Mercantile Bank Corp (MBWM) 2005 Q3 法說會逐字稿

Welcome to the Mercantile Bank Corp. third-quarter earnings release conference call. There will be a question-and-answer period at the end of the presentation. (OPERATOR INSTRUCTIONS). 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 assumption of the Company's business.

The Company's actual results could differ materially from forward-looking statements made today due to several important factors provided 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 Mercantile Bank, you can access in at the Company's website -- www.MercBank.com.

On the conference today for Mercantile Bank Corp. we have Jerry 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 the management's preferred 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 very much, and thank all of you once again for joining us on our quarterly teleconference. If you've had a chance to read our press release you will realize how extremely pleased we are with the strength both of the third quarter and our year-to-date results.

Chuck will mention these results in more detail in just a moment, but just a brief recap -- net income up 36%; net interest income up 33%; total assets increased 322 million or 22%; year-to-date our nonperforming assets are a very respectable 12 basis points, net charge-offs 7 basis points; our efficiency ratio of 51% is just about the same as it was last year. And that is notwithstanding the fact that within the past 12 months we have opened our new Highland facility and have aggressively moved into both Lansing and Ann Arbor. And Mike will mention that in more detail.

So despite the fact that we continue to successfully expand our franchise, we also continue to put forth excellent results when it comes to the growth and earnings and assets. And with that I'll turn it over to Chuck who can discuss that in more detail.

Thanks, Jerry, and good morning, everybody. What I'd like to do this morning is give you an overview of Mercantile's financial condition and operating results for the third quarter this year as well as year-to-date, highlighting the major financial condition 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 of business lending, strong asset growth led by growth of the commercial loan portfolio, high asset quality and efficient operating structure. In our financial results continue to reflect the significant provision expense necessitated by our strong loan growth as well as the initial overhead costs associated with our expansion into the Lansing and Ann Arbor markets.

Before discussing the specific results, please be aware that (technical difficulty) quarter 2005 and the third quarter of 2004 and the first nine months of 2005 with the first nine months of 2004 I will be excluding the write-off of issuance costs associated with 1999 issuance of trust preferred securities which were redeemed in the September 2004. The $845,000 onetime charge equated to $548,000 on an after-tax basis during the third quarter of 2004.

Net income for the third quarter of this year was $4.3 million, an increase of 600,000 or 17% over the third quarter of last year. In our year-to-date we've earned 13.4 million, an increase of 3.6 million or 36% over the $9.8 million made in the first nine months of last year. On a diluted earnings per share basis, for the third quarter of this year we earned $0.56, an increase of about 17% over the third quarter of last year. And for the first nine months of this year we've earned $1.72 per share, an increase of about 35% over the $1.27 we made in the first nine months of last year.

The strong increases in net income and earnings per share continue to be achieved due to strong 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.

Our overall profitability is driven by continued strong earning asset growth, which is translated into increased net interest income, which is further supported by an improving net interest margin. In the third quarter of this year our net interest income totaled $14.1 million, an increase of 3.2 million or 30% over the third quarter last year and for the first nine months of this year net interest income totaled 40.3 million, an increase of exactly 10 million or 33% over the first nine months last year.

Average earning assets during the third quarter of this year totaled $1.65 billion. That's up 285 million or 21% from the third-quarter average of 2004. Average loans during the third quarter were up $242 million during that time frame or 85% of the total increase in average earning assets. Our net interest margin during the third quarter of this year was 3.46%, up 23 basis points or 7% from the third quarter last year and for the first nine months of this year our net interest margin equaled 3.48%, up 24 basis point or also 7% from the 3.24% we had earned in the first nine months of last year.

Overall our improved net interest margin during the past year is due to overall positive impact of increasing interest rates with asset yields increasing faster than our cost of funds. As always we don't provide specific guidance in our margin, but, as in the past, the main issues will continue to be our loan yields, better reserve action or inaction and wholesale funding rates.

Variable-rate loans continue to equal 75% of our total loans unchanged from June 30th and down just a bit from the 78% at the beginning of the year. About 35% of our floating-rate portfolio has rate ceilings. However, only about $19 million thus far have not increased with the most recent Fed increases and there will likely be at least two or three more Fed increases before the impact of the rate ceilings become noticeable.

With regards to wholesale funds, our cost of funds have certainly increased in the past 12 to 18 months and will continue to do so as maturing funds are replaced with funds at higher rates. For the remainder of 2005 or the fourth quarter, we have about $200 million maturing at a cost of 3%; for the first six months of next year 370 million maturing at 3.45%; and for the last six months of last year 230 million maturing at an increasing cost of 3.80%. The 12-month current CD rate is about 4.3% as -- this rate has increased as it continues to price in future expected Fed increases.

Our loan loss provision for the third quarter this year was $900,000, a decrease of 300,000 or 25% from the third quarter last year, and for the first nine months of this year loan loss provision expenses totaled 2.5 million, a decrease of 1.2 million or 31% from the first nine months last year. Our reduced provision expense is from a combination of several things, first of all, a lower coverage ratio with a reserve to total loans of 1.31% at September 30th of this year compared to 1.36% a year ago. Lower loan growth, year-to-date we've grown $172 million compared to $218 million in the first nine months of last year, and we've also had lower net charge-offs for the first nine months totaling only 768,000 compared to 1,008,000 in the first nine months of last year.

With non-interest income or fee income for the quarter we earned $1.3 million. That's 175,000 or 15% higher than the third quarter of last year, and on a year-to-date basis we've earned 3.75 million, about $560,000 higher or 17% than the first nine months of last year. With experienced increases in virtually all fee producing products and services.

Moving on to overhead costs, in the third quarter of this year we expensed $8.3 million. That's a $2.7 million increase or 49% over the third quarter last year and for the first nine months of this year we've expensed 22.3 million, an increase of 6.2 million or 38% over the 16.1 million expensed in the first nine months of last year.

While we have had notable increases in overhead costs, please note that our revenue continues to go up at a much higher level. Although overhead costs were up $2.7 million quarter-over-quarter, our net revenue was up $3.4 million during the same time period and, on a year-to-date basis, although overhead costs have increased 6.2 million, our net revenue is up $10.6 million during the same time frame.

Our third-quarter efficiency ratio was 54% compared to 46% during the third quarter of last year, again, most of those increases due to what Jerry has already touched on, that being our expansion into Lansing and Ann Arbor as well as the opening of our Holland office and our new headquarters in Grand Rapids.

A little more detail on the growth and overhead costs, of the $6.2 million increase year-over-year 3.2 million or slightly over 50% is in salaries and benefits. Most of that coming from an increase in our FTEs, which were 190 FTEs a year ago compared to 263 at September 30th of this year, that's a 38% increase. Also, our occupancy and these equipment costs have increased about $1 million or about 16% of the total growth in overhead costs, again relating to the opening of our Holland office, our headquarters here in Grand Rapids as well as our Lansing and Ann Arbor offices. Other overhead costs are up as well due primarily to our increased asset base.

With respect to specifically Lansing and Ann Arbor, our overhead costs during the third quarter of this year were up about 600,000 over the second quarter of this year related to initial costs -- overhead costs with those two offices.

Next I want to take a couple seconds just to recap the refinance of our trust preferred. It's been about a year since we did that, and I just wanted to give an update on what's happened since we did that trust preferred refinance. Remember, we did that in the third quarter of last year in mid-September, and there was an associated onetime write-off of $845,000 as we had to fully right off the issuance costs that we had been amortizing over the 30 years. Our original trust preferred had an effective total rate of 9.82%. Our new trust preferred is a floating-rate; we took the floating-rate option which is three-month LIBOR plus 218 basis points.

During the 365 days following the refinance our interest savings have totaled $806,000 or just slightly under the 845,000 or right-off. Stated another way, it took us slightly over one year to earn back those costs. The average rate during the past 365 days has been 4.85% or almost 500 basis points cheaper than the rate on our original trust preferred. Our current rate next week as it replaces next week will equal about 6.3%, taking in today's three-month LIBOR rates. But that is still 350 basis points under the original rate but obviously our savings will continue going forward.

At September 30th of this year our assets totaled just under $1.8 billion, and in the third quarter our assets were up $87 million with our loan portfolio up about $65 million. In the last twelve months our assets have increased $322 million or 22%, and during that time loans are up $235 million or about 19%. There have been no major changes in our asset composition.

With regards to our funding strategy, our funding strategy has not changed as we continue to grow local deposits and bridge the funding gap of wholesale funds, that being brokered CDs and Federal home loan bank advances. Our deposit and repo growth during the first nine months of 2005 -- local deposits and repos have grown about $55 million or 16% annualized with our wholesale funds up about $200 million or about 30% annualized. As of September 30th our wholesale funds total funds totals about 69% compared to about 67% at the beginning of the year.

With regards to capital, we remain in a well capitalized position per bank regulatory definitions with our total risk-based capital ratio at September 30th at 12.2%. That's my prepared remarks. I'd be happy to answer any questions during the question-and-answer session but I'll now turn it over to Mike for his prepared remarks.

Thanks, Chuck. Good morning, everyone. Along with the outstanding financial results we have reported this morning, I wanted to give you an update on our expensive strategy that we first articulated a few quarters ago. As we stated then, we felt that we were more likely to enter new markets by hiring outstanding local bankers to create de novo branches rather than to acquire existing banks. To minimize cultural roadblocks and mitigate large premiums coincident with acquisitions we felt this was our best roadmap for success.

I'm happy to report today that after our first full quarter in Lansing and partial quarter in Washtenaw County, all signs appear that this strategy is working in a very positive way. During the third quarter those two new regions contributed over $13 million in loan growth and $5 million in deposit growth. In addition, both with new regions now boast some impressive backlogs of potential new relationships.

To give you a little more color of the investment we have made in these markets in addition to what Chuck is giving you, you should know that 23 of the 73 full-time equivalents we have hired over the past year are involved in either the Lansing or Washtenaw markets. These employees are well poised to contribute additional growth to the Mercantile franchise and help rapidly leverage the investment we have made in their markets. We're gratified by how well of the mercantile style of banking has been embraced by both those new regions. In addition, our Kent and Ottawa County locations continue the phenomenal growth that has been the signature of Mercantile from our inception.

As Chuck has already mentioned, total assets grew by 89 million for the quarter with loans increasing by about 64 million and deposits by 75 million. I'm going to have Bob Kaminski detail our asset quality numbers in his report, but I would like to emphasize the strength of our credit culture is evidenced by, again, another great quarter of results. The extremely low level of charge-offs and are performing assets continues to bode well for our adherence to our goals of strong growth without sacrificing the outstanding quality we are known for. As always, I'll be happy to answer any more questions during the Q&A. But for now I'm going to turn it over to Bob.

Thank you, Mike. Asset quality numbers continue to be very strong for Mercantile Bank. Charge-offs and nonperforming loans remain superior to numbers posted by the average banks in our bank peer group. Charge-offs for the third quarter were 0.05%, nonperforming loans at September 30th were 0.12%.

Besides partnering with solid borrowers, one of the keys to successful performance in the area of asset quality is the loan staff works very closely with the loan administration group to allow early identification of distressed credits. They then work together to develop an effective problem loan strategy which tends to minimize risk and any exposure for the Bank.

Mercantile's staff members continue to work in numerous areas to assess the needs of the customer, devising strategies to meet and exceed customer expectations. Some of these other initiatives include the refreshing of our website which was rolled out in the third quarter and an upgrade to our Internet banking platform which is scheduled to occur in early 2006. We also have numerous other items on the radar screen such as remote deposit capture, which will allow customers’ deposits to be transmitted electronically to Mercantile for processing. Those are the extent of my prepared comments; I'll now turn it back over to Jerry.

Thank you, Bob. And that concludes our prepared remarks, and we would be happy to take questions at this time.

(OPERATOR INSTRUCTIONS). Brad Vander Ploeg.

Thanks. Good morning, guys, and congratulations on a great quarter. A few questions. Could you touch maybe on the ongoing expense levels from your expansions? Is it largely behind you now, or is there going to be additional infrastructure and/or hiring expense of any significance and in Ann Arbor and Lansing in particular?

Brad, this is Mike. I'll let Chuck amplify, you he wants, any answer that I have. But basically the banking teams are in place, which is, as Chuck mentioned, the biggest part of the ongoing expense. We may add next year a person or two in both Lansing and Washtenaw, but basically the people are in place, and they are out in the street and bringing in good business. The rental structures, the depreciation structures, the equipment that is needed really is all in place. So I don't see any great level increase over the next couple of quarters.

We also have some recruiting fees that we paid in this quarter.

Good point, Jerry, and those are all obviously -- will be behind us. So we're in real good shape, Brad, to really start leveraging what we've worked real hard the last couple quarters to get in place in both those markets.

Okay, so it sounds like the people costs are largely in place. The bricks-and-mortar and so forth, you feel pretty comfortable there as well?

Yes, both of them are in temporary -- very nice temporary locations. We continue to work in both locations to look at a permanent site while both of those expense events for permanent brick-and-mortar are out there a ways yet and impossible really to quantify at this point anyway.

Okay. And one thing you noted that I found a little bit surprising is that I think you said 23 of your 73 new hires over the last year have been in those two markets, which implies a pretty significant number of additional hires in your existing markets. And I was wondering if you could just maybe touch on that. Did you find some big teams from elsewhere that came over? Is that just normal course of hiring or how did that come about?

Well, I guess the Bank has grown well over $300 million during the course of the year, so to add 50 FTEs excluding the two new markets were $320 million roughly in new assets. I don't really find that -- it really stays with our pretty much 1 FTEs per $6 million of assets, which is a pretty strong record if you look at the typical bank out there. So I would say really one of the things that we always talk about, Brad, is that we run a very efficient and lean shop, but we never wanted to cut into our level of customer service or our level of support.

So we've added people across the board both from production type folks, lending and branch people, but also operational and IT people, some cash management people and that type of thing. But I would say 50 FTEs outside of the 23 for the new markets in a bank that has grown 320 million over the year, I don't find that really unusual nor do I find it outside of the mercantile plan.

Okay. And are most of those people -- would you characterize them as support or production or I imagine it's a mixture?

I don't have exactly those numbers, Brad, but I would say based upon a pretty thorough knowledge they're pretty evenly split. Our operations team has been bolstered during the course of the year by some really good new hires. And as you might imagine, as we get bigger we need to add -- especially with S-Ox 404, we always need to make sure we keep our audit and accounting staff robust and -- but we've also added some good production people along the line. So I'd say it's probably evenly split.

All right. One last thing; just looking at the annualized loan growth numbers, they're still very, very strong and compare very favorably to your peers. Looking at a number annualized of about 18% this quarter, I know some people have gotten used to loan growth in the 20 to 25% neighborhood for you guys. I'm just wondering if we're going to see some sort of acceleration because of the new markets or if it's more realistic to expect something closer to the 20% neighborhood rather than 20 to 25 or if you have any sort of thoughts on that ongoing.

It's a good question. A couple things at work here, obviously the mathematical denominator as it get larger and larger makes 25% a number that would have to be truly phenomenal going further. But to try to specifically answer your question, one of the reasons why we have expanded into those markets because we see the demand there, but to continue to be known as a growth company.

So it's that finely tuned engine that you have going out there. We have a lot of opportunities; as we get larger in Grand Rapids the competition continues to be very strong and we don't want to compromise our credit quality at all. So we're trying not to make a lot of forward-looking statements. But I think if we kept that 20% target which is our internal target to grow, I think that's pretty reasonable based upon what we see out there today.

Okay. And I know I said that was my last question, but I lied. One more quick thing, and I always have to ask this. Just the general health of the economy -- obviously you guys are not indicative of necessarily what's going on in the market because you're stealing market share, you're expanding rapidly. But I'm just curious what you're seeing in terms of the overall loan demand in the market and the health of the market. And just directionally which way things are headed.

It's a great question. The overall health of the economy in West Michigan and now we're starting to see -- getting to see what obviously it's like in Lansing and in Washtenaw County. There are still pockets of difficulty in the state of Michigan, especially certain industries are very, very tough right now. We're getting more requests of growth from our existing customers than we probably have in four or five years. But it's still nowhere near the normal expansion that we've gotten used to seeing in our years of running banks, Jerry and I and Bob.

What keeps us going still and what's a really neat part of the Mercantile story is our ability to steal market share from especially the big players out there. Our level of service, our relationship style of banking, our responsiveness continues to give us a real reason to get in the door and allows us in this time of relatively small market expansion to continue to grow our bank at a very rapid pace. We continue to look forward when we can say that all cylinders in the state of Michigan are hitting. But it still looks like it's a way out. We are seeing a slow and very steady increase in the health of the state out there.

Very good. Thanks very much, and great quarter.

Steve Covington.

Good morning, guys. Nice quarter. I guess just -- this is kind of a follow-up and maybe more specifically the loan growth. Could you talk -- speak to the whether or not there was any particular lumpy months during the quarter, any significant paydowns you had at the end of the quarter maybe or was it pretty well smoothed throughout the quarter?

No, we had -- early on in the quarter we had more growth than we did at the end. But that's not -- we have months like that where we'll have a really big month and then we'll have a smaller month. But we do continue to fight a little bit of a phenomenon some of our larger customers that have been in the real estate development business this year have sold off some other development and paid us down in large chunks.

We saw a little bit more of that again this quarter. That seems to be slowing down a little bit which we're real happy about. It's good for our customers, they've done very well with these projects. But they end up with a lot of cash and obviously paying down those loans. So I would say looking forward the same thing; I think we've got a pretty good backlog for the fourth quarter teed up.

That's great. There nothing wrong with getting paid back, right?

That's what we're in the game for. We just don't like it when they're in those $5 or $10 million chunks.

Exactly. I guess secondly, and Mike, you touched on this also, but I'm just kind of curious, have there been any unique challenges or opportunities to your new markets that you've found now that you've been in for several months?

Well, we're learning. I think as the management team the four of us sit here, we're learning the uniquenesses of each market. Their marketing needs are a little different as we get the feedback, the message is the same. We really want to talk to those markets about how we do the Mercantile style of banking.

But the nice thing about it again, and why we chose the strategy is in both markets we've got veterans of those markets -- rather than good bankers from Grand Rapids transplanted we have veterans of those markets who know those markets and know what they need to do to get in the door to get our name out there, and we rely on those city presidents and their key people to help sit down with us and we formulate a strategy of how we get into each one of those markets.

So, I haven't seen anything where as we looked at day-to-day operations say, boy, we sure didn't count on that or that's a surprise or that's not going to work for Mercantile. It's been more of the subtle nuances of things like in this market billboard advertising works and in this one it's better for direct-mail or that type of thing.

Steve, this is Jerry. I would just add one of the gratifying things for me has been as I've attended various open houses in both of these markets the huge following that our city presidents in both markets and their staff have. And they have potential to bring with them a lot of great business for us. So we know we absolutely picked the right people, not just the city presidents, but their staff, to run these operations for us.

That's great. Lastly, and I might have missed this. I know Brad asked the question also. But Chuck, in your comments, has there been any I guess major changes of your expectations for added expenses associated with the new markets from your comments on last quarter's conference call, or is that still kind of the ballpark number you're looking for?

We gave the number at the last conference call and it looks like the way the expenses are coming that we're going to be quite close to that. We estimate about 600,000 this quarter compared to the second quarter in additional overhead costs associated with those two markets. It will probably uptick a little bit, probably to 650,000 to 700,000 in this quarter just as some of the folks that we hired during the third quarter were not there for the entire quarter. But overall we gave -- if you add 650,000 to 700,000 to the 600,000 for this quarter, that will come in pretty close to what we had estimated three months ago.

Okay, great. Thanks again, guys, and nice quarter.

Bryce Rowe.

Good morning, thank you. Chuck, I missed it in trying to write it all down. If you could go over the wholesale maturity schedule for the fourth quarter and then into next year.

I could certainly do that, Bryce. For the fourth quarter this year we got about 200 million maturing at a cost of 3% even. First six months of next year about 370 million, average cost about 345. And in the last six months of next year about 230 million maturing at 380.

Okay. And then -- next question. You said 69% of the deposit base is wholesale broker deposits. I'm coming to a number of 964 million. Does that sound right?

Yes, it's in the ballpark.

And if you could just -- you've talked the last couple quarters about your funding strategy and extending the duration a little bit. Is that still the MO?

Yes, historically we've kind of done a one-year 15-month average, and we're still kind of on an average of 18 to 24 months depending on what's going on in the interest rate environment for brokered CDs.

Okay. Do you see that changing at all as we come to the perceived end of Fed increases in the middle of next year or so?

Yes, when we start seeing the end of us the Fed increases we'll likely -- at least the way we think at this point in time we'll go back to the 12- to 15-month average because there won't be a need for extending the duration.

Okay. And then if I could get one more number from you. Do you have the average non-interest-bearing deposit balance in front of you there?

No, I don't actually.

Okay. I can get it from you off-line.

Yes. I just don't have it front of me, Bryce.

Okay. Thanks.

Matthew Copeland (ph).

Thank you. I had a quick question. Chuck, you mentioned the floating-rate loans, about 75% of your assets or your loans are floating-rate. You mentioned they were capped. What are they capped at or -- I don't know if it's a percentage number or what it is, but could you talk about that a little bit?

Yes. As I mentioned, probably about a third of our floating-rate loans have ceilings on them, but the ceilings are always negotiated on a loan-by-loan basis. So some of them, as I mentioned, have had caps that have already gone into effect, but a vast majority of those we still have two to three, even four and five -- 25 basis point increases from the Fed before those would go into effect. So it's kind of a long litany of when those caps go into place because it is negotiated loan by loan.

Okay. And then that trust preferred that you just refinanced, is there a cap on that?

No, there's not.

And then, my last question. I don't know a whole lot about the banking industry, but has never been a period where there have been significant amounts of floating-rate loans issued at low interest rate levels? And if so, what has that period been like for the banking industry going forward if that makes any sense?

That's kind of a hard question to answer especially for the entire banking industry. Obviously we just want to keep an eye on our own shop. When we issue -- when we have conversations with potential borrowers and existing borrowers, we give them the option of either going fixed-rate or floating-rate. We do not offer any types of teaser rates. When we put a loan on the books they're at what we would -- what I would term anyway as a fully indexed rate.

Four years ago only about a third of our portfolio was floating-rate, and we saw that change to, as you can see, about three-fourths as we speak today. I think that we do get calls from borrowers from time to time now talking about maybe going back to a fixed-rate, certainly some of our newer customers are taking the fixed-rate option over the floating-rate option. And that's why we've seen our level of floating-rate loans go down a little bit from 78% down to 75%.

But again, we price everything on our books at a fully indexed rate, if you will, and we kind of leave it up to our borrowers to take the fixed or floating rate option or to change in midstream. We do have prepayment penalties in many of our relationships that have to be factored in by our borrowers. And one of the things we certainly do on the funding side, and I think could kind of echoes over a recent question that we've had this morning is as we start seeing a change in the interest rate environment we'll start modifying our duration or average maturity, if you will, of our wholesale funding product to help manage the margin going forward.

Okay. All right. Well, thank you. That helps me out a lot.

Paul Wu (ph).

Just wanted to ask a couple quick questions on the new branches. For Lansing and Ann Arbor, when did those go online during the quarter?

Lansing went on line in mid July, and Ann Arbor when on line in mid-September. That's when we officially opened the branches.

Okay, and Mike had mentioned that both of them contributed about 13 million to the bottom-line loan growth for the quarter and 5 million deposits. Do you guys have a projected for breakeven for both branches? Timing wise?

Timing wise, we certainly would like to see them at least cover their expenses somewhere early part of next year. But we haven't gotten a specific date on that.

Okay. And then any new markets that you guys are looking into or are you guys --?

We're always out there looking and talking between Jerry and myself thinking about new markets either through, has we've always set either through acquisition or starting de novo. We look at a lot of things, but Jerry, I'll let you --.

Yes, Paul, we've had numerous conversations from an M&A standpoint here in Michigan, several in Indiana -- and we also have identified additional markets. As we've mentioned before on our teleconferences, markets like Battle Creek and Kalamazoo, and also Indiana probably from Indianapolis North holds a lot of interest for us. We have no negotiations going on, We're not hiring people at this point, but there are some very strong markets left in Michigan and some very strong markets in the state of Indiana, possibly elsewhere as well. But those would be the more immediate places we'd be looking. But at this point with Ann Arbor and Lansing just coming online we really want to see them generating at least a breakeven basis before we start additional expansion.

And with the change in the name of the Company, was there any -- or significant onetime costs that are associated with that?

No, not really, other than stationary and a few minor things, but they were certainly not very significant at all.

Okay, and you had mentioned something about some of the employee expenses that are onetime in nature. Could you quantify that number for the two branches?

That's a pretty hard number to quantify. We did pay some recruiting fees and some signing bonuses and those are certainly an ongoing coss in the banking industry. I don't really have a number in front of me that I'd be willing to give.

Okay. Thanks, guys.

Christopher Nolan.

Congratulations on the quarter. Quick question. Obviously from second quarter Q your balance sheet is highly asset sensitive so you're benefiting from increases in near-term interest rates. How much of the net interest income gain the quarter was due to rate as opposed to volume?

I think if you look quarter-over-quarter our margin was down I think 6 basis points when you compare second quarter with third quarter. So obviously a large pickup is due to our growth with our margin going down slightly. But over all we look at our margin staying pretty steady quarter-over-quarter. So most of the growth in net interest income has been due to growth.

Okay. So you're not really getting a benefit from rate so much as opposed to asset growth?

Obviously we continue to try to manage our margin and yes we certainly -- 75% of our loans had the prime (ph) -- we certainly benefit from the increases in the prime rate and we realize the market is priced in two if not three more additional increases. But certainly our cost of funds continue to go up as well, not just on the wholesale side but certainly on the local side as well. So obviously, what we have always tried to do at Mercantile is try to manage a steady margin. Obviously we want it as high as we can go, but we also want to maintain it as steady as we can as well. So looking at both those factors, not just increasing asset yields from increases in prime but also the continued increase in our cost of funds.

Got it. And Chuck, earlier you mentioned that in the fourth quarter the operating expenses related to the new expansion should add about $600,000 to those at the third quarter if I understood you correctly or did I mishear that?

That's a little bit of a misunderstanding. Costs associated with those two markets increased $600,000 from the second quarter to the third quarter. We'll have that $600,000 again, but I would expect it to go up between $50 and $100,000 only because of the timing of when we hired some of the folks for those two markets. Some of those folks were not hired the entire third-quarter.

Got it. Okay, great. Okay. Well, thank you.

(OPERATOR INSTRUCTIONS). At this time there are no questions.

I wanted to thank all of you once again for attending our teleconference. If you have additional questions that come up later as you're analyzing the remarks, please feel free to give us a call. Thank you all for attending. This concludes our teleconference.

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