Mercantile Bank Corp (MBWM) 2014 Q4 法說會逐字稿

Good morning and welcome to the Mercantile Bank Corporation fourth-quarter 2014 earnings results conference call. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Robert Burton with Lambert Edwards. Please go ahead.

Thank you, Andrew. Good morning, everyone, and thank you for joining Mercantile Bank Corporation conference call and webcast to discuss the Company's financial results for the fourth quarter and full year 2014. I'm Bob Burton and with Lambert Edwards, Mercantile's Investor Relations firm. Joining me are members of their management team including Michael Price, 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 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 President and Chief Executive Officer, Mike Price. Mike?

Thank you, Bob. Good morning, everyone. Thank you for joining us to discuss our fourth-quarter and full-year 2014 results for Mercantile Bank Corporation. On the call today our CFO, Chuck Christmas, will provide details on our financial results, followed by COO Bob Kaminski, with his comments regarding growth initiatives, merger integration, and asset quality.

Hopefully you have all had a chance to review the quarterly performance, which was highlighted by a return to solid loan growth as well as further progress on our successful integration of the Firstbank operations. The fourth-quarter results completed a truly transformational year for our Company.

As part of our strong capital position and our commitment to shareholder return, we earlier today announced a quarterly cash dividend of $0.14 per share, which was a $0.02 per share or 17% increase from last quarter's dividend. Looking forward to 2015, we see opportunity to participate in the continuing economic recovery of Michigan as Michigan's premier community bank. Our business activity levels reflect the overall continued gains in employment and business expansion that are being reported for Western Michigan and particularly the Grand Rapids market. The third-quarter study of the regional economy found that employment in West Michigan grew by 0.3%, a gain of nearly 2,500 jobs, on increases in goods producing and government employment. The area's economic indicators were positive, suggesting job growth will continue through the coming months.

Having noted that the trends are positive, I would also point out that they are only modestly so. Mercantile's loan growth in the fourth quarter improved from the third quarter but remains below the gains we saw earlier in the year. We remain very competitive in the market on a rational and disciplined basis as our emphasis on relationship banking provides us with competitive advantage and allows us to gain market share.

Our expanded market area as a result of the merger also provides us with new opportunities over the coming year. We look for continued loan growth in the mid to upper single digits over the coming year.

The overall interest-rate environment and continued pressure on the yield curve will continue to affect (technical difficulty). Pressure on net interest margin is a factor for all banks and we are no exception. Our outlook is for a steady margin over the coming year. Mercantile is fortunate that our cost of funds to learning asset is reflecting the expected benefit of the merger with Firstbank. This ratio stabilized at 0.44% for both the third and fourth quarters of 2014, significantly below Mercantile's 0.84% in 2013. And as a consequence, we are getting the full accretion to earnings that we expected. Now, this competitive advantage enhances the spreads at which we can do more business in the future.

Likewise, reflecting continued pressure on yields, mortgage banking income rebounded in the fourth quarter of 2014, improving more than 20%, but continues to run at a rate below what Firstbank and Mercantile combined achieved a year earlier.

Our markets continue to be extremely competitive, but we are encouraged that our pipeline for loans remain strong, as Bob will discuss in a moment. We have a great team in place and look forward to new activity as the year progresses.

At this time, I would like to turn the call over to Chuck.

Thanks, Mike. Good morning, everybody. This morning we announced net income of $6.3 million for the fourth quarter of 2014, a net income of $17.3 million for all of 2014. On a diluted earnings per share basis, we earned $0.37 per share during the first quarter and $1.28 per share during all of last year.

Our fourth quarter and year-to-date earnings results have been significantly affected by the merger with Firstbank Corporation, which was consummated effective June 1. In addition to our earnings results reflecting seven months of operation as a combined organization, we recorded relatively large merger-related costs during 2014. Merger-related costs totaled $0.4 million during the fourth quarter and $5.4 million during all of 2014. On an after-tax basis that equates to $0.2 million or $0.01 per average diluted share during the fourth quarter and about $3.8 million or $0.28 per average diluted share for all of 2014. We do not expect any further significant merger-related cost in future periods.

We are pleased with our financial condition and earnings performance and believe we are very well-positioned to take advantage of lending and market opportunities and deliver success as a strong community bank for our shareholders. Our net interest margin continues to reflect the benefit of the Firstbank merger. We recorded a net interest margin of 3.79% during the fourth quarter of 2014 and an average of 3.87% during the third and fourth quarters. This compares to the first and second quarter of 2014 average net interest margin of 3.52%. The majority of the improvement reflects Firstbank's lower cost of funds and purchase accounting entries relating to fair value adjustments associated with the merger.

Our net interest margin during the fourth quarter of 2014 declined when compared to the third quarter of 2014, primarily reflecting a higher volume of low yielding overnight investments. In addition, our third-quarter net interest margin was positively affected by the collection of higher commercial loan prepayment fees and the receipt of interest on a nonaccrual loan that fully paid off during the quarter.

We recorded loan discount accretion totaling $1.5 million during the fourth quarter and $3.2 million since June 1. Based on our most recent valuations we currently expect to record further loan discount accretion totaling about $1.2 million per quarter during 2015. Actual accretion amounts recorded in future periods may differ from our forecast due to a variety of reasons including periodic reestimations and the payment performance of the acquired loan portfolio.

We recorded time and FHLB advance amortizations totaling $0.6 million during the fourth quarter of 2014 and $1.4 million since June 1. We expect to record further amortizations totaling $0.6 million during the first and second quarters of 2015 and $0.2 million during the third quarter of 2015. As we noted in prior merger-related SEC filings, these particular fair value adjustments will be completed at the end of July this year.

We have also recorded trust preferred security amortizations since the merger was consummated totaling $0.2 million during the fourth quarter and about $0.4 million since June 1. Unless we call all or part of our trust-preferred securities, which currently we have no plans to do, we expect to report further amortizations totaling $0.2 million per quarter into the year 2036.

We expect our net interest margin to be in a range of 3.80% to 3.85% during the first and second quarters of 2015 and then decline slightly to our range of 3.75% to 3.80% during the third and fourth quarter of 2015. The primary reason for the anticipated decline is due to the elimination of the time deposit and FHLB advance amortizations in July. While the ongoing very low interest-rate environment continues to exert compression pressure on our net interest margin, we expect to use low yielding excess overnight investments and cash flows from monthly paydowns on lower yielding mortgage-backed securities and periodic maturities and calls on lower yielding US government agency and municipal bonds to fund a large portion of our expected loan growth throughout 2015.

Reflecting the market's current 2015 interest-rate forecast, which includes a 25 basis point increase in the federal funds and prime rate during the third and fourth quarter, we have modeled such increases as part of our 2015 budget process. Per our net interest income simulations disclosed in prior form 10-Q's and 10-K's and as confirmed in our budget process, the forecasted increases in short-term interest rates are expected to have only a nominal impact on our net interest margin.

Overall quality of our loan portfolio combined with recoveries of prior-period loan charge-offs and the eliminations of and redemptions in many specific reserves have produced a positive impact on our loan loss reserve calculations and allowed us to make no or negative provisions in eight consecutive quarters and in 10 out of the last 11 quarters. We recorded no provision expense during the fourth quarter of 2014 and negative revisions totaling $3.0 million during all of 2014.

Gross loan charge-offs totaled $0.5 million during the fourth quarter and $1.5 million during all of 2014. Recoveries of the prior-period loan charge-offs totaled $0.1 million and $1.7 million during the same time periods, respectively. And for all of 2014 we recorded a net recovery of $0.2 million.

Our loan loss reserve was $20 million at the end of the fourth quarter or 1.54% of total originated loans and remain higher than our historical averages. We recorded non-interest income of $3.3 million during the fourth quarter of 2014, a 15% improvement over the third quarter. We recorded improvement in virtually every fee income category with a 21% improvement in mortgage banking income leading the way.

Knowing that mortgage banking income can be difficult to forecast, we currently expect non-interest income to come in around $3.0 million to $3.3 million per quarter in 2015. Non-interest expenses during 2014 were significantly impacted by merger-related cost totaling $0.4 million during the fourth quarter and $5.4 million for the whole year. As noted earlier, we expect no further significant merger-related costs in future periods.

As originally projected, we expect to realize savings of approximately $5.5 million annually. We realized a portion of the cost savings during the third quarter, and we realized the vast majority of them by the end of the fourth quarter. We expect to realize 100% of the estimate for all of 2015.

We are currently projecting quarterly non-interest expenses to total in the range of $18.7 million to $19.0 million during 2015. Our effective tax rate for 2015 is expected to be around 31% to 32%. We remain a well-capitalized banking organization. As of December 31, our bank's total risk-based capital ratio was 14.4% and in dollars was approximately $101 million higher than a 10% minimum required to be categorized as well-capitalized.

Those are my prepared remarks and I'll turn the call over to Bob.

Thank you, Chuck, and good morning, everyone. In the fourth quarter Mercantile returned to a net growth position in its loan portfolio with funding of over $90 million in loans to new and existing customers. The relationship development approach employed by our calling officers continues to resonate positively with clients and potential clients. We remain steadfastly committed to the mutually beneficial value-added style of banking as opposed to focusing mainly on price, as has been the primary tactic of many of our competition. With our knowledgeable staff of bankers we are able to generate comprehensive banking packages with cash management products including our payroll processing to service all of a client's financial needs.

Fourth-quarter funding was generated in the fairly balanced fashion over a wide range of loan types including non-owner-occupied real estate, owner-occupied real estate, and commercial and industrial lending. Mercantile should benefit with a good tailwind from construction funding over the course of 2015 as we presently have about $150 million in commitments where the building construction has begun and advances have started to fund.

Our loan pipeline remains strong as we enter 2015, and we are projecting net loan growth in the range of $180 million to $200 million for the year. While we expect loan growth in all of our markets, we anticipate the most significant opportunities will be available in Grand Rapids, Kalamazoo, Lansing, with a meaningful growth also in Mount Pleasant and Cadillac. While competition remains quite intense in these and all of our markets, we continue to be encouraged and our calling staff is energized by the response to our client outreach efforts.

With a significant part of the merger integration and transition complete, we are now embarking on some major revenue enhancement, expense mitigation, and efficiency initiatives. One tremendous opportunity we are seizing with the merger is the introduction of our full suite of treasury products into our new markets. Our staff is already identifying clients and potential clients who would benefit from these products, and this outreach has been well received.

Another project focuses on leveraging retail mortgage opportunities, especially in our largest market in Grand Rapids. We're also looking at potential sources of new non-interest income involving fee structure and frequency with a special focus on relationship-based pricing on various products. Additionally, we have an initiative that focuses on gained efficiencies in all areas of our organization including revisiting processes and procedures, vendor relationships, and supply procurement as well as facility maintenance issues. Finally, we are exploring new customer sales opportunities resulting from customer dislocation as some of our competitor banks have been recently acquired in our markets.

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

Thank you, Bob. And also thank you, Chuck, for your comments. Andrew, at this time we would like to open up the conference for questions.

(Operator Instructions). Damon DelMonte of KBW.

I just -- [I'm ready to] start off with one of the last things that was being discussed regarding like looking at facilities and things like that. Is that more of a broad-based expense initiative you're looking to employ in 2015?

We are looking at it as how we manage our facilities on a global basis, because prior to the merger our facilities were handled in different manners throughout the organization. Looking to centralize everything so it's done consistently, in a manner that's consistent throughout the Company. And it will take some of those responsibilities away from the people that are on the front lines and allow them to do more positive things, such as selling to customers. So taking some of those backroom functions and centralizing them for gaining efficiencies.

Okay. And with that include the actual physical location of branches throughout the footprint? Do you have any intention of doing some sort of branch optimization?

We are looking at a wide range of opportunities within how we do business in our branches and making sure that it's consistent, so a customer has a consistent experience as they go into any of our locations. And so, the initiative is pretty broad based and we will look at a wide variety of potential opportunities for efficiencies.

Right now, Damon, it's really focused on the operational part rather than looking at branch-by-branch profitability. However, that clearly is always on our radar from time to time, to review. But the real focus, as Bob said, of this particular initiative is the general overall operating efficiency of the bank.

Got it. Okay, that's helpful; thank you. And then a question on the margin, probably for Chuck. If I look at the yield on loans quarter over quarter, they went from 503 down to 490. I know you had mentioned there was some prepayment income in the last quarter's results. How much of that 13 basis point decline was related to the excess commercial income from loan [pads]?

The reason why you see that decline, Damon, was, as you mentioned, the prepayment penalties that we collected during the third quarter. And then we also had a nonaccrual loan that paid off in full that had a pretty sizable accrued interest balance that, obviously, we weren't accruing for but the customer owed us. And that accounts for virtually all of it -- a vast -- I shouldn't say virtually -- a vast majority of it.

The other reason would just be, as we talk about and I'm sure all the banks are talking about is it's a low-rate environment. And when we are putting loans on, they are typically at a rate that's lower than what our average rate is. And certainly, I think Mike touched on it briefly, it's very competitive out there. And while we are obviously trying to stick to our policies and our guidelines, it does put pressures on the loan rates that we get when we are putting new deals on the books.

Damon, there's one other contributor to that. And that is we did put a large loan on nonaccrual, I believe, in the fourth quarter.

Yes; that was going to be my next question. Could you give a little bit more color around that relationship? I think it was around $22 million.

That would be correct. It's obviously one of the larger credits that we have in the bank. It has been struggling, yet there are some signs that things have stabilized little bit. But obviously, we don't expect that type of event to happen again this quarter; we don't have anything on our horizon that looks sizable at all going into the nonaccrual bucket. But it is in an active workout situation. It's a very cooperative situation between the customer and ourselves, and we hope to have a fairly positive resolution to it. But it may take some time, as credits of this size do.

And just from a numbers perspective, that was about two basis points off of our margin for the fourth quarter compared to the third. We did put that in nonaccrual at the end of November or early December.

Okay. Was that disclosed as a TDR in the Q, by chance?

Yes. We disclosed that as are performing TDR as of September 30. And it was during the third quarter that we put that into TDR status, but it was still on accrual. So the change in the fourth quarter was to actually put it on nonaccrual.

Got you. All right, so it's the same credit? It's not an additional --

Right.

Right.

Okay, good to know. Okay, that's all I had for now. Thank you.

Matthew Forgotson of Sandler O'Neill & Partners.

Just to follow up on the non-performer, can you give us a sense -- is this loan paying as agreed right now? And have you charged any of it off to date? And is there a specific reserve attached? Just trying to get a sense of overall exposure.

Sure. To answer your questions, when we put the loan on nonaccrual it was current with payments. As we go forward we may change the payment structure to give the company some relief in some its cash flow issues. But that would be a positive thing because that means that we are still working with them and we think we see light at the end of the tunnel.

So, yes, it was current when we put it on nonaccrual. We are just being very, very conservative in the treatment.

Have we charged anything off? No, we haven't. Like all loans, there is a reserve against that. But as you can imagine, being a nonaccrual loan, that reserve is larger than the general population of loans. Do we have an estimated loss at this time? It's a little difficult to see from the standpoint of either this company had some options available to it. It's a distribution company in the agricultural business and there's quite a bit of interest in people purchasing either the company as a whole or purchasing the assets, or the company returning to profitability. They've made some significant changes in their operating structure that could make this return to an operating loan.

So it's kind of, right now, really in the early stages of a rather significant workout situation. But we like the way it's headed.

Okay. So I'm not going to press, but it doesn't sound like you want to volunteer a dollar amount for the specific reserve help against this loan.

Well, I'm not sure it would be accurate or helpful to do so. I'm going to tell you we are not going to lose $22 million. So anybody that thinks that this is, boy, you know, that big of an exposure -- but it's really hard. It is probably a week-to-week change in dynamic, depending on how the company is being managed and how its relationship is with us. But I would characterize it as I'm less concerned about it today than I was a month ago. But it is still in an active workout situation.

Okay. And then just how many of those loans do you have in the portfolio, just call it north of $20 million? And I know that they are all performing, but any granularity there would be helpful.

Sure. We probably have a handful of loans that are north of $20 million. One of the things that we spend a lot of time doing and we went back and did recently for our Board as we discussed, as you can imagine, since we put the merger together our legal lending limit is massive. And we don't go anywhere near where that number is.

One of the things we did is we went back to the Great Recession and analyzed the portfolio and looked at our largest 20 credits and how they performed vis-a-vis the rest of the portfolio. And while they had the same uptick in percentage delinquency and loss, as a whole those larger loans performed significantly better than the portfolio as a whole. Again, that should be that way because those loans tend to have better quality cash flows, better quality management, stronger guarantees, and stronger collateral. But we keep an eye on that fairly closely.

I think from the standpoint of the largest credits of the bank that there is some very good diversity in terms of types of credits, potential loans that are comprising the biggest credits in that bucket.

Okay. And then lastly, and then I will hop out, just trying to get a sense here of earning asset balances as we trend across 2015. It sounds to me like you are going to continue to redeploy cash flows from securities and cash into loans. Does that mean that earning asset growth will be relatively muted across 2015?

Yes. We are looking for growth in earning assets of probably around 1%, 1.5% net.

Okay.

So, yes, as I mentioned and as you alluded to, the vast majority of the net loan growth we do get is expected to come from a reallocation of earning assets.

Thank you very much.

And that certainly supports a stabilized margin.

Thank you.

John Rodis of FIG Partners.

This might be a question for you, Bob. Could you just talk about the level of paydowns you saw during the fourth quarter relative to prior quarters, I guess?

You know, level of paydowns probably pick up in the fourth quarter and muted some of the growth that we would have seen otherwise. And payouts for a variety of reasons -- there weren't any payouts that left the bank because they were dissatisfied with the bank at all; it was the customer sold the assets, paid off the loan, company or entity took the financing to secondary market, financing with insurance or HUD or something like that.

So a variety of reasons, and we try to get our arms around them. Sometimes they pop up in unexpected situations. But I think we continue to manage that process and continue to be encouraged by the growth that we did see on a net basis. And with what we have in the pipeline right now, while I'm sure we will have some payouts in 2015, there's nothing on the horizon right now that looks like it's a huge detractor from the growth. But as I said, sometimes those things are a little bit unexpected.

Okay. And Bob, could you just maybe talk a little bit more about the new lenders in the Grand Rapids and Lansing market? And were they from your banks or smaller banks or --?

Yes. Probably came from a variety of different situations. You will see some that have come over from bigger banks, competitor banks, some others that may have come from smaller banks but they maybe had spent some time with larger banks in the course of their career. But really, what we're looking for when we bring commercial lenders onboard or any type of lender or employee is a good, well-skilled person that we can teach how we do business in Mercantile Bank. And we feel we've got some nice additions with these folks and have a nice contact list through years of banking in our various markets and are encouraged by what the potential for them holds for 2015 and beyond.

Okay. And Mike, maybe just one quick question for you, just your thoughts on the M&A environment. Obviously, there continues to be some deals in your Michigan markets. And then where do you think Mercantile stands today as the ability to do deals going forward?

That's a good question, John. There clearly is a lot. And I know you've noted, as many people have, a lot of M&A activity going on in Michigan at some fairly hefty prices, which is one of the reasons why we, along with obviously wanting to make sure we digest this first bank merger very well, which we have. The neat thing about us is when you look at our capital position, the success we had in integrating the merger we closed and where we stand in an ever-dwindling number of Michigan [data file] banks, we can choose to participate in M&A activity or not, or we can choose to focus on organic growth, which is always our favorite way of growing, or do a little bit of both.

So where we are right now, John, is we listen. We are an active participant in seeing what is going on out there. But we try to be, just like we build our organic portfolio, very disciplined in making sure that we check to our shareholders and any dilution that we may expose them to has a proper earn back and a proper -- the resultant Company is properly strong enough to justify doing it. So, we are in the listening mode and sometimes a talking mode. What if we didn't do a deal, as I've said in 16, 17 years doing this job at Mercantile, if we didn't do a deal in the next couple of years it wouldn't surprise me. But if we did one, that wouldn't surprise me either. That's really -- hopefully, you don't think it's too evasive. But that's exactly where we are at.

I hear what you are saying. And maybe just one final question for you, Chuck, just to follow up on the one large credit that you moved to nonperforming -- you said that's still paying as agreed under the -- I guess, as you restructured it or --?

I think, as Mike noted, it was paying as agreed when we put it on non-accrual and it continues to pay as agreed. I think what we are trying to say is that, as we work with a borrower, we may from time to time restructure what they do have to pay to us, in trying to help them right the ship, if you will. But they continue to make -- all the interest payments they continue to make. So it's still coming in. But again, we have taken the conservative approach and put it on non-accrual. And any payments we do get, from a book standpoint we are putting 100% to the principal balance.

Okay, fair enough. Thanks, guys.

Daniel Cardenas of Raymond James.

I just had a quick credit quality question. Maybe if you could just, more for housekeeping purposes, just give me your balance for your TDR's at the end of the quarter?

Yes, I've got that for you, Dan. Performing TDRs were $22.1 million, and our nonperforming TDRs were $24.9 million.

Great. And then in terms of loan growth that you saw, could you maybe give us a little bit of color as to what line utilizations look like this quarter and how that compared to Q3?

Yes. I think when we continue to look at the lines of credit, we are not seeing any major changes to the percentage, if you will, that our borrowers are using their lines. Overall, our lines of credit are growing because we are growing the loan portfolio and a nice percentage of that growth is with some C&I businesses. But overall we don't see any major changes in --to the degree that companies are using their lines.

Okay, great. And then just one last question here -- maybe if you could talk about the competitive pressures and if there has been any shift in terms of where those pressures are coming from? Are they coming more from the larger banks, or is it just across the board?

Generally, you would see it come from across the board. But obviously, some of the credits that we are working with tend to attract the larger competitors. And so you are seeing that in a lot of cases from them. But in some cases you see some competition from smaller banks and credit unions that come in and work hard to obtain some of those smaller loan transactions.

But, as I said in my comments, our style of banking is one that's based on relationships. And we will offer a fair competitive price to the customer. It's got to be a mutually beneficial relationship. And we find, time and time again, that customers are willing to work with us because we're able to provide a lot of intangible types of benefits that they see that they can obtain by banking with Mercantile while at the same time receiving our competitive package for their loans and all their financial services. They see it as an attractive opportunity for them to work with the bank that they can have a partnership with for a long time.

Okay, great. Thanks, guys.

(Operator Instructions). Stephen Geyen of D.A. Davidson.

You gave some interesting color or commentary about the outlook for loan growth and what the loans that you -- the new loans generated in the fourth quarter, I guess roughly around $90 million. Looking out into 2015, do you expect the pull-through to pick up in 2015 and paydowns to decline? I think you had commented earlier about responding to one question that paydowns may not be as high in 2015 on an ongoing basis as they were later half of 2014. so do you expect -- or you feel fairly comfortable that the pull-through in new loans is likely to pick up in 2015?

I think, as we look at our budgeting process for 2015, working with our head loan people and line lenders trying to get a sense as to which credits, which loan situations might be at risk for payout, for a variety of reasons that we talked about for 2014. We tried to factor that into the numbers that we are putting forth as far as what we see for potential net loan growth for 2015. But it is obviously just an estimate and sometimes your estimate may come out high or it might come out low because it is such an uncertain situation. But I think we've done a good job up to this point of trying to identify the ones that may be at risk for paying off. And obviously, you have a continued intense effort to drive down watched credits and at-risk credits in the bank, so that will factor into it as well, as well as some of the reasons why credits left in 2014.

So what we are seeing is we have a strong pipeline. And while it be somewhat muted by loan payouts, of course, we are projecting some good traction and what we're seeing drop to the bottom line in terms of net portfolio growth, I think.

Okay, great. All right, good. And then a last question -- just curious about -- and I know that you commented it's a tough number to give, and it varies across whatever comes into the bank. But as far as an average reserve that you are establishing for new loans, can you give us what that has been in the last, say, quarter or two?

Yes. That's an interesting question, Stephen, and something that as we go through our migration and we see less and less charge-offs, it's obviously -- it's a good problem to have. I should back up and say that. It's a good problem to have. But as our charge-offs continue to be very normal and we continue to get a lot of recoveries, actually, that does, from a migration standpoint, push down our allocation factors that we utilize, especially for our commercial loan program that's divided into five segments. And we've got allocation factors by grade. It's been to the point that some of the -- it's even getting up to grade 4's and even 5's now, and some of the segments show a zero allocation and then obviously adding some environmentals to that.

But we, for those cases, just to assure everybody, we did put in some de minimis amounts. So it's a long answer to your short question. But we are probably somewhere in the 40 to 70 basis points, if I had to venture a guess for the average credit that we are booking.

Okay, great. Thanks again.

Matthew Forgotson, a follow-up from Sandler O'Neill & Partners.

Gentlemen, just one last question -- of the 13 FTEs you added this quarter, I know some were lenders. But can you just give a complexion, say frontline versus back-office, revenue producing versus nonrevenue producing, of those 13 FTEs?

Yes, Matt. A vast majority of those increases in FTEs pretty much reflect the fact that we had some openings at the end of September that were filled during the course of the fourth quarter. So most of them would be staff positions, backroom, as you call it, positions. They are not new positions in; they were just vacancies that we had at the end of the third quarter that have been filled.

So do you expect to continue to add to the back-office in 2015, and for headcount to tick up as well?

No. The only thing that we continue to do is just fill any vacancies that we have. Having gone through the merger over the last seven months, obviously a lot of planning before that, have the right people in the right jobs. Obviously, like any company, any business enterprise continues on an ongoing basis, you look at who you've got doing and how they are doing it. And you obviously want to try to find some efficiencies. And Bob already spoke to that. But overall, we don't expect to hire in a new staff -- again, just replace any vacancies that may come about.

And now that we have been merged for a while, a better picture emerges as to the proper allocation of FTEs. And as Bob talked about earlier, that's one of the keep parts of the profitability initiatives that we are taking a look at is, do we have the right people in the right places? Are we doing things the way that are most efficient? I'm sure we will find some opportunities there.

But we really are getting into that now because, as you might imagine, when you put an MOE together in the middle of the year, the first thing you've got to protect this your customer base and your operational integrity. And we've done a real good job of that, got a great staff that is worked hard to do that. And now we are getting into more, okay, how do we do X? How do we do Y? Are there opportunities there? And if there are, how do we best do it?

But our analysis is that we really won't be adding to staff other than, as Chuck said, just we will replace folks that do leave or retire, whatever. And we may not replace them 1 for 1. We may be able to find some efficiencies along those lines. So that's kind of where we are at.

Yes. A lot of what the process involves is going back and looking to see if some of the assumptions that we made in preparing for the merger, now that the merger has occurred and the dust is settling, to look back and see how are the estimates that we made. Are there some scope adjustments that we can make to gain more efficiencies? Are there some opportunities to shift some job responsibilities around to make sure that people's skills are matched with the job that they are doing? And we all believe that there are some opportunities there. That's why we are excited about that potential there to continue to tune the machine and make sure the efficiencies are such that there is a good match with skills and jobs and that it's done in a way that doesn't grow the operational expenses.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Michael Price, President and CEO, for any closing remarks.

Thank you, Andrew. And thank you to all of you for your interest in our Company. And we look forward to talking again with you next quarter. At this time, we will end the call.

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