First Merchants Corp (FRME) 2010 Q2 法說會逐字稿

Good afternoon and welcome to First Merchants Corporation second quarter 2010 earnings conference call. All participants are in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask a question. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Michael Rechin, Chief Executive Officer. Please go ahead, sir.

Thank you, Andrea. Welcome to our earnings conference call and webcast for the second quarter ending June 30, 2010. Joining me today are Mark Hardwick our Chief Financial Officer and John Martin, our Chief Credit Officer. My comments will begin on page 4 of the webcast for listeners with access, and as a reminder the directions to the webcast were located on Page 2 of the press release that came out around midday. The press release itself issued about noon, reflects results of operations and other significant activities completed last quarter and year-to-date.

In the quarter First Merchants earned $0.35 per common share, with the levels of credit costs and charge offs beneath the first quarter and dramatically beneath the levels of the second quarter of 2009. Our increase in net interest margin to 3.9% reflects lesser balance sheet leverage and a reduction in overall funding costs reducing net interest income of $36.2 million. The level of profits for the quarter was greatly a function of our exchange transaction with the treasury closed on June 30.

Mark will reference the transaction in his remarks but the closing produced a sizable gain that in large part raised tangible common equity to 5.88%. The remaining points on Page 4 mirror the priorities we shared at the end of our call on April 28, our first quarter call, and more specifically we continue to prioritize serving our market through this low growth period and actively managing the best disposition of our problem loans, and other credit issues. Mark, at this point would you walk us through the financials?

Good afternoon and thanks for joining the call. My comments will start on Slide 6. This speaks to managements results regarding our plan to protect and strengthen the balance sheet consistent with our 2009 and early 2010 guidance regarding our capital preservation plans. The loan portfolio declined by $140 million during the first quarter of 2010, and our pace of decline improved slightly or improved to slightly less than $80 million this quarter. As mentioned last quarter, management is working to minimize the loan portfolio runoff and anticipate similar improvements in the third quarter. Our loan to asset ratio totaled 73%, down from 78%, 18 months ago.

The earning asset risk profile is more liquid and includes $164 million of new investment grade securities. The composition of our loan portfolio on Slide 7 is producing strong, a strong yield totaling 5.71 and when added to the loan portfolio, earning assets have a good interest sensitivity profile. $1.1 billion or 30% of our earning assets were priced daily and another $944 million or 26% of our earning assets were repriced during the remaining 12 months of the year. Just 44% of earnings assets are fixed beyond one year.

We like how the balance sheet is positioned for the current rate environment as well as how it is positioned when rates begin to rise. The investment portfolio on Slide 8, has been the beneficiary of additional liquidity and over -- over the last 18 months. The yield remains strong totaling 4.51% and the duration is still attractive at 3.9 years. Our other than temporary impairment, other than temporary impairment charges on our FTN pretzel investments have began, have started to slow.

We have a total balance of $6.3 million and we have a market value of $1.4 million including the portfolios unrealized loss on the FTN pretzel securities of $4.9 million, the portfolio still maintains a $19.4 million net unrealized gain. The unrealized gain increased during the quarter by $12 million as market rates declined and prices increased.

Let's go to Slide 9, line 8. The improvements in our common equity since year-end are the result of two significant transactions. The first, as mentioned in our last call was the completion of a $24.2 million registered direct private placement of 4.2 million shares and $5.75 per share or a 10% discount to the market the at the date of close which was March 30, 2010.

The second, as announced in the press release on 8-K filed on July 2, 2010 was the completion of our $46.4 million exchange with the US treasury resulting in an after tax gain due to favorable accounting treatment of $10.1 million. The reduction of preferred stock is reflected on Line 7 and produces the increases on lines 8 and 9 for the remainder of the converted funds. The composition of the remaining liabilities, still on slide 9 have also improved during the year as both the deposits and borrowings declined during the quarter by another $64 million.

The improved mix is illustrated on Page 10, is satisfying the management as demand deposit now totals 39% of total deposit and interest expense on deposits now totals 1.55%. The change in overall funding mix including borrowing changes is the catalyst behind our 40 basis point decline in total cost of funds from this time last year. All regulatory capital ratios on Slide 11 are well above the OCC and total reserves definition of well capitalized.

We are pleased that total risk based capital expanded during 2009 from 10.24% in 2008 to 13.04% in 2009, and now totals 14.72%. The tangible common equity -- tangible common assets declines during 2009 from 5.01% to 4.54% but now exceeds the 2008 totals and the number, and totals 5.88% as Mike mentioned in his opening comments.

Net interest income on Slide 12 remain consistent with the first quarter of 2010 totaling $38 million on a fully taxable equivalent basis, $36 million on the face of the income statement. Despite fewer earning assets as net interest margin expanded to 3.9%. We are pleased with our net interest margin progress to date and we feel there's still some room to move the interest expense down based on peer analysis.

Total noninterest income on Slide 13 reflects some volatility due to line 6 securities gains and losses, and when normalized for the bond portfolio activity on line 9 still results in a more modest decline quarter-over-quarter, first quarter of 2010 to second quarter of $700,000. The primary driver of the decline is on Line 3, insurance commission income, because the first quarter of each year includes contingency income or bonus commissions paid to the agency by the carriers based on loss experience from the prior year. Total noninterest expense on Slide 14 total $34.3 million, down the first quarter of 2010 by another $400,000.

The total, if total expense on Line 11 were annualized for 2010, the total would be $138 million, $13.6 million less than the 2009 total of $151.6 million. Under the protect and strengthen capital preservation mode of operation during the last 15 months, a reduction was expected and necessary of salary and benefit expense totaled $17.9 million during the quarter, and 8.9% decline from the second quarter of 2009, coincident with FTE reductions of 50. The increase, the modest increase in the second quarter is based on one additional working day costing about $220,000 and increased health insurance expense of approximately $160,000. There were also nonrecurring expenses totaling just under $600,000 per quarter during the quarter.

Please turn to Slide 15. We are pleased by our level of profitability during the quarter and we continue to be encouraged by our pretax, preprovision run rate. As we continue to improve our nonaccrual levels and our nonperforming level, levels, reductions in line 5 provision expense are expected to occur, which ultimately drive future profitability levels. Now, John Martin, our Chief Credit Officer, will discuss our asset quality trends.

All right. Thanks, Mark. I will be walking through the credit slides on Pages 17 through 26 of the presentation before turning the call over to Mike. Starting on Slide 17, the quarter was marked by a continued stabilization of the portfolio as we work through the effects of the recession, non accrual loans declined to $120.2 million from $122.93 million at 3/31/2010, which represented a modest quarterly decline. Tha allowance increased 2.84% of total loans and coverage of nonaccrual loans held at 72%, in line with last quarter despite a $15. or $16.6 million in net charge offs. Thirty to 89 day delinquency remained relatively flat increasing from $31.6 million to $32 million and we saw some deterioration in the 90 plus, plus 90 day past due category increasing from $2.6 million to $4.5 million in the linked quarter. And finally, nonperforming assets in the 90 plus days past due increased modestly from the $144 to $144.6 million to $146.5 million, but that's the former migrating from nonaccrual to OREO restructured and pay offs.

Now turning to Slide 18, as just mentioned, nonaccrual loans decreased from $122.9 million to $120.2 million despite adding $27.3 million in new nonaccrual loans. We had net charge offs of $16.6 million in the quarter. We did see some improvement in this category as we moved $4 million to Oreo, and $8.3 million was either paid off, restructured or returned to accrual status.

Turning to Slide 19, the nonaccrual trend slide on Page 19 shows the trend in nonaccruals by type. The acquisition, construction, and development portfolio continues to roll off as we curtail restructuring and amortize remaining land and development loans. With respect to commercial mortgages, we continue to see challenges of the investment real estate portfolio as leases mature, and there are renegotiated in the markets where overcapacity exists.

As a point of clarification on Slide 19, the increase in home equity percentage increase which is revolving credit secured by one to four family homes shows an increase. This is being impacted by a specific relationship where we secured the obligation by a number of one to four family residents going into that bucket in order to better position ourselves. Absent this loan, home equity nonaccruals would have risen to 1.19%. More in line with historical periods but still up.

We continue to work through the challenges associated with the one to four family portfolio mortgages, and not only home equity but also residential mortgage loans.

Turning to Slide 20, we can see the individual relationship that is comprise the new nonaccrual loans moving into the category. The type of investment real estate varies, multifamily, hospitality, to office and industrial, the common characteristic is investment real estate. We continue to closely monitor and take measures where possible to mitigate risks as we work through the portfolio in this cycle.

Turning to Slide 21, we continue to see an increase in the Oreo portfolio. At the end of the quarter, the other real estate owned increased to $20.1 million with approximately 100 individual properties in the category. Of the $20.1 million in ORE, a number of unit, roughly 70% of the total ORE was residential real estate and 30 commercial.

In contrast, as one might expect by dollar, 85% of the total was commercial and 15% residential. Turning to Slide 22, with respect to delinquency, there was an uptick in both 90 plus day and 30 plus day delinquency. There's no one account that represented a material portion of the total although matured loans in the process of collection represented approximately $3 million of the 90 plus days past due.

Then to summarize the nonperformers, turn to Slide 23 which reconciles the nonperforming assets. First, excuse me. First quarter MPA and 90 plus days past due were $144.6 million.

New nonaccrual loans as just mentioned were $27.3 million which compared to $38.6 million in new nonaccruals in the first quarter. We return to accrual restructured or refinanced out of $8.3 million in loans is compared to $7.5 million of loans in the first quarter. And we moved another $4 million to ORE after charging off approximately $1.4 million.

Now, moving past the change in the OREOs, the Oreo, excuse me, I would draw your attention to the restructured loans. This category, this category represents accruing loans that we have moved out of the nonaccrual category after restructure while only increasing roughly $800,000 for the quarter this grow more significantly as we move to accrual status for restructured assets with newly established repayment capacity. These will then be removed from the category with the on going demonstration of performance during the year. These changes with the movement of other real estate owned and 90 plus days past due of $1.9 million resulted in the overall MPA and 90 plus days past due increasing to $146.5 million for the quarter.

Finally, I would draw your attention to those items impacting the allowance on Slides 24 through 26. On Slide 24, you can see the improvement from the reduction in the land and lots portfolio down $46 million from year-end. This portfolio continues to liquidate with curtailments, while charge offs continue to decline with the reduction exposure.

Additionally the challenges we face in commercial real estate are highlighted in the commercial mortgage category, with net charge offs trending upward from 1.52% at year end to 1.89% in the second quarter. Then on Slides 25 and 26, on Slide 25 we can see the continued coverage in line with the reduction in the portfolio and we believe that the -- there is adequate reserve space on the allowance methodology with the relative NPL coverage unchanged at 72% over the first quarter.

And then finally on Page 26, you can see the progression of the charge off provision and allowance as we make our way through effects of the recession. As the portfolio has continued to stabilize, we have modernized our provisioning in line with nonperforming loans using our methodology. All right. Thank you for your attention and I will now turn the presentation back over to Mike.

Thank you, John. With a few thoughts on Slide 28, titled financial reform. Capsulizes a few thoughts either inside or outside of Doddville, the most significant of which relative to our income statement is the top point around adoption of Reg E and you may recall from previous discussions, we felt going in that we had $2.8 million to $3 million of revenue at risk and have spent the last couple of months, diligently working with our customers around education and choice with positive results to date as top bullet point reflects.

We identified 8,800 heavy users as the slide suggests folks that have five or more overdrafts in last 12 months. And as you can see a really high opt-in level from that group to date. We aren't complete with those communications where about 60% and we will spend the balance of our upwards in August to get to the finish line on that important work. The remaining points on Page 28, just speak to different aspects of reform as we run parallel to understand and prepare through the implementation. The second point speaks to the favorable changes to the columns amendment that took place prior to the President's signing, that leave in tact, not only the hybrid capital we had before but the goodness of the exchange transaction that Mark highlighted..

We do understand there will be increased costs and compliance activities around the mortgage business and yet we see some opportunity as we have come to know the small business lending fund and should our understanding of that remain constant, would look to apply to be included given the overlap of the target of that fund act with the franchise that we serve.

On page 29, I just a few summary thoughts before we go to questions. For a quarter that was, you know, full of less than glamorous activity yet necessary to get your company back to both the earnings power that it historically had prior to 2009. One of the points that parallel to what I just said will have us complete the Reg E implementation during the upcoming quarter with the hope that we would achieve similar to results to those that we have projects to date.

We have got shoulder to the wheel around asset quality and John leads a team of people that incorporates our line, our credit administration group and our special assets group to do the best for our shareholders and best for our customers in difficult times. The last bullet point talks about, I think, a little bit of room yet. Mark referenced the annualized year-over-year reduction and operating expenses and our commitment will be to that regardless of the size of the balance sheet as we watch it going forward, that our expense burden will be commensurate with the size and structure of our balance sheet and our income statement and revenue streams.

And then lastly, given the shrink in the balance sheet and the impact it has on our pretax, preprovisional run rate, we need to asure complete market coverage to retain and grow our revenue and our earning asset base. Mark shared that our June balance sheet reflected a declining rate of loan balance reduction and he's right. The last page of the hand out would show that in the June-quarter from March net loans shrunk $83 million from $135 million prior quarter, $129 million fourth quarter, and $155 million before that. We are hoping that train continues and we have got some evidence that it could looking anxiously toward the time when we talk about net growth. So I understand that our net balances are down. I do like many of our fundamentals.

Our pipelines and consumer, retail and small business segments are at the highest points of the year. Our commercial pipeline is flat and really has been all year, not a lot to be predictive that we're going to see a resurrection there although our Indianapolis region with footings of about $750 million has had and continues to have this strongest volume trends and opportunities in the Company. Our SBA volume within commercial in the first half of 2010 is double in six months of this year our entire 2009 volume because we think the product fits and we think that the preferred lender status that our commerce unit in Columbus had earned was successfully transitioned through our charter combination through the entire bank or beginning to demonstrate that capability in the market place with a fee and balance sheet impact, and then lastly, Mark talked about the insurance business. Our trust company similarly has produced two solid quarters year-to-date and our second quarter on a year-over-year basis, understanding the seasonality of that fee structure actually up 16% over the second quarter of 2009. So, it is wasn't a quarter for a significant amount of at-a-boys but I do feel like the progress we've made on several fronts continue in what will be a several quarter reemergence of the earnings power of the company. At this point, Andrea, I'm happy to take questions from our listeners.

Thank you. (Operator Instructions). Our first question comes from Scott Siefers of Sandler O'Neil.

Hi. This is actually Will Curtis. I'm Scott's associate. I guess the first question I had and you mentioned it a couple of times just in regards to the loan portfolio, and seeing a similar run off in the third quarter, what are your thoughts beyond the third quarter? How much more do you see the balances coming down? Beyond third quarter?

Will, at this point -- I can't give you a number. I would say a lesser -- we would anticipate a lesser reduction than the $83 million net reduction that we had in actual dollars, and I went through it quickly but I offered kind of what the last page in the press release would show in terms of volume amounts and $83 million being roughly $50 million lesser than the prior quarter. What's included in there is and the reason I am hesitant to offer numbers, yes, obviously our desire to serve all of the credit needs of our marketplace retail, small business, commercial, mortgage, in the manner that we are extremely capable of. Offsetting that are a couple of strategic decisions we have made in years gone by. One of them was to exit the indirect business. This is a modest kind of $1.5 million a month offset or call it $4 million at quarter exit. Of that business, which has not been a credit issue, just a -- not a relationship business, coupled with the fruits of our credit administration area, recognizing that a significant number of the $120 million in nonaccrual loan ultimately provide us the best outcome to an a exit and a recapture of the majority of the principle.

Okay. Thank you. And then, the next question is just the outlook for the margin for the remainder of the year, should we expect the further expansion?

Will, this is Mark. We feel like we're maintaining our asset yields, I think our loan yields last quarter were $574 million and they're now $571 million, at least the loan portfolio, the loan portfolio has moved from about $471 million to $451 million. So we are -- we are maintaining our level of yield on earning assets and then the cost of supporting liabilities we've seen a 5 basis point decrease and some of the pure numbers that we're seeing are less than our $155 million interest expense on deposits and it is an area of focus right now that we think it has some opportunity. We haven't specifically identified where the changes need to occur but we think that we are digging -- we have a team digging into that now to see where the opportunity exists and where would match up a little better with the peer group.

Okay. My final question is just in terms of the, seeing if you can help me with something, the difference between like if you do the, if you compute the EPS $0.32 versus the reported $0.35, can you help me I guess on what the difference is there?

I can, it's -- my assumption is we all do this the same, I know it has been clearly vetted out with our accounting firm, but we take our year to date net income divided by our year-to-date average shares outstanding, and that total was $0.36 the first quarter was we earned $0.01 so the quarterly number second quarter is $0.35. I know if you just take the net income for the quarter divided by our average shares for the quarter it is more like $0.32. So it is the way we have done that for years and I think it is consistent with others. But just wanted to highlight why that occurred this quarter.

Okay. Thank you, very much.

Thanks, Will.

Thank you.

Our next question comes from John Rodis at Howe Barnes. Please go ahead.

Good afternoon, guys.

Good afternoon, John.

Mike, help -- you sort of mentioned the SBA portfolio and maybe you see some opportunities there. How big is that today? And what sort of loans is 504, 7A, what are you doing there?

It is predominantly 504. The volume was $10 million, kind of year-to-date number. So it's not a needle mover per se other than the speed of them, and the confidence across our commercial base, you extend it from the commerce business with 15 commercial bankers, where the balance of the Company has produced the volume and the program itself has gotten a little bit easier for our borrowers to understand and want to take advantage of.

Okay. So it's never going to be -- obviously it's never going to be a huge line item but there's obviously some room for growth?

Correct.

Okay. As it relates to the commercial portfolio, what sort of, what -- I assume utilization rates are down, but where are they and what do you think is more normal? So what do you think you could pick up over time maybe?

My answer is going to have to be anecdotal because I can't give you a empirical or quantitative utilization rate, but what we look at is the borrowing bases of our largest borrowing base driven asset based customers and we have seen some lift in working capital borrowings, but I cannot give you, John, a percentage utilization rate across all of the revolver or on our credit facilities, sorry.

Okay. No, that's fair. As it relates to provisioning, this quarter the provision was a little bit below charge offs and I realize on a relative basis the loan portfolio was down. So, the reserve was basically flat. But, how do you sort of look at that going forward? I mean, I assume you've sort of build the reserve as much as you needed to for the most part, or?

I mean, clearly, think our hope at the end of the fourth quarter of last year was that with stabilization of the NPA's that the reserve building portion of the provision, that portion in excess of the charge offs was going to really reduce dramatically and so through two quarters we've kind of gotten that stability, are not necessarily satisfied with the decline that we achieved particularly in this past quarter. So you see a lot of sameness to the percentage of the coverage of the nonaccruals and in some regards, the absolute level of the reserve itself. But if we were to get the, and we would expect to have a more fruitful reduction in that over the second half of the year, I would think that at some point we would be sizing down the reserve kind of lock -- in lock step.

John, this is Mark, the big difference that you see, the first quarter and the second quarter between provisioning and charge offs is a decline in our specific impairment reserves. And the way our methodology is working and consistent with other organizations, charging off the specific impairment reserves don't require a complete replacement. They've already been provided for at the time of the specific. Once it was charged off there's usually a portion that's required to go back into reserve but it clearly isn't the full amount.

How big is the unallocated reserve right now as a percentage of the total?

It's 2.35 the unallocated reserve up from 2.23 million last quarter and 2.10 million at the end of the year.

When you say 2.35?

2.35, I'm sorry as a percent of loans, and it is $68.5 million as a percent of loans. The unallocated, everything other than specific impairment reserves.

Okay. I think you lost me there. So the unallocated piece is $68 million?

Yes, the $68.5 million of unallocated reserves or, I guess said better historical allocations and environmental factors and then we have $18.4 million that are tied directly to specific loans.

Okay. That makes sense. Okay. Mark, just another question as it relates to the margin, I mean it sort of sounds like your answer to the previous question about sort of the margin going forward, it sounds like you think you can sort of hold the margin in this 3.90% area, with lower funding costs potentially, where do you sort of think the margins sort of levels out longer term? Obviously assuming at some point rates do rise, do you think it is, can it stay in the upper 3% to 4% or--?

With this, with our current balance sheet structure, we feel like it levels out in this higher 3% range, 3.75% or better. When you start -- if we start to have more significant loan opportunities that aren't matched funding-wise with core deposits and we use some federal home loan bank advances, et cetera, it starts to put pressure on the margin but we are leaving this cycle with the attitude of having a really balanced growth profile as we move forward with loans and deposits.

Okay. Okay. And as it relates to expenses you sort of touched on the sale realign item. I think you said a couple hundred thousand was one extra day and then you said some health-care related costs. So net-net -- I guess my first question was was that health care piece was that recurring or nonrecurring or--?

I don't know how to give a good answer there, it is based on claims history and the size of the overall health insurance expense is something that the accruals monitored on a quarterly basis, and it's going to be -- I don't know. I can't give you a perfect answer on what health insurance expense should be going forward. It is generally a percentage of salary, and so since our salaries have leveled off you would expect it to be consistent.

Okay. Are you guys self funded or self insured?

We are self funded and we're well below our stop loss level. Ultimately the stop loss level is our maximum exposure, we are performing below that level and that creates some volatility in the expense.

Okay. Okay. I also noticed that occupancy costs were down linked quarter, anything going on there? They were down about $800,000.

John, no one dramatic item. We had some facilities and facility costs that still continue to ripple through from the acclimation of the Lincoln facilities, and those come in stray pieces of land, their primary facility and as you know on any lease renewals it is a good time to be a tenant in terms of negotiating power, so it is mostly a combination of things and not one.

Going back to your prior question of Mark around operating expenses, I heard in his comments when you referenced FTE, it's net FTE, because we've been adding people at the same period of time, the mix of people on our team taking full advantage of businesses that aren't as big or several quarter after the fact efficiency gains that we're finding offset by the addition of people where we need them whether that be special assets on the asset quality side or more likely in the past quarter selectively adding in Columbus and Ohio and Indianapolis, some small business and commercial lending capabilities.

Okay. Final question just on FDIC costs trended up a little bit. What's sort of the right level for that going forward and then other real estate, what was that, I didn't see that in the press release, what was that this quarter?

The -- two -- I think I can help you out with both. When you talk about the second piece to your question on OREO costs.

Yes.

It isn't in the press release broken out but it is in the PowerPoint. It is in the slide that is the noninterest expense, it has a separate line item. It was a helper in terms of page -- I think it is page 14, John, and it was I think down $1.2 million quarter-over-quarter.

Okay. I see it.

And then I am sorry, what was the first half of your question?

FDIC expense.

FDIC? I think the run rate you ought to expect going forward is about what you saw in the second quarter which are marginally higher, not insignificantly but a little bit higher than the first quarter and dramatically beneath where it was in the second, third and fourth quarters of last year.

Fair enough. Thanks, guys.

Thank you, John.

Our next question comes from Brian Martin of FIG Partners. Please go ahead, Mr. Martin.

Hi guys.

Good afternoon, Brian.

Mark you mentioned in your comments, that there's just going back to John's question on expenses, that there's 600,000 in nonrecurring items and just given your comment about the insurance, what were the nonoccurring items in the quarter, is that just regarding the capital transaction in the quarter, is that what that was tied to?

We had about $250,000 that was split between other outside services and legal services, that was related to the equity raise and the exchange. And then we had about $340,000 related to some fraudulent losses around our debit card product that have been isolated and corrected and we think all of those expenses are behind us but they were all taken in the second quarter.

Okay. So those all fall in that other line then, is that fair to say?

The $340,000 falls in the other and then the split between the $250,000 -- the $250,000 is split between other, and professional services.

Okay. So then, the 33.7 number, if you back those out, I guess when you guys look at it going forward as far as what your expectations are and expenses, is your thought you can still squeeze a little bit more out of that type of level? Is that the plan, or is 33.7 kind of a good way to think about a reasonable type of expense base as you go forward?

It is a reasonable assumption. We are not expecting the same type of recurring items and we're trying to manage the professional expenses down and the ORE expenses down as we manage our way through the credit cycle.

Okay, and then maybe just a question for John, on the credit quality side, just kind of the new additions to non accrual in the quarter. The $27 million, I mean can you just talk about what your expectations are as far as going forward? I mean, it looked like the 30 to 89 day bucket still filled back up a little bit with things going back up a little bit. What is still causing you some problems within the 30 to 89 day, that still -- I realize your $27 million is down from the $38 millionish, last quarter, so linked quarter it is still a positive trend, but the 30 to 89 days, moving a little bit higher, what's still out there that is still somewhat problematic for you guys?

Yes, Brian, I think I'd answer that question by pointing to some of the residential real estate and managing through the delinquencies that are coming out of that portfolio. I think I'd also speak to you. We have as loans mature, we are actively working with borrowers and it is pushing I think at some level for certain accounts into that bucket but we haven't really seen a sea change in any of the individual categories and at this point I would say it is -- again, it is maybe the individual situations and a little bit of consumer.

Okay. So the 30 to 89 day bucket you wouldn't say that there's anything that credits a significant size there, if it was a retailer, consumer, it's just a lot of small stuff in there?

Yes. It is not really like there's one particular credit that's otherwise impacting that number. I think we saw a little bit of an uptick in the 30 plus day category, and some of the C&I portfolio as well. Basically the commercial, small business.

Just as far as the C&I portfolio goes, I mean what's the -- if you look at the financial statements of your customers, now that you have got another quarter of performance, I mean are you guys seeing things get a little bit better for these people? Are they starting to, are they just holding stable and kind of just holding on? I guess what's your sense as you look at the C&I customers within the portfolio?

Brian I think what I would say is it depends on the individual industry. I think we saw -- we have seen some improvement in the manufacturing segment and with some slippage in the real estate portfolio. But as it relates to just pure C&I. Manufacturing has improved somewhat and we're seeing some of the auto related improvement as that market has rebounded with modest deterioration thus far in the commercial IRE portfolio.

Okay. That's all I have. Thanks you guys.

Thank you, Brian.

Gentlemen, we have no further questions at this time. Do you have any closing remarks today.

Andrea, thank you for hosting the call. The only concluding remark would be my appreciation for the continued interest in tracking our progress and we look forward to joining you again after the completion of the third quarter.

Thank you. This does conclude the conference for today. Thank you for attending the presentation. You may now disconnect.

Thank you.