Mercantile Bank Corp (MBWM) 2005 Q2 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 revenues, 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 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 any forward-looking statements made during this call.

If anyone does not already have a copy of the press release issued by the Mercantile today, you can access it at the Company's Web site www.mercbank.com.

On the conference call today from Mercantile Bank Corporation we have Gerry Johnson, Chairman and Chief Executive Officer, Chuck Christmas, Chief Financial Officer, Bob Kaminski, Executive Vice President, and Michael Price, President and COO. We will begin the call with management's prepared remarks and open the call to questions.

At this point, I would like to turn the conference over to Mr. Johnson. Please go ahead, sir.

Thank you very much and thank you and good morning to all of you and thank you for listening in on our second quarter 2005 earnings teleconference.

The Mercantile management team is pleased to report yet another exceptional quarter, both with respect to earnings per share, earnings per share growth, asset growth, asset quality, and our ongoing strategic initiatives to maintain both earnings and asset growth.

Also this morning we announced a 5% stock dividend and we also today declared an $0.11 per share quarterly cash dividend, which as has been our policy in the past, is also payable on the new shares created by the 5% stock dividend. In doing the math, when the 5% stock dividend and the $0.11 per share cash dividend are taken together, shareholders will receive a cash dividend payment which is 28.3% greater than these same shareholders received in third quarter of 2004.

I mention this only because we continue to vigilantly strive to maximize total shareholder return for a dividend policy that provides our owners with a respectable cash return on their investment while at the same time preserving the capital that Mercantile management feels is necessary to continue to invest in the balance sheet, thereby creating the subsequent earnings per share growth and as heretofore resulted in historically strong performance in the price of our stock.

To enhance our ability to continue to grow assets in earnings, and many of you have had questions of us over the last several quarters about our plans to continue our growth strategy, we have moved into the Holland, Michigan market, that was last spring, last March, a year ago last spring, actually, and during the first six months of 2005 we have hired staff and made preparations to expand our business banking franchise to both the Lansing and Ann Arbor markets. Mike Price will have additional comments on this expansion strategy in just a second.

Also, as many of you know we recently completed our move into our new 60,000 square-foot corporate headquarters on the North side of downtown Grand Rapids. This facility will provide us with many economies of scale and allow us to grow our Grand Rapids staff without putting additional strains on our physical assets.

Chuck, Mike, and Bob will further comment on these and other aspects of our highly successful second quarter and first half. And with that I will now turn the conference proceedings over to Chuck for his remarks.

Thanks, Gerry and good morning to everybody. What I'd like to do this morning is give you an overview of Mercantile's financial condition and operating results for the second quarter of 2005 and year-to-date 2005, highlighting the major financial conditions and performance balances and ratios.

The underlying theme of Mercantile's financial numbers reflect the continued successful implementation of our strategy, that being a concentration on business lending, strong asset growth, led by growth of the commercial loan portfolio, high asset quality, and an efficient operating structure. And our financial results continue to reflect the significant provision expense necessitated by our strong loan growth.

Under earnings performance net income for the second quarter of 2005 was $4.7 million, that's an increase of 1.6 million, or 49% over what we had earned in the second quarter of last year. And for the first six months of 2005, net income was $9 million, that is an increase of 2.9 million, or 48% over what we earned in the first six months of 2004.

For diluted earnings per share in the second quarter of 2005, we earned $0.64, an increase of 49% over the second quarter of last year, and for the first six months of 2005 diluted earnings per share are $1.23, that's an increase of 46% over the first six months of 2004.

Our strong increases in net income continued to be achieved due to strong asset growth in net interest income resulting from earning asset growth and an improved net interest margin, which more than offsets the growth in overhead costs and the significant loan loss provision expense due to continued strong loan growth.

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

Net interest income for the second quarter of 2005 totaled $13.6 million. That's an increase of 3.6 million, or 36% over what we earned in the second quarter of 2004, and for the first six months of 2005, our net interest income totaled 26.3 million, that's an increase of 6.8 million, or 35% over what we had earned in the first six months of 2004.

Under earning asset growth our average earning assets for the second quarter of this year totaled $1.58 billion, that is up 313 million, or 25% from average earning assets in the second quarter of 2004. Of the growth, loans made up $258 million of the average growth, or about 83% of the total increase in average earning assets.

Our net interest margin in the second quarter of 2005 was 3.52%, that's an increase of 28 basis points, or 9% over the 3.24% margin we had reported in the second quarter of 2004. Overall, an improving margin during the past year, primarily due to overall positive impact of increasing interest rate environment, but the asset yields increasing faster than our costs of funds.

Looking forward, we don't provide specific guidance but as in the past the main issues remain loan yields, the Federal Reserve, and wholesale funding rates.

Our variable rate loans at the end of the second quarter of this year totaled $1.1 billion, or about 75% of the total loan portfolio. That 75% number, or level, is down just slightly from the 78% level that we had at the end of 2004, and the 78% that we had 12 months ago, but as you can see it is still a very significant portion of our loan portfolio.

For our wholesale funds our cost of wholesale funds have increased and will continue to do so as maturing funds replace those funds at higher rates. For the remainder of 2005, we have about 370 million set to mature at an overall cost of 2.75%, and for the first six months of 2006, we have an additional 300 million set to mature at an overall cost of 3.25%.

Our total portfolio is just slightly over $1 billion with an average cost of 3.30%, but with regards to that overall cost you can see that most of the cheaper rates are in fact coming due in the next six to 12 months. To put things in perspective, the current 12-month CD rate is about 4%.

Our loan loss provision expense for the second quarter of 2005 was $900,000, a decrease of 300,000, or 27% from the second quarter of 2004, and our loan loss provision expense for the first six months of 2005 was $1.6 million, or a decrease of 900,000, or 34% for the first six months of 2004.

The reduced provision expenses from a combination of coverage growth reserved to total loans is 1.32% at the end of the second quarter of this year versus 1.38% at the end of the second quarter last year, and lower loan growth. On a year-to-date basis our loan portfolio is up 107 million again on the first six months of this year, compared to a very, very strong $149 million of loan growth that we had recorded during the first six months of last year.

I would like to make note that we had during the second quarter of this year, we had some pretty excessive loan paydowns. In fact over $12 million in loans were paid off during the latter part of the second quarter primarily due to a borrower selling several properties to an out of area buyer.

While we do have from time to time loans paid off, that level is much higher than what we typically see. We continue to see very few credit relationships going to competitors and the payouts we generally do see are the result of our borrowers selling their properties.

As in the past a majority of the provision expense is related to loan growth and not loan charge-offs which remain very, very low.

With regards to fee income, we earned $1.2 million in the second quarter of this year, up 22% from the second quarter of last year, and on a year-to-date basis earned 2.4 million, up 19% from the year-to-date last year. We had increases in all nine mortgage-related activities with just a very small, modest decline in mortgage loan-related fees.

With regards to overhead costs, we expensed $7.1 million in the second quarter of this year, an increase of 1.7 million, or 32% from what we did in the second quarter last year, however, our net revenue is up $3.8 million, or over twice the increase in our overhead costs. And on a year-to-date basis our overhead costs totaled $14 million, an increase of 3.4 million, or 33%, but again, net revenue is up 7.2 million, again well above two times the growth in our overhead costs.

The efficiency ratio for the first six months of 2005 was 49%, unchanged from the first six months of 2004.

With regards to the growth in our overhead costs, up $3.4 million increase year-to-date over year-to-date, while 53% is in salaries and benefits, primarily coming from an increase in FTEs, which increased from 183 at the end of second quarter last year to 237 at the end of the second quarter of this year, that's a 29% increase. Other overhead costs are up due to increased asset base, the opening of our Holland facility in late 2004, and the opening of our new main office effective June 1st. There are no one-time or unusual expenses or charges.

I did want to give you at least an indication from an overhead cost perspective of our expansion into the Lansing and Ann Arbor markets. I would make note that these are just our overhead costs expense expectations as we sit here today.

For the remainder of 2005, we expect an increase in overhead costs of about $850,000 after-tax, which will support our staff addition and our property costs.

With regards to our asset growth, at June 30th of this year, total assets were $1.71 billion. For the second quarter, that's an increase of $44 million. Loans are actually up $50 million.

And in the last 12 months, assets have increased 330 million, or a very strong 24%. During that same time in the last 12 months, loans are up $239 million, or 20%. There remains no changes in our overall asset structure and composition.

With regards to the funding, our funding strategy has not changed significantly as we continue to draw local deposits and bridge the funding gap with wholesale funds that being brokered CDs and Federal Home Loan Bank advances. Local deposit growth during the first six months of 2005 equaled $35 million, or an 18% annualized increase.

Our wholesale funds were up $145 million, or an annualized growth of 16%. Wholesale funds to total funds at the end of the second quarter of this year equaled 68%, up slightly from the 67% level at the beginning of the year, and 65% 12 months ago.

And lastly with regards to capital, Mercantile Bank Corporation remains at a well-capitalized position per bank regulatory definitions with our total risk-based capital ratio at the end of the second quarter of 12.6%.

That's my prepared remarks. I'd be happy to answer any questions during the Q&A session. But I will now turn it over to Mike.

Thanks, Chuck. Good morning everyone. As Jerry and Chuck have already mentioned the beat goes on for Mercantile Bank Corporation. My comments today will touch upon some of the highlights for the quarter, and as Jerry mentioned earlier, our expansion strategy that we initialized during the second quarter.

As Chuck mentioned, loan growth for the quarter was $50 million as we saw another period of strong demand, most of it in new opportunities to gain market share at the expense of our competition. That loan growth would have been even higher, as Chuck said, had we not received some significant paydowns from a few of our larger development customers as they completed and sold some significant construction and other development projects during the quarter.

We expect the third quarter to continue with approximately the same demand as the previous two quarters. In addition, our Lansing branch has begun to develop a healthy pipeline of both loan and deposit business and should begin to contribute loan volume starting this next third quarter.

Asset quality remains outstanding as we recorded only $140,000 in net charge-offs this quarter, as opposed to 447,000 last quarter, and $255,000 for the same quarter last year. Non-performing assets to total assets were reduced this quarter to .22% from .31% and .27% respectively.

We continue our march to become the pre-eminent business bank in West Michigan, but we've also started bringing these talents and expectations to Lansing and Ann Arbor during the quarter. We found excellent bankers in both markets and have brought them on to the Mercantile team. I expect very good results from the Lansing branch starting this quarter and Ann Arbor should really be come online and contributing by late fourth quarter.

We feel this mode of expansion will work very well for our bank as we avoid paying acquisition premiums, the cultural issues and portfolio surprises which are the key saboteurs of successful acquisitions.

Certainly, as always, be happy to answer any of your specific questions at the end of our remarks. But at this point I'd like to turn it over to Bob Kaminski.

Thank you, Mike.

Second quarter was indeed a very exciting one for Mercantile Bank operationally. In mid-May we had much awaited grand opening of our new downtown Grand Rapids headquarters.

Two years in the making, the 60,000 square-foot facility is allowing our bankers to deliver the usual excellent Mercantile customer service in a more efficient and effective manner.

Some of the new features of this facility include drive-up teller lanes, drive-up ATM, more spacious customer and employee parking, easy access off the major Grand Rapids arteries, consolidation of the commercial lending area with the loan support functions, and the reuniting of the bank administration group with the commercial lending function.

This facility represents a major investment in this area of the Grand Rapids downtown vicinity. We, city leaders, and those in the business community believe this will be a major hub of commerce for years to come in this area.

In addition to the completion of this major project, Mercantile staff members continue to work in numerous other areas to assess the needs of the customer, then devise strategies to continue meeting and exceeding customer expectations. Some of these other initiatives include upgrades to our Web site and internet banking platform, as well as new Electronic Funds Transfer products that will allow customers to move their funds more effectively and efficiently.

Finally, our team is working diligently to provide our Lansing and Ann Arbor bankers with the facilities and resources as they launch the Mercantile expansion into Central and Eastern Michigan.

Those are my prepared comments and I'll turn it back over to Gerry.

Thank you, Bob. And with that we would be happy to open up the teleconference to any questions you might have.

[Operator instructions]. Your first question comes from Kevin Reevey of Ryan Beck.

Good morning.

Hi, Kevin.

Can you give us a sense as to when you expect to break even on both the Lansing offices as well as the Ann Arbor offices and the types of businesses you plan to do business with and then the types of loans you intend on making in that market, in those markets, rather.

Kevin, this is Mike Price. I would expect by the end of the year Lansing should have, be generating enough income to be pretty darn close to breakeven, if, and that's somewhat north of that. Both markets we expect to continue to be heavily oriented towards commercial lending, which is obviously where we are now here in West Michigan, in Holland. Don't expect to really deviate from the mission at all or the focus.

The people we've hired are very experienced commercial bankers and the niche that we fit in Grand Rapids and Holland is the niche that we fit in Lansing and Ann Arbor and that is, the bank that has the capacity and the talent to do some fairly sophisticated commercial lending, yet the size and the agility to react much quicker than the larger banks that are in that market.

As far as Ann Arbor's breakeven horizon, not trying to be evasive but it's far too early in the formation of that particular branch and the construction of the team and the construction of what that overhead's going to look like before I could really give you an accurate portrayal of that one.

And then my last question's related to, I guess, the recent fallout in the auto sector, particularly with respect to the big three. To what extent do you believe that that could impact your business in the markets you operate, if any at all?

At the micro level, Kevin, certainly we have been cognizant for some time with all of our customers who do business with companies like Meridian and Tower and that type of thing and we diligently and vigilantly watch the relationships with those companies. And we certainly have customers that have been impacted but most of our customers have reacted in the right way by either reducing exposures or protecting themselves via the lien law or other methods out there to minimize or eliminate any losses.

Certainly it's a tough blow on the macro sense to all of the markets that we're in. And we continue to watch very carefully when we get involved with any companies that touch the automotive sector at all.

But again that's one of the wonderful things about West Michigan. We're a very diversified economy over here. Lansing will be more of a challenge because there is probably a little more percentage involved in automotive over there but we look at the opportunities and see plenty of opportunity with those recent developments.

Thank you. Congratulations on a nice quarter by the way.

Thank you, Kevin.

Thanks.

Thank you. Your next question comes from Brad Ness of FBR.

Hi, guys, how are you doing?

Hi, Brad, how are you?

Doing fine. You know, a question here regarding what do you think you're going to do to address when interest rates, Fed funds rates aren't increasing anymore or flat, or maybe positioned to decrease with 75% of your loans repriced with prime? You know, what's the strategy to protect yourself?

I'll let Chuck address that. But we've been through this before, obviously, with very little impact on our bottom line. So Chuck, if you have any comments you'd like to make.

Hey, Brad, this is Chuck. One of the things that we've been doing and we've been talking about for the last 12 to 18 months is, one of the main things that we're doing is extending the average maturity of our wholesale funding program.

Probably about 12 to 18 months ago the average maturity was probably only about 7 months, maybe 8 months, it is now almost 12 months. So as we extend that average maturity out, that would help us in the event that rates do stop going up or actually go down, but as you know, the interest rate environment is very dynamic and there are a lot of different scenarios to take a look at, and I think at least at this point in time we're taking a look at a scenario where rates are probably going to stop going up pretty soon and probably hold steady for a while, and that's the one that we're kind of attacking and with the CD portfolio distribution that I just talked about, that's our primary weapon right now.

Okay. And regarding other locations of possible branch expansion in Michigan or other, where do you think would be logical areas and how often do you think you're going to be looking at expanding into another market?

Brad, as you know from knowing us for a long time, we've looked at a number of markets from an M&A standpoint and although we continue to do that we do like the model we've developed as far as a de novo branch with a full service banking facility and a city president in these markets. The two markets we're in weren't necessarily prioritized. It'd have to be where we found the right people to do the job.

I would say for the rest of 2005, won't see us going into more markets unless something really unusual came up. But for next year or the year after, you can look at some very logical markets in Michigan, Kalamazoo, Battle Creek. You can also look at some great markets in Northern Indiana. Really as far as South as Indianapolis.

So that's not to say we're going into any of them, but we keep our eyes open and take a look at who's available and how these markets are banked. And Mike, I don't know if you have any comments you want to make as well.

Gerry hit the nail on the head. For us it's always been all about the talent that's available in the market and their ability to prosecute the Mercantile business plan and Gerry's right, probably aren't going to find, you know, it's taken us a long time to find just the right groups for both Lansing and Ann Arbor. Could happen next month in another great market but probably will take us a while to develop some other opportunities.

Right. Lastly here. Regarding the competitive landscape for say both loan pricing and deposit pricing. Have you noticed an acceleration or deceleration in this competitive landscape over the past several quarters?

This is Mike, Brad. From my standpoint in talking to both the lenders and our deposits and business development people, I would say it probably accelerated a little bit. Some of the bigger players, especially Fifth Third seem to have been irritated by their loss of market share and have done some really aggressive loan pricing deals, especially on the loan side but also on the deposit side.

And along with what Chuck and I mentioned earlier with some unusually large payoffs by some successful project completions by our customers, that's also kept our loan growth per quarter around that 50, $60 million volume instead of the 70 or 80 that we were doing for a while because there have been times where we've just looked at loan deals that were ours for the taking and then some of these very aggressive banks have come in and just priced it at such ridiculous levels that we've let it go. It doesn't happen a lot but it happens probably more the last few quarters than it did say, a year or two ago.

Right.

Brad, this is Chuck. Just let me add something on the brokerage CD market. If fact those rates remain relatively cheap and to echo Mike's comments on a deposit side locally, in fact on a local deposits now we're paying either the same as brokered CDs or actually a little bit maybe slightly above on some of the larger dollar amounts.

The brokered market remains very, very liquid. There's a lot of people that still want to put their money into CDs. And there's, you know, the banks quite frankly, aren't growing like they have in the past. There's not a lot of banks out there like Mercantile putting out offers, but there remains a tremendous amount of supply of dollars out there to be invested which is keeping spreads relatively low.

Right. Hey, Chuck, with that 4% comment on the current 12-month CD, was that brokered or was that what's offered at retail?

It's about the same right now, pretty close.

Okay.

That's the brokered rate but our retail's not too far away. Our jumbo retail's not too far away from that.

Okay. Appreciate it.

Thank you. Your next question comes from Steve Covington of Stifel Nicolaus and Company.

Good morning guys and congratulations again on a great quarter.

Thanks, Steve.

Thanks Steve.

Just a couple clarifications. Chuck, can you repeat what you said, the impact from Lansing and Ann Arbor is? I missed it. Was it 850, was that after-tax?

Yeah, Steve, that's after-tax. And that takes into account salaries and benefits and costs associated with our lease facilities above and beyond what we would have expensed had we not gone into those markets.

Okay. And that's for the second half, right?

Second half, yep.

Steve, and I would add to that. This is Gerry. That that does not include any income that we generate out of there. This is strictly Chuck's estimate on the overhead.

Okay. That's what I wanted to make sure. Okay. That's good. And Mike, is it, I guess is it too early in Lansing to give out any type of volume that you've done so far or your volume expectations as far as loans?

No. It's not too early, Steve. I mean, we can give you some parameters.

The Lansing branch actually doesn't open until next Monday, even though they've been working very hard to get the branch ready to go, they're making a lot of calls. But there's a pretty strong pipeline there and in fact we booked our first loan yesterday there.

So we would expect, we're expecting say 10 to $15 million of volume over the next three, four, five months. But the pipeline is good and it's so hard early on to get a real feel for, you know, what percentage of this pipeline's going to actually convert over and, but I'm very, very happy with what we see there.

As I said earlier, the previous question, my goal for that team and the team's goal is to try to get a breakeven point by the end of the year.

Right. That's great. Thank you. And then also, how big is the Holland operation at this point?

Holland operation just passed at the end of the quarter roughly $125 million in loans and I didn't check the deposit. I don't know if I've seen the deposit yet but they had a growth in deposits as well, Steve.

And that's been a real success story for us and those guys continue with a very, very strong pipeline as well. They've already started July with some really nice new customers brought on board.

So real happy with what's going on there in Holland. They've kind of set a nice blueprint for what we'd like to see in Lansing and Ann Arbor aspire to.

Great. Lastly, just kind of a general question for Gerry or Mike. Have you noticed any change in your customers' taste for the, I mean noticed the variable rate loans as a percentage of total has dropped a little bit, but are you getting a lot more of your customers asking for you to fix the rates for five or even more years and what is your opinion on that in your portfolio?

It's been an interesting thing. We talk a lot about it at our ALCO meetings and our management meetings. Steve, it's been a bit of an anomaly as our customers obviously don't believe that the Fed is going to continue to increase rates. They haven't believed it right from the beginning because I think we all expected a greater number of them moving towards the fixed-rate option.

But as Chuck has indicated, we still have 73, 74, 75% on that floating rate situation. So I think they're saying, hey, we're willing to ride out the increases in prime because the rates on a relative basis is still very, very acceptable, but we don't believe in the long-term that there's going to be a significant increase.

So we haven't seen any more than normally did as far as people asking for a fixed rate. We quote fixed-rate options a lot but they tend to pick the floater.

Okay. Thanks again and keep up the great work.

Thank you, Steve.

Your next question comes from John Brower of Sidoti & Company.

Good morning, guys.

Good morning.

Just a couple of questions, they're probably both for Chuck. First, forgive me if you went over this but can you go over the maturation schedule of your wholesale funds? And, second, I believe in the first quarter there was an issue with a letter of credit for about $300,000. Can you give us any updates on that?

Yeah, John. I'll answer the wholesale fund question and turn it over to Mike on the letter of credit. But our wholesale funding maturities in the next six months, the last six months of this year is 370 million. And in the first six months of next year, it's 300 million.

Okay. What was the maturation this quarter?

Oh, probably around 375 million.

Okay.

Not quite sure. But it would be about that.

Okay.

To finish it up your second part of the question on the letter of credit provision that we put in for a potential loss was that credit that was covered on the bonding by the letter of credit. Really hasn't been any significant change in that situation during the last quarter. So it's been pretty much maintenance of the status quo there.

Okay. Thanks, guys.

Thank you. Your next question comes from Brad Vander Ploeg of Raymond James.

Thanks. Good morning and congratulations. Most of my questions have been asked but I just wanted to touch on the Ann Arbor office and if you could size up the market opportunity there for us versus both Lansing, Holland, and Grand Rapids so we have an idea for what these new markets mean potentially.

Sure. Brad, this is Mike. The group that we've hired there has worked as a group for a few years and they actually started a de novo bank there a few years back and got to the 70, $75 million size. Clearly, that's not something we expect them to replicate within a year, but in looking at our capacity, the support that they're going to get out of the Mercantile platform in that particular Ann Arbor market, I don't think getting to 70, $75 million after three years is certainly out of the realm and in fact there's a lot of possibilities that they could do significantly better than that.

Ann Arbor is certainly a different market than Grand Rapids. There's far fewer smokestacks and a lot more industry that's involved as you might imagine with the University and some of the things going on there. But we look at it as a very strong market from the standpoint that the unemployment rate in Ann Arbor is significantly better than it is in Grand Rapids and Lansing.

The amount of, or the number of jobs that are being added at least during the last 12 months have been significantly greater. And so there's some real opportunity there. There's opportunity, too, because the team we hired has worked together and there's a lot of synergy already.

So not trying to be evasive, but it's hard to pinpoint and say what we're exactly going to be at X just like it was eight years ago and Gerry and I and the rest of the crew opened the doors here. If you'd have said we're going to be 1.7 billion I probably would have said, gee, that might be a little aggressive, but we like the team that we have.

We like the market that Ann Arbor represents and we are right now spending an awful lot of time really trying to size up how we want to attack the market, exactly how many people we want to employ and give them the tools to go out and prosecute the game plan very well.

The nice thing again, just like Lansing and Grand Rapids and Holland, there's really nobody in that market that plays the game the way Mercantile does and that is, hit it very aggressively with strong relationship building and have a capacity that we do to provide all the products and services of the big banks, but again, the flexibility and the agility and the service level of the small ones.

Fred, this is Gerry. I would just add to what Mike said. One of the things that we bring to this group who work together, they have never had before, is a significant legal lending limit. And they've never been able to do the size of loans that we will enable this group to do without participation. So it's hard to estimate, but the legal limit issue is kind of an unknown that we think will work well for us.

All right. And Chuck, you alluded to in your earlier comments that you're at least thinking about or preparing for a period of time where interest rates are flat, at least, if not declining. I'm wondering if you could just elaborate on that a little bit more, what you've got built into your own internal model? And then maybe touch again on, I know when rates were going down last time that you had some floors built into your credits and I'm assuming that it's a similar characteristic today or isn't, should we think about that any differently?

Yeah. Brad, we really don't provide much in the way of guidance with our margin. I think that if you can just rely on the fact that we've effectively managed it in the past and we think that we have the wherewithal and a balancing structure that we understand it that we can continue to manage it going forward.

One of the nice things about the broker or the wholesale funding program that we have here, is we do have so much maturing on a monthly or quarterly basis that as things change in the interest rate environment and they certainly change dramatically from time to time, we have a relatively easy ability to kind of change what we're doing with regards to that portfolio to help manage the overall margin. I think what we look at here at least internally, and I think that it's kind of meets the Street consensus as well, is that probably at least another prime increase, you know, perhaps in August and then holding fairly steady maybe one more towards the end of the year and then fairly steady rates.

Certainly what we're going to do is see a little bit of a contraction in our margin as when prime does stop going up, our asset yield will hold steady, but of course, as our fixed-rate funds, including brokers, CDs, local CDs, and Federal Loan Bank advances mature, they will, for the most part, have to be replaced with higher funds so therefore our cost of funds will go up a little bit and so therefore our margin will contract a little bit.

But again, it's something that we certainly live with and work at every day in trying to adjust our balance sheet structure and by way of example the CD maturities to help maximize our margin but also to manage it on a relatively steady basis on the medium and long-term as well.

With regards to floors, that really hasn't changed. Certainly when the Feds started raising a year ago, I think about 32% of our loan portfolio did not reprice with the first prime increase. That has long gone.

Every time the prime goes up, except for maybe a million dollars or so or maybe 2 million, every loan is repricing upwards. We do have some ceilings out there but we're still probably 100, 200 basis points at least before we start running into that on a material basis.

So hopefully that will answer your question. I don't know if you have any follow-up with that.

No. It does. Thanks very much and congratulations again, guys.

Thank you.

Thank you. Your next question comes from Eric Grubelich of KPW.

Hi, good morning. Could you give me an indication of the differential in yield you're getting between floating prime loan to a commercial or commercial real estate customer and, say, a 3 or 5-year fixed balloon loan? Comparable credit.

Yeah. I would say, this is Chuck. I would say that most of our customers on a floating-rate basis are going to be prime, perhaps prime minus a quarter.

What we do on the fixed-rate loans is we price them up off of a swap curve and that's very, very important. It's part of our interest rate management program, risk-management program because using the CDs, the brokered CDs, that price is right up a swap curve as well.

So what we do is try to make sure that our lenders, when they're quoting fixed rate loans out there, that they are using a swap curve. Traditionally we use a five-year balloon so when we go out there and look at the five-year rate, I'm not sure of this morning, but at least as of the close of yesterday, that same customer say a prime-based customer, is going to pay prime floating is probably going to be quoted around a 7.25 on a fixed rate five-year balloon deal.

And then with the competitive nature of the market, are you noticing any more or less ability to charge fees to customers when you originate a loan?

I think that fees, it's a great question. This is Mike. The fees, like everything else, like rate and in some cases like structure, fees become a very, very difficult part of the transaction but I've been very happy with the level and the increasing volume of fees that we're able to generate.

But certainly on the larger deals and the deals with credits with very, very high credit integrity, fees are very difficult to get. But that's been pretty much the case since we started the bank eight years ago.

Okay. Thanks a lot.

Thank you. At this time, there are no further questions.

We would thank all of you for dialing in this morning. If you think of other questions that you might have later on, don't hesitate to call Chuck, Mike, Bob or me and we'll be happy to answer them for you. Again, thank you for your interest. That concludes the teleconference.

This concludes today's conference call. You may now disconnect.