FirstMerit Corporation Q2 2010 Earnings Call Transcript

Jul.27.10 | About: FirstMerit Corporation (FMER)

FirstMerit Corporation (NASDAQ:FMER)

Q2 2010 Earnings Call

July 27, 2010 02:00 pm ET

Executives

Tom O’Malley - Investor Relations Office

Paul Greig - Chairman & CEO

Bill Richgels - EVP & CCO

Terry Bichsel - EVP & CFO

Analysts

Scott Siefers - Sandler O'Neill

Steven Alexopoulos - JPMorgan

Jon Arfstrom - RBC Capital Markets

Tony Davis - Stifel Nicolaus

John Rodis - Howe Barnes

Bryce Rowe - Robert W. Baird

Operator

Good afternoon. My name is Maria and I will be your conference operator today. At this time, I would like to welcome everyone to FirstMerit Corporation’s second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator instructions) Thank you. Mr. O’Malley, you may begin your conference.

Tom O'Malley

Thank you, Maria. Good afternoon and welcome to FirstMerit’s second quarter 2010 earnings call. Joining me today are Paul Greig, our Chief Executive Officer; Terry Bichsel, our Chief Financial Officer; William Richgels, our Chief Credit Officer; and Mark DuHamel, our Treasurer and Director of Corporate Development. Following our prepared remarks, we going to be happy to take your questions, but before we get started, I would like to mention that our press release we issued this morning announcing our financial results for the quarter is available on our website at www.firstmerit.com under the Investor Relations section.

I would like to remind you that our comments today may contain forward-looking statements that are subject to certain risks and uncertainties that could cause the company’s actual future results to materially differ from those discussed. Please refer to the forward-looking statement disclosure contained in the second quarter 2010 earnings release, as well as our SEC filings for a full discussion of the company’s risk factors.

Now I would like to introduce Paul Greig, FirstMerit’s Chief Executive Officer. Paul?

Paul Greig

Thank you Tom and good afternoon everyone. I am pleased to report very solid performance in the second quarter of 2010. our 45th consecutive profitable quarter. This quarter was significant to us because it reflected the transformation of our franchise. We profitably expanded into an important new market, we executed a seamless integration of new customers and laid a solid foundation from which we will pursue organic and acquisition-oriented growth strategies to further enhance shareholder value.

For the second quarter of 2010, FirstMerit reported earnings of $0.32 per share compared with $0.21 per share last quarter and $0.13 per share for the year ago quarter. Included in these numbers are $4.4 million or $0.03 of one-time costs related to the acquisitions. A strong showing is a result of many positive accomplishments. I’ll go into detail on some of these as will Bill Richgels, our Chief Credit Officer and Terry Bichsel, our CFO.

Before we do, let me give you a quick overview of some of the many high points for us this past quarter. Our net income for the quarter was $31.5 million, compared with $18.8 million for the first quarter of 2010 and $15.5 million for the second quarter a year ago. Revenues grew by $24 million or 16% over the previous quarter and by $33 million or 24% over the year ago quarter.

Our net interest margin expanded 32 basis points over the first quarter from 3.72% to 4.04%. Disciplined expense control is a critical element of our efficiency ratio and I’m pleased to report our continued efforts are paying off. Our second quarter efficiency ratio of 61.3% compares very favorably to the prior quarter number of 63.6% and our year ago ratio of 65.3%. From an asset quality standpoint, net charge-offs at $20.3 million or 1.18% of the average loans improved against the previous quarter’s $22.8 million or 1.36%. Nonperforming assets declined $14 million or 11% from March 31.

Criticized and classified loans drop $49 million or 12%. I am also pleased with the trend in early stage delinquencies which has now declined for three consecutive quarters versus the prior year quarter. Shareholder equity was $1.5 billion at June 30, up from $1.2 billion at March 31 and $1 billion, the year prior year quarter end.

Our tangible common equity ratio at June 30 is a solid 7.34%. We supported our Chicago expansion with a successful capital raise in May that added $320 million of common equity to our balance sheet. Internal capital generation in the quarter further strengthened our capital position and fortified the balance sheet.

Lastly, we are very excited about the Chicago acquisition of Midwest Bank and Trust. This was a very competitive bidding process that we believe the franchise is crucial from a strategic and financial perspective to execute our growth strategy. We now are in possession to fully take advantage of a growing market in the midst of market disruption. This truly provides long term organic growth opportunities, which we are well positioned to capitalize on.

I am also satisfied with the credit results we are showing in the second quarter. The company’s focus on disciplined underwriting and portfolio management have been instrumental in our profitability and invaluable to our shareholder base. We will remain committed to our credit discipline and I am confident that our credit metrics will benefit from our high standards implemented and reinforce back in 2006.

While the pace of economic recovery remains muted, we are positioned to continue serving our customer base. Regarding the current state of our Northeast Ohio and Chicago economies, the anecdotal evidence I am getting from our customer base is that business conditions continue to improve. While we are not seeing signs of growth characteristic of a normal recovery, there are signs of economic improvement in most industries. This trend also supported by the Cleveland and Chicago FED Beige Books, which both characterize a recovering and improving economy for their last six reports stating back to the fall of 2009.

I’d like to take a moment to talk about our most recent acquisition with which we increased our presence in Chicago. On May 14, we acquired with the assistance of the FDIC, the 26 branch Midwest Bank and Trust Company. Midwest Bank significantly expands our presence and our ability to serve the greater Chicago marketplace. The acquisition accounted for $2 billion of our $2.6 billion in Chicago area loans and $2.1 billion of our $3.6 billion in deposits. We also added 26 branches to our network of convenient locations throughout the Chicago market. The Midwest deal comes shortly after our FDIC assisted acquisition on four George Washington branches in February and our acquisition of 24 First Bank branches which we announced in November of 2009 and closed in February.

The Midwest acquisition made an immediate positive impact on our performance this quarter. As I mentioned, our net interest margin for the quarter was a robust 4.04%. The inclusion of the Midwest balance sheet in tandem with our own strong core deposit gathering strategies and our legacy markets were key contributors to our margin expansion.

We have had success in remixing the deposits in our legacy markets, combining these efforts with the opportunities from our Chicago deposit base, we have increased our core deposits. These initiatives should provide sustainability to an improving net interest margin in 2010 compared with the prior year. We successfully migrated our George Washington customers and branches to our brand on July 9th. The seamless integration followed the successful conversion of our First Bank customers in February. We expect to complete conversion of Midwest Bank and Trust in September and expect to realize our targeted cost savings over the acquisition by the end of that same quarter. We will retain the vast majority of customer facing employees in 65% of the overall employee count. I am pleased with our integration efforts so far bringing three new companies in cultures into the FirstMerit family. We are now able to fully deploy our super community banking model which has been so successful for us in Northeast Ohio. We continue to compete and win against a larger competition in our home market and expect to do the same in our Chicago markets.

While we keep our eyes on additional opportunities for growth through acquisition, our main focus for now is to continue the successful integration of the employees, customers and accounts of First Bank, George Washington and Midwest into our successful banking model. A testament to the success we are driving in our integration process is displayed in our deposit retention rates in Chicago.

As of June 30, the deposit retention of First Bank and George Washington’s over 95%. Midwest Bank has a highly loyal customer base and we expect to achieve similarly high levels of customer retention.

It’s important to note in light of all of our recent acquisition activity that we have not taken any focus away from our ongoing emphasis on organic growth in Ohio and Pennsylvania markets.

Northeast Ohio continues to provide opportunities for gaining market share, due to the favorable positioning of FirstMerit. We are taking advantage of our well deserved reputation in the market place as a safe and stable bank with which to do business.

This plays well not only to existing and prospective customers but also to the new banking talent we are seeking to further strengthen our employee base. We continue to hire qualified, experienced bankers in both Ohio and Chicago. Additionally, we recently named Jim Brocklehurst as Executive Vice President of our retail bank.

Among the important roles Jim has served for us is his work related to regulation E. Today we have contacted over 75% of our customers who have had overdrafts in the past year and received an opt in election from 92% of that revenue base.

I am very pleased with these numbers and feel that we will be able to neutralize any revenue pressure to the industry due to this new regulation. Its difficult today to accurately assess the full impact of the financial legislation just passed.

However, our entire management team is focused on and committed to being in front of any of the changes affecting our revenue stream. We do believe that many of the reforms will have a more significant impact on larger financial institutions.

To summarize we enjoyed a solid quarter of financial performance, our balance sheet is strong with ample liquidity and high levels of capital. Asset quality is exceeding that of our peers and the industry, and we are successfully progressing with the integration of our Chicago acquisitions. And I’d like to turn the call over to Bill Richgels our Chief Credit Officer.

Bill Richgels

Thank you Paul and good afternoon everyone. As reported our charge-offs for the quarter ending June 30, of this year, totaled $20.3 million or 118 basis points of average loans. A reduction of 11% or a $2.5 million on a link quarter basis and a reduction of 36% or $11.2 million from year and 12/31/09. These charge-offs are in line with our guidance and expectations.

Our consumer retail portfolio had a $13 million share of the charge-offs for this quarter. This label of retail charge-offs is down $900,000 from a link quarter basis and we are encouraged by the linked three quarter trend and these numbers.

Within this $2.7 billion consumer portfolio, the change in charge-offs for each portfolio are as follows, indirect charge-offs down $1.2 million from $5.1 million direct down $190,000 from $1.6 million, the quarter before.

HELOC's up $500,000 from $1.8, credit card down $300,000 from $3.7 and mortgages down $360,000 from $1.6 million linked quarter before. Overall delinquency rates in the retail book are down running 2.24% versus 2.42% on a linked quarter basis and as Paul mentioned early stage delinquencies are down year-over-year.

Nonperforming assets decline $13.6 million or 11% from the first quarter to a $110 million or 1.54% of loans significant compared to peers. Over the next few quarters we continue to expect nonperforming loan and OREO balances to remain at elevated levels, but we believe that inflows are and will continue slowing into that NPA bucket.

To further illustrate this trend NPA inflows totaled $4.4 million at June 30, contrasted with $31.2 million at the quarter ending March, $36.6 million at the year-end December of ‘09, and the current level represents some 40% below June 30 of ‘09 at $7.3 million.

Our OREO book continued to turn properties with total balances declining 4% to $10.85 million on a linked quarter basis. Roughly the 30% of our commercial nonperforming loans are concentrated in footprint multifamily and housing construction real estate.

I’m pleased that the total home builder portfolio continued to reduce nearly 18% down to $57 million from $69 million in the quarter before.

Finally our criticized and classified asset buckets decreased $49 million or 12% to $374 million this quarter representing 8.39% of non covered loan book. This improvement reflects sustained improved financial performance of portfolio companies living within the reduced cost structure and modestly improving revenue picture.

Within our commercial portfolio, we have approximately $2.6 billion of commercial real estate upstanding. The major components of that book have not shifted greatly and are comprised of owner occupied real estate at $570 million office medical at $445 million. Multi family at a $196 million, retail at $205 million, industrial, commercial, construction at $325, healthcare at $261 million. Industrial warehouse $280 million, general income production not otherwise classified at $255 million and the previously referenced home builder portfolio.

In general, this portfolio is performing to our expectation with sufficient quality to have withstood higher levels of unemployment increased bankruptcy and general economic cycle pressures. Within the retail consumer book average utilization of HELOC's remains stable at 43% consistent with the 2 previous linked quarters first link HELOCs are 48% of that book and 34% of the second link HELOCs have FirstMerit, FirstMortgages as either owner servicer or servicer and total weighted loan-to-value equals 69%. Within that book weighted average FICO it was $747 with re-scores stable to slightly up reflecting a mature and a quality book. NPLs for that $762 million portfolio equals $2.1 million or 27 basis points.

Foreclosures for our book both mortgages loans and HELOCs are steady at a $109 against the universe of roughly 63,000 foreclosures in our footprint countings. On portfolio review this quarter of commercial loans greater than $250,000 demonstrated improvement in our customer’s outlooks and cost disciplines related to reduced revenue levels, our holding and effectively the review also gave us the affirmation of our banker attention to changing circumstances both in positive events as well as challenging ones.

As of quarter end June 30, of this year our allowance for credit losses was $125 million, representing 1.84% of loans and 1.26 times to nonperforming loans, this level is adequate. To put in context we are encouraged by signs of stabilization and positive economic activity commercially utilization rates edged up quarter-to-quarter and is up roughly 200 basis points year-to-date but is still down on a lowing 12-month basis. Unemployment is and will continue to remain high and we remain vigilant across our portfolios and in the oversight of our book.

With that, I will turn the call over to Terry Bichsel our CFO.

Terry Bichsel

Thank you Bill and good afternoon everyone. Let me start by noting that our year-to-date earnings per share totaled $0.54. The first quarter of margin purchased gain associated with George Washington’s savings bank was adjusted up to the $6.2 million from $5.1 million based upon subsequent positive loan valuation purchase accounting. This change is not in the second quarter results. With the acquisition of Midwest Bank and Trust, $2.2 billion of loans were added to the balance sheet with the purchase accounting mark of $328 million or 15.2% with an associated FDIC loss share receivable of $230 million.

Cash and investments totaled $844 million, deposits $2.3 billion and purchase funds $723 million.

Goodwill totaling $278 million was recorded. Prior to June 30th, the acquired balance sheet was deleveraged repaying the purchase funds, utilizing the investments and cash to eliminate the negative spread between the investments and funds, and improving the consolidated capital position.

As previously noted, the tangible common equity ratio at quarter-end was 7.34% and our Tier 1 regulatory capital to risk-weighted assets was 11.2% at quarter-end. More detail regarding the acquired Midwest Bank and Trust balance sheet is available in an 8-K that filed this afternoon.

Now, turning to guidance for the remainder of 2010. Provision for loan loss expectations remain the same at $24 million to $25 million per quarter, even though the provision was at $21 million this quarter.

The guidance does not reflect reduced confidence, but a recognition that charge-off performance can be choppy. The provision would additionally cover loan growth or any loan downgrades. Total loan growth from June to December is expected to be between 4% and 5% with commercial growth at 6% and consumer flat-to-down slightly.

Commercial segment pipelines with a higher probability of closing have been building throughout all of our regions, including the Chicago region. The investment portfolio at $3.3 billion is very short with a duration of 1.4 years, yielding 3.7%. Over the remainder of the year, $429 million of portfolio cash flow is expected.

The portfolio is balancing our interest rate risk position, with addition of the Midwest balance sheet for 100 basis point increase in rates, our interest rate risk position is neutral. As noted previously, deposit retention has been excellent with the acquisitions. Total deposits are expected to decline 4% between June and December with core deposits holding flat and CDs declining 10% recognizing a reduction in broker deposits from the Midwest balance sheet.

Over the next six months, $1.1 billion of CDs mature with an average rate of 1.45%. Additionally, high cost sub debt and trust preferred securities were repaid or redeemed at $141 million and $21 million respectively in the second quarter. With the balance sheet described, the net interest margin is expected to be maintained at the second quarter level. It should be noted that the net interest margin without FDIC transactions increased 10 basis points first quarter to second, enhanced by the redemption and repayment of the high cost purchase funds. The accretable yield included in the net interest margin related to the FDIC transactions is estimated to be between 6.5% and 7% on a go forward basis and will be sustainable associated with the maturity of the payoff of the loans.

Noninterest income continues to be strong. Over the remainder of the year we expect noninterest income of $51 million to $52 million per quarter. Noninterest income in the second quarter has $1.6 million in cash income on George Washington loans paid off which is offset by $400,000 in noninterest expenses for the associated FDIC indemnification asset and further offset by $1.1 million of MSR impairment during the quarter.

Expenses will be elevated in the third quarter until the conversion of Midwest is completed along with recognition of one-time cost. The third quarter is expected at $118 million, which includes $6 million of one-time costs. The fourth quarter non interest expenses are expected at a $111 million, including $2 million of one-time costs, as Midwest cost structure is reduced to 50% of pre-acquisition levels. The tax rate is expected to be between 29% and 30% over the remainder of the year.

This concludes my remarks. I will now return the call to Tom O’Malley. Tom?

Tom O’Malley

Thanks Terry. And at this time we are now happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Scott Siefers of Sandler O'Neill. Please state your question.

Scott Siefers - Sandler O'Neill

Let’s see. I guess, Paul, maybe just kind of a competitive question for you, specifically on Ohio, you know, over the last couple of years, you guys have had the opportunity to take some market share from some of the big players who for various reasons were not in same position you guys are. You talked a little about your ability to sustain that from market share gain dynamic. I just wondered if you can talk maybe or less few months that some of those bigger players come back into the market in Ohio, and if so, what has that done to the pricing dynamic down there?

Paul Greig

Well, our pricing on a quarter versus quarter basis actually increased on the commercial side by 18 basis points for new originations. So, we are still seeing reasonable pricing in the market. I think it’s just common sense due to general lack of loan growth the pricing is going to be more competitive, but our positioning is still very strong. The company is positioned today in a fashion is still very strong. The company is positioned today in a faction that it had not been four or five years ago. Well, we were being considered for much larger transactions with larger sized companies, we are winning them on a pretty consistent basis and we have a very robust loan pipeline that Terry had referenced. So, we feel that we’re well positioned versus the competition and for now, pricing is holding. That increase that I mentioned is kind of a baby step, but it’s sure nice to see originations moving up in the quarter in pricing.

Bill Richgels

And then, just one further, this is Bill Richgels, Scott, on that. As you look over the last two years with the economy, as the state it was last year, people may have been inclined to look and investigate, but no businessman is going to leave essentially the relationship that they know at an uncertain economic time. Now that we are starting to see some basic improvement in the economy, we are getting much more looks, and more importantly they are looking for the safety and security and the capitalization and the skill set that we have.

Paul Greig

And take after that, Scott, the competition in certainly for a number of instances had treated these prospective customers in a pretty rough fashion over the past couple of years. And as they have more confidence in their business, they have not forgotten that rough treatment and are prepared to move to a new relationship because of that rough treatment. So, the new business opportunities continue.

Scott Siefers - Sandler O'Neill

Okay. And then I was hoping Terry to ask you a question. You gave a good explanation on the margin and the drivers this quarter versus last quarter, wonder if you can maybe look out beyond the end of this year to what kind of I guess longer term impact you’d expect the purchase accounting adjustments to have?

Over what period of time do you anticipate those administering I guess if you want to answer that life-of-loan or how do you think it's most appropriate just could you try and steer it off?

Terry Bichsel

Scott, as I mentioned in my remarks, the 8-K that was filed would give you some indication for duration of the portfolio, I’m going to swag that or cuss that, it’s 24-36 months as that portfolio moves out but also bear in mind that we are picking up particularly with Midwest a bank that has a high preponderance of performing loans so that relationships with those clients would move forward as well.

Paul Greig

Of the FDIC transaction Scott, 84 for some the loans are performing.

Operator

And next question comes from the line of Steven Alexopoulos of JPMorgan. Please state your question.

Steven Alexopoulos - JPMorgan

Maybe first, I guess the expense guidance flies about a $109 million run rate or so post the fourth quarter. With this quarter we were $101 million without the one-timers, just wondering where is that $8 million incremental coming per quarter in core expenses?

Terry Bichsel

What we are going to be doing coming from the 104 to Q3 we had 47 days of the Midwest transaction in that 104, so giving that to a full quarter and then as we get through to the conversion will be approximately another 100 full time equivalent positions that would come out to get us down to that 109 level.

Steven Alexopoulos - JPMorgan

So the 109 is a good run rate then looking into next year?

Terry Bichsel

I would answer that in the following way. We have that as our initial proforma with the company, of course we always continue to look for opportunities to refine our expense base and we’ll continue with those expenses as well as the co-embedded expense for the company.

Baring in mind that we have additional FDIC expense on a run rate basis embedded in there, it’s going to be there quite some time and perhaps some additional regulatory burden going forward. By the time you get out to the fourth quarter, we should be at the sub 60% level on an efficiency run rate basis.

Steven Alexopoulos - JPMorgan

Paul, when you say deposit retention is over 95% for the Chicago deals, is this of total deposits or you just talking a targeted core deposit number?

Paul Greig

The non-brokerage deposits. Total deposits.

Steven Alexopoulos - JPMorgan

And maybe just one final one, on (inaudible) conference call today, they said they’ve seen some changes in terms of FDIC deals, they cause them do not bid uncertain deals that they would have normally bid on and other pipeline Chicago has been quite since the [MB] deal, but do you have a sense at this point of the terms may be changing for the opportunities in Chicago?

Paul Greig

No, I do not Terry, have you heard anything?

Terry Bichsel

No, I think that the last I saw in the purchase of the assumption agreement still running with the 80-20 and there is a claw back provision relative to the threshold that the FDIC sets for their expected losses but beside from that I think everything’s running forward.

Operator

Our next question comes from the line of Jon Arfstrom of RBC Capital Markets. Please state your question.

Jon Arfstrom - RBC Capital Markets

Hi Good Afternoon couple of questions maybe there with you Bill, just wanted to make sure I had the numbers right, the inflow the non performing inflow? Was it $31 million in the previous quarter and $4.4 million in the current quarter. What do you think that is obviously positive but what do you think the. What is the difference is there anything unusual in that comparison?

Bill Richgels

Yes, I think john if you looked and that’s why I wanted to also give you the year before quarter at 7.3 the trend is down the magnitude of the trend is most pronounced the length quarter this quarter to last but you have to look at the two quarters of 09 in terms of their size as really the spill over of the significant and dramatic economic cycle downturn starting September of '08 and you’d reflect the financials of the companies to realize the revenue drop and then scramble the first two quarters of '09 to get control of their cost structure and then living with that if you will collateral damage to their balance sheets over those years, now they have got that cross discipline. They have got a revenue and the revenue maybe slightly up but at least they are covering and paying bills and they have interest carry and they have survivability and so what you are seeing is affectively the dramatic shifts, the residual effect in the timelines related to rationalization of cost structures.

Jon Arfstrom - RBC Capital Markets

Ability or outlook on resolving some of the current non-performers in OREO properties, has that changed or improved at all?

Bill Richgels

No. I think last quarter Jon we talked about moving through this quarter and next quarter. We are still positive in terms of I thought we identified some $15 million to short $20 million improvement and we are still bullish about that.

There maybe an offsetting inflow I don’t believe it will offset dramatically that number going forward but once you get these in the process it is just the timeline of completing the judicial process and so we maybe off a month, so it may startle a quarter but we are still positive about those loans we identified and talked about last quarter working through.

Jon Arfstrom - RBC Capital Markets

Question on the commercial utilization that was up 200 basis points year-to-date and I think that’s maybe ahead of some of your piers but curious how we expect to see this play out for the rest of the year, do you feel like you have enough data to say that, that should continue to improve and are you seeing things with your commercial clients, as analysts would look at it say well we could see commercial deposits start to come down as utilization rises and is that a fair way to look at how this could flow through the rest of the year?

Bill Richgels

We are actually very pleased with that utilization Jon and if you may recall as we described in our purchase of First Banks, we were fairly selective about the loans we took, we, I think we had a universal of short $900 million and we took $300 million of those and they are primarily CNI.

So that as we get a utilization and expansion into inventories we are going to get a lift there. Terry talked about the Midwest and what we saw with the performing versus not in terms of the magnitude of that portfolio and I would say in terms of basic industries in that we are starting to see people much more buoyant about activity.

I can’t say everyone lets characterize that no ones doing high fives but no ones walking around dejected, you know they are operating and starting to take advantage of opportunities and we are there help provide the capital.

Paul Greig

John, this is Paul, I have been on good number of calls on commercial customers in the last 60 days and the level of confidence continues to build in the general economy, as well as their ability to compete in their business. Just last week we was on a call where someone was thinking about expanding a planned facility by 25,000 square feet. That’s something I haven’t heard for a long time.

I was on another call last week where a company that was doing quite well is looking to buy out a competitor, a substantial acquisition, that type of thought process and activity was non-existent two years ago, and we are starting to see, as Bill referenced, the improved confidence and buoying of feelings towards the businesses. So, being in the market as much as I am, I am starting to get a sense that people are feeling good, and I would that’s in all of our markets. Some of these calls were in Ohio, some where in Chicago, and I’m really not hearing a different message at all between the different markets.

Bill Richgels

And final note, this is Richgels again, John. I think we saw more lift in the last two months, so that, had we had this conversation 60 days ago, we would not have seen more of a dramatic increase. We are starting to see the last 60 days, some lift. And that’s referenced also in our pipeline activity and what we are seeing going on there.

Jon Arfstrom - RBC Capital Markets

Alright. That’s helpful. And just a quick one for Terry. What is the planned date on the conversion?

Terry Bichsel

It is going to be late in the quarter. I think it could even go into the first week of the next quarter. We are still really working through all of the details associated with it. But we are on a very aggressive timeline to resolve and get our customers to move it over to our systems and products.

Paul Greig

Our goal, John, is to have a seamless execution of the conversion as we did with George Washington and First Bank, and that would be the reason that things may move a week or two. We want to make sure that it’s done as well as it can possibly be done.

Operator

Our next question comes from the line of Tony Davis of Stifel Nicolaus. Please state your question.

Tony Davis - Stifel Nicolaus

I guess I just want to tie down the numbers if I can, Bill. The amount of the unfunded C&I-CRE backlog as of now, first and then second, what the actual utilization rate is and what's normal for you guys?

Bill Richgels

Well, Tony, normal in a non, it’s kind of an inflection point of the recovery. Generally a commercial or a C&I book, you’d like to see in the mid 50’s and full up, full utilization in an expansion environment you would see even in the low 60’s, maybe 62. In this great recession, we’ve seen sub 50 for a long period of time. And so really, if we can work those up into the low 50’s, we are going to feel significantly more buoyant and that would be reflective of expansion in the economy. So, truly a rapidly increasing expansion you are going to see in the 60’s, level of growth for a good sustained performance in the 50’s, and right now we are sub 50’s but growing.

Tony Davis - Stifel Nicolaus

And the backlog, Bill?

Bill Richgels

We don’t disclose that number because, what we can say it’s grown about a third in the recent past and the way in which we gauge it is we look at the probabilities to close and our line officers in the segment is giving us good feedback in terms of higher probabilities, such that the loan growth projections that we set forth contemplate the fulfillment of that pipeline.

Tony Davis - Stifel Nicolaus

What is recent, Bill? You say recent past.

Terry Bichsel

The last quarter.

Bill Richgels

Yeah, the pipeline is actually done, Tony, weekly, but as the reference point we are talking about the quarter-over-quarter.

Tony Davis - Stifel Nicolaus

I’ll stay with you. Just one more for you, Bill, the percentage upon, I’ve seen hours now with rate [flows], where would that be?

Bill Richgels

I don’t have that number available, because specifically it varies market-to-market as well.

Tony Davis - Stifel Nicolaus

And Paul, for you, it sounds as if for the next little while here you really going to be predominantly focused on integration, that is to I guess ask, do you have the capability to pursue additional deals right now or should they surface or are you going through to the sidelines for a while?

Paul Greig

Well, until we are 100% confident that we are in the queue for a seamless transition of Midwest, we will not do or announce any additional transactions. But as we’ve given you the timing, that’s not for long duration, something that we execute on the integration and the conversion. By the end of this quarter, we certainly will be open to looking at additional transactions.

Operator

(Operator instruction) Our next question comes from the line of John Rodis of Howe Barnes. Please state your question.

John Rodis - Howe Barnes

Paul, may be I’ll start with you, just kind of a big picture question. When you look at the Chicago market, how do you think it’s changed today versus when you were working in the market a few years ago?

Paul Greig

Well, there has been enormous change, particularly on the commercial side. When I was last working in the market, LaSalle Bank had not been acquired by Bank of America, and LaSalle and Chase, our predecessors, had over 70% commercial market share. And that transition of market share has been rapid with the exodus of many bankers from both of those two organizations, and a change the business style of both of the organizations. So, there has been dramatic shift, additionally through this FDIC process that I think is probably only 50% done in Chicago, you are seeing a consolidation of institutions in the market and less competition. I think you have seen radical shifts in the market over the past four to five years.

John Rodis - Howe Barnes

So you just said that you actually think the FDIC process up there is only may be 50% done?

Paul Greig

You know, what our information is that the FDIC has an office of 500 people in Chicago, and I think that in and of itself is telling about further activity that is forthcoming. Additionally, if you look at the backlog of institutions that have over 100% Texas ratio, the last time I looked at it, it was over $30 billion of footings of institutions that have over 100% Texas ratio.

John Rodis - Howe Barnes

How would you sort of characterize the Chicago market today? I know your comments on the call were sort of geared towards the combined two markets and you sounded more optimistic, but how would you characterize Chicago?

Paul Greig

Are you talking of the economy in Chicago?

John Rodis - Howe Barnes

Yeah, the operating margin.

Paul Greig

I don’t see much difference between Ohio and Chicago as far as the trends we’ve talked about, about confidence and optimism and the operating environment. I did reference in my comments the FED Beige Books, of both Cleveland FED and the Chicago FED and they are relatively consistent in there commentary for, I think I referenced for last six FED Beige Book printings dated back at just about a year.

John Rodis - Howe Barnes

Okay. So, I mean just a kind of follow-up on that. As far as optimism from your business customers, it would be more on the small and little market customers, is that fair to say?

Paul Greig

Our business customers would be, you know, up to the high end of the middle market, anything from small business to the high end of the middle market.

John Rodis - Howe Barnes

Terry, maybe just follow-up question for you on, you said total loan growth in the second half of I think 4% to 5% now, is that just on the non-covered portfolio?

Paul Greig

That would include, yes, that actually includes the entirety of the loan book.

John Rodis - Howe Barnes

Okay. So, just to summarize that you’re saying up 4% to 5% for the total loan portfolio?

Terry Bichsel

Yes.

John Rodis - Howe Barnes

And this is from June to December?

Terry Bichsel

From June to December.

John Rodis - Howe Barnes

And then maybe one final question for you Bill, do you have with the level of restructured loans, was at the end of June?

Bill Richgels

Now, we have not filed our call report and we are using call report to classifications, but we will be at 45, I believe. For the quarter and that’s consistent with the previous quarter.

Operator

Our next question comes from the line of Steven Alexopoulos of JPMorgan.

Steven Alexopoulos - JPMorgan

Just wanted to follow up, first I guess, I am a bit stumped by this provision guidance, think unchanged given how much better credit looked this quarter, what seems to be fairly optimistic tone, Paul is there any reason given the credit trends are seen that you look to be providing below the level of net charge-offs in the third quarter or the maximum level just matching?

Paul Greig

I think Terry characterized it pretty well and that there doesn’t really reflect a reduction in confidence at all, but charge-off performance can be choppy and that really is the reason for the guidance given.

Terry Bichsel

This is Terry, I think on the consumer side as well unemployment remains high and even though our delinquency levels on the consumer book have move down pretty nicely on the year ago quarter levels. The bankruptcy can come out without there being you know even though the other indicators are moving in the right direction.

So until we would see unemployment moved down I don’t think the reserves on the retail side particularly would be available to release.

Paul Greig

And then the other item too Steve would be the forecasted commercial loan growth we are going to have put our provision for new loan growth.

Steven Alexopoulos - JPMorgan

And Terry just one thing, the efficiency ratio target you gave earlier later in the year does that assume the interest margin stays in this 4% range.

Terry Bichsel

It does indeed.

Operator

And the final question comes from the line of Bryce Rowe of Robert W. Baird. Please state your question.

Bryce Rowe - Robert W. Baird

Hi Paul. Thanks for taking the question here. It's just a quick question about any ability to further reduce the level of wholesale borrowings?

Terry Bichsel

What we have on our balance sheet right now is a zero [hedge funds] and we have got half set approximately $500 million in cash. So what's there would be structured repose that match up with our asset liability position as well as corporate sweeps that are collateralized borrowings and they are really there for the accommodation for our relationships with our forward clients and the rates on those really are very attractive. We get paid a fee for the sweeps as well as a low interest rate and therefore we want the product as a liquidity source moving forward.

Bryce Rowe - Robert W. Baird

And Terry, if I could make one follow-up question to a comment you made earlier about the accretable yields. First quarter I guess related interest income on the recovered loans is about $1.8 million. Is that number interest income on the covered loans about $25 million, $26 million here for this quarter or is it a little bit lower than that?

Terry Bichsel

In the aggregate, what number did you say?

Bryce Rowe - Robert W. Baird

Its the interest income on covered loans?

Terry Bichsel

Yeah the total accretable bucket, I wanted you to say what number you were stating?

Bryce Rowe - Robert W. Baird

It’s the total accretable bucket that we would find in the queue?

Terry Bichsel

Its going to be right around $24 million.

Operator

This concludes the Q&A session for today. I will now turn the floor back to management for any closing remarks.

Paul Greig

Thanks for participating on our call this afternoon. Should you have any questions, we will be available for follow-up and have a great afternoon. Good bye.

Operator

This concludes today's conference call. You may now disconnect and have a great day.

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