Mercantile Bank Corp (MBWM) 2003 Q4 法說會逐字稿

Welcome to the Mercantile Bank Corp.'s fourth-quarter earnings conference call. There will be a question and answer period at the end of presentation. If you have a question at that time please press star and the No. 1 on your touchtone 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 revenues, earnings in capital structure as well as statements on the plans and objectives of the Company or its management, statements on economic performance and statements regarding 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 filing. The Company assumes no obligations to update any 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.MERCANK.com (ph). On the conference today for Mercantile Bank Corp we have Gerry Johnson -- Chairman and Chief Executive Officer; Mike Price -- President and Chief Operating Officer; Chuck Christmas -- Chief Financial Officer and Bob Kaminski -- Executive Vice President. We will begin the call with management's prepared remarks and then open the call up to questions.

At this point, I would like to turn the call over to Mr. Johnson.

Thank you and good morning, everyone, we appreciate all of you joining us for our teleconference discussing our 2003 results. We very much appreciate your interest in our Company. Chuck, Mike, and Bob will discuss our results in greater detail in just a moment but I did once take a few minutes to highlight some of our significant accomplishments during the year. These are in no particular order but I will start with net income.

Net income was 10 million which is up 2.2 million or 29 percent from year earlier levels which were also very good. We reached the 1 billion benchmark in assets ending the year at 1.2 billion which was an increase at 281 million or 30 percent -- and to put that 281 million in perspective, of the approximately 180 banks in the state of Michigan only 42 of them or 23 percent exceed 281 million in assets.

So said another way we organically grew assets that in total exceeded in size 77 percent of the banks in our state.

We ended the year at 1,035,000,000 million in loans which was an increase of 34 percent over 2002 levels. We successfully completed a net $43 million capital raise and this was a follow-on offering which was managed by Raymond James and co-managed by Stifel Nicolaus and Oppenheimer. We were added to the Russell 3000 index for the second consecutive year. We were included in the Fortune's small business magazine list of the 100 fastest-growing businesses and in this list we moved up to 28 position from No. 30 last year. We paid our first cash dividend ever in 2003. That dividend was 8 cents per share per quarter or 32 cents.

You've probably all seen the press release indicating that we've raised that 12 1/2 percent or 1 cents a share to 90 cents per quarter [indiscernible] 36 cents per year. Our (indiscernible) branch celebrated its one year anniversary, our branch at Napps (ph) Corner opened in May and we now have achieved our goal of having a main office downtown and a branch office bank facility in each quadrant of the city.

Our mortgage loan production office in the city of Holland also opened in May. In December we began construction on our new 60,000 four story Company headquarters and downtown office and we also initiated construction on a 22,000 square foot full-service banking office in Holland.

And lastly but near and dear to all of us our stock price depreciated 62 percent. It was up $13.98 to close the year at $36.50.

All in all this was an outstanding year for Mercantile Bank Corp. from an earning standpoint and also from the standpoint that we achieved many of our strategic goals. We continue to remain highly focused on our business model, our strategic plan and the maintaining of our culture that has brought us this success thus far. At this point I'll turn the meeting over to Chuck Christmas for his remarks regarding our financial performance. Chuck?

Thanks, Gerry, and good morning to everybody. What I'd like to do is just give an overview of Mercantile's financial condition and operating results for the fourth-quarter 2003 and for all of 2003, highlighting the major financial condition and performance balance in ratios.

On the underlying theme of Mercantile financial numbers reflect the continued success implementation of our strategy that being the concentration on business lending, strong asset growth led by growth of a commercial loan portfolio -- very high asset quality improved the income and controlled overhead cost. And our financial results continue to reflect significant provision expense due to the very strong loan growth we have experienced. With regards to earnings performance our net income for the fourth-quarter was $3 million -- an increase of 700,000 or 32 percent more than $2.3 million that we recorded fourth-quarter of 2002. For all of 2003 as Jerry mentioned our net income was $10 million. That equates to a $2.2 million increase or 29 percent over the $7.8 million that we earned in 2002.

On a diluted earnings per share basis in the fourth-quarter of 2003 we earned 44 cents, that was up seven percent from the 41 cents we earned in the fourth-quarter 2002 and certainly because of our stock offering that we did in September and October last year our shares were up significantly in fact quarter over quarter for the fourth-quarter they were up 25 1/2 percent.

For all of 2003 our diluted earnings per share were $1.69 -- that's an increase of 20 percent over the $1.41 that we earned in 2002. Again our average shares up about 7 1/2 percent due to the aforementioned stock offering.

With regard to net interest income, our overall profitability continues to be driven by our strong earning asset growth which is translated into increased net interest income, further supported by an increased net interest margin.

For the fourth-quarter our net interest income totaled $8.9 million. That's an increase of 2.3 million or 35 percent over the 6.6 million that we recorded in that interest income for the fourth-quarter of 2002. And for all of 2003 our net interest income totaled 31.3 million an increase of 7.6 million or 32 percent from the 23.7 million that we recorded in 2002.

Earning assets at year end 2003 totaled 1,158,000,000 -- that's up 285 million or 33 percent from year-end 2002. Loans were up 264 million or 93 percent of the increase in earning assets.

Our net interest margin in the fourth-quarter of 2003 was 3.26 percent. That's an increase of five basis points over the 3.21 that we recorded in the fourth-quarter of 2002. And our net interest margin for all of 2003 was 3.22 - a slight increase of three basis points over the 3.19 percent that we had recorded in all of 2002.

Overall, we have a very steady net interest margin -- in fact in the past five quarters has been in a range of just 10 basis points, primarily reflecting certificate of deposit repricing and positive impact of stock sales more than offsetting our decline in asset yields.

Looking forward, again we do not provide specific guidance, but as in the past our main issues remain our loan yields, any action or inaction by the Federal Reserve as well as the wholesale funding rate.

Again a vast majority of our new loans to the bank, the borrowers continue to elect variable rate over fixed rate and again that equates to about a 4 percent yield vs. a yield of 6 to 7 percent. At year end 2003 our variable rate loans totaled 765 million or about 74 percent of our total loan portfolio.

Of that 765 million about 40 percent are currently at [indiscernible]. At the end of year 2002, about 65 percent of our loan portfolio was tied to prime again now at 74 percent. And at the beginning of 2001 or approximately three years ago only 35 percent of our loan portfolio was tied to prime -- again a very significant trend over loan portfolio from fixed-rate to variable rate.

Our costs of wholesale funds had declined as the rates have fallen. At the end of 2003, our wholesale funds had an average rate of 2.35 percent. At the end of 2002 the average rate was 3.30 percent. So we had a 95 percent drop in our costs of wholesale funds during 2003. And just to put things in perspective further, at the end of 2001 our wholesale funds had a cost of 4.6 percent, that is down 225 percent -- 225 basis points over the last two years.

Given the current interest rate environment, we still have some repricing opportunities within our wholesale funding portfolio. In 2004, we have about 475 million maturing and at an overall cost of 2.15 percent. To put that in perspective that is about the rate on an 18 month CD and broker [indiscernible] federal home loan bank advance today and we continued to do new borrowings and new CDs between the 12 and 18 month rate.

Loan loss provision expense in the fourth-quarter 2003 was $950,000. That's a decrease of $30,000 from the first quarter of 2002 when we expensed $980,000. Although we had similar loan growth quarter over quarter we had lower net chargeoffs. For all of 2003 we had to expense $3.8 million -- that's an increase of $800,000 of 27 percent over the 3 million we expensed in 2002.

Although net chargeoffs were slightly lower, we certainly had a significant higher loan growth. However, a vast majority of that provision expense is related to our loan growth. With net chargeoffs equaling just 8 percent of our year-to-date provision expense of $3.8 million.

With regards to fee income excluding securities gain or including (indiscernible) excuse me, fourth-quarter was 1.09 million. That's an increase of $90,000 or nine percent over the fourth-quarter of last year and for all of 2003 we recorded a fee income of $4 million. That 'san increase of 1.2 million or 43 percent over the $2.8 million recorded in all of 2002.

Some of the main reasons or categories for that growth -- service charges on deposit accounts. For 2003, we earned $1.2 million -- that's an increase of 300,000 or 29 percent over 2002. Mortgage fee income for all of 2003 we earned $986,000 -- that's an increase of $452,000 or 85 percent of what we earned in 2002. Internet banking and wire feeds totaled just under 200,000 this year -- an increase of 40 percent or $57,000 from 2002, and a combination of our payroll brokerage and insurance product totaled $292,000 in 2003 -- that's an increase of $120,000 or 70 percent what we earned in 2002. And, lastly, Banco (ph) and life insurance increases in cash surrender value totaled $780,000 in 2003 -- an increase of $371,000 or 91 percent from 2002, again most of that increase resulting from the purchase of $10.5 million back in August of 2002 to help mitigate rising medical insurance cost.

With regards to overhead costs in the fourth-quarter of 2003 we expensed $4.9 million. That's an increase of $1.4 million over what we expensed in the fourth-quarter of 2002. However that $1.4 million compared favorably from the fact that our net revenue was up (indiscernible) timeframe.

And for all of 2003, we expensed $2.4 million to the (indiscernible) an $18.1 million in overhead costs, an increase of about $5.3 million over 2002. But again, that $5.3 million compares favorably to the fact that our net revenue was up $9 million year-over-year. Our efficiency ratio for for 2003 was 51 percent compared to 48 percent for 2002.

Gross and overhead cost continues to primarily be surrounded in the salary (indiscernible) benefits. Of the $5.3 million increase year-over-year, 3.6 million or 68 percent was in salaries and benefits, primarily related to the increase in FTE (ph) [indiscernible]. At the end of 2002 our FTEs were 117. At the end of 2003 they were 161 -- equating to about a 38 percent increase in FTE.

Occupancy and equipment was up, also, primarily due to the opening of the two branch facilities in our loan production office and general and administrative costs were up due to our increased asset base. Once again we had no one time expenses or charges.

With regard to the balance sheet, asset growth was very strong as Jerry mentioned in 2003. We ended the year just over $1.2 billion -- that's an increase of 281 million or 30 percent from where we were at the beginning of 2003. Again, the loan portfolio continues to dominate the growth. Our loan portfolio at the end of 2003 was 1,036,000,000 -- that's an increase of 264 million or 34 percent during the year.

Again, with our asset structure, there were no changes in our asset composition.

With regard to the funding, our funding strategy has not changed. We continue to grow our local deposits and bridge the funding gaps of our wholesale funds -- that being brokerage CDs and [indiscernible] advances. We had a very strong local deposit growth throughout 2003 where local deposits were up about $69 million or 24 percent. That was led by an increase in our demand accounts of 14 million or 23 percent. Our savings accounts were up a very strong 32 million or 46 percent year-over-year and our local CDs -- primarily individuals and municipalities -- were up $17 million or 24 percent.

Our wholesale funds were up about 154 million or 29 percent.

Overall, our wholesale funds (indiscernible) total funds remain very stable at the end of 2003 it was 65 percent. At the end of 2002, it was 64 percent so you can see it is relatively stable despite the fact that our asset growth was $281 million -- again, reflecting the very strong growth that we've had in our (indiscernible) (inaudible).

And finally, with regard to capital, Mercantile continues to remain in a well-capitalized position for bank regulatory definition with our total risk-based capital ratio at the end of 2003 equating the 13.8 percent -- certainly a significant increase throughout the year due to our stock sales in September and October.

That's my prepared remarks. I'll now turn it over over to Michael for his.

I just have a couple of areas I want to amplify on or highlight in my comments this morning. In regards to the growth of the bank that Chuck and Gerry have already talked about, during 2003, Mercantile not only grew at an exceptional pace but also the nature of the growth was very gratifying.

Several well-established high-profile West Michigan firms lost long-standing bank relationships to partner with Mercantile for their financial services needs. The impact was very positive in many ways. But, especially, from a credit quality standpoint as these long-standing businesses typically have strong management teams and balance sheets but also from a marketing standpoint.

When these high-profile conversions to Mercantile further established us as the bank of choice for businesses in West Michigan.

From a team building point of view, 2003 continued a very successful pattern adding to our talented core bakers with some strong new hires. Our strategy has been and will continue to be to employ fewer but more talented and experienced individuals than our competitors. During the year we're fortunate to add additional -- find additional bankers to fill key roles in both sales and operations in Grand Rapids. In addition we were able to notify John Steiner as the president of our Holland market and have started to develop a very strong team around him.

While we had only 100 [indiscernible] full time equivalents at the end of the year we're very excited about the potential of this very talented group of people moving forward.

Asset quality remains exceptionally pristine. Despite a tough economy, we were able to reduce charge offs from a very low 2002 level of .09 percent of average loans to .04 percent for the year 2003.

Nonperforming loans have a slight increase due to one past due loan that is currently in workout mode but we're still at the top of our peer group but only 1.7 percent of total loans in the nonperforming category.

In summary, we are very excited about the results of last year and our prospects for 2004.

Our business plan has been extremely focused since Day One and we continue to stick to the plan of been a high service oriented, low overhead community bank excelling in business lending. We look forward to expanding our market share in greater Grand Rapids and establishing a strong presence in the Holland and Lakeshore area.

At this point, I'll turn it over to Bob Kaminski for his remarks.

I just have a quick update on the facilities plans for Mercantile Bank. In 2003, Mercantile started construction on both the new downtown Grand Rapids main office and also our Holland office. Holland is projected to be complete in the fourth quarter of 2004 and the Grand Rapids headquarters is projected to be completed during first part of 2005.

The downtown Grand Rapids office -- which will replace our current downtown location -- is a 60,000 square foot four-story building to a function as the headquarter of the Mercantile Bank Corporation and the main office for Mercantile Bank of West Michigan. We will also house our main branch commercial loans [indiscernible] as well as all the lending support functions, business development and investment areas.

The Holland main office is a two-story, 20,000 square foot facility and will house a Holland management plus branch commercial and retail lending functions. The Holland staff continues to take shape and is currently located in a temporary site in the city of Holland until this permanent facility is complete.

That's the extent of my comments. I will now turn it back over to Gerry.

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

[Operator Instructions].

Barry Mendel with Mendel Money Managements.

Good quarter. Couple of questions. One, that you mentioned full-time equivalent for 38 percent year into year-end which is faster than the bank had grown during the year. What's your goal for this year? What do you think the full-time equivalent number might be a year from now?

I'll let Mike Price answer that.

Barry, as you point out, FTEs grew at 38 percent and bank grew at 34 -- bank loan portfolio grew 34. We had a blip as far as number of FTEs this year because we really got two branches that came online and I would expect that the budgeted numbers and they are the budget numbers for FTE additions in 2004 to be somewhat less than 2003.

So do you expect your asset growth to be greater than your FTE growth this year.

We generally expect that, yes.

[indiscernible] what I'd think for leverage purposes so I guess that would fall into my ratio question. I'm assuming you're budgeting for a little lower efficiency ratio this year than what you had last year?

Would be correct as well.

Are you going to say what your goal for loan growth in 2004? I know you had very rapid loan growth especially in third-quarter this past year? What do you see for this year, given the better economy?

It's -- we're excited about this year coming up because most of the loan growth that we've had during the last couple of years has really been market share growth -- we've had very little of internal existing customers and putting together expansion plans and we are starting to see -- in Grand Rapids which has been pretty hard hit in certain areas with this latest recession -- we are starting to see some optimism out there. So answering the question on loan growth with us is always tough, because we have some -- we've had spurts of really strong growth that have been really hard to predict and a lot of it also has to do with the people that we're able to -- the new hires we're able to bring on board and what they're able to bring over. But I would expect continuation in 2004 that -- of loan growth -- that would mirror what we've had really since we opened the doors, we don't see anything that would stop us from achieving that at this point.

So I get the impression from your press release you still have a lot of opportunities in the Grand Rapids area. And although you are opening an office in Holland you're really not looking outside of Grand Rapids at this point.

At this point, that would be correct. We have a lot of opportunity left in Grand Rapids -- we certainly are becoming a bigger and bigger player and becoming the bank of choice for more and more businesses but we have a lot of room to grow there and certainly Holland by mid year, especially, should be pretty well fully staffed and starting to contribute to the growth profile as well.

This is Gerry Johnson again. We don't want anybody to misconstrue our strategy with Holland. That was not initiated because we felt that our Grand Rapids growth was being compromised. Michael Price and I have talked almost since the day we opened our doors about establishing an office in Holland. And we just happened to have the opportunity with personnel and other things that made opening this Holland office this year a real good move for us but it was not done in anticipation of a slower rate of growth here in the Grand Rapids market.

Okay. And, lastly, in terms of capital obviously you guys had that big equity offer at the end of September. How long do you think -- given what you see in your crystal ball which obviously you can change -- how long do you feel (indiscernible) from a capital point of view?

Barry, this is Chuck. If you look at our historical loan growth as a growth and you equated that out it's probably somewhere in the three to three and a half year range.

Howell Ridley with Security Financial Advisors.

Great job.

(MULTIPLE SPEAKERS)

Couple of quick questions -- one is, what's your thoughts regarding capitalization regarding preferred stocks which are going on market next year and do some more preferreds and the second question is is any plans or any thoughts regarding moving up the coast towards Grand Haven, [indiscernible] and etc. (MULTIPLE SPEAKERS) Holland.

I think taking the second part first, I think that really will depend on how this model we've set up in Holland works. We think it's going to be very successful in and if it is, that certainly could be a natural strategy. As we've mentioned in every teleconference, the four of us here have looked at a number of acquisition possibilities and have just never found anything that was accretive to our shareholders and because of that we think maybe this de novo branching if you will could be a good strategy for us. So time will tell and it really won't take that much time as far as determining if this is a good strategy for us.

We've got the right city president in place and we think that, given that the type of market that Holland is, it should work well for us.

With regard to trust preferred we're not sure how longer trust preferred is going to be a viable alternative. The SEC has come out within the last few days and basically said that, going forward, there's a high likelihood that trust preferred is not going to count as either tier 1 wind or tier 2 capital.

The Federal Reserve still has to make a ruling on it itself but it's hard to see them being in contravention (ph) of GAAP accounting. I think the best -- the existing trust preferred issues are going able to hope for is grandfathering in of -- we've got 16 million for example outstanding right now. So we're not sure how viable that's going to be going forward.

Obviously, the investment banking community is a pretty creative group and I'm sure they'll come up with something different but it just becomes kind of an accounting nightmare as you get more and more complicated, but I guess that's pretty much the remarks I would have on that.

[Operator Instructions]. Steve Covington with Stifel Nicolaus & Company.

Congratulations on another great year. Mike, could you give us some color on the overall pipeline you see and kind along the same lines was there any lumpiness to the growth you experienced during the fourth quarter? Whether that be month to month or just individual large credits that hit?

The pipeline is still pretty strong. It changes, obviously, we have had some lumpiness in the third and the fourth quarter just because we -- as I said in my earlier remarks -- we were able to attract some fairly large relationships during those particular quarters. So, it is sometimes hard to predict. I am not trying to be evasive but I really don't see any real change in the pipeline at the beginning of this quarter than I did at the beginning of the last seven or eight quarters. It's good we're very active on the calling market. I probably should expand my answer to the question Barry Mendel asked a little while ago and that is and it ties in to what you're asking, Steve, and it ties in with the FTE.

From time to time, we get an opportunity to hire people and that is what we did in the middle of '03. We hired a couple of real experienced lenders as well as the branch people we needed and some staff to support them and before they obviously bring a portfolio over it impacts our FTEs and our overhead expense. And what happened in third-quarter and fourth quarter and what'll happen in 2004 these people will hit the ground running now and have started to produce some income for us. So that also helps in building the pipeline because they add to an already very talented core of people out there making calls.

So it does run lumpy if you will, Steve, from time to time as we may have you know $.5 million loan, $1 million loan, we have a whole much of those going on from time to time. But then we will get that $7 or $8 million opportunity and that will increase the volume for a particular month or quarter.

That's great. Thanks, Mike. Just to clarify on something you or Gerry said earlier. It sounds to me like the economy hasn't necessarily turned in your market, however, you're starting to get the feel from your clients that it may be turning. Is that an accurate assessment?

Yeah, that's an accurate statement. It's been an odd recession in Grand Rapids here from the standpoint there are certain industries -- a lot of industries that were never touched at all and have continued to hum along very well. Obviously, you can tell by our delinquency and charge-off numbers that we've got a lot of customers that really weren't impacted at all but anything to do with the office furniture business as you might imagine, any of the suppliers to that, the transportation industry -- which is heavily dependent on that industry in Grand Rapids -- they've had some tough times in the last couple of years and there's a lot of positive talk which there wasn't a year from now or a year ago or two years ago but it really hasn't manifested itself yet with those particular industries into a full-fledged recovery. But for the first time in a long time we are hearing people say, "You know, '04 sounds pretty good." And some of those industries have been flat on their back for two years.

That's great and then, Chuck, just to make sure I heard something correctly -- did you say, what percentage of the variable rate loans were at (indiscernible) did you say 45?

40.

40. And then, what would be your rate if you're paying -- if you did a 12 month brokerage CD?

About 1.8.

And are you experiencing -- that looks like during the quarter that you were kind of leaning towards doing more federal home loan bank advances vs. the brokerage CDs. I was wondering, is there -- are the federal home loan banks' offerings a little more attractive at this point than some of the brokerage CDs rates or is that just kind of because you have some kind of room on the federal home loan bank side?

I think the answer to that is yes, but primarily, most of the federal loan bank events we took down were in the month of December and one of the things that we see happening all the time that brokers -- CD market -- a lot of banks out there get into the brokers CD market during the month in December to try to (indiscernible) address their balance sheets a little bit and that added to the competition which throws the rates up a little bit. So we just went more to the federal home loan bank which really isn't impacted at all by the supply and demand certainly [indiscernible] brokers CD market is. And the federal bank right now is a little bit cheaper on the longer end with two and three years and that's where we've been doing a lot of our new funding investment. So the combination of those two to factors had us going [indiscernible].

Gotcha. So the federal home loan bank -- the typical term you're looking at was two years something like that?

Yeah, two year average -- yeah.

Thanks, guys, and again, congratulations.

Brad Ness (ph) with Friedman, Billings, Ramsey.

Mike, can you give us all a little color on that non performer that bumped up a little bit?

Yes it's about $1.5 million commercial real estate loan that is -- basically run into some problems but we think that we've got a pretty solid buyer for the deal and that it probably will be cleared up this quarter -- if not this quarter, fairly shortly thereafter. We're into the deal extremely well. We don't expect it to be any kind of a loss, it's still on accrual. Just one of those things as I've said in every conference call I've ever been part of, we all got really excited around here and in the past six years of basically zero past due so we knew we would have one some day and this one happens to be the first one of any size. But it's being very actively worked, we've got cooperation from a borrower and looks like it should be resolved reasonably soon.

Chuck, what's the breakdown of your total deposits just relating to local vs. brokerage?

If you look at our total wholesale funding which includes federal home bank, the wholesale fund was 65 percent and the local deposit (indiscernible) 35 percent. I don't have the numbers off the top of my head. I'm getting the federal and bank advances [indiscernible].

Okay, let me try to back into that and, lastly, here have you guys noticed any change in a competitive landscape with [indiscernible] being a little more integrated in the market now? Has anything been changing on that front?

Still very competitive. I think we see from a competitive standpoint, Brad, the banks get integrated and unfocused and they come back and forth into the market at different times. Clearly, some of the bigger players who have been very unfocused and unsuccessful in the last couple of years are now starting to get their act together at the same time. There's others that are kind of drifting away from the focus. So I think you heard Gerry and Chuck and I in our comments clearly enunciate our strategy, and our theme from time to time. And that's really what our success is all about is we try to stay as focused and on task every single day and stay really close to the customer.

So we've always been in a very competitive marketplace, probably always will be that way, and -- but I don't see it being any significantly different at the beginning of '04 then I have at any of the other years.

Brad, this is Gerry. I think what we have found is that the commitment and loyalty that a lot of customers have had to the local banks such as a [indiscernible] just isn't there any more because they're not local banks. That's not to say they're not great competition but we have opportunities -- not only for employees but for deals that we wouldn't have had three four years ago -- not because these banks do a bad job but just because they're not local and being local and also having the high-profile that we've got here does give us a chance to bid on a lot of deals and we certainly won our fair share of them.

At this time, there are no further questions. I'm sorry. You do have a question from the line of Brad Vander Ploeg with Raymond James.

Congratulations again. (MULTIPLE SPEAKERS)

Chuck, would you say it's fair to say in terms of potential margin improvement in '04 the numbers that you lay out for repricing on the wholesale CDs are maybe not as compelling as they have been in the past, but with so many loans being variable rate and being [indiscernible], would maybe more of the potential margin improvement be coming from the loan yield side in '04 than repricing of deposits?

I think you're right. Certainly as we've had fixed-rate CDs mature and we've been able to reprice them over last 12, 18, 24 months, certainly the cost has come down so [indiscernible] pricing opportunities not there [indiscernible] certainly have some especially here in the first couple of quarters but, yes, obviously when you look at the level of loans [indiscernible] and any fed action or inaction would certainly have an impact on that.

And of those 40 percent of those loans that are currently [indiscernible] -- let's say that rates went up 50, 75 basis points or maybe you can give me some idea of the sensitivity for each 25 basis points fed (ph) increase -- how many of those loans come off the floors and would be a benefit to the margin?

Would be my guess that once the (indiscernible) 50 basis points that at that point in time pretty much all would be [indiscernible] within their floors [indiscernible] 25 basis points I would say probably -- this is a guess -- maybe 75 percent would still be at their [indiscernible] but once we get back at that first 50 we will be fully indexed (ph).

Okay. In terms of mortgage banking revenue if I am doing my calculations correct, you had about 138,000 in revenue for the quarter. Does that sound right?

Yes. I'm sorry.

What's your thought in terms of what kind of a normalized level is in the post boom of the cycle that we just came through? Is there going to still be some summer revenue replacement for you there or are you pretty confident that that can hold in there, especially with the Holland office as well?

We would hope to be able to match at least looking the first quarter out if not the first two quarters assuming that the rates [indiscernible] stays somewhat around where it is now we would like to match what we did last quarter for the first two quarters or second (indiscernible) all-out the window if we get ahead (indiscernible) basis point spike up or down. But down's okay, we will get more but I would say that we're looking to match that.

All right. Thanks, Mike, and one of the things I've heard from a couple of other small banks in the Midwest that Banc One just over the last couple months has really gotten very aggressive in small business lending, trying to keep business almost at any price. Have you seen that in your market at all?

It kind of goes to the same answer I gave to Brad about competition. We have in fact seen that prior to the Banc One which we're seeing now -- win at all costs at any price kind of thing. We see the Banc One get rid of everybody at all costs -- kind of think, I don't understand either strategy but it seems to be contingent almost in every large bank in our market. They seem to go through this purge and then they lose other customers and oh, we want you back.

The reason why it doesn't impact us that much is because we really never ever win back business on price and we always try to keep our approach with the customer at the very highest level and we don't manage our loan portfolio by industry. As much as we do, we look at each and every individual business. Its business plan and management team and its prospects for success.

The larger banks tend to say, well, all of a sudden they get a directive from headquarters that we don't like XYZ Industry and it's like rats jumping off the Titanic -- they push all the customers out of the portfolio and they end up losing all of this business and then somebody in headquarters says, "gee, I don't understand you know clients are down, we're losing loans and deposits -- go back out and get them."

Well, the problem that is especially some of the profile customers that we have now, they've been with Banc One and some of these other large banks for years. They don't come back. They don't leave because of rate and they don't come back because of rate So we're happy with those large banks do that and it really doesn't impact us that much. It sometimes becomes a pain in the neck but it is something that we've learned to live with and compete against very very well.

For business that they've retain through all of this time and are trying to keep I imagine that becomes much more difficult to pry away from them if they are willing to just cut the price.

That part is true basically, again, we're winning business because we're calling on these customers over a period of time and saying, "look, we're very consistent. You know what you've got, there's local decision-making, you're not going to get a new loan officer every six months, you're not going to get a new direction from the bank." And that's what we win business on.

And you're right. If they haven't -- if we don't get them over time and all of a sudden, someone and not just Banc One but from someone from one of the larger banks walks in and says, "hey, we're going to cut your interest rate by 150 basis points," it is pretty difficult. I'll be the first to admit that, but these banks tend to leave large gaps of time where the service level goes off the cliff. They treat them poorly and that's when we usually strike and get in there and I know everyone listening to this says, "gee, why don't these banks quit doing that?" and I've said that my whole 20 years in banking. I don't know why they do that.

We don't know.

But we're real glad and that's why we're here today but where we're at -- it makes no sense and I guess when someone from another marketplace who tries to manage a bank based upon numbers and balance sheets and trendlines -- those things are all very important [indiscernible]. But the bottom line is knowing your market and knowing your customers and knowing what's going on out there and that's how we try to manage the business rather than this macro let's just move this industry out and this one in, it's crazy but that's what gives us real opportunity.

Okay, thanks and one final point of clarification on the nonperforming loans, Mike, I think you mentioned something about a buyer for the deal. You're not suggesting that you're trying to sell the loan, are you?

No, no. No. That's a good clarification -- that the customer is still in full control of the property and he has it for sale and the last I knew, there was a tentative [indiscernible] agreement on it and there's the usual things, the environmentals and all that kind of stuff that's (indiscernible) ironed out but we aren't (ph) trying to sell the loan at this point. We're just working with the customers for the customer to sell the property.

All right. Very good, thanks again, guys, good quarter.

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