Mercantile Bank Corporation (MBWM) Q3 2008 Earnings Report, Transcript and Summary

Welcome to the Mercantile Bank Corporation third quarter earnings conference call. (Operator Instructions). Before we begin today’s call I would like to remind everyone that today’s 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 and 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 the press release issued by Mercantile today you can access it at the company’s web site www.mercbank.com. On the conference today for Mercantile Bank Corporation we have Mike Price, chairman, president and chief executive officer; Bob Kaminski, executive vice president and chief operating officer; Chuck Christmas, senior vice president and chief financial officer. We will begin the call with managements prepared remarks and then open the call up for questions.

We are very pleased to announce a return to profitability this morning. While the unprecedented conditions facing banks and the economy virtually guarantee more challenging quarters in the near future, the picture here at Mercantile is one of slow and steady progress as to asset quality and profitability and a continuation of our well-capitalized position. We have been focusing on margin and asset quality improvement for over a year now and I am pleased to report that this quarter showed positive trends in both areas. Chuck Christmas will present the break down of our financial report, including the update on our margin and the challenges that we continue to face given the recent fed actions. Bob Kaminski will follow with a very detailed overview of the dynamics of our loan portfolio, loan loss, and loss provision and then we will have a question-and-answer session for you.

What I would like to do this morning is to give you an overview of Mercantile’s financial condition and operating results for the third quarter of 2008 and the first nine months of this year as well, highlighting major financial conditions and performance balances and ratios. We recorded net income of $1.1 million or $0.13 per share during the third quarter of this year compared to net income of $2.4 million or $0.28 per share during the third quarter of last year; however that is a significant improvement from the net loss of $2.6 million recorded during the second quarter and a net loss of $3.7 million recorded during the first quarter of 2008 due to a much smaller provision expense and an improved level of net interest income. We recorded a net loss of $5.3 million or $0.62 per share during the first nine months of this year compared to net income of $8.9 million or $1.05 per share during the first nine months of last year. The decline in net income in the comparable period is primarily the result of a significantly higher provision expense and a substantially lower level of net interest income. The higher provision expense primarily reflects the negative impact of state, regional and national economic struggles on some of our borrower’s cash flows and the reduction of underlying collateral values. The lower level of net interest income primarily reflects the impact of the steep decline in interest rates that began in the late third quarter of 2007. With our near-term asset sensitive position, whereby we have a higher magnitude of assets subject to repricing when compared to the level of liabilities subject to repricing, combined with an increased level of non-performing assets along with a very competitive banking environment, we have experienced a decline in the level of net interest income which has more than offset the growth in earning assets. Net interest income during the third quarter of 2008 totaled $11.7 million, a decline of $2.4 million from the levels during the third quarter of 2007, however it is $1.1 million higher than the second quarter of 2008 and $300,000.00 higher than the first quarter. Net interest income during the first nine months of 2008 totaled $33.7 million, a decline of $8.8 million from the level earned during the first nine months of 2007. Average earning assets equaled $2.07 billion during the third quarter of 2008, an increase of almost $82 million from the level of average earning assets during the third quarter of 2007. As usual, the growth in earning assets was led by an increase in total loans which accounted for over 96% of the growth in earning assets. Our net interest margin during the third quarter of 2008 equaled 2.30%, up from the 2.15% margin during the second quarter of 2008 and similar to the 2.33% margin during the first quarter of 2008. The net interest margin was 2.86% during the third quarter of 2007. The 56 basis point drop in our net interest margin since the third quarter of 2007 primarily reflects the steep decline in market interest rate as reflected by the 325 basis point drop in the prime rate from mid September of last year through springtime of this year. With about 60% of our loans tied to floating rates we have experienced a significant decline in our yield on assets. Our asset yield is down about 160 basis points over the last 12 months led by a 180 basis point decline in our yield on our loan portfolio. The recent 50 basis point prime rate reduction will place additional pressure on our loan asset yield; however recent loan pricing initiatives will help to mitigate the impact. Also, at least from a short-term perspective, about 18% of our floating rate loans are LIBOR based and those loans have recently re-priced significantly upward. Most of our LIBOR based loans are tied to the one-month LIBOR rate and reset on the first business day of each month. We have also seen a significant reduction in our cost of funds, but just not to the degree of the decline in our asset yield. While our asset yield has gone down by about 160 basis points over the past 12 months, our cost of funds has declined by about 100 basis points. While deposit and volume rates have declined, our relatively high lines of fixed-rate certificates of deposit and [inaudible] bank advances results in a delayed reduction in our cost of funds. With about $265 million in relatively high-rate wholesale funds scheduled to mature during the remainder of 2008 and another $765 million maturing during 2009, we do expect our cost of funds to continue to decline throughout the remainder of 2008 and into 2009. These maturing funds carry interest rates that generally range from 50 to 100 basis points above current market interest rates. Although we were originally hopeful to see a further increase in our net interest margin during the fourth quarter the recent 50 basis point reduction will likely result in a net interest margin during the fourth quarter similar to that of the third quarter. Additional prime rate reductions would further negatively impact our asset yields, however we are hopeful that continued reductions in our cost of funds will result in an improving net interest margin in 2009, but the extreme volatility in the financial markets makes it very difficult to forecast net interest income and net interest margin with any precision. The provision expense for the third quarter of 2008 totaled $1.9 million, a decline of $0.9 million from the level of expense during the third quarter of 2007. The $1.9 million also represents a substantial reduction from the $6.2 million expense during the second quarter of 2008 and the $9.1 million expense during the first quarter of 2008. The provision expense in the first nine months of 2008 totaled $17.2 million, an increase of $11 million from the $6.2 million expense during the first nine months of last year. Our loan loss reserve totaled $29.5 million as of September 30, 2008 or $1.58% of total loans. Our loan loss reserve equaled 1.73% of total loans at the end of the second quarter of this year and 1.38% of total loans a year ago. The reduction in the coverage ratio as of the end of the third quarter of this year in comparison to the coverage ratio as of the end of the second quarter of this year primarily reflects the charge-off of specific reserves established in prior periods, which equaled about 66% of total charge-offs during the third quarter. Bob will have specific and more detailed commentary on our asset quality of loan portfolio later during the conference call. Non-interest income totaled $1.8 million for the third quarter of 2008 an increase of $0.3 million or about 21% from the $1.5 million earned during the third quarter of last year and non-interest income totaled $5.5 million during the first nine months of this year, an increase of $1.2 million or about 26% from the $4.3 million earned during the first nine months of last year. We recorded increases in virtually all fee income categories during the first nine months of 2008 compared to the first nine months of last year service charge income was up $288,000 [inaudible] banking activity income was up $175,000.00 and bank owned life insurance policy income was up $381,000.00. Non-interest expense totaled $10.5 million during the third quarter of 2008, an increase of $0.9 million over the $9.6 million expense during the third quarter of last year. Non-interest expense totaled $31.6 million during the first nine months of 2008, an increase of $3.3 million over the $28.3 million expense during the first nine months of last year. Adjusting for the one time expense during 2007 associated with the retirement of our former chairman and CEO the increase in 2008 totaled $4.5 million. The majority of non-interest expense growth during the first nine months of 2008 when compared to the same time period in 2007 relates to costs associated with the administration and resolution of problem assets including legal costs, property tax payments, appraisals and write-downs on foreclosed property. These costs totaled $0.8 million during the third quarter of this year and $2.3 million during the first nine months of this year. During the first nine months of 2007 these costs totaled only $0.6 million. One other expense item of note is increased FDIC insurance premium assessment, an increase of $0.6 million during the first nine months of this year when compared to the first nine months of last year. With regards to the funding our funding strategy has not changed significantly as we continue to try to grow local deposits and bridge any funding gap with wholesale funds, namely brokered CDs and Federal Home Loan Bank advances. Our average wholesale funds to total funds during the third quarter of this year was 67%, an increase from the 63% average in the second quarter and a 61% average during the first quarter of this year. Increases in wholesale funds reflect a combination of asset growth and a reduction of local funds. The reduction in local funds is due to a variety of factors, primarily including depositors having less available funds for deposit, especially with in regards to public unit; depositors making decisions based on FDIC insurance limitations and more importantly very high rate offerings on CDs by competitions: currently some banks in our market are offering rates that are 100 basis points above broker grades. The brokered CD market remains very liquid and we continue to raise funds as needed at reasonable costs. With regards to capital we remain in a well-capitalized position per bank regulatory definition with a consolidated total risk based capital ratio of 10.9% and a bank total risk based capital ratio of 10.7% at the end of the third quarter. The banks total regulatory capital equals about $226 million as of September 30; approximately $15.3 million in excess of the amount needed to provide for the 10% minimum while capitalizing total risk-based capital ratio. That is the end of my prepared remarks. I will be happy to answer any questions in the Q&A session, but now I will turn it over to Bob.

My comments this morning will focus on the banks asset quality and some other information on the loan portfolio. I will start with a review of asset quality headlines for the past several quarters. In the second half of 2007 we witnessed a deterioration in the residence, real estate and development, and construction loan portfolios. In the first quarter of 2008 there was continued deterioration of residential real estate, plus we identified some deterioration in commercial real estate and commercial and industrial loans. In the second quarter of ’08 there was a continued deterioration of commercial real estate loans, previously identified as the stress, including some significant charges taken for the degradation of real estate property values. In the third quarter of ’08 some previously identified impairable losses were charged off. Additionally the bank identified some loan upgrades in the past that helped offset the reduced influx of new problem loans. With regard to the loan portfolio balance at the end of the third quarter we were $1.87 billion compared to $1.8 billion at the end of 2007. As Chuck mentioned, the loan loss reserve was 1.58% of the portfolio compared to 173 at the end of June and compared to 143 at the end of 2007. With regards to the $1.9 million provision expense taken in the third quarter I will give you a break down based on loan type. Of those $1.9 million provisions there were $503,000.00 taken for land development loans. There was a benefit of $51,000.00 for one to four family construction; $51,000 of the provision was allocated for commercial construction; $591,000 was for [inaudible] family mortgage, primarily non-owner occupied; $3,000.00 for multi-family; there as a benefit of $292,000.00 for commercial real estate owner occupied; $801,000.00 was for commercial real estate non-owner occupied; there was a benefit of $20,000.00 for commercial industrial loans; loans to individuals was $15,000.00 and we had just under $300,000.00 of the provision allocated for growth that took place during the quarter for a total, again, of $1.9 million. Charge-offs during the quarter: third quarter net loan charge-offs totaled $4.3 million. Of that amount $3.0 million related to impaired loan amounts on loan losses established as of June 30. Further detail on the third quarter charge offs are as follows: land development loans residential lots was $33,000.00; commercial land development just over $1 million; One to four family construction $270,000; One to four family $354,000.00; commercial owner occupied $114, 00.00; commercial non-owner occupied $249,000.00; commercial industrial $2.2 million and various other loans $16,000, again for net charge-offs just under $4.3 million. With regards to non-performing assets at September 30 Mercantile had non-performing assets of just under $48 million; $42 million was non-performing loans and $5.7 million was consistent of other real estate and reposed assets. The break down of non-performing loans by loan type compared to last quarter is as follows: In September we had non-performing assets for our land development residential lots of $13.9 million; that compares to $12.4 at the end of June. Commercial land development we had $2.3 million compared to $3.5 at the end of June. One to four family construction $2.0 compared to $2.3; one to four family we had $5.2 million compared to $3.2 million at the end of June. Commercial owner occupied $5.3 million compared to $7.0 at the end of June. Commercial non-owner occupied we had $14.4 million compared to $10.2 at the end of June and finally commercial industrial we had $4.7 million at the end of September compared to $8.0 at the end of June; again, so the total of just under $48 million in non-performing. Further stratification of non-performing assets change from expected in the third quarter is as follows: third quarter we finished just under $47 million. We had new non-performing assets added during the quarter of $11.5 million. We had pay downs of $6.5 million and we had charge-offs of those non-performing assets of just under $3.8 million for a net increase of just over $1.1 million. Of the pay downs, of $6.5 million that I mentioned $3 million came from upgrade of credits back to performing status and $3.5 million came from payouts and pay downs on non-performing assets. The bulk of the $11.5 million in addition to non-performing assets during the quarter came from core relationships totaling $8.6 million. Of the $8.6, $6.2 consists of commercial real estate, the rest is residential real estate related. The remainder of the non-performing asset increase came from smaller C&I and commercial real estate credits. Loan portfolio stratification by purpose code, I will give you some color on that. In September we had $135 million of land development in vacant lots. One to four family construction we had $49 million; commercial construction $93 million; one to four family homes $141 million; well put [ph] family $51 million; commercial owner occupied $360 million; commercial non-owner occupied $508 million; D&I $518 million and other miscellaneous loans $16 and for a total portfolio of $1.8 billion. Past due less than 90 we saw an increase of 4.8 at the end of the third quarter compared to June 30; that compares favorably to December 31 where we were at $7.1 million. Reconciliation of that, we had additions to the under 90-day category of $5.8 million. We had pay downs and removals of $555,000. We had transfers to non-performers of $263; charge-offs of $144,000 or again for a net increase of just under $4.9 million. That’s the end of my prepared remarks and I will turn it back over to Mike.

If you have closely followed our company you will know that we were one of the first banks to anticipate asset quality issues and also one of the first banks to start to increase our loan loss provision for the same. As I mentioned a year ago, we knew there were inherent problems in almost all bank loan portfolios as to real estate development and real estate values. We pledged early recognition to service analysis and relentless pursuit of resolution of our problem assets, knowing that they take time to work through. We feel that this quarter where the required loan loss provision decreased substantially from the last two quarters due to some upgraded credits and the slowing of new loans entering non-performance status may be the first sign of stabilization of asset quality of Mercantile. While I am cautiously optimistic, I remind everyone that these are unprecedented times and while we have made outstanding strides with numerous problem credits, there remains intense strain in the system. We pledged to all stake holders the same focus and conservative approach that has held us in good stead to date. Before I turn it over to Q&A I would like to thank our customers who remain very loyal during a time of great concern in our country and certainly to our employees who performed with utmost skill and dedication.

(Operator Instructions) Your first question comes from Jon Arfstrom from RBC Capital Markets.

I just have a quick housekeeping question for you Chuck; did you say 18% of your loans are tied to LIBOR or 18% of floating rate loans?

I said 18% of floating rate.

In your prepared comments you talked about deposit competition at other banks up to 100 basis points higher than the local markets. I am guessing you wouldn’t name names, but can you just talk a little bit about the profile of the banks? Are they larger banks, smaller banks, community banks?

I definitely don’t want to name names in this venue, but I would say it’s the larger organizations, but smaller ones in a large degree are being forced to follow. We haven’t chosen to do that and there is an increased reliance on the wholesale funds. Obviously we don’t want to increase the reliance, but we certainly don’t want to pay 50 to 100 basis points more for the money either.

Then you talked a little bit about one of the reasons for a reduction in your local deposits was some FDIC insurance limits and I am just wondering if raising that cap or I guess it’s really an unlimited amount for non-interest bearing, does that change your appetite at all? Does that allow you to do different things?

Yes, hopefully certain depositors in all banks that certainly haven’t escaped it have been very worried about the banking industry as a whole and have taken money out of Mercantile and placed it with other institutions locally. We also, I think is notable, we have a partnership with Raymond James brokerage and our brokerage area has gotten quite a bit of that money and has placed it into the brokered market for those customers, hopefully just for a short term period. We can get that back. Certainly the increase on the $100,000, that $250,000 helps us because it just means that depositors will be willing to put more money with Mercantile Bank. With regards to the non-interest proposal this morning, I haven’t had a chance to look at it totally. I do know that it does look like there is going to be fees associated with the FDIC assessment, so we will have to take a look at that. Most of the money that we have lost on the deposit side is either in the savings accounts or the CD accounts. Most of the money that has left the DDA account has actually gone into our sweep program, so it’s still on the balance sheet. It is just instead of earning 0% it is now earning about 2% in our sweep account.

You talked a little bit about your pricing initiatives from last quarter. Can you talk a little bit about how much of that is contributing versus perhaps what the market is giving in terms of higher spread; then maybe give us an idea of what kind of spread you are giving on loans today than you were a year ago?

Awhile back, I am going to say probably about six months ago, we really undertook, looked at the market and looked at the fact that the fed had been very aggressive in the overall scheme of things. Prime is artificially low and it continued to be so and obviously the recent actions continued to show that as well, so we basically sat down with our management team and started to talk to our customers and said you know, at a 5% prime and now at a 4.5% prime there comes a time when customer, for all of us to make a fair profit we need to put some bottoms to those rates and we have started that initiative. We started at first with credits that had higher risk ratings and we have spread that through out our portfolio now where we have just gone on a case-by-case basis and looked at each credit and said this is where it’s got to be as they’ve matured or as they’ve had reasons to ask for new credits. It has helped us substantially in times of a flat rate prime, which we’ve run into until just recently we have been able to increase our asset yield by a fairly significant amount and we expect that to continue in scope and in value as we go forward. The market, because of where it is these days, I think the whole banking industry realizes that when you look out there and you see banks, as Chuck alluded to, offering 4% CDs and you have a 4.5% prime, it’s pretty hard to make money on that. I haven’t figured out how to do that yet. Unless you’ve got the ability to go in on your floating rate loans and just say we are not going to continue to follow this down the path. So, it has been very significant for us. We expect to continue it and most importantly, the way the market is right now, I think customers understand that there has got to be some limit on your floating rates as to how low you will go.

Can you just give us an example of spreads over prime today versus a year ago?

I think it’s more probably appropriate to say where we have somebody who is at, let’s say half under prime floating where a customer that was a prime floating, whereas right now they would be either earning 4.5 or 4, from time to time we’ve gone in with those customers, when possible, and put a 4 or 5% in there, so that a customer who normally would be half under prime, let’s say, at 4% today is at 5%, so they go from effectively from half under to half over. While we’ve got a long ways to go, because not all the credits have matured since we started this initiative each month we grind through more and more of them and each month we’re able to establish a more profitable relationship with those credits that have floating rates. Now if somebody wants to go to a fixed rate, we will put some fixed rate initiatives in there as well and those are probably around 7, 7.5, depending on whether they go three year, four year, or five year fixed. So it has made a big difference to our yield.

Your next question comes from John Szabo from Flintridge Capital.

I understand it is a fluid situation, but do you have any thoughts as to what the [audio gap] of the rescue package may be for Mercantile and for the industry generally speaking?

Well for the industry I think it will have a good impact. Clearly in the markets are reacting very closely to it and it looks like the nine large banks that were told they were going to participate or actively participated, it obviously shores them up a little bit. What is it going to mean for Mercantile and the rest of us medium to small banks? I think we haven’t gotten enough details yet to know whether or not it’s appealing to us, whether or not we would want to avail ourselves, as Chuck has indicated and our numbers show that we’re still in pretty good shape, well-capitalized position. That being said, we are going to take a look at every detail of the program as we get to know it and make a decision on whether or not it is right for us and our shareholders and customers.

I am just looking on Bloomberg right now and Paulsen was quoted as saying that he anticipated investments in the thousands of the banks, so I [interposing]. I would presume that the same sort of structure and rate would be available to you.

Well what I saw was 5% preferred with some escalators over the course of three years, but there is also the warrants and there is also some other covenants in there that we want to make sure, before we say publicly, boy that’s for us or boy that’s not for us, we need some time to digest them and we’re not in a situation where we need to do something today, but we certainly will take a very, very studied look at the program.

I think on the last conference call you talked a little bit about trying to balance the capital constraints with, I think what you said at the time was some perceived opportunities in terms of lending. Did you still feel that way or sort of where are we with that?

Well we are being very, very careful with the lending program, not only from an asset standpoint, but also to make sure that capital is utilized in the very, very best manner. There are a lot of opportunities to lend money right now. There is a tremendous amount of demand out there because everything you have read is absolutely true. I mean pretty much every bank is on the same mode that we are, so there are larger banks that are much more aggressive than we are whereas we are working with our customers and our existing customers and taking care of them and being very, very judicious on any new customers. Some of the larger banks in our market are, especially if these involve real estate deals, are asking the customers to exit. So there are some very nervous and upset customers who we would like to take care of, but just because of capital constraints we can’t or we don’t want to because we want to make sure that we can take care of our existing customer base. That being said, it would behoove us to take a look again of the TARP program and see whether or not those particulars make sense to us.

I guess one thing I’m a little bit concerned about with regard to community banks, generally speaking, is that this level of government intervention could effectively level the playing field among all of the banks, so you guys have done a good job in terms of identifying the problems and it appears that you are going to get through this ok, whereas others who maybe didn’t quite make the same level of good decisions might end up surviving and do you have any thoughts as to how that might play out or do you think that you still have a relative opportunity to take market share and grow coming out the other side of this

That’s a really good question and the answer is and if we had an hour I would go through the numerous thoughts I have about that. I mean I think it’s clear that that’s a concern, a concern that you said, but I have also done a lot of reading and I guess they have to and I don’t want to just go all the way down to just speculating here, but I would hope that this has been well thought out enough so that if the banks are so weak going into this program that, quite bluntly, that there may be those banks that want to avail themselves of this program that are not going to be allowed to. Or even if they do, from what I understand at certain levels of capital that they inject in the particulars, the covenants get more onerous. I hear what you are saying. I think we are trying to be as well run and conservative as we can be getting through this asset quality crisis. We are going to come out of it and I think we are going to have great opportunity. We have managed to keep our staff and that’s a really important thing, because a lot of our competitors have lost some very good people and have trimmed some very good people, so we will be poised one way or another to come out of this thing pretty strongly. I appreciate your question and I am not trying to dodge it, because I really have lots of thoughts on it, but I would really like to and if this was a week later I would have more information. But, I really want to see all the particulars of the program before speculating too much on it.

What gives you the comfort that you think we are kind of peaking here in terms of the asset quality issues? I know just mathematically it looks like you had a flattening in the level of non-performing loans, but what makes you think we’re not going to get sort of a reacceleration of that down the road? I mean is it just the fact that you’ve looked through every major loan in your book and you feel like even under trying circumstances it’s not going to get worse? I mean what specifically can you share with us that gives you some comfort there?

Well I think a couple of things. I think as far as the general overall economy goes I think there is certainly room for things to get worse, there is no doubt about it. I mean you look at it now everybody says I guess we are in a recession and there are clearly recessionary activities going on and indications going on out there. I think where we get a little bit of cautious optimism is again, if you have listened to our conference calls for the last year, a year ago we were one of the first banks that came out and said hey you know we see weakness. We started really downgrading a lot of credit and really attacking them and working with them and saying look we either have to work these out or we have got to do what we’ve got to do. The cautionary optimism we feel is that looking at that portfolio this last quarter we saw not only fewer credits migrating down into the non-performing, but we saw some significant upgrade in some of the larger relationships. As we have always said, one of the things that we report and we did report this time, so I can give you an estimate number, but it still remains about 36% of our non-performing assets remain contractually current. What you should take away from that, most banks don’t talk about that, because that is a pretty high number. Some of those credits have gotten better over the last few quarters because we’ve worked with them; we’ve shored them up. They have done some things that they needed to do internally and so that gives us some real optimism. That being said though, there is, as I said in my comments, there are clearly stresses in the environment and we have got credits that, like every bank does, that if they continue to get stressed they could be down graded. I am not here to declare that globally or the economy in Michigan or in the United States has turned the corner, but as far as our loan portfolio goes we are seeing some positive rather than negative trends for the first time in a few quarters now.

Was that related to asset value? So in other words the thing that kind of stopped it from getting worse? Was it because we’ve hit bottom on asset values or because the underlying cash flows are improving or what, fundamentally what is the reason for this?

It was a little bit of both. For example we had some credits that we picked up more collateral value where we came in and said hey we need to get better. We need to get more collateral. There are some credits that their cash flows improved. Where we looked at it, we put it on a watch list or they were non-performing because boy we were just unsure of their cash flows. We had one company that sold and the new management has done a better job of running the company, has given us more months of consistent cash flow to show that they can make those payments, so it is a little bit of everything. Really none of it was, to my knowledge, where we said boy we have a piece of collateral and the value of that collateral went up. It was generally we need more collateral borrower and the borrower brought more in and/or their cash flows improved enough where we said it is consistent enough now, they have always made their payments, but let’s move it up because we can feel pretty strong about that cash flow continuing.

Your next question comes from Daniel Cardenas from Howe Barnes Investments, Inc.

Can you comment on the plant closing in Grand Rapids, how that could impact you guys?

Well we can barely hear you, but it sounded like you were talking about the GM plant closing. Everybody at Mercantile Bank feels very badly about that. That plant has been part of our city for a long time and it clearly is not going to be good for the city in general, although employment has been steadily declining there over the years. It is about 1,500 jobs that will be out of here by the end of next year. Directly to Mercantile, it isn’t really going to affect us from a standpoint of we don’t have, to our knowledge any customers that are directly supplying that stamping plant. Being that is a stamping plant, we looked and maybe we had a couple, we thought we might have a couple of steel suppliers there, but it doesn’t look like that’s going to be affecting us. I think the way it would affect us, obviously, is like all banks it just makes the local economy a little more challenged when you see that go away in a year and a quarter from now.

Can you also talk a little bit about in terms of your loan portfolio your primary loans that are at or near their floors and can you give me a percentage as to what percentage of your portfolio that could be and then whether or not the floors appear to be holding?

I think looking at the numbers by recollect, of course I don’t have the rates in front of me, I think we had about $65 to $70 million in prime based loans that did not re-price downwards with last weeks rate cut. That number should be growing, as Mike was talking about, by us going with our renewals and with our new loans coming into the bank that we are putting out considerably more floors in there and obviously in some cases actually raising the rate. It wasn’t a huge number with regards to what just took place, but we would expect that number to increase as we go forward.

Your last question comes from Lewis Feldman from Wells Capital Management.

Could you give us a little more color on the loans that you said returned to the performing status and what was going on there? I mean you stated a minute or so ago that certain credits were showing stronger cash flows. Were there any other issues that had you return them to performing status?

I think as Mike mentioned previously, the situations of a couple of credits. There were changes in ownership, I brought in some new expertise to the table and we were able to turn around the operating performance of the company. In other cases more collateral brought to the table, so really a mixture of things that allowed certain credits to be upgraded including both a proven cash flows and operating performance as well as collateral position that allowed us to mitigate some impaired losses that had been established and return the credits to an accrue based performing status loan.

Second off can you touch on your head count in terms of the fact that it’s been jumping around a bit over the last few quarters?

Yes, head count has been fairly steady. I think we’re at 307 at FDEs and we expect to be around that area or slightly less by the end of the year and we don’t have any growth planned as far as FDEs for next year and if we continue to see our growth being very, very modest we may even be able to reduce the head count a little bit from there based on some initiatives to consolidate some jobs and improve productivity, but it’s not going to be a major reduction.

Lastly, can you touch on the amount of time that your oreo is spending on the books, you know what the flow through is like?

Well it depends. It’s all over the board. We have some oreo and Bob can jump in and tell me if I’m wrong, but we have some oreo that will stay on for 6, 9, 12 months. We have some that, we had one the other day which was a gas station type of deal that once we got the oreo and we got out of it in a couple of months. So it is really a fluid situation and it’s very, very difficult in some cases, depending on where the real estate is located and trying to find a value. There are some pieces of oreo you get and they sell fairly quickly and they sell for prices that you would expect based on appraisals and then there is others that you end up having to work a lot harder and take a lot longer to sell.

I think residential real estate certainly has remained challenged and you have just the surest thought, but then they, the pipeline right now in the market place is creating a situation. Some types of commercial real estate have moved a little faster, as Mike mentioned. Certain pieces of real estate that are in high traffic locations or show some underlying promise to the potential for businesses going in to that location, those kind of move a lot faster as we saw this past quarter. But it is all over the board, depending on the type of property and obviously location.

In terms of residential real estate what is the current inventory? What would RMLS say was inventory of housing at this point in time within your footprint?

I think we saw a study published a couple of weeks ago by one of the local commercial real estate companies that studies this and the inventory is obviously growing. I think they mentioned that there is certainly several years of inventory in the marketplace in the pipeline right now in residential real estate and they oversee a whole lot of new building permits and activity going on so that the pipeline is only shut off in terms of new stock going into the pipeline, but it’s a matter of working through what is out there right now, what is in partial stages of development to start coming back in the other direction.

Did I hear you correctly, several years worth of houses?

Yes.

There are no further questions.

Well thank you all again for your interest in our company and we will end the call at this time. Thank you very much.