Mercantile Bank Corp (MBWM) 2011 Q3 法說會逐字稿

Good morning and welcome to Mercantile Bank Corporation's third quarter 2011 earnings conference call. All participants will be in a listen-only mode until the question-and-answer session of the conference call. Today's call is being recorded at the request of Mercantile Bank Corporation. If anyone has any objections, you may disconnect at this time. I would now like to turn the conference over to Ms. Karen Keller. Ms. Keller, you may proceed.

Thank you, Jamie. Good morning, everyone, and thank you for joining Mercantile Bank Corporation's conference call and webcast to discuss the Company's financial results for the third quarter ended September 30, 2011. I'm Karen Keller with Lambert Edwards, Mercantile's investor relations firm, and joining me are members of their management team, including Michael Price, Chairman, President and Chief Executive Officer; Robert Kaminski, Executive Vice President and Chief Operating Officer; and Chuck Christmas, Senior Vice President and Chief Financial Officer.

We will begin the call with management's prepared remarks and then open the call up to questions. However, before we begin today's call, it is my responsibility to inform you 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's business. The Company's actual results could differ materially from the forward-looking statements made due today -- to important factors described in the Company's latest Securities and Exchange Commission filing. The Company assumes no obligation to update any forward-looking statements made during the 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 website at www.mercbank.com. At this time, I would like to turn the call over to Mercantile's CEO, Mike Price. Mike?

Thank you, Karen. Good morning, everyone, and thank you for joining us today. Earlier this morning we released our third quarter operating results, and I am pleased to note that we continue our recovery from the effects of the great recession. Mercantile has developed strong, sustainable momentum as the year has progressed. Net profit has increased substantially, non-performing assets continued to decrease, and our bank continues to grow stronger by the quarter. We are making continued improvements in core operating earnings and limiting control expenses while strengthening our capital ratios. As a result of the improving conditions of our business, we also announced our planned payment of the dividends on our preferred stock and distributions on our trust preferred securities.

While this cannot be taken as an indicator of the potential for future repayments, we are encouraged that today Mercantile is a revitalized bank focused on gaining market share and engaging our customers with new and innovative products and providing value through our relationship approach to banking. We continue to be grateful for our strong team of associates and loyal customers, and we look forward to a strong finish to 2011.

On the call today, our Chief Financial Officer, Chuck Christmas, will provide some of the details of our financial results, followed by Chief Operating Officer Bob Kaminski and his comments regarding asset quality and other operational successes for the quarter. At this time, I will turn it over to Chuck.

Thanks, Mike, good morning, everybody. This morning, we announced that we recorded net income of $2.7 million or $0.30 per diluted share during the third quarter of 2011 compared to a net loss of $5.7 million or $0.67 per diluted share during the third quarter of 2010. This $8.4 million improvement expands to $9.1 million if we exclude a federal income tax benefit recorded during the third quarter of last year.

Net income totaled $6.2 million during the first nine months of this year compared to a net loss of $9.3 million during the first nine months of last year. This $15.5 million improvement expands to $18.2 million if we exclude a federal income tax benefit recorded during the first nine months of last year as well as a one-time investment and loan sales gains recorded during the first quarter of last year. The improved operating results reflect improvements in many key areas of our financial condition and operating performance, but especially reflect a significantly lower provision expense and improved net interest margin.

We are, of course, pleased to be able to report a net profit for the third quarter of 2011, our third consecutive profitable quarter after two years of quarterly losses. These positive results are a reflection of the somewhat improved economic conditions combined with the positive impact of numerous strategies developed and implemented over the past several years. Our dedicated efforts have contributed towards a significant decline of our non-performing asset levels and a prudent loan portfolio achieved through our home credit underwriting and administration practices.

Operationally we have vastly strengthened our net interest margin, enhanced our regulatory capital ratios, improved our liquidity position through substantial local deposit growth and dramatically reduced reliance on wholesale funding, all while lowering our overhead costs.

Our improved operating results and strengthened financial condition provide us with cautious optimism as we look to future periods. Yes, more work lies ahead and head winds may continue to face Mercantile, the banking industry and the economy at all levels. However, we believe we are well positioned to succeed as a strong community bank and continue to play a pivotal role within the markets that we serve.

During the third quarter of this year, we saw the continuation of any positive trends and I would like to touch on some of them now. An improved net interest margin has provided substantial support to net interest income that has been negatively impacted by the decline in earning assets. Net interest income during the third quarter of this year was $12.3 million or 12% lower than the third quarter of last year. Average total earning assets declined by about $266 million during the third quarter of last year and the third quarter of this year.

However, our net interest margin increased from 3.33% to 3.50% or about 5% during this same time period. The improvement is primarily due to a decline in our cost of funds which has more than offset the decline on our yield on assets. The lower cost of funds primarily results from the maturity of higher cost in certificates of deposit and borrowed funds and reduced rates paid on local deposits. The lower yield on assets primarily results from several items, including lower loan yield reflecting improved borrower financial performance and increased competition, lower securities yield reflecting US agency call activity and paydowns on higher-yielding mortgage-backed securities and a higher level of federal funds sold.

In addition, during the third quarter our asset yield was negatively impacted by the mark-to-market valuation adjustments on our cap corridor that we entered into late second quarter of this year. Interest income on loans was reduced by almost $300,000 during the third quarter, equating to a reduction of about 10 basis points on our yield on assets and our net interest margin.

Provisions to the reserve totaled $1.1 million during the third quarter of this year, a substantial decline from the $10.4 million we expensed during the third quarter of last year and well below the average quarterly provision amount during the past three years. For the first nine months of 2011 provisions to the reserve totaled $5 million, dramatically lower than the $25 million expensed during the first nine months of 2010.

Our loan loss reserve was $39.4 million at the end of the quarter or 3.60% of total loans. Despite the improved condition of our loan portfolio, the reserve coverage ratio is up from the 3.30% level year ago.

Local deposit and [SIP] accounts were up another $5 million during the third quarter and are up about $280 million since the end of 2008. Combined with the reduction in our loan portfolio, we have been able to reduce our level of wholesale funds by about $960 million since the end of '08. As a percent of total funds, wholesale funds have declined from 71% at the end of '08 to 35% at the end of the third quarter.

Non-performing asset administrative and resolution costs remain elevated. However, these costs fell significantly during the third quarter of this year. Non-performing asset costs totaled $1.6 million during the third quarter, well below the $2.9 million expensed during the third quarter of last year and a $2.7 million quarterly average over the previous four quarters. As with provision expense, we would expect continued reductions in non-performing asset administration and resolution costs in future periods if the level of non-performing assets continues to decline.

We remain a well-capitalized banking organization. As of September 30, our bank's total risk-based capital ratio was 14.5% and in dollars was over $55 million higher than the 10% minimum required to be categorized as well-capitalized. As of September 30 last year, our bank's total risk-based capital ratio was 12% and the surplus was about $30 million. Our efforts to right-size our balance sheet over the last few years has enhanced the regulatory capital ratios, and at the present time we believe our capital position is sufficient to fund our operations as well as provide for future growth opportunities.

As was noted in this morning's press release and on Mike's introductory remarks, we are in the process of bringing current all deferred distribution payments on our trust preferred securities and deferred dividend payments on our preferred stock. This morning we wired the monies owed on our trust preferred securities to the trustee, which paves the way for us to wire dividends owed on our preferred stock tomorrow. Although we have been deferring payments on our trust preferred securities and preferred stock since the third quarter of 2010, we have been accruing for these payments all along.

Those are my prepared remarks. I will now turn the call over to Bob.

Thank you, Chuck. My comments this morning will focus on some of the details of the Company's asset quality, as well as some customer acquisition initiatives.

In the third quarter, Mercantile showed continued asset quality improvement as demonstrated in several key metrics. Non-performing assets were reduced 8.2% to $56.8 million during the quarter. Since September 2010, NPAs have been reduced by 38.5%. Distribution of NPAs by loan category is as follows -- $22.8 million in commercial real estate non-owner occupied, $11.3 million in commercial real estate owner occupied, $8.1 million residential land and development, $7.7 million in residential real estate owner occupied and rental, $3.9 million in commercial non-real estate, $1.9 million in commercial land development and $1.4 million in residential construction.

During the third quarter, Mercantile was pleased to report that only $3.7 million in new non-performing loans were added to that list, and of that total $1.4 million represented the repurchase of the guaranteed portion of an SBA loan that had been sold on the secondary market. Reconciliation of non-performing assets for the third quarter is as follows -- $5.1 million in principal payments, $2.7 million in sales proceeds of other real estate owned, $476,000 in charge-offs and $604,000 in valuation writedowns, which combine to more than offset those $3.7 million in new additions for a $5.1 million net reduction in NPAs.

Loan charge-offs during the quarter were $1.3 million on a gross basis and $469,000 net of loan recoveries. Loan recoveries continued at a robust pace, totaling $873,000 for the quarter and $3.1 million for the first nine months of 2011. The majority of the charge-offs were concentrated in the commercial real estate non-owner occupied category with the other loan types experiencing either nominal losses or net recovery positions. Of the losses recognized in the third quarter, 64.1% were specifically allocated at the end of the second quarter.

Provision expense for the third quarter was $1.1 million. For the year-to-date 2011, it's $5 million. This provision combined with low charge-offs and a smaller portfolio have bumped the reserve percentage total to 3.6% at September 30. While the quarterly provision is still significant, it is notably less than was recorded quarterly over the past two years and is on a downward trend. This is another metric which indicates continued progress on improvement in asset quality. As the portfolio continues to improve, the allowance for loan loss methodology will provide additional benefit to the bank as the heavy loss in provision quarters over the past two years receded.

Past-due loans 30 to 89 days delinquent continued at a very nice level during the third quarter at only $411,000 as of September 30. Although the loan portfolio contracted in the third quarter, new business development efforts continue at a very strong pace. The commercial pipeline remains very active and some good loan opportunities queued for the rest of 2011 and into 2012. Loans moving off the books consisted of some higher-risk assets as well as some commercial real estate totals as a result of borrowers finding some attractive secondary-market financing.

Through discussions with many commercial customers and prospects, confidence in the economic climate in west Michigan is surprisingly strong compared to some reports in the media about economic downturn in other parts of the country. As a result, we remain enthused about the prospects for new business development and growth even as repositioning and pruning of the portfolio will continue to drive totals of certain risk profiles and loan types to lower levels.

Finally, Mercantile is continuing its efforts to expand its customer acquisition activities on the retail side of the bank. Product development and refinement plus new marketing and other customer outreach efforts continue to be active and we have met with success so far. We remain convinced this approach will be the key to building the retail business of the bank. Those are my prepared remarks. I will now turn it back over to Mike.

Thanks, Bob, and Jamie, at this time we would like to open it up for questions.

(Operator instructions) Terry McEvoy, Oppenheimer.

I was wondering if you could just talk about your targeted loan mix. We have seen the non-owner commercial real estate piece decline and the C&I piece now at call it 25% of the portfolio. I guess the question is, how much smaller on a relative basis is that non-owner occupied CRE piece going to get so we can try to maybe model out when the loan portfolio, which has been coming down, begins to bottom out?

Hey, Terry, this is Mike. I'll try to answer it for you and certainly let Bob or Chuck jump in if they want to amplify my answer. But I suspect we're still going to see some continued runoff in non-owner occupied just for no other reason that we really aren't out looking for any of the non-owner occupied. As I know you are aware, that has, during this downturn, shown the most stress and the most risk to community banks like ours.

But I guess the real wild card is the C&I and how quickly the economy recovers. As Bob mentioned, we are starting to see some pretty positive movement here in west Michigan as far as optimism. We seem to have stopped seeing the runoff in our C&I portfolio that we saw during the great recession, when a lot of our really good customers who went through the recession just fine -- they just hunkered down and became more liquid. They paid down some debts, especially lines of credit. We are not seeing so much of that anymore, but we are waiting to see how much we're going to see on the other side of that, which is the expansion of the lines of credit, etc., etc.

So I would like to give you a date certain or a number certain to say this is how much longer or how much further the portfolio is going to shrink. But we would like to, I guess, target in our minds by the end of this year pretty much having it at a neutral situation and start to see some growth at the beginning of next year. We are seeing probably more potential deals on the C&I side than we have seen in at least three or four years, and that gives us some real optimism as well. But as you know, with C&I lending, it takes some time to work through the process of going through the credit requests, getting new customers over and getting the loans booked.

And this is Bob as well. I think what we're doing is spending a good amount of time looking at our commercial real estate portfolio and really looking at it on a risk-based basis. And I hate to paint all commercial real estate with a really broad brush and say we don't want it as part of our portfolio; that's far from the truth. And I think, in all reality, you will still see commercial real estate being a significant part of our portfolio for a long time.

It's really -- it's pruning the high-risk assets off and trying to partner with those that have successful real estate projects and keeping those as part of a community bank's portfolio.

Great, and then could you just talk about the variables that went into actually building the reserves a bit in the third quarter? Your provision was greater than the charge-offs and reserves relative to loans, as you pointed out in your call, still over 3.5%. So why the reserve build? And assuming the credit improvement continues, do you see that number then kind of beginning to come down in the fourth quarter and into next year?

This is Bob. There are a lot of moving parts in our loan loss reserve methodology, and part of those moving parts have to deal with the mechanics of the portfolio itself and specific loans, as well as the qualitative factors that really drive towards the environment and the economy and all the things that are probably beyond our control. And so I think, that being said, we are still taking a pretty conservative approach to our reserve, as we have for a long time. And the fact that we had very low loan charge-offs this quarter certainly helped bump that reserve up. We took a very healthy provision, despite the fact that the loan portfolio contracted and despite the fact that the metrics improved, but I think that's still the right thing to do right now. We are seeing, as a result of that, the reserve bump up. And it really reflects our overall conservative approach to loan loss reserves methodology.

Terry, this is Mike again. Bob said the word about three times, and I'll say it four or five more times, and that is the conservative nature of the way we operate the bank. And clearly, as we have always said to everyone pretty publicly, that we are pretty conservative and aggressive in identifying problems during the beginning of this recession and we're going to be pretty conservative and very, very careful coming out of the back end of it.

That being said, from a bigger picture we want to make sure -- and while we are thrilled that our NPAs have come down very, very rapidly -- we are now below 4% NPAs to total assets. We also know there's other things out there. There's a focus on troubled debt restructuring. There's a few other things out there that we want to make sure that we are anticipating and that we are looking at every possibility that while -- when we start stepping this thing down, and we recognize it's going to be stepped down here in the near future. But while we step it down, we want to be very prudent, very anticipatory of all -- as someone said, the moving parts that are out there. And there's a lot of them, both regulatory and economic -- that we do it in the right way.

The one thing that we've always said at this bank is we don't to prematurely start to reduce that; we don't want to take a negative provision. That's just not our style, although we recognize that somewhere probably in the next few quarters we are going to have all the numbers point to a part where we say, hey, we are over-provided for. But right now we want to be very, very conservative before we make that call.

Terry, this is Chuck. Just to echo on Mike and Bob's comments, we had really good quarter for some recoveries, which obviously helped the reserve calculation as well. And so I think when you kind of bleed that over to ORE valuations, we have sold some ORE, and more times than not we are actually recognizing some gains. I think that gives us comfort from our valuation standpoint where we have priced and valued impaired assets, whether they be non-accrual loans, impaired loans and, certainly, OREs.

So that gives us a good comfort level as far as what we are doing there, which will help us not only with provision expense as we go forward, but also non-performing asset costs.

Chuck, that's a good point. As I mentioned in my comments, we had some very healthy recoveries in the quarter as well as for the year so far, and, again it reflects the conservative nature of our valuation on the properties and the fact that we take a loss on the front end and if we have successful collection efforts on the back end, we will realize the recovery.

I have one more comment, Terry, and then we are going to let you get on to another question. But while we are -- I talk about this in general as well, I think the exciting take-away from this is that we still did have a small provision expense during the quarter, but we still continued to increase profitability, meaning basically the main engine of the bank is performing pretty well now. So that gives us a pretty good feeling that we are making some decent money, we are going in the right direction and we still have room on the provision to probably improve with less provision in the next few quarters.

Understood. And then just one last question, I guess for Chuck. Could you just talk about CD reprice, down the repricing in the fourth quarter and maybe the near-term outlook for the margin, and then maybe a longer-term view on the net interest margin in light of the funding profile changing where a significant part of your funding is going to come from local deposits; and then, on the flip side, fewer commercial real estate and more of a focus on C&I lending?

There's a load in that question. But I don't have that specific numbers with me on the CD side, but there are definitely some repricing opportunities, both on the broker side as well as the local side when it comes to maturities that are coming up. And also, when we get into the end of the first quarter and through the second quarter we've got some opportunities on our FHLB advances; they got some pretty hefty rates on them as well. The volume and certainly the rate differentials aren't as great in magnitude as what we saw a couple years ago, or even -- especially in the last year. But there are definitely some opportunities there.

Interestingly, right now we are not doing any wholesale funding whatsoever. Every penny that is maturing we are just letting go as we continue to use the cash proceeds that are coming in on the loan paydowns as well as on some of the calls and mortgage-backed paydowns that we are getting in the investment portfolio. So I think our Fed funds average about $95 million in the third quarter. We are still endeavoring to get that down to about $50 million, at least as how we look at that now. So the next $50 million or so, notwithstanding any cash flow coming in the asset side, we will just continue to really just fund the maturities of wholesale funding and just let those liabilities go. Now at some point, we're going to have to start getting back into the game, probably late fourth quarter but certainly into the first quarter. We will kind of have some of that peer refinance where we are letting 2% money go and replacing that with 50 basis point money. But at least for the fourth quarter it's pretty much just letting those liabilities run off.

There's a lot of stuff going on, when you start talking about the margin and some of it is more short-term, some of it is long-term. In my prepared remarks, as I mentioned, we are seeing our loan yield decline, probably averaging last -- end of the second quarter and throughout the third quarter, and it looks like at least in the beginning of the fourth quarter, about 3 basis points a month in the loan yield.

And some of that comes, as I mentioned -- our borrowers are getting stronger. And with that they deserve an upgrade, which helps to provision. But they also, with the way that we price loans, means that they are going to get a better rate on loans. We did just the opposite over the last two to three years. As some of them were struggling, we downgraded them and, certainly, we're increasing rates. So we see a little bit of reverse going on there. A lot of that is captured or least replaced, if you will, with a lower provision expense.

There's no doubt that competition is becoming more keen, especially on the C&I side. It seems that everybody is comfortable on an overall basis with that part of the portfolio. And so, while we are out there trying to gain new relationships, there's a lot of other company out there doing it as well. And certain banks are much more aggressive than, really, what we want to be. But that impacts not only bringing in new business onto the books, but it also impacts existing business as some of those companies are being courted by our competitors.

So that's kind of going what's -- I think that's both short-term as well as probably longer-term in the next year as far as what is going on with loan yield. It's really higher; I said it's about 3 basis points a month. Obviously, that's just historical. It's kind of hard to tell exactly what's going to go on in the near-term, but we would certainly be expecting and budgeting for some level of decline on loan yields.

Securities yields are also coming down. As I mentioned, we've gotten quite a bit of call activity into the third quarter and into the fourth quarter here as well. So far, we've done very little in the way of having to buy additional bonds where we are pretty well set right now on pledging requirements and on the overall size of the investment portfolio, so we're losing some. I think average rate is probably into the upper 3s, low 4s on what we are losing. So far, we haven't really had to replace some of that money going forward. If that activity continues, we will have to replace some of it. And we will be putting stuff on the books probably around 2%, and so that will have an impact.

But having said all that, as I mentioned and as you've seen throughout this year, we have had a high level of Fed funds. Like I said, we've kind of been targeting $50 million, but we have certainly been a lot higher than that, again, because of the cash flow that's happening there. But certainly, as we get closer to that $50 million and as we continue to improve our overall condition, we think we will probably bring that down in next year at some level. That will certainly help offset some of the declines in the loan yield and what's going on in the securities portfolio.

On the liability side we already kind of talked about wholesale funding. There are some cost-cutting opportunities there that we will be able to enjoy. And on the local deposit side, we have, in about mid third quarter but also throughout the rest of the quarter and the beginning of the fourth quarter, we have had the opportunity to lower the deposit rates, especially on some of our non-maturing deposits. We are still aggressive, we are still very competitive, and we really haven't seen a significant amount of money leave the bank as a result of that.

But I think really what happened, when the Fed came out with their announcement in July and they really put that July of 2013 -- I think that's when they came out, July or August -- and they put that July of '13 date on there, that really impacted the markets. We all saw that nationally, but it also impacted everything here locally as well. But we are able to take advantage of that opportunity. And yes, it impacts our asset yields, but it also gave us the opportunity to reprice some of our deposit products as well.

So overall I think we will stay, on a longer-term basis, relatively steady. There are some pressures on asset yields, but there are some mitigating factors there with some Fed funds balance changes, and then some cost of funds there as well.

So long answer to your question, but obviously a lot going on.

Great, I appreciate everything, thanks.

Stephen Geyen, Stifel Nicolaus.

Maybe just one follow-on question to a couple of Terry's questions. Just curious what the monthly or quarterly cash flows from the securities portfolio was, or is.

It kind of varies by month, Stephen, because of the call activity. We are getting about $1 million a month on the mortgage-backed paydowns; probably about $900,000 is probably the average. The calls on the US agency stuff have been kind of all over, but I would say the last couple months it's about $6 million a month. But it's really, really difficult to tell what's going to get called and when it's going to get called. There's bonds in my portfolio -- don't tell anybody -- that I thought would have gotten called quite a while ago that are still out there. And then there's bonds that are being called because they are callable that -- you know, it's kind of surprised me because they are already at pretty low rates.

So it's really, really difficult to try to predict what's going on there. I think, as we all know, certainly rates have fallen. If you look at just the rates you've got on your books, it would behoove the agencies to go ahead and refinance that. But we all know that they've got swapping programs out there as well and I'm sure those swaps have some negative positions, and I'm sure that's impacting what's going on there.

Okay. And certainly you guys -- you're three quarters into profitability now. Just curious what may be some thoughts on the DTA.

I knew the question was going to come up sooner or later. That really is going to be a year-end decision. It will impact 12-31 financials. It will be a decision that we will make -- we're already starting to talk about we've got our auditors and our tax folks coming in the next couple of months to make sure that we all understand the concepts and obviously working with the specific numbers as much as actual and somewhat predictable results for the rest of this year, but certainly our 2012 budget. And we continue to be confident that we will put some level of DTA back on our books and these discussions we'll have over the next two months; we'll obviously pin that down in the very, very first part of next year. We will make that decision and backdate that entry to year end and obviously detail that in not only the earnings release but talk about that as part of the conference call in January.

Okay. And last question -- with the resumption of the payment of the preferred dividends, just curious if you had discussions with the regulators as far as repayment of TARP as well.

We are constantly evaluating with our Board and our management team and the regulators the appropriate repayment plan on TARP. So it's something we are contemplating. We kind of rank ordered a few things, and obviously resumption of the payments was the first thing on the list. And now that that is ticked off, the DTA and the TARP strategy is right up there. So nothing we can make any announcements on today, but something we clearly consider every week.

Okay, thank you.

(Operator instructions) John Barber, KBW.

I just wanted to make sure I understand this correctly. Your net loans went down, but your C&I portfolio -- we saw some growth this quarter; is that right -- $270 million from $262 million last quarter?

Yes.

Well, could you talk about what drove that? Was it an increase in utilization or is that new relationships?

I think it was a combination of both, John. I know that for most part of this year, our line usage has been -- it definitely steadied the first couple of quarters, where we saw some increased usage during the third quarter. But we have also, I think, as Mike was talking about earlier, some of our existing borrowers are starting to ask for equipment financing, those types of his. So that's starting to come through as well.

I think what you see is the fluctuation that occurs really on a daily basis of line activity and some customers in certain parts of the month and certain parts of the quarter are into their lines and some of them are getting out and we get some seasonality there, too. But what we are pleased to see is that overall stabilization in those levels, whereas we have seen decreases for quite a long time.

All right, thank you. And could you talk about your Board's decision to bring your TARP and your TRUP dividends current? Were there any particular metrics you were looking to hit or targets, or was it just kind of a continuation of the positive trends you've been seeing?

Yes; I think it's a continuation of the positive trends that we are seeing and it's in line with our overall capital management policy and procedures. And I think it just -- the astute examiner of our financial statements could see that obviously we feel pretty comfortable with not only where we have been the last couple of quarters, but where we are headed, and the fact that we have really bolstered those capital ratios and that we feel very comfortable in bringing those payments current.

Yes; I think, if you look at the numbers, even though we paid a dividend of 2.5 -- we actually paid the dividend from the bank to the parent company during the third quarter of $2.5 million. The bank's capital ratio still increased despite that reduction. And certainly, that's kind of more of a one-time dollar amount to catch everything up from a cash flow standpoint, the amounts necessary to pay both the trust preferred and preferred stock, equal about $500,000 per quarter going forward.

And last question I had -- do you know approximately duration of the securities portfolio?

It depends on what our interest rates are doing, but it's probably averaging right around 2.5 to 3 years at the current interest rate.

All right, thank you -- those were all my questions, thanks.

Daniel Cardenas, Raymond James.

Just a couple of quick questions -- in terms of competitive factors where you seem -- on the loan side, where are you seeing most of the competition coming from? Is it coming from the larger financial institutions, or is it coming from your like-sized brethren?

Right now, Dan, what we're seeing most of the competition come from is some of the really big players in the market, the national players. They are very aggressive with some very, very low rates and some very loose structures. And I think Bob alluded to earlier and I know Chuck said the same thing -- we are just -- we are not going to play in that arena. We are building good customer relationships using reasonable pricing, reasonable structure. But really we're back to building out on the relationship factors that the bank was founded on, and not just trying to win the deal on the lowest price.

And what are your customers saying in terms of their willingness to come back and tap on lines of credits? Are they still pretty much waiting to see what happens with the economy and standing on the sidelines, or are you engaging in more discussions with them about potentially having them borrow more?

Yes, more discussions than we've had in the last three years. That being said, there's still a lot of caution in the air out there. But we are -- and I think Bob alluded to this -- in the last month or so we are starting to see more optimism than we've seen in a long time in west Michigan, and that's real good factor.

Is that primarily manufacturing driven?

Yes, manufacturing. I don't want to say the Big 3 has totally recovered, but we are seeing that automotive at least stabilize little bit. That has certainly helped the state and it has certainly helped some of the manufacturing component that's on this side of the state. But, yes; overall, we are seeing them being a little more optimistic, and as Chuck was talking about, I think, to the last caller, we are starting to see a slight increase in our C&I outstandings, which is exactly what we had hoped would happen, and to start gaining some momentum there.

Okay, great, thank you.

At this time we have no further questions. I would now like to turn the conference call back over to stir Mike Price. Mr. Price, you may close the conference.

Thank you, Jamie. We continue to make significant strides, and our results are a reflection of the positive impact of the strategic initiatives put in place over the last few years. Our dedicated team will use this momentum to build on our successes going order as we develop new relationships that highlight the value of our experience and local expertise while maintaining a conservative approach to risk. We remain committed. Our long-standing relationships and proven excellence in community banking will serve us well as we continue down the path of achieving efficient and profitable growth.

For the remainder of this year and well into 2012, our priorities will be growing local deposits, shifting our loan portfolio towards more profitable lines of business with a special focus on C&I business, limiting controllable expenses and continuing to work to enhance our capital ratios.

Thank you all for tuning in this morning and for your interest in our Company. We look forward to talking with you again after the fourth quarter. At this point, we will end the call.

Thank you, everyone, for joining today's conference. It is now concluded. You may now disconnect your telephone lines.