First Merchants Corp (FRME) 2009 Q2 法說會逐字稿

Hello, and welcome to the First Merchants Corporation second quarter 2009 conference call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). Please note during the call, Management may make forward-looking statements about the Company's relative business outlook. These forward-looking statements and all other statements made during the call that do not concern historical facts are subject to risks and uncertainties that may materially affect actual results. Specific forward-looking statements include, but are not limited to, any indications regarding the financial services industry, the economy, and future growth of the balance sheet or income statement. Please note this conference is being recorded.

Now, I would like to turn the conference over to Mr. Mike Rechin, President and Chief Executive Officer. Mr. Rechin?

Thank you, Amy, and good afternoon, everyone.

Welcome to our earnings conference call and webcast for the three months ended June 30, 2009. Joining me today are Mark Hardwick, our Chief Financial Officer, and John Martin, our Chief Credit Officer. John is not new to the Corporation, but is new in responsibilities, having been promoted to Chief Credit Officer earlier in the Spring. We have offered a webcast for today's presentation that's accessible to listeners in either of two respects. One would be in the Press Release where our URL address was provided. Alternatively, at www.firstmerchants.com under the Investor Relations section, that same access is granted. So, my hope would be is that you can follow our comments and let's get started with the first slide, which is numbered 4. So, the Company endured a difficult and very disappointing quarter, producing a net loss just over $31 million, or $1.48 per share. Many of the aspects of our income statement do reflect results consistent with our plans, but the credit costs and provision and charge-offs overshadow any of the accomplishments we have made. Mark will cover our financial report in greater detail, and John Martin will follow with a deeper look at our loan portfolio composition and the risk pockets we continue to manage.

On the balance of slide 4, has information related to the provision and the significant levels year-to-date to include $59 million in the second quarter alone, which does produce a allowance at 2.16% alone, the highest it's been in an intentional effort on our part to increase the coverage of our nonperforming loans, which achieved 66% at June 30. Bottom portion of the slide highlights the really sizable charge-off on an annualized basis to 2.53%, which we'll be looking to work down. It is offset somewhat by the fact that it achieved a flat, nonperforming asset level at the end of the second quarter with that of the end of the first quarter. As the press release stated, all of our capital threat levels well in excess of well capitalized status. I am going to move to slide 5 and speak to these points in inverse order of the way they are presented and maybe start with our experience in the first six months ownership of Lincoln Bancorp, an acquisition we completed on the last calendar day of fiscal 2008, and I will speak to the points as listed. I was pleased at our last discussion at the end of April just to talk about the very near term result we had at that point, about our core operation conversion and the simultaneous rebranding of the Lincoln banking centers across all of the Lincoln franchise into First Merchants Bank and a core conversion that has gone smoothly at this point, seasoned by four months with customer counts remaining exceedingly strong and our ability to look at the purposes behind any customer closures and account closures we've had to asure ourselves that our service level stays strong.

In addition to that, our expense savings capture, while 30 days behind where we thought we would achieve it, is on a run rate now that meets our expectations. From a pure FTE standpoint, in identifying the synergies through our time prior to closing, we had identified all of the roles and responsibilities for those folks from Lincoln joining our Company and we have gone from 236 Lincoln employees at 12/31/08 to 149 at this point, and are realizing in June the run rate of salary expense that we had planned in the synergies identified. Credit quality remains stable. I think anyone familiar with the Lincoln franchise knew that they had built an attractive portfolio on the south and west sides of town to include Marion County, with a portfolio that was heavily concentrated in real estate and as such, at close, had a nonperforming level that was high, approximately 5% in the commercial portfolio, and that portfolio has been stable for us, frustrating somewhat in that there's the real absence of liquidity in terms of refinancing options, but the borrowers that we have brought on board and the relationship managers handling them are doing a fine job. We are looking at some less conventional ways by way of secondary markets to investigate ways to reduce that level. We have also added management to that team in an effort to diversify what the portfolio would look like on a go forward basis to include some Senior Management help that are now integrated fully with the team that we have had at First Merchants Bank of Central Indiana, historically.

So, in summary, our feeling, my feeling about Lincoln is every bit as excited as it was going into the fourth quarter of 2008. We have got work to do in building out the diversity of mix we would like. We have got a small business initiative that has picked up from the small business efforts we have with aggressive calling out of our banking center managers as it rolls into what are many of the healthiest markets in the state, and our Management Team is completed down there with an integration of some of our most tenured folks with talented people we have brought on board with Lincoln. If I move up on that slide, we look and plan to further refine and simplify our model overall, and earlier today, a press release went out announcing that we will be reducing the number of bank charters we operate from four to one. The application's being filed today. We look to have that work completed before quarter end with the primary benefits to us just being significantly greater flexibility and the sharing of our liquidity across the Company and our capital deployment. Moving to the top of the slide rather, having recognized our capitalized status and our well reserved position, we feel well positioned overall when we look at the Company, and while John, in particular, and Mark will speak to some of the blemishes that took place in the second quarter and the work that remains to be done, I would really like to just speak to some of the work that gets overshadowed.

For instance, an improving deposit mix that reflects our priority in the rollout of that small business model, which is gaining some maturity with our demand deposits continuing to grow, a stable net interest margin and pieces of our non-interest income that really reflect the quality of service that we are continuing to provide our customers. To be more specific, in line items that the Press Release identifies, our service charges continue to grow commensurate with our plan, our card fee business strong, our mortgage gains associated with the same type of wind at your back volume activity that we saw throughout the Company in the first quarter has only grown as the processes and originations out of the Lincoln franchise and the strength of its markets play into that, and our insurance business remains strong. So, while our results are anything but satisfying or satisfactory, we look at the core fundamental business with some level of pleasure as to the pieces falling together.

At this point, I was going to turn the presentation over to Mark Hardwick.

Thank you, Mike. Good afternoon, everyone.

As Mike mentioned, our results are disappointing, as our credit deterioration accelerated at a pace beyond our expectations. However, First Merchants Corporation remains well capitalized, is now well reserved and is well positioned for the future. The second quarter was filled with highs and lows and 2008 is already a distant memory. Problems and explanations tend to dominate earnings calls when a loss exists, but I intend to mix in several items that suggest we are positioned well for the future. There are points of optimism that reflect a strong company with a bright future. On slide 8, total assets reached $4.7 billion at quarter end, a decline from the prior quarter of $170 million as loans declined by $100 million and the reserve for loan losses increased by $18 million. Declines and other assets exceeded increases in the investment portfolio by $50 million, resulting in a reduction of borrowings of $50 million. The loan portfolio on slide 9 totaled 75% of the Corporation's assets and the composition remains evenly balanced as the various categories of commercial banking comprise 68% of loans. The overall yield of the portfolio totals 5.96% and is also the primary asset driver of our 364 net interest margin.

The investment portfolio on slide 10 totals $631 million, or 13% of total assets. The duration of the portfolio is just four years and the average yield totals 4.9%. The quality of the portfolio is very good with one exception, our exposure to pooled bank trust preferred securities totals $11.1 million, down from an original book balance of $14.9 million, with a current market value of $2 million. Our OTTI charges to date total $3.8 million, including $2.1 million -- a $2.1 million charge in the second quarter. Our liability mix on slide 11 continues to improve our overall liquidity position as broker deposits declined by $97 million during the last three months and bank level borrowings, including the TLGP, equaled our 2007 level, which are pre-Lincoln acquisition amounts. This slide is additionally significant regarding capital levels given the changes in our industry over the last 18 months. The $111 million of hybrid capital includes $61 million of trust preferred borrowings, which qualify as Tier 1 capital with a maturity date of 2037, and $50 million of sub-debt with a maturity date of 2015. The preferred stock is made up of 100% CPP capital and qualifies as Tier 1 regulatory capital as there is no maturity date.

Common stock totaled $361 million, down from $396 million in the prior quarter, due to the second quarter loss, second quarter dividends and declines in other comprehensive income due to changes in the unrealized loss of the bond portfolio. On slide 12, our deposit mix results in an average cost totaling just 2.05%, the changes in the deposit mix that are detailed on the last page of the press release are very positive as DDAs, our least expensive category, totaled 33% of deposits and grew by over 10% on an annualized run rate for the second consecutive quarter. Broker deposits, our most expensive deposit category, are down $164 million from the high watermark at the end of 2008. On slide 13, all regulatory capital ratios are above the OCC and federal reserve of primary regulators' definition of well capitalized and can be attributed to Management's use of various hybrid capital instruments over the years. The hybrid capital instruments are not included when calculating tangible common equity, or TCE, which now totals 4.42%. Management and the Board of Directors understand the market sensitivity to this capital ratio and have started taking actions to preserve the Corporation's tangible capital as a percent of assets. Mike Rechin will highlight some of the actions underway that help preserve our tangible equity in his closing comments.

The Corporation's margin on slide 14 continues to drive a solid pretax, preprovision run rate as net interest income on an FTE adjusted basis increased by $1 million when annualized. Our interest sensitivity model is reflective of balance sheet strategy, and depicts a rising net interest income of nearly $6 million with a 100 basis points shift upwards in the key external driver rates. Management is not putting future earnings at risk and is positioned to perform in a more inflationary environment. The allowance for loan losses on slide 15 has increased by 275% during the last six quarters and now totals 2.16% of total loans. The allowance for loan losses began this cycle just under 1% of total loans and equaled $28.2 million. The allowance now totals $77 million as we believe we are now well reserved for future quarters. Provision expense in 2008 and the first half of 2009 totaled $100 million while charge-offs totaled $62 million, the difference of $38 million when combined with Lincoln Bank's $10.8 million acquired allowance accounts for the $48.9 million increase. Total non-interest income on slide 16 increased by $224,000 over the first quarter of 2009 when adjusted for bond gains and losses, reflecting improvement in relationship banking fees. The improvements came from service charges on deposits and mortgage production.

Total non-interest expense on slide 17 also improved when adjusted for FDIC assessments and credit-related expenditures as salary and benefit costs and outside data processing expense declined, as expected, from the completion of our data integration of Lincoln Bank. Management did not adjust the slides on, on 16 or 17 for the bond gains and losses as well as FDIC assessments and credit- related expenditures as they did occur in the last several quarters. However, we are attempting to look forward and reflect a more normalized result to help you value the future earnings stream of this Corporation, once our credit problems are behind us. We believe that First Merchants is well positioned for the future and slide 18 is reflective of that opinion. This is the first quarter that First Merchants has experienced a loss in the Corporation's long history and we believe that without declines in the Indiana economy and/or other significant customer fraud events from this point forward that it should be our last. Our pretax preprovision run rate of just over $16 million allows for approximately 180 basis points of annualized credit-related costs to breakeven on a go forward basis.

Now, John Martin, our Chief Credit Officer, will talk about mix and quality of our portfolio.

Thanks, Mark. Well, hello, everyone.

I will be walking through our credit metrics on pages 19 through 25 of the slide presentation, but before the detailed analysis, I would like to discuss the quarter-end highlights. Turning to slide 20, nonperforming assets totaled $140 million or 2.9% of assets for the quarter, which includes non accrual, 90 days plus past due and other real estate owned. This represents a $1.9 million increase, or less than 1.5% increase for the quarter. This change represents a less significant increases compared to previous quarters. While there are a number of factors driving the level of non performers, we will turn our attention to this when we get to the NPA analysis. Other real estate owned declined by 8% or $1.85 million to $20.2 million from $22.1 million from the previous quarter end. This resulted from both property sales of $1 million and real estate write downs of roughly $850,000. Loans 90 days past due or greater declined to $3.6 million from $7.7 million as two loans totaling $3.4 million were paid off in their entirety. Commercial construction and land development loans continue to run off. These balances have declined $90 million since December with a $46 million reduction in the second quarter.

Decreases in this category came from payoffs, a decrease in other real estate owned and charge-offs. The impaired loan portfolio has been marked down by 36% from the customer balance. This is to say from direct charge-offs and specific reserves as a part of the allowance, we have written down or specifically reserved for losses of 36% in this portfolio. Now turning to slide 21, for the quarter, charge-offs totaled $40 million while provision expense totaled $59 million. The table in the middle of slide 21 represents charge-offs on loans greater than 500 -- or loans greater than $500,000. Specifically, these 16 loans comprise $35 million of total charge-offs for the quarter with one commercial loan comprising $10.2 million of the total, or 25% of total charge-offs. Although this loan had not been previously specifically reserved for in prior quarters, the charge-off was taken as a result of material misstatements in the financial statements provided by a large commercial industrial borrower. Turning to slide 22. On this slide, let me run you through the charge-off ratios by asset class. Commercial and industrial charge-offs are 5.3% on an annualized basis.

Now, if the $10.2 million charge-offs were not included, the annualized number would have resulted in a 3.41% charge-off ratio. We continue to see challenges coming out of our residential land and lot development portfolio with annualized net charge-offs of 8.93%. We continue to closely monitor this portfolio with respect to existing projects as well as being selective with any new exposure to the industry. Our consumer portfolio continues to perform reasonably well given the environment with year-to-date annualized charge-offs of less than 1% of consumer loans. In this category, the home equity and residential mortgage portfolio experienced annualized charge-off ratios of .84% and .67%, respectively. Turning to slide 23, non-accrual loans increased from $108 million to $112 million while 90 days plus past due decreased from $7.7 million or $3.5 million and our other real estate owned decreased from $22.1 million to $20.2 million. The residential and lot development portfolio with 20.3% of the portfolio non-accrual represents our largest category, but now only represents 4.5% of total loans. In total, nonperforming assets represented 3.92% of total loans.

Now turn to slide 22 for a brief review of our existing real estate owned portfolio. Total real estate owned was $20.2 million as previously mentioned. As can be seen in the chart, 75% of the dollar amount of the portfolio is in CRE and residential construction and land development. These properties are all being actively marketed in a variety of ways, including direct listing or through other forms, such as auction. Finally, please turn to slide 25 for a look at our portfolio risk drivers that have occurred over the last quarter. As is illustrated in the first portion of the slide, in the middle of last year, like most banks, we began to feel the immediate impact of the housing crisis and the spike in energy prices. Our construction development portfolio was the first to begin to show signs of stress. Additionally, we began to see the costs of agriculture inputs increase with spiking energy prices offset by increases in grain prices along with the change in metal prices. Next, we saw a fall in consumer (inaudible) and rising delinquencies and a fall in home energy prices impacting our consumer and automotive-related portfolios. So, where are we now? Our team is working hard to work with our customers in our local community to resolve problems that the stresses over the last year have created.

One last thought before I turn the call back over to Mike for his closing remarks, I would like to thank all of the bankers, credit staff and the operational team for their efforts in managing through this challenging time. Mike?

Thanks, John Martin.

I am on slide 27, and at the end of some thoughts on that page, would open up Amy, the call to questions. But before I do that, I did want to speak to what Mark had highlighted, some asset quality improvement in capital preservation initiatives that are underway. John referred to them as well. But I don't want it to cloud the idea that we've got 1225 people working at First Merchants, the vast majority of whom are focused on servicing our customers for the future while the immediate needs in this difficult environment are also being met. It's very appropriate to cover the material in the depth that John did and it reflects a really sizable effort on our part to put adequate resources behind balance sheet improvement that has to take place. We are keenly aware of both the risks of the portfolio where it stands now and the cost of it to our shareholders, so it's getting the appropriate work. Beyond the block and tackle work that John, his team and all of our relationship managers are putting in, we've got a couple of unique efforts worthy of a couple of words. As I mentioned on page 27, starting with John's team which, at this point, has been more than doubled under a new manager and coincident with John's promotion to Chief Credit Officer, was a realignment in our credit function whereby all of the Chief Credit Officers in banks and geographies report up through John now so that we take a similar to market strategy in terms of customer maintenance when that's the case, and exit a relationship when that's the case.

It is already proven to be effective for us culturally and as we manage the portfolio. The executive team above and beyond that team are looking at sale alternatives. We were encouraged that right towards the end of the second quarter, we have begun to see increased activity among strategic buyers of businesses, notes and other words and higher prices being offered, so we are going to take advantage of that on a case by case basis through the balance of the quarter. We think it is a very viable means to manage our NPA levels. Also listed on the page is nonstrategic asset reductions. And for those of you familiar with our balance sheet, we have just under $100 million of indirect loans at a really attractive yield that we think would have value at or above par and we are considering the sale of those and have begun those efforts, and have mortgages on the balance sheet also, we feel, and at level of par, and for those of you that have followed us a couple of years know that we have sold those from time to time. We have and continue to have essentially a originate and sale model that hasn't deviated and we'll continue to operate the business in that manner, but have found buyers in some liquidity for mortgages that we have on the balance sheet.

Earlier in the quarter, we did, through corporate board direction, have an approval to reduce the dividend as just another manifestation of capital preservation we think appropriate for the time. Among the other assets that we are looking at is the bond portfolio, which through the activity in that market have regained values such that continuing to be nimble with a larger portfolio gives us some upside to potentially preserve capital in that manner. I alluded earlier to the charter consolidation citing liquidity benefits and capital deployment benefits, the other advancement we hope to see is just the cultural change that continues dating back to the 2007 combination in charters that we executed on and the benefits we have seen from that. So, before we get to questions, I will end with the idea that our team continues to see First Merchants as a long-term force throughout Central Ohio and Central Indiana and look forward to executing on that plan through this difficult environment. At this point, Amy, we are all available for questions.

Thank you. (Operator Instructions). Our first question comes from John Rodis at Howe Barnes.

Good afternoon, guys.

Hi, John. How are you? It's Mike.

Good. Good. Thanks for doing the call, first off. Can you just refresh my memory, the indirect loan portfolio, how big is that, potentially, that you are talking about?

Sure. It is -- Mark will give you an exact number. It's around $90 million. It comes from two components, a legacy automotive-related piece that we had in the First Merchants portfolio, and then another piece that came to us from Lincoln that was a combination auto and boat and RV. Mark, do you have that number?

Yes, it is $89 million at the end of the quarter, or at the end of the month.

Okay. Thanks, Mark. And Mike, I guess, as you're talking about capital planning and so forth, what sort of target are you managing to and what sort of level are you looking for?

Well, near term, we are looking at a 5% level. We feel it is attainable through a combination of the actions I described, coupled with a return to profitability.

Okay. One other question on fee income, the -- I noticed trust fees were down at linked quarter. Can you just talk to what was going on there?

Yes, our trust business, which is effectively retirement planning and personal trust, with personal trust being a larger component, has a fee structure that really is just going to run parallel to assets under management, and although the market overall had a bit of a rally in the second quarter, what we are still lagging is just the choices on behalf of our customers, especially in the March time frame, to move out of equities into safer asset classes that don't have some of the commensurate fee benefit, but we would fully expect to see from a customer count standpoint and the retention in growth in that business where our new pipeline is kind of lost because of the line item you're referring to, John, that as the client mix moves back into a traditional mix that the revenue line would grow.

Okay. Maybe just two final questions, Mike. Just can you maybe talk a little bit about the dividend, what your thoughts are there. And then, secondly, I guess, towards the end of your remarks, you also talked about, I guess, better opportunities to potentially sell non-performers. Could you maybe just expand on that, what you are seeing in the market and so forth?

Sure. I will tackle the dividend question first. And it was a difficult -- we know that the dividend is highly valued by our owners, and so the decision to reduce it was a difficult one to make, but one that we really endorsed based on our level of earnings and based on the need to retain as much capital as possible. If your question extends into the weakness of the second quarter, we -- that was not actively discussed as our near-term and going forward earnings expectations have the $0.32 per share dividend looking very appropriate to us. Is that --

So, you are talking about $0.08 per quarter; correct?

Correct.

Okay. And then, as far as the, I guess, market for nonperforming.

Oh, the market for activities is, well, the land has just been so stagnant, but there was a really sizable, the largest single family residential builder in all of Central Indiana disbanded and went bankrupt about three months ago and we had zero exposure to that name. It is probably a name that a lot of you are familiar with. We didn't have any exposure there, but it left a big void in the market that, absent any demand, wasn't filled until recently when two out of state builders have begun to get into the market and create some activity around lots. And so, there is just a ripple effect of that that is pushing up the market and it is not pushing it up to an attractive level, but it is pushing it beyond the level where you would never consider selling into a point where you can look at it. And then similarly, outside of residential real estate, there's just bottom feeding, I guess, around what has been really a sustained depressed value such that there's been some activity taking place.

Okay. Thanks, guys.

Thank you.

Our next question comes from Adam Klauber at Fox-Pitt Kelton.

Thanks. Good afternoon.

Hi, Adam.

After this quarter, where do you think you are in the credit cycle? Do you think as far as rate of growth and non-performers, reserve build, do you think you're around the peak? You're not sure, or do you think there is still some more escalation in both non-performers, I'm talking material escalation in non-performers and reserve build to go?

You came with the hard one, Adam. It's Mike. We think we are near the bottom. The -- John Martin referred to the automotive sector, which until now and if you got into any detail in our largest non-performing credits, are really absent any automotive suppliers Tier 2 or otherwise. Having said that, we have got a significant exposure to the auto industry all the way down to tertiary suppliers, and so that is probably the portion of the economy that Ohio, Indiana, pervasive that has us most concerned because our real estate -- the depth of the value of the real estate as we can get properties now coming through their second appraisal cycle have stabilized some. And, as I mentioned, that's where we have seen a resurgence in demand. So, without giving you the kind of black and white answer you might be hoping for, we feel like that the rate of growth of NPA should slow. Now having said that, our NPAs barely grew second quarter over first, but as you are aware, that is primarily a result of the aggressive charge-offs.

Right. Right. Okay. No, that's a fair assessment. And getting to the charge-offs, could you have some idea -- I mean, how much of the charge-offs were credits moving into non-performing versus credits already in non-performing?

I would say it was probably -- Adam, this is John Martin. I would say it is probably about half of them.

Okay. And is that -- on the ones moving in, is that the C&I or which bucket did that come in?

Well, again, not having the actual dollar figures for what's going in and out necessarily, I think as I look at the non-performing list, it is, it is pretty uniform with the concentration in the land and lot development being impacted, I think, on a rate that's higher than the other areas.

Okay. And as far as the C&I charge-offs, aside from that one credit, could you give us some more flavor on what were some of the other types of credits that got charged off during the quarter?

Well, we had, we had obviously, the one, and we had an energy producer. We had just other C&I borrowers as well as a manufacturer related to the -- basically, the consumer slow down, if you will, as well as some land development. We took charge-offs on properties that are moving towards or are in OREO and just as it relates to builders and the home construction.

Okay. And on that -- switching over to the margin, do you think it is stabilized here, and is there some potential expansion as we look towards the end of the year?

Yes, Adam, this is Mark Hardwick. I do think it is stabilized. The rate environment is probably as low as it can get, which a down rate environment is where we would see some additional compression. Rising rate environment, as I mentioned, produces a stronger net interest margin and some of the capital preservation discussions that we had mentioned, although not real aggressive, but I think prudent in this environment, are a little more reflective of a traditional return on asset strategy and some of the asset sales that we're talking about would be offset by our most expensive borrowing categories, broker deposits, federal home loan bank advances, and that would produce a little stronger margin, albeit on a smaller asset base, but we feel like the margin numbers are really stable and some of that sale activity will have an impact that we anticipate will cause the margin to increase.

Okay. And one more on the credit side. On your classified list, did that stay relatively stable, did that move up or down?

Let me take a quick -- it has -- did see some increase and I can't give you the exact percentage, but classified loans increased about a percent.

Okay. So that's pretty stable? Okay. Thank you very much.

Thanks, Adam.

Our next question comes from Brian Martin at (inaudible).

Hey, guys,.

Good afternoon, Brian.

Hey, one of the questions you just asked, Mark, was on the margin, but just, Mark, would you have the monthly, the monthly margin, what the margin was for June?

I do, but we had so many interest reversals, let me see if I have my notes. Yes. It was -- the month of June was 354, but we have taking loans to charge or to non-accrual, actually, when placed on non-accrual we had interest reversals of about $650,000 in the month of June, which backing that out, would have resulted in a margin of 372.

372. Okay. And then just, how about can you just give a little color, maybe it is more of a Mike question, but just for the different markets you guys are operating in, kind of where you are seeing the most stress and, I guess, you talked a little bit about what industries you've got exposure to, but just markets you're feeling more stresses in, what areas are giving you more concern?

Sure. The area of greatest concern is really the central part of Indiana. It is Delaware County where Muncie is. It extends up into the Decatur market and Wabash with the north and west. By contrast, commerce in Columbus, Ohio has our best credit quality, as you know, it is an exclusively commercial bank and probably with some risk systems that have more maturity and it is reflected well. It is a service-related economy and they have done well. You would probably get some additional color around that if you were to take a look at our call reports by bank. And then, the Lafayette Bank, $900 million in assets with a $600 million portfolio has really held up pretty well. The largest bank in terms of ag concentration and the commodity prices have moderated such that I think it is going to be a descent ag season and the credit statistics reflect that.

Okay. And just the -- in the charge-offs on the commercial side, do they come out of the Ohio bank at all or is that all, all of it primarily Indiana?

John might have a number, but our charge-offs out of commerce are exceedingly low.

Just, Brian, to pick up on that point, I would say of the -- when we referenced on the slide about the $35 million, none of that was included any charge-off from commerce.

Okay. Did not. Okay. That's all I had, guys. Thank you.

Thank you.

I show no further questions at this time. I would like to turn the conference back over to Management for any closing remarks.

Thank you, Amy. I hope our thoughts were comprehensive around the challenges that the industry faces and the way that First Merchants is addressing our balance sheet challenges. Appreciate your continued interest and look forward to speaking with you again at the conclusion of the third quarter. Thanks, Amy.

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