Mercantile Bank's (MBWM) CEO Michael Price on Q2 2014 Results - Earnings Call Transcript

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 |  About: Mercantile Bank Corporation (MBWM)
by: SA Transcripts

Mercantile Bank Corporation (NASDAQ:MBWM)

Q2 2014 Earnings Conference Call

July 22, 2014, 10:00 AM ET

Executives

Robert Burton - Investor Relations, Lambert Edwards

Thomas Sullivan - Chairman, Board of Directors

Michael Price - President and Chief Executive Officer

Robert Kaminski - Executive Vice President, Chief Operating Officer and Secretary

Charles Christmas - Senior Vice President, Chief Financial Officer and Treasurer

Samuel Stone - Executive Vice President, Corporate Finance and Strategic Planning

Analysts

Damon DelMonte - KBW

John Rodis - FIG Partners

Daniel Cardenas - Raymond James

Stephen Geyen - D.A. Davidson

Operator

Good day, and welcome to the Mercantile Bank Corporation's second quarter 2014 earnings results conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Robert Burton with Lambert, Edwards' investor relations. Please go ahead, sir.

Robert Burton

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?

Thomas Sullivan

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 Firstbank 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 am 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?

Michael Price

Thank you, 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 Firstbank 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 result is included in our second quarter report, along with approximately $3.5 million in merger-related cost 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 merger opportunities. While it's 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 our market share, as combined franchises position for long-term growth with a size and scale to complete 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'd like to turn it over to Chuck.

Charles Christmas

Thanks, Mike. Good morning, everybody. As you probably saw this morning, we announced net income of $1.5 million for the second quarter of '14 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 Firstbank Corporation, which was consummated effective June 1. In addition to our earnings result reflecting one month of operations as a combined organization, we recorded relatively large merger-related cost during the first six month of this year, especially during the second quarter.

Merger-related cost totaled $3.5 million during the second quarter and $3.8 million during the first six month of 2014. 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 month.

We do expect to expense further merger-related cost 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-off has provided for negative provisions for loan loss reserve. In addition, the level of problem asset administration cost has substantially declined.

Non-performing assets have declined over 92% since the peak level in March of 2010 and are currently at their lowest dollar volumes since the yearend 2006. We are very pleased with our financial condition and believe we are very well-position 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 Firstbank 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 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 that loan growth will likely be funded via reduction in lower yieldings, overnight interest-bearing deposits and federal funds sold, and from investment portfolio of cash flow from monthly pay downs mortgage-backed securities and the periodic maturities and calls on U.S. 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 calculation, 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 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 a 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 remained 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 month 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 Firstbank 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 remained 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'll now turn the call over to Bob.

Robert Kaminski

Thanks, Chuck, and good morning to everyone. While, the merger with companies and the integration of the affiliate banks was dominant news for the quarter, we're 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 Firstbank markets are up $25 million over 2013, when comparing year-to-date averages.

During recent quarters, we have 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 loans developmental activities. This community banking approach resonates well in our markets. As a result, new opportunities continue to be created with our clients and perspective clients.

The competition for these customers remains quite intense, but the Mercantile team continues to successfully engage businesses, 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 the 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 remains 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 complete in 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. Now, I'll turn it back over to Mike.

Michael Price

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Damon DelMonte of KBW.

Damon DelMonte - KBW

I guess my first question, just kind of talking 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 just talk a little bit about what was behind that and maybe give a little color on some of the credits that you're seeing?

Thomas Sullivan

Well, as we talked about in previous quarters, a big thrust of ours, as an initiative was to create some better balance in our loan portfolio, obviously with the merger, lot of that was brought about to that process, but we talked about getting more C&I in our portfolio, and as we talked about the calling 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're seeing new C&I customers coming into the bank and a wide variety of industries. There's not a real huge concentration in any one area, but we're very pleased to see customers that have an equal lines of credit and terms loan and owner occupied mortgages, and that's just giving some good balance on the strong commercial real estate sector. That's always been a strong part of our portfolio to begin with. So the pipeline, as it stands right now, it continues to be containing a lot of C&I activity in there as well. And 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.

Damon DelMonte - KBW

And 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 that you think?

Michael Price

That's a great question. I think we're trying to get our arms around it, because as we've noted few times, last quarter was fantastic in growth. I think about 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 a pretty strong backlog. So again, if we could get some of these deals closed, which we think we can, we certainly think the 3% to 4% rate, may be its obtainable.

Charles Christmas

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'll get some assistance with our loan totals from those funding as well.

Robert Kaminski

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

Michael Price

Again this is Mike, Damon. The only thing that is always a tricky thing as well is I am sure you're hearing this across the country, but it's a very competitive environment out there from a rate standpoint. So if we were to abandon our margin discipline, we'd be very comfortable in telling you that it's 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.

Damon DelMonte - KBW

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

Charles Christmas

Yes. As part of your question, there is a lot of moving parts here. The answer to 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 $375,000, I will say that it is predicated on a forecast, we feel good about it, we did use it. But again, we'll 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'm sure as you know, there is just one month of the quarter of the combined operations in there. One of the things that we're 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 standalone, 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, my both companies had excess overnight liquidity, especially Mercantile. For this month we've been operating with only about $50 million in overnight liquidity compared to probably at least a $100 million, if not a $150 million or higher million, in a several quarters prior to that.

So that's 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, as we think we will, and then we also start using some of the cash flow of the investment portfolio to fund loan growth that will obviously benefit our yield and overall margin as well. Cost of funds, when we'll get to the full quarter, the combined operations, we should continue to see some benefit from that as well.

So 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're 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.

Damon DelMonte - KBW

And then I guess, just one more quick question, just on the expenses. If you take out the $3.5 million of non-recurring or add 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 here as to what would be a decent level of run rate kind of for the back half of the year?

Charles Christmas

Yes. We are still working through that as well as we analyze that second quarter number, because that's a number that obviously we were all over as well. There has been, I won't say virtually no, but there has been very little on the way of cost saves going through. And when we are looking at our cost saves, obviously the vast, vast majority, we're 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 to letting some of that stuff go and just be on the one system for all of our products and offerings.

So 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 had thought we were going to get on a core basis. It's 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've obviously, already had 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 to the income statement, but we're making headway and certainly by the end of the year, we'll certainly expect that the savings will be in our income statement as we go forward.

Operator

And our next question comes from John Rodis of FIG Partners.

John Rodis - FIG Partners

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?

Michael Price

Yes, if I were to go out on a limb that probably looking at it today, I think a fairly solid number. And also if you remember my comments, a lot of stuff that you look at in July, it looks like it's got a pretty good chance to get booked. There are some times 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.

John Rodis - FIG Partners

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

Charles Christmas

I think I'll describe it as several different commercial loan relationships that are really within our sweet spot in the range of $5 million, $10 million to $12 million. I think you'll see some of the bigger, some of the smaller, but the bulk of the growth is coming that range. And I think it's what we described as, as long as we do very, very well and the pipeline is reflective of that too.

Michael Price

It really does come from all over, is the answer, John. Right now, our larger competitors are a little bit unfocused in the market, and the Mercantile really has a strong reputation, as a good solid commercial lender. And in addition, over the last year, year-and-a-half, we've hired some new people that have come from some of those larger competitors, and they've been able to bring some relationships with them, and you combine that with our normal, our bread and butter, what we do here, it's been a real nice combination.

John Rodis - FIG Partners

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?

Charles Christmas

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.

John Rodis - FIG Partners

And 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 sort of thoughts on future acquisitions going forward?

Michael Price

Well, I think the answer pretty much is the same as it's 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've been following us long enough to know that's kind of how we boys answered it. And I think we've looked at opportunities and when Firstbank came along, it was the perfect combination for us, it made a ton of sense.

That being said, I think we also are very fond of organic growth and that's been the namable game for most of our existence so far. So a short answer on that is that, we work hard to make sure that we're gaining market share to the organic means, but after we've had this digested in and if there is an M&A deal that make some sense, we like the fact that we have the flexibility to consider it.

John Rodis - FIG Partners

How long do you think you're sort of on the side lines as far as sort of getting this deal, assuming later and so forth?

Michael Price

Well, I could get data, but I think we've 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's going extremely well so far, so it's no reason to believe that they are.

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

Operator

And our next question comes from Daniel Cardenas of Raymond James.

Daniel Cardenas - Raymond James

Just going back to 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 Firstbank franchise?

Charles Christmas

That $75 million was solely from the Mercantile franchise.

Daniel Cardenas - Raymond James

And then looking forward, I mean, just given your enhanced size now, I mean is there -- what's your new legal lending limit, your new in-house lending limit? And then maybe, what's 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?

Charles Christmas

Yes. In regards to the amount, I think our previous legal lending limit was little bit north of $35 million. Under the combined and given the state allow, we're well over $80 million. But I don't think we're going to be seeing any $80 million credits anytime soon. So for that standpoint, I'll turn it over to Mike or Bob to comment on in-house.

Michael Price

Yes. Again, I think it's nice to have a larger legal lending limit, but we have no plans to get anywhere close to that sum. It's just nice to have that flexibility, but what we see is pretty much the same, as our wheelhouse or relationships between $3 million and $15 million, lots of them smaller than that as well, but that's really what we're seeing in the Grand Rapids market, somewhat smaller deals in Mount Pleasant and Kalamazoo and that type of thing. But it is good to have that flexibility.

Robert Kaminski

I think really the bottomline is that we're well equipped to handle any of the financial needs of most of the companies and individuals in all of our markets. And as Mike said, that include some of the bigger credits in some of our bigger markets and as well as some of the very profitable businesses and some of the smaller markets as well.

I think, obviously, a legal lending limit is important when you're 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 our demanding, and as everybody knows that's followed us, as we're always on the forefront of what we can offer from a treasury management standpoint.

So we've 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 elect to come to Mercantile Bank.

Daniel Cardenas - Raymond James

And then, maybe in terms of utilization rates, I mean is there a number that you can point to, as to what second quarter will look like versus first quarter?

Robert Kaminski

As far as lines of credit?

Daniel Cardenas - Raymond James

Yes.

Charles Christmas

Yes, I think it's been pretty stable. We did have, I think as Bob mentioned some growth in lines of credit, some 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 borrow on those lines. I think on an overall basis, I don't think we saw any significant impact for overall utilization rates on lines.

Daniel Cardenas - Raymond James

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

Charles Christmas

I think it's a combination of both. I think if you look at, as I believe Mike mentioned, we have some new 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. And then, you see some existing customers that are seeing some opportunities for growth and expansion that we've been waiting to see for a long time, and it is happening in individual cases. So it's been a good combination of new opportunities and new markets for us as well as an increased growth with existing portfolio of customers.

Daniel Cardenas - Raymond James

Would you say it's about 50-50 then?

Charles Christmas

I'd put actually percentage to it, but I'd say from my view, it's pretty balanced.

Operator

And our next question comes from Stephen Geyen of D.A. Davidson.

Stephen Geyen - D.A. Davidson

You could touch on a little bit with Dan's question, but as far as the line commitments, I think you had said that new loans, a part of it, came with term loans as well as some lines, so 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?

Michael Price

I'll say the majority of that number is C&I, commercial and industrial.

Stephen Geyen - D.A. Davidson

And then maybe just a little bit more on the margin, just trying to figure out where we're going to go from here. The $50 million in fed funds are down versus a $100 million previously. What was the impact when it occurred in the quarter? If there is like a full year benefit quarter-to-quarter, what was the impact during the quarter, first quarter to second quarter, so we can kind of maybe hopefully back into a little sharper number for third quarter as far as the margin?

Charles Christmas

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 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 those loan growth that we're 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, our fed funds our interest-bearing deposits.

Our average short-term investments for the second quarter was about $90 million. So like I said, we're running around $50 million on that right now, but it was almost a $100 million. Just Mercantile alone in the first quarter was about $115 million. So 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.

Operator

And our next question comes from [ph] Eric Grubelich, a Private Investor.

Unidentified Analyst

Just want to clarify something, when you're 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's 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?

Charles Christmas

Yes. Eric, this is Chuck. I think it is more of a timing issue. Obviously, we thought the merger would be consummated quicker than what it was. But like we said, as we still feel confident with the numbers, with the cost saves, it's 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're very, very cautious going into the operations conversion, which we sit here as executives, and say, well, it will happen this weekend, if we flip the switch, I can assure you the tremendous amount of people investment and some capital investment for many months, to make sure that this conversion happen properly. And a lot of things, a vast majority did happen a couple of weekends ago.

We were already making some changes once the merger was consummated on June 1. I'm not going to say, we spent more money than we had to, but we want 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's debit cards, obviously our mainframe, ATM systems, all that.

So there was some duplicative services. We made sure we had the right people involved. Obviously, there was some overtime involved as people were working for lots of nights, lots of weekend. So I think 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 calculated a year ago, are going to come to fruition, is now is just a matter of exactly at what point those happen. And I can assure you that some of those are already happened and have already happened. And they will continue to happen as we go forward the next several months.

Michael Price

Yes. Just specifically to be clear, we expect that we're right on track with the cost saves that we estimated. If anything got stretched out, it was with the putting the actual merger together, the actual execution date, and that was a regulatory issue that we've 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 enough to be fully felt. So as we look at it, June 1 closure, you're seeing that the great majority of the cost in this quarter and we'll start to see the cost saves, just as we predicted as the next few quarter will allow.

Eric Grubelich - Private Investor

And then just one thing, any changes in the lending ranks at all that you maybe didn't want to see?

Michael Price

Not at all. As a matter of fact, as time goes on, we continue to get a stronger and stronger reputation, as the pre-eminent commercial lender for small-to-medium sizes business. And I think of 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.

Operator

And we have a follow-up question from Daniel Cardenas of Raymond James.

Daniel Cardenas - Raymond James

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

Charles Christmas

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

Operator

Thank you. And 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.

Michael Price

Well, thank you. Mercantile's momentum is increasing and our team is motivated and dedicated to building on our success. As I stated earlier, our longstanding relationships, improving excellence and community banking are serving us very well. So we continue on the path of achieving efficient profitable growth.

Thank you to 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, Betty.

Operator

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

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