Mercantile Bank Q4 2007 Earnings Call Transcript

| About: Mercantile Bank (MBWM)

Mercantile Bank Corporation (NASDAQ:MBWM)

Q4 2007 Earnings Call

January 9, 2008, 10:00 am ET


Michael H. Price - Chairman President and Chief Executive Officer

Robert Kaminski - Executive Vice President and Chief Operating Officer

Chuck Christmas - Senior Vice President and Chief Financial Officer


Brad Vander Ploeg - Raymond James

Jeff Ignallo - JP Morgan

John Rowan - Sidoti & Company

Eileen Rooney - KBW

Ben Crabtree - Stifel, Nicolaus


Welcome to the Mercantile Bank Corporation’s Fourth Quarter 2007 Earnings Conference Call. (Operator Instructions)

Before we begin today’s call I would like to remind everyone that this call may involve certain forward-looking statements, such as projections of revenue, earnings and capital structure, as well as statements on the plans and objectives of the company or its management; statements on economic performance and statements regarding the underlying assumptions of the company’s business.

The company’s actual results could differ materially from any forward looking statements made today due to 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 this call.

If anyone does not already have a copy of this press release issued by Mercantile today, you can access it at the company’s website

On the conference today for Mercantile Bank Corporation we have Michael H. Price, Chairman President and Chief Executive Officer; Robert Kaminski, Executive Vice President and Chief Operating Officer; and Chuck Christmas, Senior Vice President and Chief Financial Officer.

We will begin today’s call with management’s prepared remarks and then open the call to questions. At this point, I would like to turn the call over to Mr. Price. Mr. Price you may begin.

Michael Price

Thank you. Good morning, everyone. The fourth quarter of 2007 was dominated in the financial world by a continuation of the severe problems in the residential real estate market. During the quarter, we continued our extensive search for any borrowers who were showing weakness or could show signs of weakness in the near future.

We took a very aggressive approach to downgrading many credits and this, combined with some outright defaults, mandated a significant expense to our loan loss reserve, as we determine whether or not some of these borrowers can survive this depressed real estate market.

While our level of non-performing assets and charge-offs are generally better than many of our [inaudible] we continue to focus very hard on returning asset quality to our historic levels.

The depth and length of this downturn is hard to estimate; however, we do feel comfortable that we have identified the appropriate borrowers for downgrade and or workout action. The other part of the equation, the return of a properly balanced real estate market, where supply and demand are somewhat normal, is much harder to predict.

Asset quality remains the top focus of our institution. We continue to make progress on many fronts but understand that real estate collateral takes time to work through the legal system and marketing repossessed properties has gone slowly in today’s environment.

On a positive side of things, we continue to grow the assets of the bank and our Oakland County location appears to be off to a very solid start.

At this time, I’ll turn it over to Chuck Christmas for a review of the financial statements and as usual, we’ll have a Q&A session at the end of Bob Kaminski’s remarks.

Chuck Christmas

Thanks Mike and good morning, everybody. As typical, what I’d like to do this morning is give you an overview of Mercantile’s financial condition and operating results for the fourth quarter of 2007 and all of 2007, highlighting the major financial condition and performance, balances and ratios.

Our net income for the fourth quarter of 2007 totaled $0.1 million compared to $4.6 million in the fourth quarter of 2006 and for all of 2007, our net income equaled $9 million compared to $19.8 million made in 2006, a decline of $10.8 million or about 55%.

On a diluted earnings per share basis, we earned $0.01 in the fourth quarter of 2007 compared to $0.54 in the fourth quarter of ’06 and for all of 2007 our diluted earnings per share were $1.06 compared to $2.33 in 2006, or a decline also of about 55%.

The declines in the 2007 earnings performance are primarily the result of an increased level of non-performing assets which necessitated a higher provision expense and higher operating expenses from the related collection efforts and holding costs. The increase in non-performing assets, along with a very competitive loan and deposit environment, also had a negative impact on asset yield which when combined with the recent decreases in the prime rate and a flat to inverted yield curve over the last 12 to 18 months, resulted in a lower level of net interest income which more than offset the positive impact of growth and earning assets.

Our net interest income from the fourth quarter totaled $13.1 million; that’s a decline of about $2.2 million or 14% from what we earned in the fourth quarter of 2006 and for all of 2007 our net interest income totaled $55.6 million, a decline of $6 million or about 10% from the $61.6 million we had earned in 2006.

Our average earning assets during the fourth quarter of 2007 totaled $2.01 billion, an increase of about $69 million or about 4% from average earning assets in the fourth quarter of 2006.

Our average loans during the fourth quarter of 2007 totaled $1.79 billion, that’s an increase of about $62 million or about 4% from the $1.73 billion outstanding during the fourth quarter of 2006.

Our net interest margin during the fourth quarter of ’07 equaled 2.64%, down about 22 basis points from the third quarter of ’07 and down 55 basis points from the fourth quarter of ’06. The primary contributing factor of the decline in net interest margin during the first nine months of 2007 was the continuation of an increased cost of funds, reflecting the maturity and repricing of fixed rate CDs and borrowed funds that were originally obtained in periods of lower interest rate environments.

The increased cost of funds and corresponding decline in the net interest margin for the most part reflects a reversal of an increase in net interest margin we enjoyed back in the latter part of 2004 and 2005.

During the fourth quarter, the net interest margin was negatively impacted by the decline in the prime rate with about 58% of our loans tied to floating rates, our asset yield declined at a much faster rate than our cost of funds during the quarter.

Other contributing factors to the declining net interest margin include a higher level of non-performing assets, a very competitive loan and deposit environment and a flat to inverted yield curve.

Due to the recent 25 basis point cut in the prime rate during December and a likely additional prime rate reduction, we expect a further compressed net interest margin heading into the first and likely second quarters of 2008.

As we move forward throughout 2008 and into 2009, we have fixed rate CDs and borrowed funds that should reprice downwards but our net interest margin will likely remain under pressure until the prime rate levels off.

Given the multitude of factors that impact the net interest margin -- for example, Federal Reserve decisions, corresponding changes in interest rates for deposits and borrowed funds, shape of the yield curve, loan and deposit competitive environment, changes in balance sheet structure, level of non-perfoming assets and potential changes in interest rate risk management strategies, just to name a few -- it is difficult to predict future net interest margins.

However, under the current interest rate environment, it appears that it will be at least the late second quarter or into the third quarter before net interest margin begins to improve.

Our loan loss provision expense for the fourth quarter of ’07 totaled $4.9 million, an increase of $3.2 million over the expense in the fourth quarter of 2006 and for all of 2007, our provision expense totaled $11.1 million, an increase of $5.3 million over the $5.8 million that we've spent in all of 2006.

The increase in provision expense during 2007 primarily results from a higher level of non-performing loans and other downgrades within our commercial loan portfolio, which has necessitated a higher reserve coverage ratio.

Defined as the amount of loan loss as a percent of total loans, the reserve coverage ratio was 1.43% at year end ’07 compared to 1.38% as of September 30th of ’07 and 1.23% as of December 31, 2006.

For the fourth quarter of ’07, our fee income totaled $1.5 million, up by 11% from the fourth quarter of ’06 and for all of 2007, our fee income or non-interest income totaled $5.9 million, also an increase of 11% from all of 2006.

We recorded increases in virtually all fee income categories with the exception of a modest decline in mortgage banking activity during both time periods.

Our overhead costs totaled $10 million during the fourth quarter of ’07, an increase of about $1.8 million or 22% from the expense in the fourth quarter of ’06 and on a year-to-date basis, we expensed $38.4 million, an increase of $6.1 million or 19% from what we had expensed in 2006.

Of the $6.1 million increase year over year, $3.9 million or about 64% was in salaries and benefits. Included in that is the former chairman’s retirement package of $1.2 million and our FTE’s increased about 5% year over year. Our occupancy and equipment costs were up nominally at about $200,000 year over year and our other operating costs were also up, primarily due to increased costs associated with higher level of non-performing assets, increased FDIC insurance premiums, software and systems enhancements and the overall increased size of the company.

With regard to asset growth during the last 12 months, both assets and loans were up about $54 million or about 3% and again, there are no major changes in our asset composition.

With regards to funding, our funding strategy continues to stay very steady growing our local deposits and bridging the funding gap with wholesale funds -- that being broker CD’s and federal loan bank advances. Our average wholesale funds to total funds in the fourth quarter of 2007 equaled 59%, down from the 61% in the third quarter of ’07 and down from 63% in the fourth quarter of ’06; as you recall, we’ve been as high as 69%.

Given the lower interest rates environment on federal loan bank advances when compared to the brokers CD market, we have recently replaced some maturing brokers CD’s with federal loan bank advances and we’ll continue to do so if current interest rate environments remain unchanged.

Lastly, with regard to capital, we remain in a well-capitalized position for bank regulatory definitions with a total risk-based capital ratio at the end of ’07 of 11.4%.

That’s my prepared remarks. I would certainly be happy to answer any questions in the question-and-answer session. I’ll now turn it over to Bob.

Robert Kaminski

Thank you, Chuck. For my remarks this morning I will focus primarily on various aspects of the loan portfolio and non-performing assets. Net loan growth during the quarter was about $4 million; while the [inaudible] declined by about $22 million, $26 million was generated on a combined basis in the offices of Holland, Lansing, Washtenaw and Oakland County.

Non-performing assets increased a net $10 million, or $26 million in September to $36 million at year end. Please note that of this total of $36 million, it does include other real estate owned of approximately $5.9 million.

Loan additions to the non-performing list of $16 million were partially offset by pay downs, resales and other reductions totaling $2.5 million, as well as charge-offs of $3.9 million. To give some further color to these numbers, I would offer the following information as to some of the larger credit downgrades to non-performing status in the fourth quarter.

A $1.7 million credit to our residential land development loan in the Washtenaw County market;

$1.2 million to a construction supplier in the Grand Rapids market;

$4 million on five commercial real estate credits in Grand Rapids;

$3.5 million on five C&I related loans in the Grand Rapids portfolio.

With regard to overall non-performing assets, I want to briefly walk through a summary of some of the specific components as of December 31st and compare those non-performing totals to the related segments totals in the portfolio.

First, land development and lot loans, we had $8.6 million in non-performing loans and related foreclosed assets compared to a total land development lot portfolio of approximately $142 million. Residential construction, $3.1 million in non-performing loans and related foreclosed assets compared to total portfolio of $53 million.

Lessors of residential real estate, $3.2 million in non-performing loans and related foreclosed assets compared to a total portfolio of approximately $70 million. Commercial real estate, $13.8 million in non-performing loans and related foreclosed assets compared to a total portfolio of approximately $900 million.

Finally, commercial industrial loans, we had $7.1 million in non-performing loans and related assets compared to a total portfolio of approximately $525 million.

As an additional point of note, of the $29.8 million in non-performing loans, approximately $13 million was contractually current as of December 31st. Mercantile loan review and lending personnel reviewed the residential land development and construction portfolio in the fourth quarter and as a result, approximately $10.5 million, which consists of ten relationships in credit, was downgraded to watch list status. Please note these are not non-performing loans at this time.

Regarding charge-offs, during the fourth quarter Mercantile had gross loan losses just under $4 million. Of that total, $1.5 million was residential real estate and land development related. Approximately $700 million was related to owner occupied commercial real estate coming off foreclosure redemption with impaired losses charged. The $1.4 million was related to realizing impaired losses on non-owner occupied commercial real estate sold or engaged in the foreclosure process.

Mercantile lending personnel continue to work closely with customers to identify struggling real estate projects and assess the ongoing risk to the bank. Continuing to assess the financial capacity of principals and guarantors, in some cases these individuals’ financial capacity is being stressed due to the oversupply of housing stock in this market and the resulting need of the guarantors to tap their liquidity and income to carry projects.

One final update, Mercantile’s Oakland County office opened for business on December 10th and at the end of the month that office had loans totaling $4.5 million with a good pipeline and total deposits of about $1.1 million.

That’s it for my prepared remarks. I’ll now turn it back over to Mike.

Michael Price

Thank you Chuck and thank you Bob. We would now like to open it up for a Q&A session.

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Brad Vander Ploeg with Raymond James. Please proceed with your questions.

Brad Vander Ploeg - - Raymond James

Thanks good morning.

Michael Price

Hi, Brad.

Brad Vander Ploeg - - Raymond James

Typically in a credit cycle like this you’d expect that maybe competition would ease off a little bit with credit quality deteriorating so much and growth slowing, but it doesn’t sound like that’s the case.

Michael Price

Brad, a little bit. Certainly it’s not the same as it was out there a year ago, but conversely what does happen is because a lot of good credit requests are hard to come by, there's still plenty of competitors out there that are looking for that kind of business.

One thing we have seen is that some of the crazy structuring where some of our competitors were doing stuff with no guarantees or limited collateral, that has really, really abated which has been nice because we’re able to put some more sense into the marketplace as far as credit structure goes. But the rate competition is still pretty heavy out there.

Brad Vander Ploeg - - Raymond James

Right. I know you said that it’s almost impossible to handicap sort of where we are in the cycle, but just given what you’ve seen in terms of migration in the non-performers and charge-offs and so forth, is there any way to handicap what inning we’re in here?

Michael Price

It is hard, Brad. One of the things that makes it really difficult is that in all of our years of collective wisdom around the table here at the bank what we typically can estimate is by looking at our past dues you can kind of watch them migrate and you have a pattern of this is what’s going to end up as a non-performer or a charge-off.

What’s really been difficult at this point is that there’s been such a severe and deep downturn; I think Bob gave you the numbers of that, a lot of our non-performers are actually contractually current so we've skipped past the 30 day, 60 day, 90 day past due and part of that’s us being very, very conservative and saying, okay the payments are up to date but we see, given what's going on out there in the residential real estate market, we know that the only way they're making their payments are by hook or by crook. Or, in a lot of cases, the guarantors have done a valiant job of pouring their liquidity in these things and keeping them going.

But we can see that three six nine months down the road unless things change out there they're going to run out of cash. So it makes it really difficult to handicap it, and of course what happens out there nationwide and statewide? Are we going into a recession in 2008? Are we not? I think there’s opinions on both sides of that; that factors in.

But as far as our portfolio goes, I mean we finally said that during the beginning of the fourth quarter, as Bob said, we look to every one of our residential real estate development deals. 10% of them are already classified, are non-performing and there’s an additional number that are on the watch list. But if it had anything at all that we thought was showing any kind of weakness, we put it on either the watch list or non-accrual.

So we think we’re in the latter innings as far as what's going on in our portfolio with our bank. But, we also understand that we’re at somewhat of the mercy of what the rest of the market forces bring to us in 2008.

Brad Vander Ploeg - - Raymond James

Obviously residential real estate is very weak. Is that bleeding over at all as far as you can tell into true commercial real estate? Maybe further into just unsecured lending and cash flow line, or how does that feel?

Michael Price

A couple of things about that. I think Bob gave you a breakdown of all of our non-performers and what industry they're in. If you listen to those numbers you’ll see that while they're somewhat spread out among C&I and commercial real estate or residential real estate as a percentage the residential real estate is inordinately represented in those numbers.

Where we’re seeing it, it really isn't bleeding into other areas that aren’t related. But we are seeing it bleed into areas that are related. For example, Bob mentioned there was a $1.2 million credit, it was a commercial credit but this company’s job was supplying drywall and lumber and that kind of stuff to the residential real estate builders. So we are seeing that kind of bleed over.

Your final part of the question, we have traditionally done very, very little unsecured lending here at the bank so that’s holding us in good stead. and so we’re not seeing anything at all as far as those types of loans becoming a problem for us. I know naturally people are asking the question, are home equity loans the next big problem? And we’re seeing very, very little trouble in that portfolio. It’s not a big portfolio for us anyway but for us it’s really a deep problem on residential real estate and it’s directly related to credit.

Brad Vander Ploeg - - Raymond James

Okay thank you very much.

Michael Price

Thank you.


Our next question comes from the line of [Jeff Ignallo] with JP Morgan please proceed with your question.

Jeff Ignallo - JP Morgan

I just wanted to ask some higher level strategic and philosophical questions. When you are in a credit cycle like you are now and in the operating environment you see and some of the structural challenges that you face with your balance sheet and funding, why be expanding either operationally or balance sheet wise? You have your stock trading at 50% of book value. Why would you use your capital to expand your exposure to what basically appears to be an environment economically that you're unsure about? Could you walk me through that thought process, when you could be buying back your stock quite frankly?

Michael Price

We always consider that obviously before starting. I’ll let Bob or Chuck add onto this answer, but for us we look at this as yes, the credit cycle’s tough out there. We have a couple of options of what we want to do. We can think very, very short term and say okay, we’re not going to do anything except hunker down; we’re going to let good business walk away.

We’re not going to take advantage of prosecuting our game plan, which has always been to take advantage of when we get good bankers putting them in place and allowing them to build the bank for the future.

We talk about stock buyback. We just don’t feel that that’s the proper use of our capital right now. I think as time goes on -- and no one can put a finger on how deep this issue’s going to be as far as -- residential real estate and its related impact, it’s clearly, we think, an intelligent idea is to stay pretty well capitalized.

Finally, I have to point out to you, the amount of money, the amount of capital that it’s taken us to start Oakland County and bring a good team of people in there and start to build a good piece of business there is miniscule compared to what the incremental increase in our asset quality or fee income or that type of thing that we know we can build going forward.

I mean, it’s not like this was a major impact to our financial results at this point. To give you an example, We had to spend $350,000 in December to pay the past due taxes on properties that we either own or will own through the foreclosure process pretty soon, that’s a far bigger issue than the couple of hundred thousand dollars that we've spent to expand into Oakland County. Maybe that can give you a little bit of color of our thinking.

Robert Kaminski

We’re very pleased with the performance of our regional markets for 2007. If you look at year to date numbers for the whole year, those markets contributed about $60 million of loan growth for the corporation, so we’re very pleased with what they’ve contributed, especially if you compare it to what monies were spent to start those locations.

Jeff Ignallo - JP Morgan

I understand that, but this is not a rounding error; I mean the stock is trading at 50% of book value, so it just seems pretty compelling to me.

Michael Price

We appreciate that and we’ve had lots of conversations and I'm sure you can do some of the research yourself. We know a lot of our competitors have announced stock buybacks over the last year. As we look at the numbers that they file on a quarterly basis, most of them aren’t buying a whole lot of the stock back anymore because I think they're taking the same approach that we are.

We appreciate it, we look at it, we discuss it as a management and a board team quite often, but at this point that hasn’t been the direction we want to go.


Our next question comes from the line of John Rowan with Sidoti & Company; please proceed with your question.

John Rowan - Sidoti & Company

Good morning.

Michael Price


John Rowan - Sidoti & Company

Mike, just to follow up on the last question, how safe do you think the dividend is if the current credit trends don’t improve?

Michael Price

Well we have not given any consideration to a dividend cut, but we always are very careful in guaranteeing or predicting dividends into the future. At this point, that hasn’t been a point of discussion among our group. We certainly hope that this quarter, as tough a quarter as it has been, we think we have our arms around the asset quality issue and we look for certainly better quarters in the first, second and third and fourth quarters of 2008 for sure.

John Rowan - Sidoti & Company

How much of your loan portfolio have you now reviewed?

Robert Kaminski

As I mentioned in the commentary, we reviewed all of our residential development loans related to that industry of loans that have given us the most trouble from a non-performance standpoint. What I will caution you though is that reviews take place at a point in time and we continue to assess all of the portfolio on an ongoing basis because as we've stressed, things haven’t gotten any better. As the economic situation continues to worsen here or does not get better, it continues to add stress to borrowers and guarantors that may have been strong at a point in time, but continue to tap resources that were once a lot stronger.

So it’s an ongoing process. It’s something that we’ll continue to do continually to make sure that we have our arms around the portfolio.

John Rowan - Sidoti & Company

One last question for Chuck. What’s a reasonable tax rate to use going forward?

Chuck Christmas

Somewhere, John, probably between 28% and 30% depending on the level of provision.

John Rowan - Sidoti & Company

Thank you.


Your next question comes from the line of Eileen Rooney with KBW. Please proceed with your question.

Eileen Rooney - KBW

Related to reserves, I just wanted to get a sense of your comfort level with where reserves are now. Not really as a percent of the loan portfolio but more as a percent of a non-performing loans. It is only about 87% this quarter, given the big increase that you guys had in NPLs, so I was just wondering what your thoughts were on that?

Robert Kaminski

Really when a loan goes to non-performing status you become less worried about the percentages necessarily as opposed to analysis and what you actually have in terms of collateral and support for that loan as a total. You do a specific analysis of that breakdown and any shortfall that you have you reserve specifically against that loan, and that’s a dynamic process that takes place every month. Those numbers change from month to month as real estate values were to decline, those impaired losses become higher so that’s really what we’re looking at.

What we look at when loans gets to impaired status is very specifically what collateral do you have and you get away from a pooled approach of reserve allocation.

Eileen Rooney - KBW

So pretty much all of the reserves then are specifically allocated?

Robert Kaminski

No, of our loan loss reserves, a roughly small percentage is allocated specifically to non-performing loans. A far greater percentage is consisting of our pool allocation against our performing portfolio and that’s normal operating status for any bank.


Our next question comes from the line of Ben Crabtree with Stifel Nicolaus. Please proceed with your question.

Ben Crabtree - Stifel Nicolaus

I’d like to talk about the margin. This is a little bit of a follow on to the strategic question. At a margin solidly under 300 basis points, even were charge-offs and provisions to move to a more normal level -- and I haven’t done the numbers -- it would seem to me as though you're locked into a return on equity that’s well below double-digits. That kind of leads back to that same question about why grow the balance sheet at such skinny profitability ratios? Why not basically hunker down and focus on the ones where you can make a decent spread and which again, would create some additional capital that you could use to buy back stock? I mean it’s nice to talk about good loans out there, but if you don’t make a decent spread on it how good loans are they, really?

Michael Price

I think part of it has been that right now, you look at it and because we’re an asset sensitive bank we’re in a position where you say it is a thin margin there’s no question about it. Our model’s always been operating on a fairly thin margin with low expenses and good asset quality.

Obviously we haven’t been able to do the last two in the last three quarters because asset quality has become a problem that we normally don’t have. But the other part of it is that as Chuck said earlier, starting in the third or fourth quarter that margin is going to start to turn around the other way and those numbers are going to improve. We’ll be able to take advantage of it as it works its way through the liability the repricing opportunities that we get.

I think that’s the one thing that we try to avoid is that you can look at it today and say we’ve got to fundamentally change what we’re doing as a bank. it worked really well for nine years and this is a quarter where it doesn’t work; abandon ship and pull the anchors up and change ourselves fundamentally.

I think if we have to do that someday, the management team is willing to do it and the board is willing to do it, but I think we want to make sure that that needs to be done and is done in a very thoughtful process and not under the reaction of what right now, today, at today’s margin we really should stop doing what we have been very good at doing.

Ben Crabtree - Stifel Nicolaus

I guess my thought process here is that you seem to be so subject to whatever the Fed’s going to do and in effect you end up having a fair amount of interest rate risk in your earnings model. Perhaps if you really were fully balanced in terms of rate sensitivity, the profitability just wouldn't be attractive enough to be putting some of those loans on the books?

Michael Price

A big part of where the margin is where it is today is certainly timing, and you’ve already talked to that. We’ve always known that we have historically been a very asset sensitive bank in the short term, as Mike mentioned and as I mentioned in my prepared remarks. When the prime levels off. and it’s obviously going to apparently take a while to get there, we’re going to get some of those reversals.

So like I said, we just don’t live with what happens in the margin in the short term. We try to do some things to counteract that, but it is a cycle that we've always gone through. You saw it several years ago when our margin basically skyrocketed because rates were going up.

It helps us when rates are going up but it hurts us short term when rates are going down. But it all cycles through. I think to add to that, we’ll never get to zero non-performing assets but I was doing some calculations today. Our current non-perform assets has in total has about a 15 to 18 basis point hit to our margin. Again, we can't down to zero, obviously we won't be there but there’s certainly some basis points in there that are non-performing.

Also as I mentioned, and this is obviously hurting all banks, we just don’t have a yield curve. When you look at the loans that we’re putting on the books, if you just look and eyesight them, certainly the spreads are a little bit skinnier than what we've gotten historically and part of that’s yield curve. A lot of that has to do with competition, but it’s certainly not like we’re out there and we’re not growing a lot certainly; but even the growth we do have is fairly profitable to us.

It’s not certainly great spreads that we would get if we had a normal yield curve and more of a normalized competitive operating environment, but they are profitable. As Mike mentioned, we have opportunities and we look at this as a long-term strategic plan of not just looking at the current economic or rate cycle, but obviously longer term than that. Eventually we’ll come out of this and we think that the strategic moves we do now will play out very well as we move forward.

Robert Kaminski

Ben, from a business perspective what you're suggesting, it’s done quite a bit and it’s exactly what our large competitor banks do all the time and that’s really what allowed us to get into business and do so well. In other words, to put the mandate out there, well boy if it doesn’t make sense to make good loans today, it doesn’t make sense to add new relationships, so we are not lending anybody, we are going to shrink the balance sheet, we’re going to layoff a whole bunch of people and then three quarters later when you look and say oh margins improved, it looks better. Let’s go and hire some people back. Well we’re back in business, folks. Hey, everybody in the marketplace, we’re back and we’re really interested in doing business with you now.

I think you can look at the balance sheet and try to manage the business totally that way but I think you also need to understand the fundamental element of what we do as a bank. The minute we start to send at least in our opinion right now, the minute we start to send the signals out there that to all the good customers who are trying to gain through their relationships with the bank, hey it doesn’t make sense for us as Mercantile to make loans right now we’re going to be pretty much dead in the water for a much longer period of time.


There are no further questions at this time. I’d like to turn the floor back over to management for closing comments.

Michael Price

Thank you very much. We appreciate everyone’s interest in our company. We understand that we’re in very challenging times right now. I want to reiterate to everyone who follows us that we are working extremely hard to return ourselves back to the levels of profitability, especially in the asset quality area that we are well known for. Thank you again.

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