Mercantile Bank Corporation Q2 2009 Earnings Call Transcript

Jul.21.09 | About: Mercantile Bank (MBWM)

Mercantile Bank Corporation (NASDAQ:MBWM)

Q2 2009 Earnings Call

July 21, 2009 10:00 am ET


Michael Price – President and Chief Executive Officer

Robert Kaminski – Chief Operating Officer

Charles Christmas – Chief Financial Officer


Jon Arfstrom – RBC Capital Markets

Terry McEvoy – Oppenheimer

[Dennis Clasure] - Raymond James

Eileen Rooney – Keefe, Bruyette & Woods

Stephen Geyen – Stifel, Nicolaus


Welcome to the Mercantile Bank Corporation second quarter earnings conference call. There will be a question and answer period at the end of the presentation. (Operator Instructions)

Before we begin today's call, I would like to remind everyone that this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure, as well as statements on the plans and objectives of the company for its management, statements on economic performance and statements regarding the underlying assumptions of the company's business. The company's actual results could differ materially from any forward-looking statements made today due to important factors described in the company's latest Securities and Exchange Commission filings. The company assumes no obligations to update any forward-looking statements made during this call.

If anyone does not already have a copy of the press release issued by Mercantile today, you can access it on the company's Web site at its On the conference today from Mercantile Bank Corporation we have Mike Price, Chairman, President and Chief Executive Officer, Mr. Bob Kaminski, Executive Vice President and Chief Operating Officer, and Mr. Chuck Christmas, Senior Vice President and Chief Financial Officer. We'll begin the call with managements prepared remarks and then will open the call up to questions.

At this point, I will turn the conference over to Mr. Price.

Michael Price

The second quarter was again dominated by the severe economic conditions that persist. Because of our conservative recognition of potential problems loans, we again felt it prudent to aggressively enhance our loan loss provision creating a net loss for the quarter. Our COO, Bob Kaminski, will detail the dynamics of our loan portfolio during his comments.

While it may not be readily apparent by looking at the bottom line, Mercantile made important progress in many areas during the quarter. Net interest margin expanded and is trending upward. Changes in our branch locations and overhead will significantly lower overhead on a go-forward basis, and significant reductions were made in our level of commercial real estate loans and broker deposits. Our CFO, Chuck Christmas, and Bob will cover the changes in their comments.

While these improvements were not robust enough to counteract the increased loan loss expense, they should help us continue to improve results in the upcoming quarters.

At this time, I will turn it over to Chuck Christmas.

Charles Christmas

What I'd like to do this morning is give you an overview of Mercantile's financial condition and operating results for the second quarter of 2009 and the first six months of this year as well, highlighting the major financial condition and performance, balances and ratios.

We recorded a net loss of $6.4 million or $0.75 per share during the second of 2009 compared to a net loss of $2.6 million or $0.31 per share during the second quarter of 2008. Excluding the impact of our branch consolidation and the one-time FDIC special assessment, the net loss during the second quarter of 2009 was $5 million or $0.59 per share.

We recorded a net loss of $10.9 million or $1.28 per share during the first six months of 2009 compared to a net loss of $6.4 million or $0.75 per share during the first six months of 2008. Again excluding the one-time cost during the second quarter of 2009, the net loss during the first six months of 2009 was $9.5 million or $1.12 per share.

The net loss recorded in all time periods primarily results from a significant provision expense, which reflects the impact of local, state and national economic struggles on the condition of our loan and lease portfolio. Although in 2009 we have recorded increases in net interest income and reductions in controllable overhead costs, the significant provision expense has resulted in a loss position.

Net interest income during the second quarter of 2009 totaled $12.5 million, an increase of $1.9 million over the level earned during the second quarter of 2008. Net interest income during the first six months of 2009 totaled $24.3 million, an increase of $2.3 million over the level earned during the first six months of 2008. Our net interest margin during the second quarter 2009 equaled 2.50% up from the 2.15% margin during the second quarter of 2008.

Although our yield on assets declined by about 45 basis points during this time period primarily resulted from an increased level of non-performing assets and a decline in interest rate environment, our cost of funds declined by about 80 basis points as we were able to replace higher costly matured broker CDs and FHLB advances at significantly lower rates.

We do expect our cost of funds to continue to decline throughout the remainder of 2009 and likely into 2010 as well. We have about $300 million of wholesale funds maturing during the third quarter at an average rate of 3.15% and an additional $250 million at an average of 3.35% coming due in the fourth quarter. To put this in perspective, current rates generally range from 0.75% to 2.50% depending on product and term, and during the second quarter of 2009 the average rate on new wholesale funds averaged about 1.00%.

We have started the process of extending the duration of our wholesale funding portfolio, which will likely result in an increase of the average rate of new wholesale funds in comparison to the second quarter, however, the cost savings should remain significant.

We believe that continued reduction of our cost of funds combined with the benefit of our strategic and pricing lending initiatives and our yield on assets should provide for further notable improvements in our net interest margin and net interest income, despite the difficulty of predicting the impact of asset quality.

The provision expense during the second quarter of 2009 equals $11.5 million, an increase of $5.3 million from the level of expense during the second quarter of 2008. And the provision expense for the first six months of this year totaled $21.9 million, an increase of $6.6 million from the level of expense during the first six months of 2008.

Our loan loss reserve totaled $32.6 million or 1.91% of total loans at the end of the second quarter compared to $27.1 million or 1.46% of total loans at the beginning of the year. I will have specific and more detail commentary on asset quality later during the conference call.

Non-interest income totaled $1.9 million during the second quarter of 2009, an increase of $105,000 or 6% from the second quarter of 2008. And non-interest income totaled $3.9 million during the first six months of this year, an increase of $247,000 or about 7% from the first six months of 2008. The increases during both time periods primarily reflects higher mortgage banking activity fee income resulting from increased refinancing activity due to lower residential mortgage loan interest rates.

Non-interest expense totaled $12.4 million during the second quarter of 2009, an increase of $1.6 million over the level of expense during the second quarter of 2008. Excluding the charges associated with our branch consolidation and the FDIC special assessment, our non-interest expense totaled $10.3 million during the second quarter of 2009 or $0.5 million lower than the second quarter of 2008.

Non-interest expense totaled $23.1 million during the first six months of this year, an increase of $2 million over the level expense during the first six months of last year. Again adjusting for the one-time expenses during 2009, non-interest expense was $0.1 million lower during the first six months of 2009 when compared to the same time period last year.

Branch consolidation cost totaled $1.2 million during the second quarter of 2009 comprised of $0.5 million in severance costs and $0.7 million from the expensing of leasehold improvement and lease termination. We expect an additional one-time charge of $0.2 million during the third quarter of 2009 associated with the branch consolidation.

Moving forward, we expect the branch consolidation to result in about $200,000 per month reduction in overhead costs. The bank industry wide special FDIC assessment for us totaled $0.9 million, which was fully accrued for during the second quarter and will be paid on September 30th. Our quarterly assessments have also increased during 2009 when compared to previous years reflecting implementation of the FDIC's new assessment formula and rate.

Core salary and benefit costs were $0.4 million lower in the second quarter of 2009 when compared to the second quarter of 2008 and $0.6 million lower in the first six months of 2009 compared to the first six months of last year. The majority of the decline results from reduction in fulltime equivalent employees.

With regards to funding, our funding strategy has not changed significantly as we have continue to attempt to grow local deposits and bridge any funding gap with wholesale funds, namely brokerage CDs and FHLB advances.

Although our reliance on wholesale funds increased during 2008, we have seen a significant decline during the first six months of 2009 primarily reflecting an increase of $165 million in local deposits and sweep accounts, along with $150 million reduction in total loans and leases. Wholesale funds have declined by about $300 million during the first six months of 2009. Average wholesale funds to total funds during the month of June equaled 61% compared to December of 2008 when it was 71%.

And with regard to capital, we remain in a well capitalized position for bank regulatory definitions. The bank's total risk base capital at the end of the second quarter of this year was 11.6%, almost $30 million above the 10% minimum above capitalized threshold.

That's my prepared remarks. I'll now turn it over to Bob.

Robert Kaminski

My comments this morning will focus on the bank's asset quality. I'll start with the review of the asset quality headlines from the past several quarters starting back with the commencement of these challenges with the residential real estate and development problems back in late 2007.

In the first quarter of 2008, there was a continued deterioration of residential real estate plus we identified some deterioration in commercial real estate and C&I loans. In the second quarter 2008, there was a continued deterioration of commercial real estate loans previously identified as distressed, including significant charges taken for degradation of real estate property values.

In the third quarter 2008, some previously identified impaired loan losses were charged off. Additionally, the bank identified some loan upgrades and payoffs that helped offset the influx of new problem loans. In the fourth quarter '08, we saw continued stresses on the real estate values, including commercial real estate.

In the first quarter 2009 we saw further deterioration of some C&I and commercial real estate credits. Real estate and equipment values of credits going into liquidation continue to be challenged. The second quarter of 2009 brought a continuation of stresses in the loan portfolio, specifically in the areas of C&I and commercial real estate. Some of the C&I loan issues were the result of automotive industry challenges, while others were more the product of the general recession.

The large provision expense during this quarter was necessitated by distressed values on real estate collateral backing some non-performing loans. The oversupply of commercial real estate compared with the activity levels from potential tenants has continued to create challenges in this market.

Provision expense was also necessitated from general allocations for credit downgrades. Proactive portfolio monitoring for any potential problem loans and aggressive workout strategies on non-performing assets remain the primary focus for 2009. Additionally, we continue to look for opportunities to create a better balance in the mix of the portfolio, specifically by reductions in commercial real estate.

I'll start with some general information on the loan portfolio. At June 30th the portfolio size was $1 billion $708 million, a reduction of $69.5 million from the end of the first quarter and just over $148 million from the start of 2009. The most significant components of the loan portfolio are as follows.

Land and development in vacant lots comprised $119 million of the portfolio, one to four family construction consisted of $40 million, commercial construction $75 million, one to four family including rental was $136 million, multifamily was $48 million, commercial owner occupied real estate was $360 million, commercial non-owner occupied was $498 million, commercial and industrial $417 million, and other consumer and miscellaneous was $15 million.

These numbers reveal that the largest reduction came from C&I related loans followed by commercial real estate and development. Portfolio reductions from line pay downs were totaling $25 million during the quarter.

Regarding the loan loss reserve, we had a reserve of $32 million $604,000 at the end of the quarter or 1.91% of the portfolio. Regarding non-performing assets, non-performing assets were $86.6 million at June 30. The breakdown by loan purpose is as follows.

Land development residential lots totaled $10.4 million, commercial land development $2.3 million, one to four family construction $12.9, one to four family $4.9, commercial owner occupied $17.4 million, commercial non-owner occupied $28.1 million, and commercial industrial $10.6 million, again, totaling $86.6 million at the end of the second quarter.

Reconciliation of non-performing asset change from first quarter to second quarter is as follows. At the end of the first quarter we had $83.7 million in non-performing assets. During the quarter we had new non-performing assets of $21.5 million. We had pay-downs of just over $8 million, and we had charge-offs of $10.6 million, again, reconciling to $86.6 or an increase of $2.8 almost $2.9 million from March 31.

Past due loans between 30 and 90 days were $7.9 million at June 30 compared to $10.1 million at the end of March. Charge-offs, second quarter net loan charge-offs totaled $10.8 million. Of that amount, $5.8 million was from impairments reserved at the end of quarter number one, $2.5 million was newly identifiable losses on those previously classified loans as impaired, $2.7 million was for losses on previously identified watch credits not classified as impaired at March 31.

Breakdown of the charge-offs by loan purpose is as follows. Land development and vacant lots residential $1.0 million, commercial land development $74, one to four family construction $1.0 million, one to four family $729,000, commercial owner occupied $593,000, commercial non-owner occupied $2.3 million, commercial industrial $4.9 million, and other miscellaneous $35,000 for, again, a total of just under $10.8 million.

[Inaudible] provision, provision expense for the quarter was $11.5 million. The breakdown of that provision by a loan purpose is as follows. Land development and vacant lots $1.3, one to four family construction $620,000, commercial construction $360,000, one to four family residential $902,000, commercial owner occupied $1.1 million, commercial non-owner occupied $4.4 million, commercial industrial $2.8 million, again, for a total provision expense for the quarter of $11.5.

Those are my prepared remarks on the analysis of the portfolio, and I'll turn it back over to Mike.

Michael Price

At this time, [Anthony], we would like to take questions.

Question-and-Answer Session


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

Jon Arfstrom – RBC Capital Markets

In terms of the inflows into the non-performing category, do you have that from the previous quarter just so we can compare that?

Robert Kaminski

For the previous quarter, inflows in the non-performing was $21.5 million.

Jon Arfstrom – RBC Capital Markets

Was that the Q1 number as well?

Robert Kaminski

The first quarter was $35.6 million.

Jon Arfstrom – RBC Capital Markets

Just curious if you could maybe gauge, I think as analysts and investors we all tend to look at that number as one of the key indicators in terms of how credit is really, whether it's deteriorating or getting better. Can you give us an idea of how you feel about that category and do you expect it to get worse from here or better from here or is it just something that's pretty difficult for you to gauge at this point?

Robert Kaminski

Well, as you suggested, it is very difficult to get a real good read on it. I guess it depends upon the segment of the portfolio, the segment of the economy that you're talking about. Residential real estate, we started to see some stabilization of that segment over the last few months values are still very low and they're still over-supplied, but I think there is demonstrated somewhat stability there such at it is.

Commercial real estate, we're certainly still seeing some challenges. Values continue to decline. I think economic activity for landlords, commercial real estate properties continues to be very challenging and you're seeing that with property owners that are [inaudible] to garner tenants at a very attractive rate for those tenants because of the oversupply.

Commercial and industrial, obviously the automotive situation has affected a lot of the segments of manufacturing. But I think what we're seeing now is with the bankruptcies of Chrysler and General Motors, I think people are realizing that there will be some light at the end of the tunnel in the restructured companies and everyone's jockeying for position, trying to figure out where they fit into the new mix.

And I think things are tending to calm down a little bit there and I think we're hoping for more of that in the coming months and coming quarters, but obviously there's still a lot of uncertainty out there, a lot of challenges that we're all trying to position ourselves best to make sure the bank is protecting itself from those deteriorations as they occur or further degradation.

And some of the initiatives that we started certainly point us in that direction and we're very pleased with some of the progress we've made. Despite the heavy provision for the quarter, a lot of the things we've done to position the portfolio and mitigate the risk that continues to be present there.

Michael Price

This is Mike and adding on to what Bob said, it feels a lot like it did about a year ago and, as Bob mentioned, a year ago the issue was largely centered in residential real estate and residential real estate development. And we had big provisions in the first and the second quarter and we had a trending down as far as new problem loans into the mix. But then, at the end of last year, the economy definitely took another turn downward and the problem migrated into commercial real estate. As Bob indicated, that's the real issue now and we're seeing that same downward trend.

We've gone through the portfolio again. We've been very aggressive, high 30% of our non-performers are contractually current. And so we feel pretty good like we did about a year ago, but just on all the things that Bob said, it's very unstable out there.

If things were to continue on as they are now, I feel pretty good that that's going to continue to have fewer and fewer new credits trend into the non-performer pen, if you will. But we've all seen in the last two years it's very hard to make predictions as to where the economy is going and how deep and wide it is. So we continue to be vigilant and very aggressive in adding to our provisions.

Jon Arfstrom – RBC Capital Markets

A follow-up on that, others outside of your region are saying that some of the straight C&I customers are seeing sales trends stabilize in their businesses and sometimes maybe we have a different perception outside of Michigan than you might have inside of Michigan. But are you seeing those similar trends or would you say it's a bit worse than maybe some outside of your market have talked about?

Michael Price

I think as far as C&I goes, we're seeing basically our C&I customers shake out into two areas and one, and Bob touched upon this a little bit, is the area that's involved with automotive. We took some hits mostly last quarter, first quarter, with some C&I automotive stuff, but that's pretty well settled down a little bit. Everybody's kind of waiting to see where GM comes out of.

But the other C&I customers that we have, I would agree with that statement, we're seeing actually more positive things than negative things. We're seeing some optimism for maybe fourth quarter '09 and the first part of 2010 and some orders increasing. So that's good. But the big thing that looms out there, again, is real estate and what's happening with real estate in our markets.

Jon Arfstrom – RBC Capital Markets

Chuck, just one question for you, how far out are you extending the duration of some of your wholesale funding?

Charles Christmas

What we're going to attempt to do, Jon, is historically we've kind of done a one-year average and we're going to extend that out probably to 18 to 24 months, but we are taking more of a barbell approach to that. Some of the brokered markets you can get a lot of one, two, and three-month money, and then in the larger markets and especially the FHLB advances will be doing some two, three, and maybe four-year stuff. So I would expect that average to be out 18 to 21 months, maybe 24 months depending on how the rates behave.


Your next question comes from Terry McEvoy – Oppenheimer.

Terry McEvoy – Oppenheimer

As you look at the shift in your non-performing asset categories which you talked about in the release and today's problems are the fastest growing category owner-occupied commercial real estate, would you agree with me that the severity rates and the losses on your owner-occupied commercial real estate will be meaningfully below the residential C&D portfolio of last year and the year before. And so would that indicate at some point charge-offs and provisioning slowing down, and do you think we're going to see that over the next couple of quarters or is that more likely a 2010 event?

Charles Christmas

I'll try to answer first and then let Bob jump in with his perspective, but you kind of think that would be the case Terry, but we're very cautious into making that conclusion just because it seems like everybody got burned a little bit on that last year when we saw things, at least we did, for the third and fourth quarter kind of settle down a little bit, and then November and December things really fell off the table as far as the economy goes.

But we feel really good about where we are as far as identifying problems and making the non-performers that they need to be and providing for them at the appropriate amount. And I'd like to believe, I mean it's nice to see the stock market rebounding and it's nice to see some of the things that we're hearing out there. That's all good. But we really want to see a quarter or two of real solid recovery before we make any comments like that. Bob?

Robert Kaminski

Yes, I think with the owner occupied commercial real estate, what you have there is typically you have more to work with than you do on your straight commercial non-owner occupied properties where it's a vacant property, vacant strip mall, and there's not really a whole lot there to grab onto, other than try to lease it up or sell it.

With the commercial owner occupied, there's typically a business there and sometimes the business is performing at greater degrees of efficiency than others. But when it does go to liquidation, you've got some other things to work with there in terms of the receivables, the current assets, and the equipment. And our experience in liquidating some of those things has been actually fairly successful.

We've been able to garner some recoveries of those assets that are typically greater than that percentage that's typical for those kinds of liquidations. So that can help offset a little bit some of the challenges with the real estate side of it, but again in terms of owner occupied there is usually more to work with there and more to latch onto in the overall scope of working the credit out or liquidating the credit if it comes to that point.

Terry McEvoy – Oppenheimer

You've had nice success growing local deposits. Is there a change in strategy at all going after say more consumer retail customers whereas in the past a lot of it has been business-related? And then, is it the market growing or do you get a sense that you are growing your market share within western Michigan?

Michael Price

That's a multifaceted answer and I can tell you that we're hitting it on all cylinders, Terry, and that's a very good question. We clearly are focusing more on changing our strategy a little bit, even more strategy in the customer awareness category. For the first time in our history we did some television advertising on a fairly significant basis. We did a lot of billboard advertising, just letting more and more people on the retail side of our markets know who Mercantile was, where we were.

We ran some fairly aggressive rate campaigns in certain key areas where we could still gain margin because of what we were re-pricing, but we got customers in the door. The idea here is then to cross-sell them. Our branches have done a very good job changing their focus a little bit from almost the strictly good service thing to good service and cross-selling, and so we've got some good programs going on there.

We've been much more aggressive with our commercial owned customers. And as the renewals come up and as we put new loans on the books, we're very honest with them saying you know what we require now minimum compensating balances as part of the relationship, and those that cannot or will not do that, we ask them to leave and go somewhere else.

Even things like requiring tax escrow accounts for real estate taxes, add a couple million dollars to that amount. So it's a multifaceted approach, but clearly we are focused on moving deposits as the number one priority to the bank now for quite a few quarters, as far as our employees knowing that that's what we need to develop.

Robert Kaminski

This is Bob. We also rolled out a couple products on the retail side, the consumer side the consumer e-capture as well as mobile banking. We also had a very robust cash management product on the commercial side, and we've had developed for a couple years now, these retail products and we rolled that out in conjunction with our television ads these past couple quarters. And with the new sales efforts we're starting to get some real traction there with both new product offerings and new focus on sales efforts.

Michael Price

I think that goes back to, Terry, your question goes back to my opening comment and part of that opening comment was while it's hard to see because of the bottom line, there was a lot of important work done for the bank in this quarter, and that's one of them. And Chuck mentioned it was like almost $300 million in wholesale funding is off the books since the end of the year.

We are changing the way that that balance sheet looks. We're changing the way that our loan portfolio looks. We're changing the way that we manage the margin. We're definitely going to increase that margin we have and it's going to continue to do that way. But you don't do all those things in one or two quarters, but we're making very good progress across the board and it will put us in good stead in the next few quarters here.


(Operator Instructions) Your next question comes from [Dennis Clasure] - Raymond James.

[Dennis Clasure] - Raymond James

Most of my questions were asked and answered, but maybe just a little bit more in terms of the migration issues around non-performing loans. I think you noted that the 30 to 90-day delinquent loans is down, and I'm wondering if there's other sort of early stage indicators that you could point to that might indicate a trend, such as your watch list or your amount of criticized assets.

Robert Kaminski

Yes, it's a hard thing to gauge. We have customers that are in a pre-watch list rating category that exhibit high risk but not quite to watch status yet. We watch those very closely, 30 to 89-day past dues again you said were down, but it's hard at this point to draw any conclusions as far as trends there.

You have some customers who are struggling but exhibiting some signs of some positive movement, and that affects those numbers as well. So I think at this point we're very happy they're down, although it's premature to draw real strong conclusions that it will be sustained trends of lower non-performers ultimately.

[Dennis Clasure] - Raymond James

Just a little redundant as well with Terry's question, but your strong growth of local CDs seems to be a strategy to replace the brokered CDs. Are you able to get any pricing advantage there or is it kind of an equal swap in terms of pricing?

Charles Christmas

Now Dennis, this is Chuck, and in fact as historically been the case, our market continues to be above the brokered market. We're probably paying premium, and this is a pretty wide range, but anywhere from maybe 25 to 75 basis points currently.

[Dennis Clasure] - Raymond James

So you're willing to sacrifice that in order to get the local deposit and a local relationship?

Charles Christmas

Exactly. Well, you know what we looked at it, and I kind of put it in my commentary, are some of the rates that are rolling off, and kind of using some of that savings that 325 now becoming say 1% on the brokered. We're using some of that savings to go ahead and offer some attractive rates in the local market to help us with that wholesale funding number, so kind of getting the best of both worlds to some degree.

Michael Price

It's definitely a change in strategy from where we've been. It doesn't always, as you can obviously see, help us initially on a margin side, but our goal is to get the customer indoctrinated to our level of service, the local part of Mercantile, and then to cross-sell them. We absolutely need to do that, and we're going to do that.

But we also recognize that the investment community and the regulatory community, rightly or wrongly, views brokered and wholesale funding as much less favorable than they used to. And whether we agree with it or not, we recognize it and we're adapting to those changes that we need to make.

[Dennis Clasure] - Raymond James

In terms of your balance sheet, I presume that when we look out over the next few quarters relatively flat to no loan growth or even a little bit of negative growth is probably likely?

Michael Price

Yes, as you can see because of conditions out there, there's just been a very, very strong drop-off in demand. And some of the numbers that both Chuck and Bob went over indicated, for example, that C&I lending is down just from the standpoint that we still have the same customers, but instead of saying hey I need a $2 million line of credit, now I only need a $1 million line of credit because we're just seeing some volume changes.

We are still actively making loans to good customers. I mean we're very focused on that, but the natural by-product of the economic downturn would lead us to believe that the number of new loan applications that have really dropped off the table will continue to be low in the next couple of quarters.

And, therefore, we'll probably see a negative loan growth, because you combine that with there are certainly certain higher risk customers that we are asking to leave the bank and in some cases we are successful in getting them to move.

[Dennis Clasure] - Raymond James

In terms of operating expense trends, it looks like you've picked up some good ongoing savings with your branch consolidation. I wonder, in terms of your outlook there, are there other similar actions that you could take in the future, or have you pretty well harvested those cost savings at this point?

Michael Price

I think we've done a lot of things over the course of the last 18 months. We had a very active campaign where our employees gave us some great tips and we employed that and saved us a couple of hundred thousand dollars. We did some painful, painful cutting with, as you can see, we're down about 40 FTEs from a year ago. That was very difficult to do.

My feeling at this point is that the thing that's going to help us the most at this point is margin improvement and, obviously, asset quality improvement. We've cut a lot and had a $2 billion bank getting down to 270 FTEs, that's pretty thin. You need to make sure you have the excellent service that we've always been known for.

Not to say that if we had to find more that we couldn't, but I think we've harvested a lot of good ideas and we're really focused now on balance sheet improvement, margin improvement. And one of these quarters we're going to be able to say to you with a lot of confidence that we see asset quality going the right way.


Your next question comes from Eileen Rooney – Keefe, Bruyette & Woods.

[John Barr] for Eileen Rooney – Keefe, Bruyette & Woods

This is actually [John Barr] with KBW. I just have two quick questions for you guys hopefully you haven't covered them already. But I was just curious, what were the average rates of the wholesale deposits that matured this past quarter?

Robert Kaminski

I don't have that off the top of my head here, (John), but it's probably around 325, 320, somewhere in there.

[John Barr] for Eileen Rooney – Keefe, Bruyette & Woods

Do you guys have a target mix between retail and wholesale deposits?

Robert Kaminski

We don't have any specific targets or goals, certainly we put budgets together. I think I just kind of dovetailed what Mike was talking about. We've got a campaign. We've got a strategy and what we want to do is just continue to employ that strategy and continue to further reduce our reliance on wholesale funding. And kind of where it ends up is where it ends up. But we're certainly more interested in what we're actually doing than the end result number.


(Operator Instructions) Your next question comes from Stephen Geyen – Stifel, Nicolaus.

Stephen Geyen – Stifel, Nicolaus

The repossessions in the press release was $13 million and REO was up about $3 million, I think if I look back at the model. I was just wondering if you had some success selling some assets and the types of assets you were able to sell and the prices that you got.

Robert Kaminski

Yes, it's been a good mix. As I mentioned, we had $8 million in pay-downs over the last quarter. That consisted of a variety of mix. We had some commercial real estate that sold at or near the prices that we had charged them down to. We had some experience, as I mentioned earlier, with some collection of some receivables, and inventory on C&I liquidation situations. Some equipment values continue to be quite challenged, but we've been able to maximize some of the values there, and some liquidation involved in C&I types of customers.

The biggest area of concern that we have is those values in the commercial real estate side and we're being very vigilant about monitoring those values every month looking to see if we have the appropriate amount booked in ORE and if not we take some charges there to get it down to the estimated market value. That of course is a moving target based upon what the market's doing. And I think we're doing a good job of trying to stay on top of that and make sure that we have appropriate reserves set aside for those assets.

Michael Price

It's a very little glimmer of hope but it was interesting to know, I think this is the first quarter that we've had since this crisis hit where we actually sold some properties and we got small recoveries on them, meaning that we charged them down below where the market was. And the reason why that's important, that was one of the things that was really very frustrating over the last prior quarters is that we charge the things down, we take them into ORE and we charge them down again to say, okay here's where the market is.

And then sometimes we sell them and have to take yet another charge-off. And every once in awhile that still happens, but at least this quarter we had two, three, four situations where we sold some things. It wasn't by a whole lot, but we actually got more than what we had them charged down to. So that may be an early sign that we're able to see some stabilization out there.

Stephen Geyen – Stifel, Nicolaus

And second question, just wondering, the charge-offs in the quarter, just wondering was there any influence from the regulators as far as being a bit more aggressive on some of those specific reserves that were set aside for –

Michael Price

No, we've always had a tremendous relationship with the regulators. We are mid-cycle right now as far as when they did the last exam and when the next one starts. So we've never had any influence from the regulators as to you need to do this or you're missing the boat on that. The charge-offs, this quarter like every quarter, are strictly managements best estimate as to what's appropriate.

As Bob indicated, I believe a lot of what we charged off was stuff that had been on there as a specific reserve for awhile. We finally took a hard look at it and said as much we'd like to think otherwise, we're probably not going to get any recovery of these, so we prudently took the charge-off and that's always been the way we operated.


With no further questions in the queue, Mr. Price, I'd like to turn the conference back over to you for any additional closing remarks.

Michael Price

Thank you very much and thanks to all of you for joining us today. If you have any additional questions or comments please feel free to give Chuck or Bob or myself a call, and we'll end the call at this time. Thank you.


This does conclude today's presentation. We thank everyone for their participation.

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