoming a bigger and bigger portion of our fee income, in the first quarter was $46,000 compared to $19,000 in the previous year, an increase of 27,000 or 142%. Credit and debit card usage fees, first quarter of this year was 76,000, that's an increase of 33,000 or 77% over what we earned first quarter last year. And increases in cash-surrender value of bank-owned life insurance, this year first quarter was 209,000, an increase of 164,000 or 365% over what we earned last year. If you remember in August of 2002, we had purchased an additional $10.5 million of bank-owned life insurance to help mitigate our rising medical insurance costs.

With regard to non-interest expense, in the first quarter we expensed $4 million in overhead costs. That's an increase of $1.1 million over what we expensed in the first quarter of last year. However, although it was an increase of $1.1 million quarter over quarter, our net revenue was actually up $2.2 million. So once again we've been able to demonstrate our ability to grow revenues much faster than the cost of, our increased cost structure.

Our efficiency ratio was relatively unchanged quarter over quarter, 51.8% this year compared to 51.1% first quarter last year, down slightly about 1%. With regards to the growth in our overhead costs, of the $1.1 million increase quarter over quarter, 800,000, or 70% of that is in salaries and benefits. As you saw in our press release, our FTEs have increased 27% going from 101 FTEs at the end of the first quarter last year to 128 at the end of the first quarter this year. Also impacting salaries and benefits costs, our annual merit increases for current employees as well as an enhanced bonus program as we make bonuses a bigger, bigger portion of our employees salary and benefit program. Occupancy and equipment costs were also up primarily due to the opening of our southeast branch in the latter part of 2002. General administrative costs were also up throughout most of those items. However, that's primarily due to an increase in our asset base. Once again, there are no one-time expenses or charges.

A couple comments with regards to overall asset growth. At the end of the first quarter 2003, we stood at $968 million. That's an increase of 240 million, or 33% over the 728 million where we stood at the end of the first quarter last year. As I mentioned before, loan portfolio growth certainly dominates our asset growth. Loans stood at $812 million at the end of the first quarter. That's an increase of 191 million, or 31%, from the quarter of last year, first quarter last year. And loans were up $40 million, or 5% just in the first quarter of this year. So loan growth remains strong.

With regards to overall asset structure, there are no major changes. We keep loans at about 83% of assets and short term investments and securities at 11%.

With regards, some comments with regards to funding, our funding strategy certainly has not changed significantly. We continue to grow our local deposits as much as we can and bridge the funding gap with wholesale funds which includes brokered CDs as well as now Federal Home Loan bank advances. Deposit growth in the first quarter of this year, our first quarter has traditionally been our toughest due to our business focus. Towards the end of the year and certainly in the beginning of the new year, a lot of our businesses have significant deposit withdrawals as they pay out year end bonuses as well as tax money. Local deposits and repose were actually up $18 million in the first quarter of this year, or 6% growth, led by strong increase in our demands accounts. They were up $6.5m, or 10%. We also had strong growth in local CDs, comprised of both individuals and municipalities. Those are up 21 million, or 29%. We did see as expected some declines in our Savings Now accounts and our repose. Again we traditionally see those declines when they were expected. Our brokered CD portfolio was up $24 million for the quarter, or 5%, and our overall brokered CD concentration increased slightly from 64% to 65%, remaining in a range of what we've seen for the last two and a half to three years. The brokered CD market remains extremely liquid and actually the brokered CD cost including the broker fee continued to be 20 to 30 basis points cheaper than what we have to pay to get local CDs.

As you saw at the end of the last year, we are using the Federal Home Bank for borrowing purposes. We have $15 million outstanding at the end of the first quarter of this year and our borrowing line totals about $100 million. We intend to use the Federal Home Bank borrowing program as part of our wholesale funding program as we do the brokered CD market.

My last comment is with regard to capital. We continue to have a solid capital position as a result of our stock sales back in 2001 and certainly as a result of our improved and growing earnings performance. Our total risk-based capital ratio at the end of the first quarter was 11.8%. While it is declining and that's certainly expected, it is still well above the 10% minimum. Given our capital structure at the end of the first quarter, it is estimated that we could have been about $150 million larger in assets given that capital structure, and that does not include any predicted future net income.

That is my prepared remarks. I will be happy to answer any questions in the Q&A session but for now I will turn it over now to Bob for some comments.

Thank you, Chuck. The first part of my remarks will deal with loan growth and credit quality and the second part will deal with some operational comments.

In this time of economic and market uncertainty, both globally and locally, Mercantile experienced steady continued loan growth in the first quarter of 2003. This growth has come primarily from new business relationships and, to a lesser extent, growth from existing relationships. Mercantile's growth was a selective growth as we continue to attempt to partner with customers who exhibit characteristics and risk profiles that are in line with the bank's credit policies. We are very pleased with our asset quality in the first quarter. Charge-offs, past dues and nonperforming loans were all well below that of our peer group. As was mentioned in the press release, this strong asset quality is attributable to our knowledgeable lenders, diversified business loan mix and strong loan review process. Management and the lending staff maintain a very pro-active risk identification and loan work out process that enable us to address problem loans usually very early in the deterioration cycle. While asset quality remains strong, as we have maintained in previous conference calls, however, continued downward pressures from various sectors of the economy will continue to challenge management and the lending staff and will make it more and more difficult the ability to cost to post-asset quality numbers in the ranges that we have been demonstrating.

Now operationally, Mercantile will be opening its fifth location in May in the northeast quadrant of Grand Rapids at [Knapps] Corner. We feel this will be an excellent for us both in terms of business and retail customer opportunities. Additionally, in the first quarter Mercantile embarked on a project which will allow the bank to relocate its downtown Grand Rapids office to a new facility at the intersection of Leonard Street and U.S. 131. Plans are in the works for the construction of an approximately 60,000 square foot facility which will house the main office of Mercantile Bank of West Michigan, the commercial lending function, credit, loan operations, loan review, business development and investments. We hope to begin construction on this project this summer with a construction time frame of approximately 12 to 18 months.

That is the extent of my prepared remarks. I will now turn it back over to Jerry.

Thanks, Bob. At this point we would be happy to answer any questions that you have.

At this time I would like to remind everyone, in order to ask a question please press star then the number one on your telephone key pad. We will pause four just a moment to compile the Q&A roster.

Your first question comes from Steve Convington with Stifel Nicolaus and Company.

Good morning, gentlemen. Congratulations on another outstanding quarter.

Thanks, Steve.

Just a couple quick ones. I apologize if you touched on this, I got disconnected briefly. Was the growth during the quarter, was it relatively balanced in the loan portfolio?

Yeah, I think overall, Steve, it was relatively balanced on an average basis.

I guess secondly, in regards to your margin and I understand you can't provide forward guidance, but the decline in the yield on the earning assets, in a stable rate environment, are you getting to a point where you think that is starting to flatten out?

I think Steve, most of the decline in our loan portfolio, which is obviously driving the overall asset yield, is just due to the growth. All the new loans are just coming in at lower rates relative to the overall yield of the portfolio. I think as long as we continue to grow, obviously we are going to see some decline, and assuming that the borrowers continue to take the floating rate option, we are going to continue to see a decline. Obviously as the overall yield goes down the decline should go down somewhat. We certainly expecting a continued decline given what's been happening and assuming that's going to continue to take place.

That makes sense. Lastly, and this is just in regards to the competitive landscape in your area, number one, how does your pipeline look and, number two, is the competitive landscape changed at all in the last couple months? Is it still kind of working in your favor as it has been?

Steve, this is Bob. I think the pipeline continues to be good for us. It's obviously something that we work very hard at to make our opportunities. As I mentioned, most of our growth has come from new business relationships as opposed to growth from existing customer base, but new projects from their standpoint. Competitively, it's certainly very competitive out there. We have some very strong competitors in this market. As we've demonstrated in the past and hopefully in the future that we continue to be able to certainly hold our own with respect to competitive product lines and the ability to put together a good package for that type of customer that we are looking for in the small to medium-size business market.

Any new commercial lending hires, Bob?

We are certainly always looking for new opportunities along the lines as new lenders become available and we will continue to do that in the future. We added one lender this past quarter and we will look for opportunities in the coming months of the year.

Great. Congratulations again, guys.

Thanks, Steve.

Your next question comes from Howard Whitley with Security Financial.

Jerry and guys, keep up the good work.

Thanks.

A couple questions, number one, I was wondering it appears that your new services are starting to reap some benefits as far as selling life insurance, brokerage service, [inaudible] services, those types of things, and some of the percentages are quite significant, of course the services are new. Are you satisfied with the people you are affiliated with and what they are doing, and are you looking at any other services that you might offer your clients?

As far as the providers, yeah, our relationship, for example, with Raymond James is a very good one. The insurance agency that we formed in conjunction with Michigan Bankers has proven to be a very good one as well. So at this point I think our relationships with our vendors, outside providers, et cetera, is satisfactory. We are continuing to grow those businesses. We don't have anything specifically right now we are looking at as far as adding new services but we are always on the look out.

One other quick question. With the growth of the bank at the present levels and with an economy that hopefully will improve one of these days, what do you anticipate timeframe-wise you may run out of adequate capital for the bank and, if so, any thoughts on what you might do?

I will let Chuck answer that.

If you, I will base comments on historical numbers. I certainly don't want to give our any future guidance or anything like that. But if you look at how we've grown historically which has been relatively consistent and apply those numbers going forward and take into account street estimates that are out there on net income, it would probably be sometime mid-next year, mid-2004 before we would have to go back to the capital markets. That's the way it looks at this point in time.

I would assume your thoughts are still to keep your preferred stock out there, Jerry, at this point in time?

You know, we have a lot of options, well, we have several options but one of the things we really are looking at, Hal, is the amount of float we have in our common equity. If we can do an equity offering of whatever size and still give our shareholders, even with the dilution, a really good increase, continued increases in EPS, that's probably at this point the way we would be leaning. We have about 5.5m shares outstanding right now. If we can get that float a little higher without, and still return 15-20% EPS, that's probably, at least as I sit here today, the way we would be leaning.

Okay. Thank you very much.

Thank you.

Your next question comes from Terry McEvoy with Fahnestock.

Good morning.

Good morning, Terry.

Nice quarter, guys.

Thank you very much.

I was wondering if you could remind me again, what percentage of your overall loan portfolio is commercial real estate in nature and maybe what percentage of that is owner occupied. And then maybe just touch on some general office or industrial vacancy trends that you are seeing in your markets.

Okay.

Terry, this is Chuck. I can give you some numbers on your on the loan portfolio. I think about 55% of our total loan portfolio is commercial real estate, and of that, well over that, at least 90%, now a little bit more, is actually owner occupied.

Okay.

As far as vacancy trends, obviously the economy being such as it is, you are seeing some businesses pull out of this area and relocate from a large business standpoint and that has created some more vacancies in this market. But as Chuck mentioned, being that most of our commercial real estate or a majority of it is owner occupied, we haven't had pressures from that standpoint as far as vacancies creating challenges for landlords in buildings that we finance.

And, Bob, in your comments you mentioned there was some downward pressure on credit quality as you looked out and especially coming off your low base. Could you be a little more specific? Are there some specific industries that you are worried about today or were you just making some broad-based comments?

In this market specifically, I think there's particular focus on the office furniture industry being that we have several of the industry leaders in terms of annual revenues in this market and some ancillary subsidiary businesses in the small to medium-size market, business markets are contingent upon those industries. And as well the transportation industry in this market is very big. And both of those areas have struggled, they are also interrelated so it causes pressures from that standpoint as well. But we continue to manage and monitor the portfolio for concentrations and making sure that anyone that has reliance upon those industries are addressed and in [inaudible] contact with our lending group to make sure that any problem signs are addressed.

Terry, and specifically - this is Jerry. We don't, there's nothing that's going to surprise you next quarter that we know of at all. This is just a general comment that the longer the economy stays slow and soft, the more challenge it becomes to continue to return the types of numbers that we have. But we are working at it and so far we've been very successful at it and we hope to continue to be successful.

Great. Thanks a lot.

Next question, comes from Sandy Ken with Raymond James and Associates.

Hi, guys. Congratulations on the great quarter.

Thank you.

My question is related to Terry's question, actually. I was wondering, Mercantile has had great loan growth this quarter and you said 55% of your loans are in commercial real estate. What's the make up of the other 45%?

As far as industry mix and that type of thing?

Exactly.

It's fairly well diversified. We put everything on our system with SIC codes and it's a list that we look at, certainly formally every quarter but we are starting to look at every month as well, it's really quite diversified even within that commercial real estate number, because primarily we are a relationship lender, the diversification is not only with the other industries but it's also within that commercial real estate portfolio as well. So as Bob mentioned, we do, this area does have a lot of relationships with office furniture and trucking companies and stuff, and obviously we can see that with our reporting and certainly we take a look at some of those industry codes a little more closely than others. But really we don't have any significant concentration to speak of to any one particular industry.

There aren't many SIC areas that we don't have relationships in. We don't have any customers that own farms, for example, and some of those things being in an urban setting, but it's a pretty broad-based spectrum. And as Bob said, we analyze those concentrations frequently and if we feel that we are getting too heavily concentrated in an area we will ask our lenders to pull back a little bit and let that concentration drop to a lower level.

Great. Thank you. Also I have another question. Your credit quality was great this quarter. Going forward, do you think, I know you're not supposed to give any real specifics on it, but incrementally do you think it will get better or worse?

Our credit quality has been very consistent over the last several years. It doesn't come without a lot of hard work on our part from the lender's standpoint as well as the management, the portfolio. We set the bar very high for ourselves in terms of asset quality both in relation to our market as well as our peer group, and it's something we work very hard at and the numbers, the results kind of speak for themselves. But I'm not going to make any predictions about the portfolio and the asset quality but, as I said, we set the bar very high for ourselves.

One of the things that Chuck also mentioned was the yield on our loan portfolio, and one of the reasons that it tends to be a little lower yield is the quality of credits that we book. And we would rather live with a little less yield than live with a portfolio fulfill of problems. That's a trade-off that we consciously make.

Okay. Well, thank you very much and congratulations again.

Thanks again.

You have a follow-up question from Steve Convington with Stifel Nicolaus and Company.

Just a quick one for Chuck. I forgot to ask before; your tax rate continues to decline a little bit. Is a 28% type number what we should be using for the full year, Chuck?

Yeah, that would be pretty accurate obviously with regards to our tax exempt portfolio as well as the [security portfolio] and bank-owned life insurance, I don't expect any significant changes there with regards to the overall structure. So I would say 28, 28.5% would be an accurate number to use.

Okay. Thanks.

Your next question comes from Brad Ness with SBR.

How are you doing guys?

Good, how are you?

Doing good. I have a couple of questions here. With some of the new loans you've been booking, can you tell me as far as pricing how you're competing against a [inaudible] and how competitive they are nowadays?

They are one of our major competitors and they are very, very aggressive. A couple of the banks, infect being one of them, have specifically targeted us in our portfolio and are very aggressive in their pricing. And there comes a point we've walked away from some deals we would have liked because we didn't like the pricing. They have been very unsuccessful in stealing business back away from us. We've been able to sell a little higher rate that we are charging by the fact that we give great service. But it's a constant battle.

It sounds like they are trying to undercut you in price but you guys are --.

We've been holding our own. On some new deals, we just said, no thank you.

I think some customers find out when they sometimes take a lower rate, they find out that the quality of service or the partnership that they get with the larger financial institution that may have undercut us in price isn't quite what it is in the package they get with Mercantile, and so you see some rebound opportunity that a customer finds out that maybe they didn't get quite what are they were bargaining for when they took that absolute lower right.

Right. Sure. A couple questions on the expense side. With the new office expected to open in May 2003 this year, how much of the expenses associated with that office and the staff required to support that office are in the first quarter numbers here?

Brad, this is Chuck. From a staffing standpoint, all those numbers are already in the first quarter. We've already hired our staff especially with regards to the manager and the assistant manager. It's a relatively small office from an expense standpoint. It actually I think cost more to buy the land than it did to put up the building. So certainly when it comes on line here sometime hopefully next month there will be some additional depreciation expense. But going forward it will be that depreciation experience with general overhead costs, utilities and such that would be part of that building.

Okay. And with the relocating the downtown office, remind me again, did you own that property or is that leased?

That we are in right now?

Yeah.

We are tenants. We lease it.

Okay. When can you get out of that lease, is there a penalty?

We are working on that right now with the landlord. There's not going to get a penalty if we can help it. He has a much nicer building now than when we went in there and we are in negotiations, beginning negotiations with him as we speak. I don't know, Bob, if you have any more comments. Bob is the hit man on this, so.

There's going to be a very involved process because our building that we are constructing is going to be quite lengthy in terms of duration so we have many basis to cover but we will be addressing those in the coming quarters.

It's probably in your 10(K), but what's, right now with the downtown location, what's the maturity of that lease, the term?

2007, I believe, it's a ten-year lease, end of 2007.

Chuck, I thought you mentioned something about an enhanced bonus program. Could you just give a couple bullet points of how it was enhanced?

As part of our bonus program, we have to meet [profitability] numbers and, assuming that we meet them, we have maximum percentages of salaries that can be paid out in bonuses and, again, those percentages are a base of, a percent of the employees' salary and what we did is did some increases in that percentage level.

What we've done, Brad, is cut back on the percentage salary increases that employees get and put more of that salary increase into the bonus plan. So if they want to earn additional money, more of it is driven by performance of the bank than just an automatic salary increase. It's just a way to use incentive pay more strongly than just base pay.

Right. Okay. Appreciate it, guys.

Thanks, Brad.

Again I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone key pad. At this time there are no further questions.

Thank you all again for joining us this morning. If you think of additional questions later, please feel free to call Chuck, Bob or me. We will be happy to discuss them with you as much as the SEC allows. So thanks again. Have a good day, everybody.

Thank you for participating in today's Mercantile Bank Corporation first quarter earnings conference call. You may now disconnect.