Mercantile Bank Corporation (MBWM) Q1 2017 Earnings Report, Transcript and Summary

Good day and welcome to the Mercantile First Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. And I would like now to turn the conference over to Bob Burton of Lambert Edwards. Please go ahead.

Thank you, Ryan. Good morning, everyone, and thank you for joining the Mercantile Bank Corporation's conference call and webcast to discuss the Company’s financial results for the first quarter of 2017. I’m Bob Burton with Lambert Edwards, Mercantile's Investor Relations Firm. And joining me are members of their Management team, including Michael Price, Chairman; Bob Kaminski, President and Chief Executive Officer; Chuck Christmas, Executive Vice President and Chief Financial Officer; and Ray Reitsma, President of Mercantile Bank of Michigan. 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 obligations to update any forward-looking statements made during the call. If anyone does not already have a copy of the press release issued by Mercantile today, you can access it at the Company’s website, www.mercbank.com. At this time, I would like to turn the call over to Mercantile’s President and Chief Executive Officer, Bob Kaminski. Bob?

Thank you, Bob, and good morning, everyone. Thank you for joining us. On the call today, I will review the quarter and provide an update on loan activity, growth initiatives and asset quality. Then our CFO, Chuck Christmas will provide details on the financial results followed by Q&A. Mercantile's track record of strong financial performance continued in the first quarter of 2017. I'm pleased to report that positive operational trends stemming from our strategic initiatives have continued during the first two months of 2017. In particular, let me highlight some of the accomplishments in the areas of strategic focus that underscore our optimism. During the quarter, total loans grew approximately $62 million representing an annual growth rate of nearly 11%, which is at the high end of our guidance and outlook. As we have commented in the past, the timing of commercial loan funding can be rather uneven and in that regard it should be noted that the vast majority of the growth and total loans could place during the last half of March. Commercial term loan originations to new and existing clients remain strong totaling $130 million during the quarter. This performance reflects both ongoing efforts on the part of our lending team and underlying Michigan economy that continues to improve. Overall our pipelines continue to be solid and we are encouraged by the opportunities that we see over the remainder of 2017 both in our well-established Western and Central Michigan markets, and in our new operations in Southeast Michigan. Non-interest income was strong during the quarter. Year-over-year comparisons reflect a bank owned life insurance claim during the first quarter of 2017, which increased per net income by approximately $1.1 million or $0.06 per diluted share, and a repurchase of $11 million in trust preferred securities at a discount during the first quarter of 2016, which increased reported net income by about $1.8 million or $0.11 per diluted share. In the first quarter of 2017, mortgage banking activity income, debit and credit card fees, service charges on accounts and payroll processing fees were ahead of last year. Chuck will touch on this further in his comments but let me note that we continue to gain momentum with production, operational excellence, and product arrays in our retail mortgage area. The net interest margin stayed steady against our guidance. We remain very pleased with the strength and stability of our core net interest margin reflecting our continued focus on long pricing discipline. It is worth noting that our net interest income is expected to benefit from any further rate hikes initiated by the federal open market committee. We continue to experience peer-leading asset quality which is reflected in the very low level of nonperforming assets representing only 2.6% of total assets. The bank continues to be an extremely strong position here. As evidenced on our strong capital position and demonstrating our continued commitment to shareholder return, we earlier today announced the quarterly cash dividend of $0.18 per share for the second quarter providing an annual yield of about 2.2% based on our current market share price. While the underlying financial performance is very good, Mercantile has been active on the strategic front as well. In late February, we announced the opening of a commercial loan office in Troy, Michigan which we see as a gray opportunity for Mercantile to bring our brand that customer relationship focused banking to a new and growing market. The Greater Detroit area is a logical extension of Mercantile's current service area and we are encouraged by the strength of the region's economy on business environment. We are also very fortunate to commence operation there with the team of experienced commercial lenders led by Violet Gintsis with decades of commercial experience in the Greater Detroit market. We also continue to make progress towards expanding operations to include the full-service banking at the Troy location. We have also strengthened our leadership team and operations by adding Nancy Turtle, as Community Bank President for the Kalamazoo, Southwest Michigan. Nancy's 20 years of commercial banking experience in Southwest Michigan and her understanding of Mercantile's relationship-based approach to business are terrific assets for the bank as we look to grow our base of business in these key markets. Entering 2017, our financial condition is strong and our operating metrics are healthy. Looking forward we see additional opportunities participate in the economic strength of our markets as Michigan's premier community bank. Our outlook is that the overall healthy employment and business expansion being reported for Michigan will continue particularly within our largest markets. The Michigan economy overall continues in a positive direction. That concludes my initial remarks. At this time, I'd like to turn the call over to Chuck.

Thanks Bob and good morning to everyone. As was already noted, this morning we announced net income of $7.6 million or $0.46 per diluted share for the first quarter of 2017. During the first quarter of 2016 we earned $8.5 million or $0.52 per diluted share. A bank owned life insurance benefit claim during the first quarter 2017 increased diluted earnings per share by $0.06, while the repurchase and trust preferred securities at a large discount during the first quarter of 2016 increased diluted earnings per share by $0.11. Therefore, on a more core basis earnings per share diluted share equals $0.40 per share during the first quarter of 2017 compared to $0.41 during the first quarter of 2016. We remain pleased with our financial condition and earnings performance and believe we are very well positioned to take advantage of lending and market opportunities while delivering consistent results for our shareholders. Our net interest margin was 3.73% during the first quarter continuing a relatively stable trend. Our loan yield is benefiting from the recent rate hikes from the FOMC with each 25 basis point increase in the federal funds rate equating to about a 9 basis point increase in the loan yield. Although interest rates have increased in recent periods, the overall interest rate environment remains low and when combined with a strong competition for loans, there remains some downward pressure on our loan yields. Alternatively, our cost of funds which has remained stable for the past few years has increased only slightly during the past several quarters as interest rates offered on liquid deposits have changed very little. We recorded loan discount accretion totaling $0.8 million during the first quarter of 2017 compared to $1.3 million during the first quarter of 2016. To a large degree, the lower level of discount accretion reflects the change in accounting treatment for our pool of purchased CRE impaired loan to the cost recovery methodology as of year-end 2016, as we discussed on our last conference call. As a reminder, as of year-end 2016 payments received since the merger lowered the recorded investment on this particular pool to zero. In accordance with the cost recovery methodology, a net deferred gain of $1 million was immediately recorded as interest income. Starting on January 1 of this year, accretion income is no longer recorded on this pool but instead all payments made by borrowers are immediately recorded as interest income. We currently expect to receive a minimum of $6 million in principal payments on CRE pooled loans in future periods which were recorded as interest income upon receipt. Based on our most recent evaluation and cash flow forecast on purchased loans, we expect to record further quarterly interest income totaling about $0.5 million during the remainder of 2017. Please note that this forecast ignores scheduled balloon maturity dates of the purchased loans that formally comprises CRE impaired loan pool. Instead, we assume those loans will be renewed that terms similar to current rate terms on the balloon date. As a result, interest income related to the former CRE pools recorded in future periods may differ from this forecast. We expect our net interest margin to be in a range of 3.75% to 3.80% throughout the remainder of 2017. This forecast assumes no further changes in the prime and LIBOR rates. Our interest rate risk measurements continue to reflect an improved net interest margin in an increasing interest rate environment. The overall quality of our loan portfolio remains very strong. Nonperforming assets as a percent of total assets equaled only 26 basis points as of end of the first quarter and net loan charge-offs equaled only $0.3 million during the first quarter or 5 basis points as an annualized percent of average total loans. We recorded a provision expense of $0.6 million during the first quarter in large part driven by commercial loan growth. We expect to record quarterly provision expense of 0.5 million to 1.0 million during the remainder of 2017. Our loan loss reserve totaled $18.3 million at the end of the first quarter or 92 basis points of total originated loans. This coverage ratio has remained steady for many quarters and no significant changes are expected for at least the remainder of 2017. We recorded noninterest income of $5.9 million during the first quarter of 2017 compared to $7.1 million during the first quarter of 2016. We recorded increases in virtually every fee income category led by 0.5 million increase in mortgage banking income. We also recorded $1.4 million in income resulting from a bank owned life insurance claim and during the first quarter of 2016 we recorded $2.9 million and $0.3 million gains from the repurchase of certain trust preferred securities and the sale of an equity investment respectively. Therefore, on a more core basis, noninterest income totaled $4.5 million during the first quarter of 2017 compared to $3.9 million during the first quarter of 2016. Subject to potential fluctuations in mortgage banking income, for the remainder of 2017 we expect noninterest income to total $4.7 million to $4.9 million during the second and third quarters and $4.4 million to $4.6 million for the fourth quarter. We recorded noninterest expense of $19.8 million during the first quarter of 2017 compared to $19.9 million during the first quarter of last year. Salary and benefit costs were up 2.5% in large degree reflecting merit increases effective January 1, which were essentially offset by a decline in our FDIC insurance premiums mainly resulting from changes in the deposit insurance assessment calculation. Currently, we expect quarterly noninterest expense to total between $19.7 million and $20.2 million during the remainder of 2017 with our effective tax rate at just under 31%. We will remain a well-capitalized banking organization. As of quarter end, our bank's total risk-based capital ratio was 13.0% and in dollars was approximately $81 million higher than the 10% minimum required to be categorized as well-capitalized. Those are my prepared remarks. I’ll now turn the call back over to Bob.

Thank you, Chuck. At this time we will now take your questions.

[Operator Instructions] And the first question comes from Matthew Forgotson with Sandler O'Neill & Partners. Please go ahead.

Hi, good morning, everybody. So I just thought I would start high level. Historically, your focus on Western Michigan has insulated you relatively speaking from volatility in auto. Having said that, in light of the softening in auto sales and your recent expansion into Southeastern Michigan, I was wondering if you might give us a little update on your direct and indirect exposure to auto and just tell us a little bit about what you are hearing from your lenders and from your customers.

Yes, thanks for the question Matt. I think if you look at our overall portfolio and the balance is something that we watch very closely and continually to make sure that we have - we don't have any undue concentrations in the area whether it be the auto industry, commercial real estate or any in the sub buckets that each of those contains. I think the overall exposure to auto industry hasn't really changed and we don't expect it to change a lot with the entrance of the Southeast Michigan because although we are West Michigan, we still have a fair of indirect reliance upon the auto business for many - not many - some of the C&I customer that we bank here and West Michigan, we expect that balance to continue with the credits that we would entertain in Southeast Michigan as well. But you raised a point we continue to be very careful in monitoring all of our loan concentrations in whatever buckets they maybe in to make sure we don't have any undue balance or imbalance in any of those areas. So something we'll watch very closely.

Okay. Thank you. I guess just next on loan growth, wondering if you'd just shine a little bit of light on the loan pipeline. Talk to us a little bit about its size and its complexion and just your growth expectations as we move throughout the year.

I think we stand firm by our guidance that we've established and Chuck outlined and if you recall back in the conversation we had at the end of the fourth quarter conference call, we talked about healthy pipeline and the fact that there was timing differences and that really bodes stuff out in the first quarter here as well, and we had nice growth uptick for the quarter overall. But as I mentioned in my comments, most of that growth took place at the end of March as we've discussed in the past commercial loan funding can be rather uneven in terms of the timing, and choppy whatever you may call it and that's just nature the beast. And so, we had a very strong first quarter. It was late in the quarter growth. Our pipeline continued very strong and consistent with what they had been throughout most of 2016. I think if you look at what we see out there, we see good activity in all of our markets especially our largest markets. I think you look at the balance we got good balance in terms of C&I in terms of CRE and all those pipelines as well. So we’re very encouraged for the growth to remain consistent with the guidance that we’ve established for the whole year. Although as we saw in the first quarter some of the growth and the timing maybe rather uneven and just because a particular quarter may not see the growth that we’re expected on our overall basis long-term, we expect it to be consistent with the guidance.

Okay, great. And then just lastly for me and then I will hop out. Clearly some seasonality in terms of deposit flows, but your stated loan to deposit ratio now is 107%. And when I back out the sweep accounts classified as repo, I'm at 102%. Can you talk to us about your deposit growth expectations for this year and ultimately your tolerance for running these ratios higher from here?

Yes Matt, this is Chuck. I think from the ratio standpoint we expect that - kind of longer term to be right where it typically is, right around that 95% maybe 97%. Obviously looking at just a quarter end number and certainly if you look at our interest-bearing assets which is really our fed account we were down lower than typical and a lot of that had to do - where at the quarter with all the loan growth that we had. So I think from funding the loan growth is the same thing that we've been talking about on many calls now as we look at raising local deposits as much as we can from a lot of different areas. Certainly as we continue to bring on some C&I credits which we have, those bring some really strong demand deposits. You can see the trends with our non-interest bearing check-in account continues to be very, very strong. Yes, it's typically down at March because of the tax payments that we see going out especially in January but if you step back a little bit you can see the very strong trend there. And again a lot of that is because the C&I growth as Bob just touched on with the pipeline, we expect further C&I growth as we go in the future periods. Certainly, we look at under every rock to gain additional deposits whether it’s calling our municipalities, making sure we got the right products that are out there, that are competitively priced. We try to be in the top third whenever the leader in regards to our deposit pricing but we’re definitely in the top third. We're not a big bank when it comes to think like CD campaigns. Although we do run them periodically, we don't do things like teaser rates where you can have a money market account at some special rate for an extended period of time. We typically don't do that either but we certainly look at that. We have a group that meets every month to talk about trends, talk about different products, how those are being sold and the successes and maybe some of the weaknesses in there. So, and of course then we have the backdrop of the wholesale funding program whether that be FHLB advances with well over 300 million, over 325 million in additional availability. And certainly we can tap the broker CD market if need be. So, a long-winded answer your question, but there is no area that we don't look at and I think on an overall basis notwithstanding the very strong loan growth that we had at the end of the first quarter and the impact that had on some of our overnight liquidity, we would expect deposit structure to stay relatively consistent at it has been over the last couple of years as we go into future periods.

Thank you very much.

Our next question comes from Brian Zabora with Hovde Group. Please go ahead.

Thanks, good morning. Just one question on expenses. You moved the guidance just a little bit up, a little higher and it's maybe some of the investments that you've done in Southern Michigan, or are there other factors? Moving expenses again just a bit up.

Yes Brian, you're right on. The increase in the guidance is primarily related to our move into Southeast Michigan.

Okay. And then a question on mortgage, twofold. One, how is the pipeline looking today versus maybe the end of fourth quarter? And then, second, what type of mortgage loans are you portfolioing? There's a nice increase this quarter. Is it ARM production and I guess how much of the ARM production are you choosing to portfolio versus sell?

Yes, this is Bob thanks for the question. That’s an area that we talked about the last year and half has been a strong area of strategic focus for us here at Mercantile and the results are reflection of that. The pipeline at this point remains significantly ahead of where it was in 2016 represent really reflecting the traction that’s been gained by the initiatives that we started to back over a year ago now. And I think we’ll continue to see this throughout all of 2017 with it being up quite a bit over where it was last year. I think in terms of the loans that we are portfolioing now, I think in the past that we talked about we missed some good opportunities to retain some loans in the portfolio that we in the past either would pass on or whenever we had the opportunity to look in the first place. And is strategically being crafted so that we can at least maintain the levels of our mortgage portfolio as we've seen continue contraction that we have in the last couple years. So, it’s not a major growth area for us in terms of the overall bank but it’s an area that we can see contributing as we saw in the first quarter going forward. I think those loans been basis of arms protected from interest rate standpoint and really add to the mix because we've introduced some new mortgage products that really started to get some notice as we talk to clients and customers about what we have to offer here in Mercantile Bank. So this is an area that we’re really positive on and we’re seeing some good results now. We’ve hired some of the mortgage lenders as we mentioned in the past and we’re starting as we head into the spring months now to really see some good activity there as customers are out looking to either federal homes, refinance their homes or whatever. So it’s an area of strong focus for us and we’re very pleased with the results of what we saw in the first quarter.

Good. Thanks for taking my questions.

Our next question comes from Damon DelMonte with KBW. Please go ahead.

My first question, Bob, I think you had mentioned about you are reiterating your outlook for the loan growth. Could you just remind us again what the loan growth was? Is it high single digits for 2017?

Yes, that's correct.

Okay. And just with regards to following up on a question earlier about the outlook for pipelines and stuff, I think the C&I balances jumped pretty significantly here in the first quarter after a down fourth quarter. Was the fourth-quarter decline, was that more just seasonal in nature and is this a decent run rate or a decent level to build from going forward?

I think as we talked about for the fourth quarter conference call we had that large loan payout through the syndicate loan. We saw that produced our C&I totals for the end of the year. You saw the recovery in that as we continue to book the loans and the pipeline and also we had some lines of credit that we're up at the first quarter during the first quarter as well. So maybe we’re seeing some fluctuations there and as we talked about on a couple questions ago we look at the balance of the C&I and commercial real estate all the time making sure that is a good balance and what we see in the pipeline is continuing good balance between real estate and commercial industrial types of loans. So we’re going to see some fluctuations there as we saw in the last couple quarters but that is natural. I think overall the trend is upward in all of our buckets because we’re having a focus on all kinds of loans throughout our markets.

Got you. Okay. And then with respect to the margin, probably a question here for Chuck. Could you just repeat what you said the accretable yield was that was included in the margin this quarter?

The accretable - could you repeat I guess on that because I can search that to which number you’re after there is a bunch of.

I guess so you reported a margin of 3.73%, but if we took out the accretable yield impact, what would be the core margin? That's basically what I'm asking.

I don’t have that right in front of me. I can certainly get to you offline. As I did indicate that we did - our total loan accretion was $0.8 million so I just have to go back and calculate that for you.

Okay. All right. That's good enough. I can work with that number. And then I guess my last question, just following up on the expansion efforts into Southeast Michigan. I think you mentioned you are in the process of trying to make it a more full-service location. What is the outlook for three, four, five quarters down the road? Is this going to be an area that you will look to actually open up more branches, or potentially maybe look to do an acquisition in?

At this point Damon we can open at LPO, loan production office because of the timing of that kind of structure allow us to open fairly quickly. The plans are for later this year to make that into a full-service branch. Beyond that in terms of additional bricks-and-mortar we have no plans to do that at this point in time. The history of Mercantile Bank and the commercial lending side, we have always operated from a standpoint of fewer branches, fewer bricks-and-mortar and especially these days with the abilities to contact and communicate with customers to technology, online banking, other types of ways that they don't need to come in your offices I think that model will serve us very well in that Southeast Michigan market. So no additional plans for additional cases at this point in time. I am very pleased with the team that we've assembled there and their ability to grow that office at a successful phase.

Okay. That's helpful. Thank you. And then I guess just last question, with respect to the deposit competition, we've seen a couple rate hikes in a shorter amount of time than we have in the last handful of years or so. Are you guys seeing any change in behavior from the larger banks that you guys compete against as far as deposit pricing goes?

Yes, this is Chuck. As I mentioned in my prepared remarks, really haven't seen anything in the liquid rates but we definitely are starting to see a pickup in competition at CD rates, as rates have gone up I think virtually every bank has raised CD rates to some degree. We are starting to see a lot more CD specials out there, very various in terms, some are relatively short terms, some are longer-term. So I think the competition on the deposit side in regards to anybody changing their methodology whether it be a rate and/or different products definitely on the CD side but interest bank, checking account, savings, money market account it's been pretty quiet.

Okay. Great. Thank you very much for the color this morning, guys. That's all that I had for questions. Thanks.

[Operator Instructions] And our next question comes from John Rodis with FIG Partners. Please go ahead.

Good morning, guys. Chuck, maybe just back to the yield accretion. So it was roughly $832,000 this quarter and I think - did I hear you correctly? You said that should be around $500,000 going forward per quarter?

Let me make sure - the 500,000 is based on scheduled payments, contractual payment with the assumption if there's maturities are blooms coming up, that they will - that loan will be rewritten and it current terms. So that's a scheduled cash flow expectation that's where the 0.5 million comes from. So the impaired loans but the vast majority are paying, so I guess that would be more of a minimal amount and then of course if there is any additional pay-off as somebody pays as off, refinances elsewhere, sells assets or anything else that provides us cash, that will be in addition. So basically you’re looking at about 300,000 in additional cash flow above and beyond scheduled payments on those particular loans.

For this quarter, right, Chuck?

Yes. For this – kind of a minimum and then any additional cash on top of that would be obviously in addition.

Okay. And you said the total that you expect of yield accretion is the $6 million, but that would exclude any recoveries too?

That’s correct.

Okay, okay. Just back to the Troy location, can you guys just give an update on how many lenders are there now and then how big conceivably from a lending standpoint could that LPO be - slash branch?

The current team consists of five lenders and a couple of support people. We're very satisfied with the level of activities that we believe that these folks can bring into the bank. In terms of additional lending staff that's a bit premature at this point as we’ve always talked about here in Mercantile Bank, so about the people. We identify good people, we tend to bring them on board that was the strategy with this market as well. And we saw new additional lenders in that market that popped up that were good fit for our culture and we take a look at them but if not then we’re very satisfied with what we have right now. So no plans in the works to grow at that the traditional lending team members at this point in time.

I'm sorry, Bob. I was more along the lines of how big from loans outstanding do you think that location could be?

I guess it’s a little bit premature, we’ve got obviously some good expectations for what we feel that they can generate from a standpoint of the size of the loan that the five lenders are able to generate within their portfolio. Not making any prognostication at this point in terms of dollar levels but and we feel pretty enthusiastic and excited about what we feel that can bring to the table in terms of loan growth in that market.

Okay. And then, Chuck, just for you, I guess, are you still thinking as far as expenses for that location around $500,000 a quarter?

Yes.

Okay. And one other question for me, guys. Just on the credit front, credit quality looks very good for you guys, but you have seen a small increase in non-accruals the past two quarters and I know it's off very low levels so, but are you seeing any significant issues or anything in the portfolio at this time?

Well I guess down the head it’s very low and if you look back where it were a year ago, it’s about almost exactly at the same level of nonperforming loans and nonperforming asset. So when you get numbers that low if you have any increase in terms of percentage, it’s kind of eye popping but I think if you look at the overall level of nonperforming assets, it’s very good we’re very pleased with those results. We’re going to see some fluctuation from time-to-time it may pick up, may pick down but not seen any trends to answer your question directly in the portfolio that given there’s concern that there is inherent problems these are in the markets or the portfolio as see it today.

Yes John, this is Mike. Bob described pretty accurately and while we don't disclose what our watchlist is numerically that's always the precursor where we think things are happening and that watchlist number continues to be very manageable in trending in the right direction.

Okay. Thanks, guys. That's helpful, Mike. Thank you.

[Operator Instructions] And our next question comes from Daniel Cardenas with Raymond James. Please go ahead.

Good morning, guys. Just a couple questions here. On the loan growth we saw this quarter, can you maybe give us some sense as to what percentage of that was just a market share grab versus maybe growth coming from new or existing customers?

I think what you saw was a good to healthy amount of new loans coming from new customers. We talked about in the past relationship banking is something that it takes time, it takes time for relationships - going to develop then to be able to get to the point where we can make a presentation, had that presentation accepted. We had nice confluence of that activity happening in the first quarter where we had some new client that we’ve been calling on for a long time in developing our relationships and those all came to bear in terms of loan funding in the first quarter. That’s how the process works here at Mercantile I think while - we also had some nice existing credit relationship with existing clients. So it’s been a good balance and that's what makes us very excited about the overall portfolio trends with that we’re seeing some nice new clients come on board. We’re seeing some good healthy growth with existing clients looking to put up a new building or to buy some equipment. And so it’s given us overall optimism on the Michigan economy as well.

Okay, good. And then looking at your margin, I guess really more just looking at given the recent rate hike, how much of the March hike, if any, do you expect to pass on to your deposit customer base and if little or none, when do you kind of expect to see that occur?

Yes Dan, this is Chuck. Like I said before on the liquid rates we done very little as our competition has done the same but not done anything. Definitely seeing some increases on the CDs obviously that takes impact over time especially with the renewals. So there's some passing of the rate hike into our deposits certainly we’ll see a little bit on the federal home bank side as well and our trust preferreds. But a majority of it definitely is a positive to our net interest income and to our bottom line. I get that it’s our opinion that when rate hikes are few and far between there's not much attention garnered by depositors. But if it picks up which is so far it has with the rate hikes become more frequent maybe it garners additional attention. But again overall interest rates are still very, very low and while you’re paying some 10 basis points or 15 and increase it up to 20 or 25 it’s still not incredibly significant and eye-catching, but we’ll just see what the trends are and go from there.

Yes Dan this is Mike, the new thing about it as well as the first couple of rate hikes as Chuck has explained in the past we weren’t able to take the entire benefit from it because there were some loans that were below the floors and we’re just about past that now. So we know it somewhere down the line we’re not quite sure where we’ll probably have to pass some of those rate hikes down to our depositors, but we’ll be able to more effectively do that because we’re going to gain almost 100% when we can on those floating rate loans from the increase on the loan side.

Yes and just let me add the color, the number color to what Mike just said. As we go forward at the next rate hike 95% of our loans are no longer on floors. It was 87% for the March rate hike and now we’re up to 95% those last five will fall off of the next couple rate hikes and that's about 53% of our commercial loans are floating.

Like in the lamination that we know are going to have to bypass some of that down into deposit side.

Got you. All right, perfect. And then just a couple questions on the credit quality side. Have you guys started work on CECIL yet and is that something that you plan to do in-house or maybe outsource to a third party?

Yes that’s still pretty early in the game Dan. Obviously we keep our eye on the ball, there is lots of vendor out there that are trying to sell those solution. I think it’s their solution and not necessarily anybody else's. Obviously we talk to our auditors I talk to them every quarter about it, they kind of do what I do and rest of us do we kind of snicker when we get these emails but the solution because I don't think the rules have been or the expectations have really been set yet for that’s going to look like. Obviously every quarter we’re a quarter closer to the implementation date. I think what we're doing is what everybody else is doing is just kind of waiting for some additional guidance. But in the meantime we’re making sure that we’re gathering all the data that we need to. I think we’re already were before CECIL became a concept. But clearly having your database filled with as much data as possibly is going to be a big help whether it's something you do internally or whether you want to go out there externally and you get some assistance there. So we're just making sure we’ve got the data and we’ll just see where it goes in regards to the guidance and expectation but hopefully if we get as we get closer to implementation.

It’s not unlike things that have happened in the past whether it will be Sarbanes-Oxley all the types of legislation that has come down or regulations that have come down will remain pretty adaptable and look to see what the expectations are, what the guidance is and then look to see what vendors if any we partner with to make sure that we are fully implemented with whatever expectations may be for our organization.

Okay, fair. And then you may have said this. I jumped on the call a couple minutes late, but the sequential quarter increase in NPLs, what was that related to?

Dan as we talked about in previous couple calls you're going to see some movements up or down, we’re going to arrange as look in the portfolio happens as loans that are work out past come to a conclusion you may get some new blips on the screen. But look at overall the level of NPA is most exactly what it was at the first quarter or in the first quarter 2016 and so not concerned about any trends or anything there it just the usual movement that you see with loans and maybe in workout process or in a state of distress that should work through and very manageable, very appropriate for the level that we see in the overall level NPLs in the portfolio.

Okay. But was this kind of related to one credit or was this a handful of credits that just kind of blipped up this quarter?

No I think the increase that was all of changes in a couple of different credits we had some credits that went to conclusion and a drop in the NPAs and a couple of other ones went in non-performance was up, but it wasn’t related to one specific credit, had a couple of different credits.

Okay, good. And then last question. Maybe you could comment on the M&A environment. What's it look like right now? Are you guys getting more phone calls than a year or so ago?

No, it remains consistent about what it has been last few quarters, not a whole lot of activity out there. We remain obviously open to conversations that I think is across our best but nothing that we see as evident in any case whatsoever but obviously as the economy changes, the market changes that could change but that's being a whole lot right now.

Okay, great. Thanks guys.

This concludes our question-and-answer session. I would like to turn the conference back over to Bob Kaminski for any closing remarks.

Thank you for your interest in our Company. We look forward to talking to you again after the second quarter. Thank you very much.