Michael Price - President & CEO Charles Christmas - SVP, CFO & Treasurer Robert Kaminski - EVP, COO & Secretary.

Matthew Forgotson - Sandler O'Neill and Partners Stephen Geyen - D.A. Davidson Damon DelMonte - KBW John Rodis - FIG Partners Daniel Cardenas - Raymond James.

Operator:.

[Call Starts Abruptly] successfully. While we are only three months into a qualified process, we are very pleased with the progress to-date, and our initial expectations for emerging savings and cost opportunities are being realized on schedule.

Over the longer-term, we are confident in the direction of economic recovery as evidenced by the third consecutive quarter of healthy employment gains in our west Michigan markets. Our business goals remain consistent.

We expect to grow market share, as the combined franchises position for long-term growth, with the size and scale to complete very effectively on our markets. We will capitalize on a geographically diverse and attractively mixed loan portfolio, coupled with balanced core funding that positions the bank for continued expansion.

We believe we are well-positioned in the marketplace with our continued strong emphasis on value-added relationship-based banking. Our continued goal is to deliver an effective use of our strong capital position to enhance both profitability and shareholder value.

We expect to provide strong shareholder returns through both price appreciation and cash dividend policy that balances cash returns with growth opportunities. We will continue to do this, while remaining focused on building our franchise, and helping the communities we serve to prosper. Thanks for your attention.

At this time, I'd like to turn it over to Chuck..

Thanks, Mike, and good morning, everybody. As you saw this morning, we announced net income of $5.9 million for the third quarter, and net income of $11 million during the first nine months of this year.

On a diluted earnings per share basis, we earned $0.35 per share during the third quarter and $1.36 per share during the first nine months of the year. Our third quarter and year-to-date earnings results have been significantly affected by the merger with Firstbank Corporation, which was consummated effective June 1.

In addition to our earnings results reflecting four months of operations as a combined organization, we recorded relatively large merger-related cost during the first nine months of this year. Merger-related costs totaled $1.3 million during the third quarter and $5.1 million during the first nine months of 2014.

On an after-tax basis that equates to $0.9 million or $0.05 per average diluted share during the third quarter and $3.6 million or $0.29 per average diluted share during the first nine months of the year.

We do expect to expense further merger-related cost totaling approximately $0.4 million during the fourth quarter and then nominal amounts during the first and second quarters of 2015. As Mike noted in his opening comments, we believe total merger-related costs will approximate our projections made at the time of the merger announcement.

In addition, we are now starting to realize cost savings resulting from the merger, which we also expect to approximate our projections made at the time of the announcement.

The quality of our loan portfolio remain strong, which when combined with recoveries of prior loan charge-offs continues to provide for a negative provisions expense to loan loss reserve. In addition, the level of problem asset administration cost remain low.

Non-performing assets have declined over 92% since the peak level at March 31, 2010, and are currently at their lowest dollar volume since year-end 2006.

We are very pleased with our financial condition and believe we are very well-positioned to take advantage of lending and market opportunities and deliver success as a strong community bank for our shareholders.

Highlights for the past quarter include, our net interest margin was 3.95% during the third quarter, a 33 basis point improvement from the second quarter, and a 53 basis point improvement from the first quarter.

Our yield on earning assets increased 9 basis points during the third quarter, when compared to the second quarter, primarily reflecting discount accretion recorded on legacy Firstbank's loan portfolio per purchase loan accounting rules.

We accreted a total of $1.3 million during the third quarter, with about $0.2 million of that being accelerated due to payoffs. Our cost of funds declined 24 basis points during the third quarter when compared to the second quarter, following a 10 basis point decline during the second quarter when compared to the first quarter.

A vast majority of decline on the cost of funds during the past two quarters reflects our June 1 merger with Firstbank. We expect our net interest margin to remain relatively steady over the next few quarters.

While the ongoing very low interest rate environment continues to exert compression pressures on our net interest margin, we expect to use cash flows for monthly pay downs on lower yielding mortgage-backed securities, and periodic maturities and calls on lower yielding U.S.

government agency and municipal bonds, to fund expected loan growth for the remainder of this year and into 2015. The level of discount accretion recorded on legacy Firstbank's loan portfolio may cause some volatility in our quarterly net interest margin calculation.

The ongoing improvement and the quality of our loan portfolio, combined with recoveries of prior period loan charge-offs, and the elimination of and reductions in specific reserves, have produced a positive impact on our loan loss reserve calculation, and allowed us to make negative provisions in seven consecutive quarters and in nine of the last 10 quarters.

We recorded a negative provision expense of $0.4 million during the third quarter and $3 million during the first nine months of this year. The gross loan charge-offs during the first nine months of 2014 totaled $0.3 million excess this third quarter compared to the recoveries of prior period charge-offs totaling $0.2 million.

Well, we did record a very small net loan charge-off for the third quarter; we had recorded a net loan recovery during the previous five consecutive quarters and during seven of the last 10 quarters. Our loan loss reserve was $20.4 million at the end of the third quarter or 1.72% of total originated loans.

Despite the significantly improved condition of our loan portfolio and reduction of the loan loss reserve in terms of dollars, and as a percentage of total originated loans, our loan loss reserve coverage ratio remained substantially higher than historical averages.

New term loan originations totaled approximately $47 million during the third quarter, bringing the total up to $168 million during the first nine months of this year. The new loan pipeline remains very strong. In fact we have already closed about $20 million in new term loans since September 30.

In addition we have over $140 million in unfunded commitments on commercial construction and development loans that are in the construction phase and expect to be funded in the next 12 to 18 months. The loan portfolio is well-diversified.

At the end of the third quarter, commercial real estate non-owner occupied loans comprised 28% of total loans; commercial and industrial loans equaled 26%; commercial real estate owner occupied loans were 20%; and residential mortgage and consumer loans aggregated 18% of total loans.

As a percent of total commercial loans, commercial and industrial loans and commercial real estate owner occupied loans equaled 57% at quarter end. Our funding structure is also well-diversified.

As of September 30, we had a very well-diversified funding mix with non-interest bearing checking accounts comprising 22% of total funds, interest checking and sweep accounts combining for 22%, savings and money market accounts combining for 23%, and local time deposits accounting for -- also accounting for 23%.

Wholesale funds, consisting of broker deposits and FHLB advances, represented 10% of total funds at quarter end. We remain a well-capitalized banking organization.

As of September 30, our bank's total risk-based capital ratio was 14% and in dollars was approximately $93 million higher than the 10% minimum required to be categorized as well capitalized. Those are my prepared remarks. I'll now turn the call over to Bob..

Thanks, Chuck, and good morning. As we have discussed in previous conference calls, the nature of our loan portfolio tends to create some uneven patterns of growth. While the second quarter witnessed significant growth in the commercial portfolio, third quarter finished with portfolio totals that are basically leveled with the previous quarter.

The timing of loan closings and advances continues to be the cause of the swings in the growth rates for 2014. For the third quart we had over $47 million in new loans to new and existing customers.

The relationship building and new COG activities are taking place in all of our markets, and we continue to enjoy new opportunities in commercial and industrial enterprises and commercial real estate projects. The pipeline remains very healthy.

And additionally Mercantile has approximately $148 million in unfunded construction and development commitments that will be coming on the books over the next 12 to 18 months. We anticipate steady overall growth when viewed by measurements greater than any single quarter.

The internal phase of the integration process continues as most facets of the merger that directly impact customers are not complete. Mercantile staff members are implementing and adjusting to the plans developed by the transition teams.

Our employers are working extremely hard to maintain an environment of best-in-class sales and service for customers and prospects, while balancing the risk management practices that are appropriate for a $2 billion company.

The staff remains energized about the opportunities to offer new products and services to all of our markets in the merged company. Asset quality remained strong with net loan charge-offs of $82,000 for the third quarter and a recovery position of $553,000 for year-to-date 2014.

The reserve was 1.72% of total loans in the originated portfolio at September 30. The portfolio continues to be in good balance between C&I and owner occupied commercial real estate with non-owner occupied commercial real estate.

So in summary, with the third quarter complete, we feel we are well-positioned to continue on with our integration work and relationship development activities with our customers and prospects and have a strong finish to 2014. Those are my prepared comments. I'll be happy to answer questions during the Q&A session.

And I'll now turn it back over to Mike..

Thank you, Bob, and also thank you, Chuck, for your comments. Gary at this point, we would like to open the conference up for questions..

We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Matthew Forgotson of Sandler O'Neill and Partners. Please go ahead..

Hi, good morning.

Am I coming through?.

Yes, you are..

Okay. Just a quick question on the purchase accounting accretion this quarter.

Can you give us a sense of what the balance was at September 30? I think it was $10.6 million at June 30?.

Yes, Matt I don't have that with me so I will give that to you offline..

Okay.

And just in terms of how long the purchase account accretion should contribute to the margin? What are your renewed expectations, kind of it in light of the pull back in long-term rates?.

We'll have to see, what -- obviously it's been a crazy couple of weeks with the interest rate environment and we'll obviously see where that goes overtime. Certainly not enough time right now to get an idea of how that's going to impact not only the purchase portfolio but even our originated portfolio as well.

So far we haven't really seen any major impacts there. We've been expecting that the accretion will primarily be run into our earnings stream over the next, primarily three to four years, as we will see that. Obviously it's a little bit frontloaded as we use level of yield.

But over a three or four year period of time we would see most of that accreted back into income, obviously reflective of the payments we receive..

Okay.

And then as far as expenses are concerned I guess first was there anything non-core or lumpy in the expense base this quarter? And can you just give us a sense of the overall expense trajectory say over the course of next 12 months your expectations?.

No, Matthew I think that we hadn't, and we obviously highlighted that was our merger-related cost and again we expect about $400,000 here in the fourth quarter and then just some nominal amount in the first couple of quarters of 2015.

Excluding that merger-related number you look at the other numbers, I think that they're pretty well core numbers and a good base for going forward..

Okay.

So you think operating incentive is going to build softly off this level or you think that they kind of trend down a little bit as the cost savings fall out in the model?.

Yes, I think that we're just now starting to get the cost saves in there and that's a very good point. We got some of them certainly in the third quarter but the first quarter will be the first full quarter that those cost saves will start being realized.

Again some of those cost saves are based on rate reduction and professional fees such as legal fees, accounting fees especially having two publicly traded companies come in, there are definitely going to be some cost savings there. But again we accrue that over a 12-month period of time. So obviously we've already adjusted our accrual.

So if you try to get to that $5.5 million cost saves number, which we think is still accurate, a good approximation it's going to take some time to get that fully through a 12-month period of time in our income statement..

Okay. And then just lastly and then I'll hop out. Reserve coverage as you point out very strong 172 basis points originated loans.

I guess just the question is how much more negative provisioning should we expect assuming the credit profile holds?.

Yes obviously that's the million dollar question when it comes to trying to fix up where your reserve should be and then obviously plugging in your provision number to get you there.

Certainly as you've seen while we're still doing it, I've mentioned still do at negative provision certainly the balance of that the dollar amount of that negative provision has been coming down and not withstanding any significant large recovery then I can assure you that we're still working on our charge-offs not withstanding anything larger unusual coming through.

We would see in that the provision expense is going to be near zero over future quarters. But again in light of lot of that goes into that not only grading our originated loans obviously any significant loan growth we'll take some provision and of course our recovery experience that we've got.

So my crystal ball says what we saw in the third quarter is probably reflective of what we'll see over the next couple of quarters much closer to zero as we go forward..

The next question comes from Stephen Geyen with D.A. Davidson. Please go ahead..

Hey may be just a follow-on to the cost saving questions. In the presentation of the actual merger agreement you had mentioned i.e. 60% cost saves or phase-in in 2014 and then the remaining or 100% thereafter.

Is that kind of a still good number to kind of use a 60% phase-in in 2014?.

I think that 60% number is a good phase-in to use over the first 12 months. When we put that out that we were expecting the merger to take place obviously on January 1. So we're kind of five months behind it, if you will, based on that trajectory.

So I think what we are seeing is within 12-month period we would see 60% of that realize and then the 40% soon thereafter. We still, I think that still makes sense that 60% number. We just got to push that back five or six months..

Okay, okay great.

And then the pay downs on loans this quarter, was there anything unusual about it?.

No, I don't think really anything unusual. We continue to get periodic pay downs on loans that we would like to see it leave the bank and not unhappy that they were able to find a different place to go. And we still see business owners from time-to-time selling their businesses and obviously we get paid off in relation to that.

It's very competitive out there. So occasionally we do lose credits to our competitors. Especially we try to keep them, we were assuming these are good customers but sometimes the pricing, the underwriting, just isn't to the degree that we think is appropriate. So we step back and go ahead and let those loans go somewhere out.

But I don't think there was anything during the quarter that was unusual or different than the previous year-and-a-half or so..

Stephen, this is Mike. I'll add a little more color to what Chuck said, he is right. We did have one moderate size commercial real estate deal that went to long-term FHA funding but we had expected that and that came to provision last quarter. But again that isn't anything unusual or unexpected just that take some total volume out of the picture..

Do you have any guidance that you're kind of looking at the loans that are out there as far as what might or could go to permanent financing over the next quarter or so?.

Well I don't think there is a whole lot less to that type of stuff. I'm sure there is one or two within the portfolio. But as both Bob and Chuck have eluded to the pipeline and activity that we've seen so far and the fourth quarter has been very strong, more akin to what we saw in the second quarter.

Unfortunately for purposes financial reporting, we had a really good first week of the fourth quarter in fundings. If you go to the customers they make our numbers are better by doing it a day or two would have been great but fourth quarter is looking very strong and we think the first quarter will look pretty good as well..

Sure. And I guess just last question.

How much of the $47 million in new loans this quarter was C&D loans?.

What is it, what?.

Construction and development?.

Yes..

The construction, what that number is for new term loans those are loans that we would have funded at the table, for equipment, real estate those types of things that would not have included anything in the construction and development side..

Okay..

We certainly, Stephen we certainly closed some of those loans but when you close the loans obviously we expect the owners and any other outside financing to put their money on the table first. So it usually takes three to six months after closing a construction loan before we start seeing withdrawals come out..

Yes, that will be a bigger factor going forward as opposed to this past quarter..

Okay.

And actually I just have a follow on that, $148 million in unfunded loans, how does that compare to some of the prior quarters?.

That is definitely growing..

Okay. Thanks for your time..

And to the plan that's what I was answering we did close on some pretty decent size construction and development loans during the third quarter, which increased that unfunded amount but certainly anything that closed in the third quarter saw very little of any funding to-date.

So we'll start seeing that likely during the fourth quarter and certainly into the first and second quarter. Most of our construction, our commercial construction development is a 12 to 18 month funding period..

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

Just to kind of continue on the topic on the loan growth.

So as we look into the fourth quarter I mean are you guys going to put a like a range of the growth which do you -- would be comfortable saying high single-digits may be low double-digits?.

No, I think not really comfortable to put a number like that out there.

But as I mentioned in my prepared comments, if you look at the swing between the second and the third quarter, if you pick the number that was inclusive of funding of some of the construction development commitments that we have out there, some loans that we have in the pipeline, line draws are always a hard figure to predict.

But I think we'll see as the fourth quarter being a number that's certainly more than the third quarter will be higher than second quarter probably not but that remains to be seen.

But I think the crux of the matter is that we have some really nice opportunities that we're seeing and that we have accepted commitment letters on from our customers, and perspective customers, and the opportunities are out there and its really all matter of timing as Mike mentioned we had a great first couple of weeks of the fourth quarter but that's just the timing of it..

Okay. That's helpful thanks. And then Chuck just to kind of circle back on the expenses. So we call $19.5 million of core operating expenses this quarter.

So when you guys look at the cost savings that you're going to generate in the upcoming quarters are you basically saying it's going to be flat and then any growth that you would normally have would be effectively the cost savings?.

Yes, I think when you look at that and obviously we're just starting to put our budgets together and our thoughts together for 2015 and certainly we'll just see some normalized type increases and overhead cost. There are -- when you look at the third quarter there certainly are some cost saves that are going to come through that number.

So there would be a reduction there as we go forward. But again we also have to look at any normalized cost increases. I think net we'll definitely see some cost savings but obviously a lot of moving parts.

Certainly if you look at firming up our existing company, for example, when experienced and loan officers come available that would set our platform nicely. We are obviously going to extend offers.

So while there is $5.5 million in cost savings there obviously we're not operating in a vacuum here and there is going to be some movements within our overhead structure as we go about running our company..

Got it. Okay.

And then just lastly on fee income, anything notable this quarter? Are you comfortable with a run rate in that $2.9 million, $3.0 million quarterly rate?.

Yes, I think when you look at, if I break it down, if you look at service charges and the other income, I think that's probably a decent run rate. Obviously, the other question is going to be with mortgage banking income what rates are doing and how that impacts the level of applications and any refinance activity that comes through.

Certainly rates have dropped over the last couple of weeks but a lot of volatility out there. It seems like we've seen a little bit of an uptick but with that volatility just not sure where that fee income is going to go.

I hate to be evasive but hopefully we would expect that $2.9 million -- we would hope that that $2.9 million number be kind of a base but not knowing really what's going to happen in that mortgage area, it's hard to guess..

Okay.

And I guess lastly on the tax rate what would be a good effective tax rate to model in?.

Probably somewhere around 31%, 32% somewhere around there, whosever following out..

(Operator Instructions). Our next question comes from John Rodis with FIG Partners. Please go ahead..

I guess most of my questions have been answered but may be just a big picture question for you just sort of now that the deal is complete you've got one quarter under your belt.

May be sort of how are you viewing potential future acquisition opportunities right now?.

That's a good question John. I think we answer it pretty much the same way we've always answered it in the last eight to 10 years and that is if we see something that makes a lot of sense we'll certainly vet it and see if it is price right and fits into our strategic goals.

And for a longtime we said that not going to happen and then we met up with Firstbank and put together we think it's a pretty compelling organization when we put that merger together. So it could be one of those things where we do it again in a year or two or could be one of those things where we don't do it again for six to eight years.

But one thing is for sure is our experience in planning and putting together this merger has not detoured us from using M&A as a growth strategy.

As a matter of fact that we have been very encouraged by the hard work of our employees and the focus and the planning they went on by the teams as they went through the integration process and the impact to the customer has been pretty minimal as far as disruption goes.

And at the same time, the range of products and services that they now are able to access has grown substantially. So again, it's one of those things where we knew we needed some time, we're taking that time to digest the fairly compelling and large merger.

But knowing what we know and learning what we've learned even though organic is our stated preferable way to grow; we certainly keep our eyes open for M&A opportunity..

That makes sense Mike.

Would you consider -- I mean would you look at deals outside of Michigan at this point?.

Yes. I -- our preference would be in our own backyard or in our own state but we certainly would take a look at the -- at other opportunities as well..

Okay.

And I assume mostly contiguous states, nothing?.

Yes. I think as you rank order them contiguous is probably right behind in state you bet..

The next question comes from Daniel Cardenas with Raymond James. Please go ahead..

May be just some color on competitive factors and on the lending side.

Is it still primarily pricing where you're seeing the competition or are you seeing changes in structure? And then may be some color too on what you're seeing on competition for deposits right now, if any?.

I think on the loan side the competition has been fairly consistent throughout this year. Like you see on some deals, some pretty competitively priced situations and in many more cases than not our style of banking, our relationship focus, and value added to our customers, definitely gained this favor.

And customers, they appreciate and they like the approach that we're taking with our banking outreach.

Not to say that they aren't deals out there that we Chuck necessarily, we walk away from, because they're just priced too thinly for us and we've done a good job of maintaining our discipline with the desire to keep our margin where we desire to maintain it.

And so as far as structure goes, occasionally there is a situation that present themselves that the structure is not quite what we like it but I think again in most cases we are able to get the structure that we need from a risk standpoint, the customer understand that and so structure really hasn't been a huge issue for us.

On the deposit side, there is -- most of the situations are pretty flush in liquidity and that is not really competitive situation right now..

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

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

Thank you to all of you for joining us this morning and for your interest in our company. We look forward to talking with you again..

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