First Interstate Bancsystem Inc (FIBK) 2011 Q2 法說會逐字稿

Good morning and welcome to the First Interstate Bancsystem Inc. second-quarter 2011 earnings conference call and webcast.

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 Mary (sic) Mutch. Ms. Mutch, please go ahead.

Thanks, Amy. Good morning. Welcome and thank you for joining us for our second-quarter investor conference call.

Before we begin, I would like to remind everyone that some of the remarks today may constitute forward-looking statements, particularly regarding revenues, quarterly provision for loan losses, net interest margin, loan growth, and non-performing assets. We may also make other forward-looking statements, including statements about our plans, strategies, and prospects.

I would remind you that all forward-looking statements are subject to various risks and uncertainties, and our actual results may differ materially from those expressed or implied by such statements. For a full discussion of the risks and uncertainties associated with our forward-looking statements, please refer to our securities filings, in particular is the Risk Factors section of our most recently filed Form 10-K.

Joining us from management this morning are Lyle Knight, our Chief Executive Officer, and Terry Moore, our Chief Financial Officer. Lyle will begin by giving you a general overview of this quarter's results and review economic conditions in our footprint. Terry will follow up with more specific information behind the quarterly results and provide a general review of credit quality information.

Also with us this morning is Bob Cerkovnik, our Chief Credit Officer. Bob will be available during the question-and-answer time to address specific questions concerning our loan and asset quality.

At this time I would like to turn the call over to Lyle Knight. Lyle?

Thanks, Marcy. Good morning and thanks to all of you for joining us on the call.

Last night we reported earnings for the second quarter of $9 million, which equates to diluted earnings per share of $0.21. This level of earnings is in line with our expectations for the quarter, given where we anticipated we would be in the credit cycle and the current interest rate environment.

We talked about this being a challenging environment for generating loan growth. Well, our economic climate remains soft and, as always, competition is tough. We are now seeing some of the large national banks offer very low interest rates, although they tend to focus on primarily the larger deals.

We continue to experience a decline in our construction portfolio as demand remains soft and there is still a lot of developed residential inventory in the marketplace. We anticipate that the construction portfolio will continue to decline until we see more significant improvement in the overall national economy and its impact on housing.

Now let me provide some color regarding our local economic drivers before we get into the specifics of our second-quarter results. While economies, both local and nationally, have not bounced back as we had hoped, we are pleased to see slight increases in our commercial and ag loan portfolios.

Out in the branches we are hearing a lot about pent-up demand, but there is still enough uncertainty around the economy that businesses remain hesitant to expand significantly. So what heading into the third quarter our trend line is pretty flat. We are seeing just enough new activity to replace loan run-off.

In many of our market areas tourism has a significant impact on the local economies. Almost 10% of our loan portfolio is directly impacted by the tourism industry. Now last quarter I was asked about $4 a gallon gas and how it may impact us. As it turned out, it wasn't gas prices but the weather that was the real factor.

In Montana, the wet spring lead to a sluggish start for the tourism industry. Even though hotel occupancy rates across Montana have increased 8% over last year through May, June rains and flooding slowed everything down. At the end of June Glacier National Park visitations were off 19% from last year, which is pretty good considering the Going-to-the-Sun highway, which travels 50 miles right through the center of the park, just opened two weeks ago because there was so much snow on the road.

However, on the good news side, with the onset of warmer weather we understand the national parks and the lodging industry are having a robust July. Now South Dakota tourism also experienced a late start due to a very rainy spring and flooding across the western half of the state.

While visitation to the various state and national parks were down for the first half of the year, June began to show some improvements. Campgrounds in Custer State Park were reporting 100% occupancy through the first half of June. The Black Hills reservation service has very strong bookings and, as of June 15, were only down 1.2% over last year's record-breaking levels.

In Wyoming it's the same story. The wet, cold spring has led to an 11% decrease in visitations to Yellowstone Park through June. Grand Teton National Park also saw a 4% decline.

But despite the decline in Yellowstone visitations to the park in the first half of the year, we are still -- this is still the fifth-highest year on record, exceeding 2008 by almost 7%. We use 2008 as a benchmark because that was the last time that we saw gasoline prices this high. This may indicate families have adjusted to the higher gasoline prices and this won't be a significant factor this season.

Since July and August are typically the park's peak months, we are hopeful that visitations will reach high levels for the rest of the summer.

Now while abundant moisture is usually a positive for the farming industry, the impact of the wet spring is yet to be seen on Montana and South Dakota farmers. Late planting provides some uncertainty around crop success due to a possible short growing season, so the late summer and early fall weather will be the determining factor as to yields.

On the bright side, the moisture will lead to a bumper forage crop, so winter feed for our cattle should be plentiful. With record livestock prices in the calf and yearling markets, many of our ranches have already pre-sold their cattle production for fall delivery.

Commodity prices, particularly oil prices, have stabilized at levels that support growth and activity in the petroleum industry. In Southeast Wyoming activity in the Niobrara is still in the early phase of development and the petroleum industry seems encouraged by the results.

Across the Rocky Mountain region rig count is up, which is a direct indicator of oilfield activity. Consideration for enhanced oil recovery projects, especially the CO2 injections, is on the rise. These projects require significant investment and will provide what we call a second life for many of the mature energy fields.

Now our lenders continue to focus marketing efforts on the many businesses that develop or service the energy sector, and we are seeing increases in outstanding loan balances, particularly in our Wyoming markets. Coal production in Wyoming is stable in 2011. The Powder River Basin coal is selling close to the three-year high of $15 per ton.

Recently there has been an increased demand for Powder River coal from a couple of new markets. Because of the low sulfur content in the Powder River coal, the Southeast portion of the US would like to replace coal currently obtained from the Appalachians. The Pacific Rim has also expressed interest in order to meet their energy demands for aggressive growth.

Exploration of coal to the Pacific Rim would require increased mining capacity in Wyoming. All of this could mean more jobs and more economic opportunities.

Well, back to specifics for the quarter. Gold revenues are up 2.6% quarter over quarter and 40 basis points year over year. Terry will address this in more detail, but at a high level we have seen improvement in our net interest margin this quarter along with revenue increases in income from origination and sale of loans along with other fee income.

While this is good news, non-interest income, specifically debit card interchange fee income, is about to be challenged by the implementation of the Durbin Amendment this October. We were very hopeful that Montana's Senator Tester would be successful in his bid to delay implementation of this amendment until it could be determined what the overall impact of the ruling would be. While this didn't occur, it is encouraging that the transaction fee was increased.

With the Federal Reserve Board's approval of the final rule on July 29, there is no longer speculation about how Durbin will impact the larger financial institution. And while MasterCard and Visa have both indicated that they will have a two-tier payment system which is aimed at protecting community banks like First Interstate, ultimately the impact to us remains unknown.

Our debit card interchange fee income is a significant source of revenue for us totaling $5.7 million through June, and we are currently meeting with both MasterCard and Visa to determine what changes may be implemented. In the interim, while we wait for the dust to settle, we are obviously considering ways to supplement non-interest revenue by looking at how to value all the products and services we provide to our customers.

But now let's talk about asset quality. Non-performing assets rose 3.5% to $292 million this quarter. This puts our non-performing assets at 4.05% of total assets as of June 30. We are now seeing some sales of property within our stressed markets and, based on sales and recently obtained appraisals, we are now seeing some slow down in the deteriorate rate of collateral values. So we continue to believe that, if we aren't currently at the peak of NPAs, we will be over the next couple of months.

Credit improvement continues to be our primary focus and we are making progress. However, with a large amount of inventory of recreational real estate in our stressed markets, progress seems slow. Our lenders in these markets continue to put considerable efforts into workout plans and resolution of non-performing assets. As we push through this part of the credit cycle, we will, of course, experience elevated loan charge-offs for the next few quarters.

Although modest, we are encouraged that this is the third consecutive quarter to see a decline in criticized loans. OREO property continues to churn with $5 million in OREO property sales this quarter. We made some headway in reducing the OREO inventory.

So with those highlights, let me turn it over to Terry for more detail around our numbers.

Thanks, Lyle. As Lyle reported, earnings for the second quarter were $9 million with diluted earnings per share of $0.21. First, I would like to report that how pleased we are that we have an 11 basis point increase in our net interest margin. This improvement is due to the continued decrease in funding costs, which were down an additional 5 basis points this quarter, as well as an additional shift into higher-yielding investment securities from overnight funds.

However, part of the impact of Q2 has been a result of the decline in interest-bearing time and savings deposits, primarily due to our decision to reduce interest rates on various deposit products. With the corresponding decrease in interest-bearing deposits and banks the outcome was a meaningful improvement to our net interest margin.

The lack of loan volume continues to remain a detriment to seeing significant upward movement in our margin. The pace of decrease in average loans slowed this quarter and from March 31 to June 30 period end loans actually increased $17 million. We have continued our strategy of investing primarily in US government agencies and have been able to maintain our investment portfolio yield without stretching for yield or taking on credit risk.

As you all know, the Dodd-Frank Act went into effect last Thursday. Among other things, the act lifted Reg Q allowing banks to offer interest-bearing accounts to business customers. While this is a significant change in the rules, we don't expect it to have much impact on revenues in the current interest rate environment.

We currently offer other cash management products to our business customers that allow them to receive financial benefit for balances held at the bank. Another consideration for those customers will be that funds kept in a non-interest-bearing account will receive unlimited FDIC insurance coverage through 2012. So in an interest rate environment that is paying a nominal return, we don't expect to see many customers moving into new interest-bearing accounts.

Non-interest income increased on a linked-quarter basis by $1.4 million or 7.1% from Q1. Fee income increased primarily due to higher interchange revenues from an increase in debit and credit card volume. Lyle has talked about the potential impact of the Durbin Amendment on debit card interchange income and it is yet to be determined what impact that will have on us, although we do know any impact has been deferred until at least the fourth quarter.

We also saw an increase in residential real estate origination income with 61% of originations from purchased home loans. Spring and summer are the strong buying seasons within our footprint so we would expect an uptick in purchase activity. Of course, refinance activity has a direct correlation to current residential mortgage rates and so at current rates we don't anticipate seeing the levels of refinancing we saw the latter half of last year.

OREO expense was $2 million or a 19% increase over Q1. The bulk of this expense was a $1.5 million valuation adjustment to a land development property located in the Flathead market. This particular property, which includes both residential and commercial lots, is valued for a bulk sale should the opportunity arise.

Meanwhile, we have lower prices on the real estate lots to stimulate individual lot sales. Based on the size and nature of our other properties currently in OREO inventory, we would not anticipate another adjustment of this magnitude.

We are continuing to move out OREO inventory and had sales of $5 million this past quarter with 40% of those sales occurring in our stressed markets. 71% of OREO balance remains in the stressed markets. And this, once again, is the fifth consecutive quarter we have seen a reduction in our OREO inventory and we believe it will remain at manageable levels as we work through this credit cycle.

Worth noting this quarter is the decrease in FDIC insurance premiums of approximately $800,000. This savings is a result of the new rate schedule and method of assessing FDIC premiums that was implemented April 1. Other expenses increased, primarily due to timing issues, with the most significant increases occurring in advertising and legal expenses.

Increased legal costs, which are $1.3 million year to date through June 30, were impacted by one specific litigation combined with the high cost of ongoing collection activities. We believe they will not expand beyond the current levels of expense.

Now I would like to turn to credit. I have already mentioned that we saw a $17 million net increase in outstanding loans as of June 30. The positive side of this modest increase is that, even though we experienced a $32 million net decrease in outstanding loans in our stressed markets, most of the remaining markets saw improvements in outstanding loan balances. Lyle has already mentioned non-performing assets have increased to what we believe is at or near the peak at 4.05% of total assets.

We are encouraged with the progress of the special mention loan category over the past several quarters as we see the emergence of new problem loans slowing. Non-accrual loans increased $17 million to $230 million as of June 30, which equates to an 8.1% increase over last quarter. The majority of the increase was due to the addition of a $15 million land development property.

Consistent with Q1, approximately 78% of our non-accrual loans reside in the commercial real estate and construction real estate portfolios. 43% of total non-accrual loans are in our stressed markets. As of June 30, approximately 67% of non-accrual loans are current with regard to principle.

TDRs decreased slightly this quarter to $32 million and 49% of the TDRs reside in the commercial real estate and construction real estate portfolios. Virtually all of our accruing TDRs are current under their restructured terms. As expected, provisions remained elevated and were $15.4 million this past quarter.

On an annualized basis, this is equivalent to 1.41% of average loans. As we have worked through this credit cycle we have seen improvement from the 2010 second-quarter provision high mark of $19.5 million. As we experience improvement in credit metrics in coming quarters, we anticipate further improvement in provisions as well. Net charge-offs this past quarter were $15 million with 78% of this amount related to distressed markets.

Gross charge-offs exceeded the current quarterly provision, a pattern which may continue in future quarters as provisions are adjusted for any improvement realized in non-performing assets. Fortunately, our markets are quite diverse and we aren't seeing substantial erosion of collateral values in most of them. And as Lyle mentioned, deterioration of values even in our stressed markets has slowed.

And while we don't anticipate a spike in charge-offs in any one quarter, we do expect the timing of charge-offs to be lumpy over the next several quarters. Our capital continues to remain strong and reflects improvement in all capital measures this quarter.

Tier 1 common capital increased to 10.56% as of June 30. We believe we meet or exceed the Basel III capital metrics as we currently understand the rules. Over the coming years we expect to generate excess capital, allowing for further organic growth as well as strategic acquisition opportunities.

With that I will turn it back to Lyle.

Thanks, Jerry. As I have shared in previous calls, our number one focus this year is credit quality improvement. In addition, we focused on improving revenues and our cost structure.

Although there are acquisition opportunities beginning to emerge, we remain committed to our 2011 priorities and do not anticipate any acquisitions occurring during the current year. We see this as a better path for First Interstate as it will allow time for some of the imminent issues that we are facing in our economy to be resolved and perhaps add more certainty around the future.

With that we are prepared to respond to your questions.

(Operator Instructions) Jeff Rulis, D.A. Davidson.

Terry, wanted to follow up on your margin discussion. You talked about the factors of why it expanded this quarter. Wanted to sort of see is that expansion sustainable; are those same factors carried through in the next quarter?

Great question, Jeff. Nice to visit with you. In the net interest margin there are certainly, as you well know, numerous factors that will influence the ratio, but we would have the attitude that it should be sustainable. Certainly things like loans decline or increase would have a factor.

We think there is still a little bit of margin for cost of funds to reflect further decreases. Some seasonality could cause it to be up or down just with the mix of loans and deposits, but all-in I would say, Jeff, we would see that the ratio we reported in second quarter is a sustainable level.

Okay.

And we continue to put energy behind reducing our funding costs, Jeff. We don't think we are at the bottom yet.

Right. I guess to clarify on sustainable meaning at this -- meaning those factors could continue, meaning continued expansion, or are you suggesting just at the very least stable margins?

Jeff, they will obviously go up or down a few basis points every quarter, but I think it's sustainable at its current level over the next few quarters.

Got it, okay. And I guess tied to that would be on the loan side and I guess you mentioned some seasonal fluctuations in the C&I and ag portfolios. Does that suggest that this could fall off next quarter? In terms of the pipelines, how does that look going forward?

Jeff, this is Bob Cerkovnik. I would say that that is a seasonal adjustment we are seeing. The lines being used in our ag portfolio is the operating lines, revolving lines are being used -- utilized during this time of the year. We do expect those lines to come back down. Overall, we think revenue or loan growth will be fairly flat right now.

Okay. And then one other question on -- Lyle, we haven't had a management succession update in sometime. I don't know what -- your previously stated retirement plans where that sits at the current time.

Jeff, my announced retirement date remains April 1, 2012, so we are closing in on the six-month area. The candidates for my job are all internal. It's up to the Board to make that selection when they feel the timing is correct. But I can tell you that we are not looking outside; we are only evaluating our internal candidates and we have good ones internally.

Okay. Thanks for taking my questions.

Brett Rabatin, Sterne Agee.

Wanted to ask on the credit side; just thinking about the provision going forward and the potential for credit leverage. I realize that 67% of the non-performing loans are current to principle, but can you talk about the -- thinking about the reserve relative to non-performers. On the surface looks like vis-a-vis some peers and I know there is reasons for that, but can you just talk about the potential for credit leverage going forward and if that ratio in particular may have some bearing on that?

Good morning, Brett, this is Terry and I will, at least initially, respond to your question. The reserve levels, obviously we would deem them as adequate for our estimated losses. And as we would at least speculate how do we compare with other banking organizations, we went back and reviewed just to validate things what is our loss history.

Over the last 20 years our loss history is notably less than what our peers have been looking at other peers that are our size. And so I think that is a reasonable and persuasive position to understand and to validate this ratio of NPAs or reserves to NPAs.

As we estimate our losses on a go-forward basis, we would see that not so much of on the peer side, but as we just evaluate quarterly what our losses are we have sufficient reserves. We have about $44 million of specific reserves allocated to impaired loans and approximately $80 million in just general reserves so that we -- as we evaluate this each quarter, including this last quarter, we would feel quite comfortable that our reserve position is appropriate.

Brad, this is Bob. What we look at too, Brett, is one of the things Terry mentioned, the $44 million, but back -- if you look at our loss history over 10- or 12-year horizon, you can see that our $44 million is real consistent with our loss history has been in our non-performing assets -- in our doubtful credits. So it's real consistent what we have specifically provided for each of those loans through our FAS 114 analysis. You look back at our loss history on our doubtful credits, it's very consistent with that number.

Okay. Maybe -- and that is all great color. Maybe to come at it from a slightly different perspective, would it be reasonable to assume that you expect provisioning to be significantly lower next year than we are seeing in the most recent quarters?

Brett, that is a pretty wild question; if you want to put some meat around significant.

Can the provision fall by half on a quarterly basis from the 2Q levels next year and your thought process?

No, I wouldn't be in a position to say exactly where it will fallout, but directionally we have indicated that we believe NPAs are at or near their peak. And as those -- as we see progress and improvement there we would anticipate seeing just a reflection in the mirror that the provisioning is declining as well.

And so it will be largely a factor, Brett, of how quickly these loans are resolved over the next probably two or three years as we work down through this. So I suppose you could have a broad range that maybe it could be down somewhere like half next year, but that would be not something that we would be advocating that it will necessarily be at that level. It could be better or worse than that depending on how much progress is made on NPAs.

Okay, that is fair enough. And then just one last question. The special mention decline linked quarter; I am assuming that was mostly construction related improvement.

Yes, that would be correct.

Okay, great. Thanks for all the color.

Matthew Clark, KBW.

I guess just as a follow on to the question on non-performers and credit leverage, I guess you guys don't feel the need or any pressure to resolve these things any quicker than you see appropriate. I guess what I am wondering is I guess you could obviously resolve a lot of these things a lot faster if you marked them down even more. But it doesn't sound like that is something you want to do.

Just curious as to your expectation for the timing as it relates to resolving these things and what maybe the weighted average LTV might be on an updated basis on your non-accruals?

This is Bob Cerkovnik; very good question. We have taken the approach that we are in for the long term so we are working with our customer as long as they will work with us. And we found that to be the most efficient way and most beneficial to the bank and shareholders is to work with the customers for as long as you can.

Once they stop working for us, we are very aggressive in starting an action, whether it be legal action or foreclosures. Whatever is necessary given the situation. I know banks do do loan sales; they do charge-offs more aggressively.

But we have continuously commented that we are in for the long term and we think the long-term shareholder value is to work with the customer for as long as we can. Given the communities that we are in, most of our communities are 30,000. Once you have one of those customers -- and we work with them for as long as we can because maybe sometime long term they will continue to be a customer.

Okay, great. And on the -- maybe this one is for Terry. In terms of the securities portfolio we saw come down a fair amount here, also looks like you -- I think as you mentioned, redeployed some of the cash. Just curious as to what your view is on the cash position here today, whether or not you might reinvest more of that into higher yielding securities, and then what the overall securities portfolio might do here in the second half.

Matthew, as it relates to the magnitude or size of the portfolio, I think it will hover around the $2 billion mark over the next couple of quarters. And certainly our -- the category called interest-bearing deposits and banks is really our daily liquidity position, which has declined to an average in second quarter of $360 million. I would anticipate that it will probably be in that range and remain around $300 million.

We do not have an intention to drive that to be a smaller balance and the loan portfolio higher, but obviously if we were to experience a meaningful growth in deposits and at the same time no growth in loans, we would look to increasing our investment portfolio. That wouldn't be hundreds of millions but it might be directionally some slight increase. And vice versa as well in that.

So I think the level we are at is probably a reasonable estimate for the next couple of quarters, recognizing it will be something different than that estimate.

Okay. But your overall earning assets down a couple hundred million, or $190 million it looks like, we should see that stabilize to some degree you think here?

Yes, I think, if you will, the earning assets is largely a function of our deposit base. And our deposit base shrunk, which in large part is seasonality from first quarter to second quarter, and so we would not anticipate in third and fourth quarter that additional shrinkage in our funding base. So I wouldn't expect that it would decline and, in fact, this is traditionally our growth season for deposits would be third and fourth quarter.

So I wouldn't think it would shrink anymore and this might be kind of a new base, at least as you look at it over the short run, for it to increase a bit over the next couple of quarters.

Okay, great. And then just on the other expense line, I think you had mentioned on the call the $1.3 million, I believe, in collection costs in one litigation; is that correct? And maybe what portion of that $1.3 million might not -- we might not see in the upcoming quarter?

Certainly our legal costs are higher than they were a year ago by a pretty good mark, and we believe that we are close to that high water mark. A little bit hard to precisely indicate, but I think for round numbers somewhere around $1 million for the next six months would be a reasonable estimate. And so they might be off just a tick, Matthew.

Okay, thank you.

Tim Coffey, FIG Partners.

Good morning, everybody. I am trying to figure out how this works. So I am seeing non-performing loans increase and early-stage delinquencies increase, but yet you feel that your problem credits are kind of on the down slope now. Am I missing something?

Tim, as you adeptly pointed out there, if you look at our 30 to 89 day bucket, yes, it is increasing over a three-quarter average. But if you look back at the same period last year, we were at $99 million in 30 to 89 bucket and we are at 70.

I would say that our -- we have been consistently and our past few percentages have been consistent over the quarter. They may go up some a little bit one quarter to the next, but we don't see that as a deteriorating trend in the past year.

Okay, all right. If credit quality -- the numbers are starting to -- going to improve, would that mean we would see more inflows than outflows in OREO this next quarter?

You know, it depends. I would expect to see the same rate continuing, just depends on a lot of what happens with each one of those properties. That is a real tough question.

Okay. And then given the --

We anticipate OREO to continue to dispose of, but we are very aggressive in getting rid of that property.

Okay. And then with the extent of the amount of time that snow has spent on the ground this year so far in Montana are you expecting an exceptionally brisk selling season as it warms up?

We haven't seen it thus far, Tim. And, boy, we had a very long winter and a very long spring, but for us it feels like it's a little slow in the resort areas right now.

Okay. The rest of my questions have been answered. I appreciate it.

Brad Milsaps, Sandler O'Neill.

Good morning. Just wanted to see if you guys could talk about some of the operating expense initiatives. I know, Lyle, you mentioned that in your initial comments, but it looks like operating expenses are running at a rate less than they were in the back half of last year, particularly on the personnel expense side.

Just kind of curious what you guys are thinking there going forward. I know a lot of the things you were looking at were sort of smaller in nature, kind of singles, not home runs, but I am just kind of curious any update on how to kind of think about that going forward.

Brad, I will make a few comments on that. Certainly it remains a critical initiative for us to -- and we have put a lot of energy into monitoring, tracking, and examining and turning stones over to find opportunities for sustainable savings of expenses or opportunities to increase revenues. So there is a lot of progress underway and energies, which we think will bear out mostly in the next couple of years as opposed to a substantial show in the first six months.

We have found some meaningful improvements in renegotiating or negotiating as they come up opportunities with vendors that provide services for us. And so we have been quite successful in that regard which are sustainable.

Certainly on the largest area would be as we examine or look at how we operate and how we can operate more productive with our staff. We have been successful in reducing the number of staff that we operate with and that is adding and contributing quite a bit of savings on a go-forward and sustainable basis. So we continue to have focus there.

On the other hand, there are other pressures of costs that come about just in normal inflationary considerations, whether it be utilities or employee benefits, etc. So to the extent that we are successful in launching and having improvement in these initiatives, much of that may be or some of it at least may be offset in part by just inflationary costs or costs of doing business as we have had to add folks, as an example, in the compliance area.

So it may not show as a great big deduct when you are looking from it at an analyst perspective, but we would hope to offset most of our increase. We made a comment as well that was nice -- rarely does it work to our benefit or the Bank's benefits, but in the second quarter that we actually had an advantage in the restructure of the way FDIC premiums are assessed. So that is a sustainable example.

It wasn't one we got to work, but usually they work against us. So I just wouldn't want you to get the impression we are not serious about it. We are very focused in this area of looking for cost structure opportunities and continue to apply energy. Again, when you look at it from an analyst perspective I think you just wouldn't see a lot of reduction because of other pressures or increases in costs.

Okay. And then just one second question on the OREO. Just curious if you maybe described sort of what you have coming down the pike in terms appraisals. Was the second quarter maybe heavier than the first quarter or vice versa?

I know, Terry, that you mentioned that you had the one large write-down against one property in the Flathead Valley this quarter that kind of pushed that number up. But I was just curious if you had more properties queued up in the third quarter or if it's a lighter quarter kind of relative to the first part of the year.

Just to answer your question on appraisals, we are evaluating those on a quarterly, basically a month-to-month basis. And as I said earlier referring to another question is we are aggressive in trying to eliminate our OREO as quickly as possible.

As far as appraisals coming in, we are not -- the level of deterioration that we are seeing primarily in our stressed markets is not as high. What we are seeing in the Flathead is we are seeing properties -- there is just not many sales out there. Appraisals come in; as you know, they are based a lot on comps so that is just keeping those values down.

Do we continue to see some deterioration? There may be some further deterioration, but again we are not seeing the level of deterioration you are seeing; look at the Bozeman market.

I think what Brad was asking is whether we are going to have more appraisals come in in the third quarter than we had in the second quarter. Are you able to forecast that?

Not really. We do that -- most of our appraisals, I think we have three that are coming in for the next quarter that are up for review, but generally speaking of all the properties we have it's not significant number of upcoming appraisals which we would see a significant write-down.

Okay, great. Thank you very much.

Brad, I might add just a little color to what -- we had this $1.5 million write-down and that was not an occurrence as a result of receiving an updated appraisal. It was an internal assessment that said we wanted to position the value of that properties for a bulk sale. And, frankly, it is on our books now for substantially less than our current appraisal.

(Operator Instructions) We show no further questions. I would like to turn the conference back over to management for any closing remarks.

Thank you. In summary, the sun is finally shining, the skies are finally blue, the parks are finally open. There is a sense that there is more activity in our marketplaces now, so we look forward to talking to you again at the end of the third quarter. Thanks for joining us.

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