Mercantile Bank Corp (MBWM) 2014 Q2 法說會逐字稿

Good day and welcome to the Mercantile Bank Corporation's second-quarter 2014 earnings results conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Robert Burton with Lambert Edwards Investor Relations. Please go ahead, sir.

Thank you, Betty. 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 second quarter of 2014.

I am Bob Burton with Lambert Edwards, Mercantile's investor relations firm, and joining me are members of their management team including Tom Sullivan, Chairman; Michael Price, President and Chief Executive Officer; Robert Kaminski, Executive Vice President and Chief Operating Officer; Chuck Christmas, Senior Vice President and Chief Financial Officer; and Sam Stone, Executive Vice President.

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 any forward-looking statements made today due to the 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 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, www.Mercbank.com. At this time I would like to turn the call over to Mercantile's Chairman, Tom Sullivan. Tom?

Good morning and welcome to our conference call reviewing second-quarter results. Before I turn it over to Mike I just wanted to take a moment to review the status of the merger of First Bank Corporation into Mercantile Bank Corporation.

We completed the merger of the holding companies on June 1 and completed the consolidation of the three bank charters on June 30. I'm pleased to report that we successfully completed our systems conversion earlier this month and that we are now operating the entire bank as Mercantile Bank of Michigan.

While we did experience some delay receiving regulatory approval, the additional time helped us to prepare for a seamless combination. We want to thank all of our staff members who have worked tirelessly to assure that our systems conversion was virtually flawless.

We now look to the future, building on the strength of two fine companies and to establishing the new Mercantile as Michigan's community bank. Now I would like to turn the call over to Mike Price, President and Chief Executive Officer of Mercantile Bank Corporation. Mike?

Thanks, Tom. Good morning, everyone, and thank you for joining us to discuss our second-quarter 2014 results for Mercantile Bank Corporation.

On the call today, CFO Chuck Christmas will provide details on our financial results followed by Chief Operating Officer Bob Kaminski with his comments regarding asset quality and other operational successes for the quarter. EVP Sam Stone is also on the call with us today.

Of course, as Tom mentioned, the overarching event is the long-anticipated completion of the merger between Mercantile and First Bank and the progress being made today in integrating the two companies. As Tom mentioned, the transition is going exceptionally well, and while there remains work to be done, we are very pleased with the progress to date.

As Chuck and Bob will discuss, the timing of the merger at June 1 means that one month of combined results is included in our second-quarter report along with approximately $3.5 million in merger-related costs for the quarter. We look forward to the next few quarters as these one-time events expire and the full benefits of the combined company emerge.

In the short term, our first order of business is to execute on our merger opportunities. While it is very early in the process, we remain confident that the assumptions and projections regarding EPS accretion, tangible book value earn-back period, and internal rate of return continue to be achievable.

Over the longer term we are confident in the direction of economic recovery for both West and Central Michigan. Our business goals remain consistent. We expect to grow market share as the combined franchise is positioned for long-term growth with the size and scale to compete very effectively in our markets.

We will capitalize on a geographically diverse and attractively mixed loan portfolio, coupled with balanced core funding that positions the Bank for continued expansion. We believe we are well positioned in the marketplace with our continued strong emphasis on value-added relationship-based banking. This was evident in the $121 million in new term loan originations Mercantile delivered during the first six months of 2014.

Over the long run, our continued goal is to deliver effective use of capital to enhance both profitability and shareholder value. We expect to provide strong shareholder returns through both price appreciation and a cash dividend policy that balances cash returns with growth opportunities. We will continue to do this while remaining focused on building our franchise and helping the communities we serve to prosper.

Thank you for your attention. At this time I would like to turn it over to Jeff.

Thanks, Mike, and good morning everybody. As you probably saw, this morning we announced net income of $1.5 million for the second quarter of 2014 and net income of $5.1 million during the first six months of this year. On a diluted earnings per share basis we earned $0.13 per share during the second quarter and $0.50 per share during the first six months.

Our second-quarter and year-to-date earnings results were significantly impacted by the merger with First Bank Corporation which was consummated effective June 1. In addition to our earnings results reflecting one month of operations as a combined organization, we recorded relatively large merger-related costs during the first six months of this year especially during the second quarter.

Merger-related costs totaled $3.5 million during the second quarter and $3.8 million during the first six months of 2014. On an after-tax basis that equates to $2.4 million, or $0.21 per average diluted share, during the second quarter and $2.7 million, or $0.27 per average diluted share, during the first six months.

We do expect to expense further merger-related costs during the next several quarters, although the exact amounts and timing are not currently known. However, we do expect the amounts to be considerably smaller than the amounts expensed during the second quarter.

The quality of our loan portfolio continues to improve, which when combined with recoveries of prior loan charge-offs has provided for negative provisions to loan-loss reserve. In addition, the level of problem asset administration costs has substantially declined. Nonperforming assets have declined over 92% since the peak level in March of 2010 and are currently at their lowest dollar volume since the year-end 2006.

We are very pleased with our financial condition and believe we are very well positioned to succeed as a strong community bank and to take advantage of lending and market opportunities.

Second-quarter highlights include our net interest margin was 3.62% during the second quarter, a 20 basis point improvement from the first quarter. Our yield on earning assets increased 10 basis points, while our cost of funds declined 10 basis points.

The improvement in both the asset yield and cost of funds was primarily a result of the merger with First Bank, as well as a lower level of low-yielding federal funds sold during the quarter. The latter primarily reflects non-merger-related loan growth, which in large part was funded through a reduction in our federal funds sold position. We do expect further merger-related improvements in the net interest margin during the third quarter when we measure the impact of the merger for an entire quarterly period.

In addition, we currently have a strong loan pipeline and any net loan growth will likely be funded via reduction in lower-yielding overnight interest-bearing deposits and federal funds sold and from the investment portfolio cash flow from monthly pay downs on mortgage-backed securities and the periodic maturities and calls on US government agency and municipal bonds.

The ongoing improvement in the quality of our loan portfolio combined with recoveries of prior loan charge-offs and the eliminations of and reductions in specific reserves have produced a positive impact on our loan-loss reserve calculations and allowed us to make negative provisions in six consecutive quarters and in eight out of the last nine quarters. We recorded a negative provision of $0.7 million during the second quarter of this year and $2.6 million during the first six months of this year.

Gross loan charge-offs during the first six months of this year totaled $0.7 million compared to recoveries of prior-period charge-offs totaling $1.3 million. We have recorded a net recovery during the past five consecutive quarters and during seven out of the last nine quarters.

Our loan-loss reserve was $20.9 million at the end of the second quarter or 1.82% of total originated loans. Despite the significantly improved condition of our loan portfolio and reduction of loan-loss reserve in terms of dollars and as a percentage of total originated loans, our loan-loss reserve coverage ratio remain substantially higher than historical averages.

As Mike mentioned, new term loan originations totaled approximately $75 million during the second quarter and we also saw a net increase in line balances, primarily due to line activity from new customers. New term loan originations totaled $121 million during the first six months of this year and the loan pipeline remains very strong.

The loan portfolio is well diversified post merger. At the end of the second quarter commercial and industrial loans comprised 30% of total loans. Commercial real estate non-owner-occupied loans were 27% and commercial real estate owner-occupied, along with residential mortgage and consumer loans, were both 19% of total loans. As a percent of total commercial loans, commercial and industrial loans and commercial real estate owner-occupied loans equaled 59% at quarter end.

The merger with First Bank also had a significant positive impact on our funding structure. As of June 30, we had a very well-diversified funding mix with non-interest-bearing checking accounts comprising 21% of total funds, interest checking and sweep accounts totaling 22%, savings and money market accounts combining for 24%, and local time deposits accounting for 23%. Wholesale funds consisting of broker deposits and FHLB advances represented about 10% of total funds at quarter end.

Problem asset administration resolution costs were slightly negative during both the first and second quarters of this year. Gains on the sale of foreclosed properties, which are netted against problem asset costs, totaled $0.4 million during the second quarter and $0.6 million during the first six months. This expense line item has been dramatically and positively affected by a lower volume of problem assets, gains on the sales of foreclosed properties, and lower instances of valuation write-downs on foreclosed properties.

Finally, we remain a well-capitalized banking organization. As of June 30, our bank's total risk-based capital ratio was 13.7% and in dollars was approximately $87 million higher than the 10% minimum required to be categorized as well-capitalized.

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

Thanks, Chuck, and good morning, everyone. While the merger of the companies and the integration of the affiliate banks was the dominant news for the quarter, we are also very pleased to report impactful new loan growth during the second quarter.

For the previous Mercantile Bank markets in Grand Rapids, Lansing, and Holland new term loans to new and existing customers increased approximately $75.4 million during the second quarter, while new lines of credit increased by $42 million in commitments. Commercial borrowings in the former First Bank markets are up $25 million over 2013 when comparing year-to-date averages.

During recent quarters we had talked about the healthy loan pipeline that has developed as a result of the relationship building efforts by the sales staff. The loan growth witnessed this quarter is a direct reflection of those developmental activities. This community banking approach resonates well in our markets and, as a result, new opportunities continue to be created with our clients and prospective clients.

Competition for these customers remains quite intense, but the Mercantile team continues to successfully engage businesses and individuals in our markets with leading products, top-notch service, and a value-added approach to banking. Despite the volume of new loans booked during this past quarter the new loan pipeline continues to be strong, boding well for activity in upcoming quarters.

Asset quality continues to be strong with the loan staff working with customers to improve distressed credits and get them off the problem loan list or in collateral-dependent situations liquidate the collateral and minimize losses. Our conservative valuation approach continues to be reflected through gains on sale of other real estate as the property is sold. 30- to 89-day past dues remain in very good shape.

Regarding the integration and systems conversion of the affiliate banks, our conversion teams are executing the comprehensive plans that were developed over the past several months by our transition teams. We are very pleased with the progress thus far and remain steadfastly committed to creating minimal disruption for our customers.

We are appreciative of the tremendous efforts of our staff as well as the assistance and contributions of our technology partners. We look forward to completing the integration and moving ahead, realizing the tremendous opportunities that we have as a combined organization.

Those are my prepared comments. I'll be happy to answer any questions during the Q&A and I will turn it back over to Mike.

Thank you, Bob, and also thank you, Chuck, for your comments. Operator, at this time we would like to host a Q&A session.

(Operator Instructions) Damon DelMonte, KBW.

Good morning, guys. I guess my first question just kind of talking a little bit about the loan growth.

You guys commented on the new term loans that were originated. It looks like C&I was a big driver of that growth. Could you just talk a little bit about what was behind that and maybe give a little color on some of the credits that you are seeing?

As we talked about it in previous quarters, a big thrust of ours and initiative was to create some better balance in our loan portfolio. Obviously, with the merger a lot of that was brought about through that process, but we talked about getting more C&I in our portfolio. And as we talked about the culling efforts that have been going on for the last year-and-a-half or two years are really starting to get some traction for us now.

We are seeing new C&I customers coming into the bank in a wide variety of industries. There is not a real huge concentration in any one area. However, we are very pleased to see customers that have the need for lines of credit and term loans and owner-occupied mortgages. That is giving some good balance to the strong commercial real estate sector that has always been a strong part of our portfolio to begin with.

So the pipeline, as it stands right now, continues to be containing a lot of the C&I activity in there as well. We hope to continue that balance of the CRE and the C&I that we hope to maintain, as Chuck alluded to in his comments, as well.

Okay. If you guys were to kind of look at the combined operations of the two banks now and look at a forecasted rate of growth for the back half of this year, what would be an attainable level do you think?

That is a great question. I think we are trying to get our arms around it because, as we have noted a few times, last quarter was fantastic in growth. I think about a 7% linked-quarter rate. I am a little reticent to say going forward for the rest of the year that that will continue; however, we do have pretty strong backlog.

Again, if we could get some of these deals closed, which we think we can, we certainly think a good 3% to 4% rate may be obtainable.

The other thing -- this is Chuck. The other thing that we have that will help loan growth is that over the last six to nine months or so we have booked quite a few construction deals, development deals that are starting to fund or that will start to fund here in the third and fourth quarter. So we will get some assistance with our loan totals from those fundings as well.

Lines of credit, as I mentioned, were also up during the quarter. That is always a volatile component of the loan portfolio, but hopefully, based on the draws that we are seeing, that is an indication of increased activity by our commercial customers and hopefully that will continue.

The other thing -- again, it is Mike. Damon, the only thing that is always a tricky thing as well, as I am sure you are hearing this across the country, but it is a very competitive environment out there from a rate standpoint.

So if we were to abandon our margin discipline, we would be very comfortable in telling you that it is going to be a really strong loan growth quarter. But we take great strides to make sure that we win the deals on the relationship while being competitive on pricing, but not to the point where we destroy our margin.

Okay, great. I guess kind of just segueing into the margin. Chuck, could you describe some of the accounting impact on this quarter's margin? Can you maybe quantify what the accretable yield impact is and maybe give us a little more guidance as to what we could expect of an impact for next quarter?

Yes, as per your question, there is a lot of moving parts here. To answer the easiest question, in the month of June we booked about $375,000 in accretion into interest income. That is based on an estimate.

While we have completed our day one entries, certainly we continue to reevaluate our estimates as we get additional information in. So while I give you that $375,000 I will say that it is predicated on a forecast. We feel good about it; we did use it. But, again, we will continue to reevaluate the total accretion amount, but obviously actual performance will impact that number as well.

As both Mike and myself mentioned, and I am sure as you know, there is just one month of the quarter of the combined operations in there. One of the things that excited all of us in regards to the merger of the two corporations was the benefit to the margin that we were going to see. We have already started to see that with the improvement in the margin.

Again, the first quarter margin was down quite a bit because, as a stand-alone, we had an exceptionally high level of overnight investments, primarily Fed funds. We have brought that down very, very significantly.

As a matter of fact, while both companies had excess overnight liquidity, especially Mercantile, for this month we have been operating with only about $50 million in overnight liquidity compared to probably at least $100 million, if not $150 or higher million in the several quarters prior to that. So that is benefiting the margin as well.

But certainly as we go forward and in my comments, as I mentioned, if we keep the overnight liquidity low like we think we will and then we also start using some of the cash flow out the investment portfolio to fund loan growth that will obviously benefit our yield and overall margin as well. Cost of funds, when we get the full quarter of the combined operations we should continue to see some benefit from that as well.

Obviously, some moving parts there. We look forward to the third quarter and beyond to get to that more of a core net interest margin and manage our balance sheet appropriately to maximize that margin, not only in the short term but make sure that we are doing the things that we need to do to protect the margin in the long run, which certainly may have somewhat of a negative impact on short-term margin. But, again, just try to balance that as we go forward.

Okay, that is helpful, thank you. Then I guess just one more quick question just on the expenses.

If you take out the $3.5 million of nonrecurring you are at about $12.6 million or so, call it, operating expenses for the quarter. So that reflects only one quarter of the impact. Can you give us directionally a little bit of some guidance there as to what would be a decent level run rate kind of for the back half of the year?

We are still working through that as well as we analyze that second-quarter number, because that is a number that obviously we were all over as well. There has been I would say virtually no, but I would say there has been very little in the way of cost saves going through. And when we were looking at our cost saves obviously the vast, vast majority were in the overhead component. Not just the salaries and benefits, but also certainly the other as well.

As we go through the conversion, especially in the operations area, there have been some duplicative services. Now that we got the operations conversion done a week-and-a-half-ago we can start letting some of that stuff go and just be on the one system for all of our products and offerings.

There is some duplicative expenses there in the second quarter. There will be a little bit more in the third quarter, but as we go through the quarter and certainly the rest of the year those numbers will be coming down.

As Mike alluded to in his opening comments, we feel very good about our estimates that we put out almost a year ago now in regards to the cost saves and some of the synergies that we thought we were going to get on a core basis. It is just more of a timing issue in regards to putting the companies together effective June 1, getting the companies together from an internal standpoint, and then getting the benefits.

But we have obviously already started working on reducing the number of vendors. The expenses of a combined organization are already starting to decline; it's just going to take a while to get that out through the income statement. But we are making headway and certainly by the end of the year we will certainly expect that the savings will be in our income statement as we go forward.

Okay, thank you very much. Appreciate all the color this morning.

John Rodis, FIG Partners.

Good morning, guys. Mike, maybe just a quick question for you. You made the comment I guess as far as loan growth a couple of minutes ago, I think you said 3% to 4% in the second half. Is that 3% to 4% per quarter you were thinking maybe?

Yes, if I were to go out on a limb, that is probably looking at it today I think a fairly solid number. But, again, also if you remember in my comments, a lot of stuff that you look at in July it looks like it has got a pretty good chance of getting booked. There are sometimes some rate games that get played that we don't get, but as both Chuck and Bob have alluded, the backlog is pretty strong right now.

Okay. As far as the growth in the second quarter, the core growth, excluding the acquisition; was there any bigger loans in there that sort of drove that growth or was it fairly granular?

I would describe it as several different commercial loan relationships that are really within our sweet spot in the range of $5 million to $10 million to $12 million. I think you will see some that are bigger, some that are smaller. But the bulk of the growth has come in that range and I think it is what we described as loans that we do very, very well and the pipeline is reflective of that, too.

It really does come from all over as Bob said, John. Right now our larger competitors are a little bit unfocused in the market and Mercantile really has a strong reputation as a good, solid commercial lender.

In addition, over the last year, year-and-a-half we have hired some new people that have come from some of those larger competitors. They have been able to bring some relationships with them and you combine that with our normal bread and butter what we do here, it has been a real nice combination.

Okay, okay. Chuck, maybe just a follow-up question for you on the margin. I think you said it could come down longer term, but I think near term directionally it probably still goes up some. Is that correct?

Yes, once we get a full quarter of the combined companies together definitely expect that to go higher than what it was in the second quarter as we get into the third quarter.

Okay. Mike, maybe just a final question for you. Just sort of given what you guys have been through over the past six, nine months with the deal, what are your thoughts on future acquisitions going forward?

Well, I think the answer pretty much is the same as it has been since we emerged out of the Great Recession and that is we like to position the Company to take advantage and leverage any opportunities on an M&A standpoint that might show themselves. You have been following us long enough to know that is kind of how we have always answered it.

I think we would look at opportunities and when First Bank came along it was the perfect combination for us; made a ton of sense. That being said, I think we also are very fond of organic growth and that has been the name of the game for most of our existence so far. So short answer on that is that we work hard to make sure that we are gaining market share through the organic means. But after we have had this digested and if there is an M&A deal that makes some sense, we like the fact that we have the flexibility to consider it.

How long do you think you are sort of on the sidelines as far as getting this deal assimilated and so forth?

Well, you are not going to get a date out of me, but I think we have got work to do on making sure that all of the things that we wanted to hit as far as goals and taking advantage of this merger, we want to make sure and be absolutely positive that those are happening. It is going extremely well so far, so we have no reason to believe that they aren't.

And at the same time, we are seeing some nice organic growth. We know there is opportunities to increase our commercial lending and other sales in some areas that we have never had exposure to before with our combination with First Bank. I think job one is to make sure the merger opportunities get leveraged; we are well on our way with that. And just to see what happens down the line.

Okay, fair enough. Thanks, guys.

Daniel Cardenas, Raymond James.

Good morning, guys. Going back to the loan discussion here. I guess as we look at the $75 million in growth this quarter how much of that was from the Mercantile franchise versus the First Bank franchise?

That $75 million was solely from the Mercantile franchise.

Okay. And then looking forward, just given your enhanced size now, is there a -- what is your new legal lending limit and your new in-house lending limit? And then maybe what is your appetite for going after credits that are kind of outside that $5 million to $10 million or $12 million range you were just talking about?

Yes, in regards to the amounts, I think our previous legal lending limit was a little bit north of $35 million. Under the combined and given the state law, we are well over $80 million, but I don't think you are going to be seeing any $80 million credits anytime soon. So from that standpoint I will turn it over to Mike or Bob to comment on the in-house.

Dan, I think it is nice to have a larger legal lending limit, but we have no plans to get anywhere close to that summit. It is just nice to have that flexibility.

But we really -- what we see is pretty much the same, our wheelhouse or relationships between $3 million and $15 million, lots of them smaller than that as well. But that is really what we see in the Grand Rapids market, somewhat smaller deals in Mt. Pleasant, Kalamazoo, and that type of thing that, but it is good to have that flexibility.

I think really the bottom line is that we are well-equipped to handle any of the financing needs of most of the companies and individuals in all of our markets. And as Mike said, that includes some of the bigger credits in some of our bigger markets as well as some of the very profitable businesses in some of the smaller markets as well.

I think obviously legal lending is important when you are looking at the size of the credit, but I think the thing to always remember too is that we can bring a full array of treasury management services that these larger companies, especially on the C&I side really need and are demanding. And as everybody knows that has followed us, we are always on the forefront of what we can offer from a Treasury management standpoint.

We have got a legal lending limit to handle any lending needs of any customers who want to borrow, but we can also competitively -- compete against our competitors in regards to the products and services that we can offer and be a really good partner with the borrowers that like to come to Mercantile Bank.

Good, good. Then maybe in terms of utilization rates, is there a number that you can point to as to what second quarter will look like versus first quarter?

As far as lines of credit?

Yes, sir.

Yes, I think it has been pretty stable. We did have, I think as Bob mentioned, some growth in lines of credit so net growth. Obviously, a lot of moving parts there, but a lot of that net growth in lines was from our newer borrowers that we booked. Obviously, the term loans we already gave the number but they also came with lines of credit and we saw them borrowing those lines.

I think on an overall basis I don't think we saw any significant impact to our overall utilization rates online.

Then one last question and I will step back. Just in terms of the growth that we saw this quarter; if you can categorize it, how much of that do you think was market share grab versus people kind of coming off of the sidelines and starting to borrow for growth's sake?

I think it is a combination of both. I think if you look at, as I believe Mike mentioned, we have some new loan officers that have come on board and gained us the ability to contact and engage some businesses that maybe we haven't had opportunities previously. Then you see some existing customers that are seeing some opportunities for growth and expansion that we have been waiting to see for a long time. And it is happening in individual cases.

It has been a good combination of new opportunities and new markets for us, as well as increased growth with existing portfolio customers.

Would you say it is about 50/50 then?

I wouldn't attach a percentage to it, but I would say from my view it is pretty balanced.

All right. Thanks, guys.

Stephen Geyen, D.A. Davidson.

Good morning, guys. You touched on it a little bit with Dan's question, but as far as the line commitments, I think you had said that the new loans part of it came with term loans as well as some lines. Just curious about the lines. I think you had mentioned $42 million.

How much of that is commercial real estate or construction development loans that are likely to be filled over the next couple of quarters?

I would say be majority of that number is C&I, commercial and industrial.

All right, that is what I needed. And then maybe just a little bit more on the margin, just trying to figure out where we are going to go from here.

The $50 million in Fed funds down versus $100 million previously, what was the impact versus when it occurred in the quarter? If there was like a full-year benefit quarter to quarter, what was the impact during the quarter, first quarter to second quarter, so we can maybe hopefully back into a little sharper number for third quarter as far as the margin?

Stephen, this is Chuck. I don't have that in front of me. I know I calculated it; I just don't remember it and I don't want to throw a number out here on the phone. But I will tell you from a timing standpoint the average of our short-term Fed funds basically in the first quarter was pretty consistent.

What we saw with all this loan growth that we are talking about this morning, a vast majority of that came towards the end of the quarter so we definitely will continue to see some reduction in our short-term investments, if you will, or Fed funds or interest-bearing deposits. Our average short-term investments for the second quarter was about $90 million, so like I said, we are running around $50 million on that right now. But it was almost $100 million -- just Mercantile alone in the first quarter was about $115 million.

Sorry, I don't have a specific number for you but there is still some benefit there as this loan growth that we got in the second quarter we get the full benefit of the interest income as we get into the third quarter.

Okay. All right, thank you.

(Operator Instructions) Eric Grubelich, private investor.

Good morning. Just wanted to clarify something. When you were talking about the expenses before it sounded like the initial cost savings and synergies that you described last year are intact. Did I get a sense that maybe the timing of how that comes in has been a little bit stretched out or not going to plan or did I misunderstand, I think it was Chuck?

Yes, this is Chuck. It is more of a timing issue. Obviously, we thought the merger would be consummated quicker than what it was, but like we said, we still feel confident with the numbers, with the cost saves. It is just a matter of when those actually come into play.

And just from an operational standpoint, again there was some duplication there. What we wanted to do is make sure that this merger had no impact whatsoever on our current customer base so we were very, very cautious going through the operations conversion.

Which we sit here as executives and say what it happened this weekend, we flipped a switch. I can assure you it was a tremendous amount of people investment and some capital investment for many months to make sure that this conversion happened properly. And while a lot of things, the vast majority, did happen a couple of weeks ago we were already making some changes once the merger was consummated on June 1.

Maybe we -- I'm not going to say we spent more money than we had to, but we wanted to be very, very cautious on our approach. Again, to make sure there was no negative customer impact to any of our conversions, whether that is debit cards, obviously our mainframe, ATM systems, all that. So there was some duplicative services, made sure that we had the right people involved. Obviously there was some overtime involved as people were working lots of nights, lots of weekends.

The expenses were probably a little bit higher as part of putting the companies together than maybe what we were expecting, but we thought that was the right thing to do. And, ultimately, the cost saves that we did calculate a year ago are going to come to fruition, now it is just a matter of exactly at what point those happen. I can assure you that some of those are already happening and have already happened and they will continue to happen as we go forward over the next several months.

Specifically, Eric, to be clear, we expect that we are right on track with the cost saves that we estimated. If anything got stretched out it was putting the actual merger together, the actual execution date and that was a regulatory issue that we have talked about a lot.

But as Chuck said, everything has been put in place so there was no customer disruption. And if you go back to when we announced the merger back last August, we were pretty clear that those cost saves are going to take a year to be fully felt. So as we look at a June 1 closure you are seeing the great majority of the cost in this quarter and we will start to see the cost saves, just as we predicted, as the next few quarters rollout.

Thanks for that detailed answer. Then just one thing, any changes in the lending ranks at all that you maybe didn't want to see?

None at all. As a matter of fact, as time goes on we continue to get a stronger and stronger reputation as the preeminent commercial lender for small to medium-sized business. I think, if anything, the merger just raised our profile and gave us even more exposure to people across Central and West Michigan who might want to join our team.

Okay, sounds great. Thanks a lot.

You bet. Thank you.

Daniel Cardenas, Raymond James.

Just a quick administrative question here. What were your TDR balances at the end of the quarter?

You know, Dan, I don't have those with me but I would be happy to share them with when I get back to my office. Sorry about that.

All right, no problem. Thanks, guys.

As it appears that there are no more questions, I would like to end the question-and-answer session and turn the conference back over to Mike Price and Tom Sullivan for any closing remarks.

Thank you. Mercantile's momentum is increasing and our team is motivated and dedicated to building on our success. As I stated earlier, our long-standing relationships and proven excellence in community banking are serving us very well as we continue on the path of achieving efficient, profitable growth.

Thank you all of you for joining us this morning and for your interest in our company. We look forward to talking with you again. At this point we would like to end the call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.