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Mercantile Bank Corp  (NASDAQ:MBWM)
Q4 2018 Earnings Conference Call
Jan. 22, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good morning and welcome to The Mercantile Bank Corporation Fourth Quarter 2018 Earnings Results Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions (Operator Instructions). Please note, this event is being recorded.

I would now like to turn the conference over to Mike Houston. Please go ahead.

Mike Houston -- Investor Relations

Thank you Kate. Good morning, everyone and thank you for joining Mercantile Bank Corporation conference call and webcast to discuss the company's financial results for the fourth quarter and full year 2018. I'm Mike Houston with Lambert IR, Mercantile's Investor Relations firm.

And joining me are members of their management team, including Bob Kaminski, President and Chief Executive Officer; Chuck Christmas, Executive Vice President and Chief Financial Officer; Ray Reitsma, President of Mercantile Bank Michigan; and Bob Worthington, Senior Vice President, Chief Operating Officer and General Counsel.

We will begin the call with management's prepared remarks and then open up the call 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 factors described in the Company's latest Securities and Exchange Commission filings. The Company assumes no obligation to update any forward-looking statements made during the call today. 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'd like to turn the call over to Mercantile's President and Chief Executive Officer, Bob Kaminski. Bob?

Robert Kaminski -- President and Chief Executive Officer

Thanks, Mike and good morning, everyone. Thank you all for joining us. As you saw this morning, Mercantile released its fourth quarter and full year 2018 financial results and announced an increased first quarter dividend as evidence of our confidence in the bank and commitment to enhancing total shareholder value. On the call today, we will provide an update on our overall performance, financial results, along with our key areas of strategic focus. We will also discuss loan development, growth initiatives and asset quality. Afterwards, we will open the call for a question-and-answer session.

As was outlined in the earnings release this morning, fourth quarter 2018 operating results represent a continuation of the strong performance demonstrated during the first nine months of the year, resulting from improved operating performance and balance sheet growth. This was evidenced in the healthy net interest margin, consistent loan fundings which were produced from the ongoing strength of our commercial loan pipeline and another quarter of solid net loan growth and a continuation of our improvement in an already sound asset quality. As a result, Mercantile reported a strong performance for fiscal 2018, with growth in total revenue and earnings per share.

We are pleased with the increases in certain fee income categories and remain committed to controlling overhead costs, while at the same time, invested in our people as we continue to prudently grow our business. Despite a reduced level of mortgage banking activity income in 2018 due to the lack of inventory in our markets and lower refinance activity, we are confident that the combined effects of our mortgage production strategies, consistently elevated level of pre-qualifications and focused efforts to sell a greater percentage of originated mortgage loans will lead to growth in our mortgage banking results. Ray and Chuck will provide more details on these areas momentarily.

In addition to this financial strength, we are proud to report that Mercantile Bank of Michigan once again received an Outstanding Community Reinvestment Act rating from Federal banking regulators, which reflects our continuing focus on meeting the needs of the communities we serve. This is the fourth consecutive exam cycle covering more than 13 years that Mercantile has earned the highest CRA ratings, less than 10% of all banks in the United States receive an Outstanding.

Turning to the Michigan economy, the directional trend remains positive even as rising interest rates and a tightening job market and housing market are increasingly evident. Employment in our primary market continued to grow and overall real estate conditions remain healthy. Overall, our client base remains positive on the economic outlook for 2019 in our markets and seeks to appropriately assess and leverage opportunities to expand their businesses.

In summary, our sustained strength and core profitability as evidenced by our performance in 2018, solid capital position, healthy commercial loan pipeline and bankwide strategic initiatives to properly position us to enter 2019 in a strong fashion and to take advantage of future growth opportunities in the coming year and beyond.

That concludes my prepared remarks. I'll now turn it over to Ray.

Raymond Reitsma -- President-Mercantile Bank of Michigan

Thanks, Bob. During the fourth quarter, total loans grew by $55 million. Commercial term loans funded to new and current clients totaled a $136 million. We are very pleased with these results as the level of new commercial term loan originations exceeded $500 million for the fourth consecutive year. Funding activities were consistent with the first nine months of 2018, contributing to a net loan growth rate of 7.6% during 2018.

During the fourth quarter, the commercial loan portfolio grew $54 million, this is -- included in this number is $10 million of loan growth funded by our Troy office, which opened in March of 2017. The office provided $40 million incremental commercial and residential loans during 2018. All commercial loans segments, most notably the commercial and industrial loan portfolio, grew during the year and our solid growth in commercial loans depicts our ongoing efforts to identify new lending opportunities and meet the credit needs of our existing customers.

Note also that our pipelines continue to be solid. We enter 2019 with a pipeline that is consistent with the prior year and our current commitments to fund construction projects total a $170 million. We continue to build momentum in generating non-interest income with growth in credit and debit card fees, payroll processing revenue and treasury management income during the fourth quarter of 2018. As we look forward to growth in these areas in our business in the coming year, the strong results in the fourth quarter were more than offset by a decline in income from mortgage banking activity although growth in these revenue streams during the full year 2018 surpassed the decrease in mortgage banking activity income.

While the increase in residential mortgage loans reflect the continuing success of our strategic initiatives that were focused on expanding our market penetration in 2018, our mortgage banking activity income declined during the 2018 periods compared to the respective 2017 periods, primarily due to the impacts of a limited supply of homes for sale in our markets, as well as lower refinance activity due to rising residential mortgage loan interest rates as Bob mentioned earlier in the call.

Non-interest expense for the fourth quarter 2018 grew slightly faster than the growth of net interest income, primarily due to increased salary costs, including annual employee merit pay increases and higher stock-based compensation expense as well as pay increases for all hourly employees, which were implemented April 1, 2018. As stated earlier, our strategy is to reinvest a portion of the savings from the Tax Cuts and Jobs Act of 2017 in our employees, customers and community.

Our employees are talented and dedicated and these investments are consistent with our service-based approach to the market. We had $1.8 million in net loan recoveries during the year, and year-end asset quality performance metrics continued to reflect our strong portfolio. Total non-performing assets are under $5 million at December 31 or 0.15% of total assets. Our lending officers and management continue to diligently monitor our loan portfolio for potential signs of stress.

Total deposits for the year declined slightly, reflecting a $69.2 million decrease in local deposits, which was partially offset by $10.5 million increase in out-of-area deposits although average non interest-bearing deposits grew $61 million. Continuing growth in our local deposit base remains a strategic priority. Wholesale funds ended of the year at $474 million or approximately 16% of total funds, an increase of about 5 percentage points from the prior year period.

That concludes my comments. I'll turn it over to Chuck.

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

Thanks Ray and good morning to everyone. This morning, we announced net income of $11.6 million or $0.70 per diluted share for the fourth quarter of 2018. Comparatively, during the fourth quarter of 2017, we earned $8 million or $0.48 per share. Net income for the full year 2018 totaled $42 million or $2.53 per diluted share compared to $31.3 million or $1.90 per diluted share during the full year 2017. Net income during the fourth quarter and full year 2018 also benefited from a reduction in the corporate federal income tax rate which was lowered from 35% to 21% effective January 1st of 2018, due to the enactment of the Tax Cuts and Jobs Act. Our year-to-date effective tax rate was approximately 19% during 2018 compared to about 32% during 2017.

We remain pleased with our financial condition and earnings performance and believe we are very well positioned to continue to take advantage of lending and market opportunities, while delivering consistent results for our shareholders. Our net interest margin was 3.98% during the fourth quarter and 3.96% for all of 2018. Our net interest margin was 3.79% for all of 2017. Our net interest margin has benefited from the interest rate hikes by the FOMC over the past couple of years and was further supported from the recording of interest income that stem from periodic successful collection efforts and purchase impaired and certain originated impaired commercial loans.

Our yield on earning assets increased 35 basis points during 2018, primarily reflecting a 31 basis point increase in our loan portfolio yield, improved investment portfolio yield and a lower level of excess liquidity maintained at the Federal Reserve also positively impacted our yield on earning assets. Our cost of funds as a percent of average earning assets increased 9 basis points during the fourth quarter of 2018 compared to the (inaudible) increases during the previous three quarters. The increases during all quarters are a reflection of higher interest rates on certain money market deposit accounts, time deposits and borrowed funds, in large part, due to the increase in interest rate environment.

We recorded $0.6 million in purchased loan accretion and payments received on CRE-pooled loans during the fourth quarter of 2018 and $4 million for all of 2018. We recorded similar results of $0.7 million and $4.6 million during the respective time periods in 2017. Based on our most recent valuation and cash flow forecast on purchased loans, we expect to record additional quarterly interest income totaling about $0.2 million throughout 2019. In addition, we expect to receive, in aggregate, almost $2 million in principal payments on purchased impaired CRE-pooled loans over the next several years, which will be recorded as interest income upon receipt.

We expect our net interest margin to be in a range of 3.85% to 3.90% during 2019. This forecast assumes no further changes in the prime and LIBOR rates. The overall quality of our loan portfolio remains very strong with continued low levels of non-performing loans and loan charge-offs. Non-performing assets as a percent of total assets equaled only 15 basis points at the end of the fourth quarter.

We recorded net loan recovery during each quarter of 2018, totaling $1.8 million for all of 2018. Loan charge-offs totaled just $0.4 million during the fourth quarter and only $1.5 million for all of 2018. We recorded no provision expense during the fourth quarter, reflecting a net loan recovery of $0.7 million that was offset by increased allocations from loan growth and changes in a couple of reserve environmental factors.

Provision expense for all of 2018 totaled $1.1 million compared to $3 million in 2017. We expect to record quarterly provision expense in the range of $0.5 million to $1 million throughout 2019, assuming a steady economic environment. Our loan loss reserve totaled $22.4 million at the end of 2018 or 0.88% of total originated loans. This coverage ratio has remained steady for many quarters and no significant changes are expected during 2019. With regards to CECL, we expect to have our model up and running by the end of the first quarter and plan to run this new model in parallel to our existing model through the end of 2019.

We recorded non-interest income of $5.4 million during the fourth quarter of 2018, which includes a one-time $0.9 million accounting adjustment related to mortgage banking activities in prior years. Excluding this adjustment, non-interest income totaled $4.5 million for the fourth quarter, near the top of the estimated range provided on our last conference call. For all of 2018, we recorded increases in most fee income categories, including an almost 9% increase in treasury management fees, payroll processing revenue and credit and debit card fee income when compared to 2017.

Mortgage banking operations continued to be hampered by ongoing low inventory of homes listed for sale throughout our markets, especially in the Western Michigan area. However, we do believe that we have increased our market share over the past couple of years. We expect quarterly non-interest income to be in a range of $4.6 million to $4.9 million during 2019. We recorded non-interest expense of $22 million during the fourth quarter of 2018 and $86.2 million for all of 2018.

For all of 2017, our overhead costs totaled $79.7 million. The 8.1% increase primarily reflects the increased salary costs, in large part, reflecting annual employee merit pay increases and a one-time pay increase for all hourly employees that was effective April 1. We also increased our training and charitable contributions budget for 2018. Currently, we expect quarterly non-interest expense to total in a range of $22.0 million to $22.5 million during 2019 with our effective tax rate remaining near 19%.

Total deposits at year-end 2018 were $59 million lower than at the end of 2017. Local deposits declined $69 million, while broker deposits were up $10 million. Noninterest-bearing checking accounts continue to grow, increased in $23 million during 2018, in large part, reflecting new commercial loan relationships. The overall decrease in local deposits mainly depicts the managed reduction of public unit time deposits, reflecting the strong competition and resulting relatively high interest rates as well as declines in certain personal non-time deposit accounts stemming from depositors using their funds for investments and expenditures.

As of year-end 2018, wholesale funds comprised 16% of total fund, up from 11% as of year-end 2017 in large part due to reduced excess liquidity, strong loan growth and the aforementioned decline in local deposits. We have instituted various initiatives to grow our local deposit base. As of year-end 2018, our loan-to-deposit ratio equaled to 112% compared to a 101% and a 100% at year-end 2017 and 2016, respectively. When adjusting for our sweep accounts, the loan-to-deposit ratio declined to a 107%, 97% and 95% during the respective time periods.

The increase in the loan-to-deposit ratio over the past couple of years reflects two primary factors. First, we have increased our reliance on wholesale funds during this time period. And second, a majority of the reliance on wholesale funds is with FHLB advances versus brokered deposits. In obtaining wholesale funds as needed, we have purposefully extended the rate -- the duration via longer-term fixed rate bullet advances, generally three years to seven years, thereby mitigating potential interest rate risk from our fixed rate commercial real estate loans. Advance rates for these time frames have generally been cheaper by as much as 20 basis points to 30 basis points than broker deposits. While this program negatively impacts our loan-to-deposit ratio, we believe it is prudent to manage the interest rate risk from our commercial lending activities and to obtain the needed funds at a cheaper cost.

As of year-end 2018, our availability at the Federal Home Loan Bank totaled about $383 million. We remain a well-capitalized banking organization. As of year-end, our bank's total risk based capital ratio was 12.3% and in dollars it was approximately $72 million higher than the 10% minimum required to be categorized as well-capitalized. We are -- we were active in buying back our stock during the fourth quarter, buying about 200,000 shares for almost $6 million at an average price per share of $29.73. We have remained active thus far in 2019, having bought about 120,000 shares for approximately $3.6 million at an average price of about $30.25. We currently have approximately $6 million available in our current buyback plan.

Those are my prepared remarks, I'll now turn the call back over to Bob.

Robert Kaminski -- President and Chief Executive Officer

Thank you, Chuck. At this point in the call, we'll now open it up to the questions-and-answers session.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions). The first question is from Brendan Nosal of Sandler O'Neill & Partners. Please go ahead.

Brendan Nosal -- Sandler O'Neill & Partners -- Analyst

Hey, good morning guys. How are you?

Robert Kaminski -- President and Chief Executive Officer

Good morning.

Brendan Nosal -- Sandler O'Neill & Partners -- Analyst

Just wanted to start off here on the margin. I believe you guys said 3.85% to 3.90% for full year 2019. If we look at where you ended the year, obviously a stronger number of 3.98% and even backing up the PAAs (ph), you're kind of above that 3.90% mark. So just curious as to your thoughts -- as to why it seems like the core margin could come down a little bit from here throughout 2019?

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

Yeah, Brendan this is Chuck. Good question. I think there's really two primary reasons for that. One is, the increased reliance on wholesale funds. Certainly, a wholesale funding is more expensive than most local deposits. So there is some pressure there. And then second, as I noted, we're not project -- in my -- in my estimate, in my range, we're not projecting any further interest rate increases, which obviously have a very positive impact on our asset yield.

So what we're expecting is, there is some lag in our cost of funds, that we knew that once the interest rate environment just stop increasing from the FOMC that there would be a lag effect on our cost of funds and for a period of a few quarters. Especially the first few quarters when we get into that time period, we would see continued increases albeit smaller than what we have been seen, but some increases in our cost to funds, as we have some fixed rate CDs and the occasional FHLB advance that will mature and will have to be refinanced at the higher rate environment. So I think it's the combination of those two things that put us into that 3.85% to 3.9% range.

Brendan Nosal -- Sandler O'Neill & Partners -- Analyst

Okay, that makes sense. And then if we were to see one or two rate hikes this year, I know it's not expected widely currently, but if we were, do you still think the net interest margin would benefit from that?

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

Yeah, absolutely. We still have about 55% of our commercial loans are tied to floating rates as they have been. So we generally see on our asset yield probably a 10 basis point to 12 basis point increase every time the Federal Reserve increases the Fed funds rate so that will certainly continue. I would think if we do get those rate increases, we would see further increases in interest rates on deposits and FHLB advances and those types of things too. So there definitely would be an offset, but for the most part, our asset yield would equal, if not exceed, I think those increases in the cost of funds as long as the Fed keeps raising interest rates.

Brendan Nosal -- Sandler O'Neill & Partners -- Analyst

Got it. Great. And then, the last one from me before I step back. Just looking at the average balance sheet this quarter, it looks like loans now make up about 88% of total earning assets. I'm just wondering how much more remixing, if any, you think could take place over the next couple of quarters or are you pretty much -- more or less tapped out on that remixing dynamic?

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

Yeah, I think you'll probably see that lower a little bit. One of the thing is that with our excess funds that we keep at the Federal Reserve, we do that on an average basis, because there is quite a bit of volatility from day-to-day and week-to-week. And what we saw -- what I saw going into the fourth quarter is that our year-to-date average, we try to keep it around $40 million. I think our year-to-date average through the first nine months was still around $60 million, $65 million because the first part of last year, we did have some excess liquidity, that we no longer have.

And so, I (inaudible) that $40 million average was much lower than that during the fourth quarter as I just tried to balance out that year-to-date average. Here in the first quarter and into the second quarter we'll build that back up closer to the $40 million mark. So that 88% number that you talked about will likely be 86%, 87% for most of 2019, and that has some impact on the margin question you had earlier as well.

Brendan Nosal -- Sandler O'Neill & Partners -- Analyst

Fantastic. Thanks for taking my questions.

Robert Kaminski -- President and Chief Executive Officer

Thank you.

Operator

The next question is from Kevin Reevey of D.A. Davidson. Please go ahead.

Kevin Reevey -- D.A. Davidson -- Analyst

Good morning, gentlemen. How are you?

Robert Kaminski -- President and Chief Executive Officer

Good morning, Kevin. How are you?

Kevin Reevey -- D.A. Davidson -- Analyst

Good, thanks. The first question is, I know when we talked last quarter, you had talked about three of your deposit gathering initiatives focused on coupling lending with deposit opportunities and then cross-selling your cash management products and the third leg of that was your leverage in your muni relationships. Can you give us an update as to where you stand on those three initiatives?

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

Yeah, I'll touch on muni then I'll let Bob or Ray to touch on the other ones in regards to the commercial lending efforts. On the municipal side, I think we can kind of what we have been doing over the last year or two years, I think there's kind of two groups here. We have some really strong and very much appreciated municipal relationships on the non-time deposit side. So, some savings account and checking accounts, and those, we definitely have kept strong relationships with. Sometimes those relationships come with time deposits, and we have been active in bidding on those time deposits as part of our entire relationship mantra with that.

The public time deposits that we've been letting go over the last, again, year or two years are those that are just time deposit customers only and those generally tend to be municipalities that put their deposit opportunities out there for bid and so it could be anywhere from two banks to 10 banks that are out there bidding and those are the opportunities, if you will, that we've been kind of staying away from and shy off because of the very, very strong competitive market.

But having said that, again, if we go back to those relationships that we have that are strong banking relationships, we have their operating accounts, we have their savings accounts, we still have some very good time deposit relationships with those folks as we make sure that we continue to price those relationships on an overall basis and that will continue.

Robert Kaminski -- President and Chief Executive Officer

Yeah, Kevin this is Bob. Our deposit initiatives remain one of our most important areas of focus in 2019. I think what you saw in the fourth quarter was we've continued to maintain some very nice growth all year in non-interest bearing deposits, especially on the commercial side. If you look the fourth quarter, I think we were hampered a little bit by some cyclical and seasonal patterns of deposit withdrawals that happen typically around year-end.

But be that as it may, the initiatives are something that raise leading the charge on and that is wrapped into the focus that we have with promoting our treasury products and the ability to tie those together to get the complete customer wallet as far as deposit relationship in that, which I think we do a very good job on. I think we're also looking at some additional initiatives with respect to deposit only customers that are out there. And I think like I said from the standpoint of the focus of all of our calling officers, loan people, deposit people, everybody is focused with the greatest intent this year on gathering those local deposits.

Kevin Reevey -- D.A. Davidson -- Analyst

And then, OK, go ahead.

Raymond Reitsma -- President-Mercantile Bank of Michigan

If I could just add, as we had commercial relationships, we've done a very nice job of adding the full complement to treasury services and our adoption rate by our clients has been very strong. And so over time, that will certainly build the deposit base that accompanies those activities.

Kevin Reevey -- D.A. Davidson -- Analyst

And then, you had some pretty strong C&I loan growth in the quarter. What was your line utilization at the end of the fourth quarter. And can you remind us where that was at the end of the third quarter, and were there any particular industries or sectors that contributed to that growth?

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

Kevin, this is Chuck. I'll talk on the line usage. It's been staying pretty consistent right around 50%. So most of -- that vast majority of the C&I loan growth that you spoke of is really new relationships that have come to the bank not only during the quarter, but previous quarters that are now in a funding phase.

Raymond Reitsma -- President-Mercantile Bank of Michigan

And I would add to that, that the nature of the relationships that we added, they came from consistent long-term calling efforts and one of the more significant relationships that came into the bank was one that had been with its prior bank for decades and a consistent long-term calling effort resulted in the fruition of that relationship at our bank.

Robert Kaminski -- President and Chief Executive Officer

I think what we also see is the great diversity in our pipeline, our C&I pipeline that you look at the new customers that are coming on board, they're coming from a variety of industries within our markets and that's encouraging, because it shows the breadth of our calling efforts, the breadth at our loan officers, our engaging clients to develop relationships and as Ray said, when they do come to fruition, we'll get some nice -- some very nice victories there as we did with the customer that Ray mentioned.

Kevin Reevey -- D.A. Davidson -- Analyst

Great. Thank you.

Operator

(Operator Instructions) The next question comes from Damon DelMonte of KBW. Please go ahead.

Damon DelMonte -- Keefe, Bruyette, & Woods -- Analyst

Hey. Good morning guys. How are we doing today?

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

Good.

Robert Kaminski -- President and Chief Executive Officer

Good, Damon. How are you?

Damon DelMonte -- Keefe, Bruyette, & Woods -- Analyst

Great. Great, thanks. So just to put it -- wondering if I could talk a little bit about loan growth and the outlook. I think in your prepared comments you guys noted that the economy still seems to be holding up pretty good. How do you look at the state of the pipelines and what you think that could translate into growth for 2019?

Raymond Reitsma -- President-Mercantile Bank of Michigan

This is Ray. Our pipelines are very consistent with what they've been in the past and for that matter the economic environment is very consistent with what we've seen in the past as our customers, suppliers with ongoing results that certainly seems to be the case. So, we really don't expect the results that come out of the pipeline or the impact to the economy would be much different in the very near future than it has been in the past.

Robert Kaminski -- President and Chief Executive Officer

The nice thing that we're seeing is that despite the nice consistent strong level of fundings that we saw in the fourth quarter and resulted in net loan growth, the pipeline has been remaining amazingly consistent which shows that lenders are out there, continuing to develop new relationships and replenishing the pipeline, keeping at the same level as it was despite some very nice loan fundings during the quarter.

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

And, if I can just add to pile on to your answers here. I think you get from Ray and Bob's comments here that we feel pretty confident that our fundings can be similar to what they've been over the last few years and we've hit -- over -- for commercial loans we've hit over $500 million in new term fundings over the last four years. We see the environment per our comment that that would be, it seems to us that it will be relatively consistent, if the economy continues to hold throughout this year.

As we always talk about the big unknown, I think the hardest to predict are the payoffs. And it was gratifying to see that the payoffs some of which we want certainly, but the payoffs in 2018 were actually a little bit lower than what we saw especially in 2017. So our gross fundings were actually a little bit lower in 2018, but our net loan growth was higher because we didn't have quite a level of loan payoffs. But on an overall basis, we're kind of budgeting, forecasting our net loan growth to be similar to what it was last year in that 7% to 8% range.

Damon DelMonte -- Keefe, Bruyette, & Woods -- Analyst

Okay, great. Good color. Thank you. And then with respect to the margin this quarter, Chuck, were there any benefits from interest recoveries? I think you have mentioned something about that in your remarks.

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

Yeah, there was a little bit. There is probably maybe a -- when we talked about interest recoveries, I assume we are talking about originated loans. I think we may have had a -- might have had about a basis point, but we certainly got some more purchase income as we talked about, I think it was $600,000, which was about $400,000 more than what our forecasts were and that was primarily through one payoff of a purchase impaired loan that we got during the fourth quarter. That was the one of those CRE loans. So, there's definitely a few basis points there.

Damon DelMonte -- Keefe, Bruyette, & Woods -- Analyst

Okay, great. And that's about all that I had. All my others questions had been asked and answered. Thanks a lot.

Robert Kaminski -- President and Chief Executive Officer

All right, thanks, Damon.

Operator

The next question is from Daniel Cardenas of Raymond James. Please go ahead.

Daniel Cardenas -- Raymond James -- Analyst

Hey. Morning guys.

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

Morning, Dan.

Robert Kaminski -- President and Chief Executive Officer

Morning, Dan.

Daniel Cardenas -- Raymond James -- Analyst

So a quick question, I think, Chuck, you mentioned that your wholesale funds were about 18% right now. Is that correct?

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

It's 16% right now.

Daniel Cardenas -- Raymond James -- Analyst

16% OK. So as you kind of look at that total, I mean, where is kind of the maximum that you guys want wholesale funds to represent?

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

We'd really don't want to get over 20%. We would like to keep it around 15%. We're projecting probably close to 16%, 17% for this year just given some of the dynamics that happened, especially the strong loan growth through the fourth quarter and the ongoing strong loan growth and the fact that we do need to get our excess liquidity back up to where we want it over time.

So a 16%, 17% I think is probably what we're shooting for, for this year. That's a level that we're comfortable with. Again per my comments, not only in this call, but in previous comments in investor meetings and stuff is, if we have to go out there and get the wholesale funds which obviously we do have to from time-to-time given our strong loan growth, the good part of that is, it does allow us to do some really good things we believe in managing our interest rate risk. And while we like the 55% of commercial loans that are floating rate, the other 45% are fixed rate, primarily, especially on the real estate side, our five-year fixed rate balloon.

So if we do go ahead -- if we have to get the wholesale funding standpoint to fund loan growth, there is definitely an advantage to being able to go out there to the Federal Home Loan Bank System and get those advances in those three-year to seven-year terms that I mentioned and I -- and do what we believe is a prudent thing and managing our longer-term interest rate risk.

Daniel Cardenas -- Raymond James -- Analyst

Okay, got you. Makes sense. All right. And then maybe just kind of jumping over to the loan side, when you look at your growth expectations for 2019, can you give us a little bit of color as to geographically, where most of that growth -- I'm assuming most of that growth is coming from the Western part of the state, but maybe some update as to what the footings look like on the Eastern part of the state and maybe some thoughts on expectations for talent additions in 2019?

Robert Kaminski -- President and Chief Executive Officer

Dan, this is Bob. I think if you look -- your assumption is correct that the majority of our growth will come from our activities here in West Michigan, that is our largest and strongest market that we've had for a long time. We are expecting some nice growth in the market in Southeast Michigan based in Troy. Those folks are doing a very good job over there and I think that's an area that has tremendous potential and the size of the market alone will give us some really good opportunities. So we look forward to continuing to leverage those opportunities as we go into 2019 and beyond as well.

That said I think if you look at all the rest of our markets, some of the smaller -- including some of the smaller rural markets, we are seeing some good activity in the pipeline from those areas, certainly not to the size comparison that you get in West Michigan and Detroit area, but there are some nice activities happening there and some nice opportunities that we're leveraging as well in the Company.

So regarding your question on talent acquisition, we're always looking to add new folks to the Mercantile team, but that's been our culture, that's the most important thing. Over the course of any year, we maintained conversations with people in our various markets and we know who the people are that we would like, we think will be a good fit for the Mercantile team and we'd like to have them on board at some point. So we maintain conversations.

And at some point, the time might be right to add that person on the team. But as we said in the past, culture is extremely important to us and so we maintain a very flexible approach to having conversations with people as we gain a sense that they won't fit our culture and you develop plans and strategies to eventually have them join the team and their situation changes down the road with their current employer.

Daniel Cardenas -- Raymond James -- Analyst

Okay, great, thank you. And then last question just on the buyback. Given just kind of where the stock is right now, kind of at $34-ish level. I mean is that quells your appetite for buying back stock or is this a price level that would still kind of peak your interest?

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

Yeah I think -- Dan this is Chuck. I think the $34 in our opinion and discussions with our Board get a little bit lofty from what we're trying to accomplish from buying back our stock. So we've been very active certainly when it was in the upper $20s and even low $30s obviously, we like what the stocks do in this morning, hopefully it holds. But where it is right at this minute is starting to get above our target where we would be active.

Daniel Cardenas -- Raymond James -- Analyst

Okay. Great, thanks. I'll step back. Good quarter guys.

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

Thanks, Dan.

Robert Kaminski -- President and Chief Executive Officer

Thanks, Dan.

Operator

There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Bob Kaminski for closing remarks.

Robert Kaminski -- President and Chief Executive Officer

Yes, thank you for joining us on our call today. We certainly appreciate your interest in our company and we look forward to talking with you again after the end of the first quarter. That concludes our call. Thanks again.

Operator

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

Duration: 39 minutes

Call participants:

Mike Houston -- Investor Relations

Robert Kaminski -- President and Chief Executive Officer

Raymond Reitsma -- President-Mercantile Bank of Michigan

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

Brendan Nosal -- Sandler O'Neill & Partners -- Analyst

Kevin Reevey -- D.A. Davidson -- Analyst

Damon DelMonte -- Keefe, Bruyette, & Woods -- Analyst

Daniel Cardenas -- Raymond James -- Analyst

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