First Merchants Corp (FRMEP) 2011 Q3 法說會逐字稿

Good afternoon, and welcome to the First Merchants Corporation third quarter 2011 results conference call. 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 Michael Rechin, President and Chief Executive Officer. Please go ahead.

Thank you, Valerie. And thanks for today's listeners. Welcome to our earnings conference call and webcast for the third quarter ending September 30, 2011. Joining me today in the presentation are Mark Hardwick, our Chief Financial Officer; and John Martin, our Chief Credit Officer.

As has been the case, we would open up the microphone for questions at the end of our prepared remarks, at which point 2 of our other senior team, Mike Stuart, our Chief Banking Officer; and Jamie Bradshaw, our Chief Accounting Officer are here, should questions call for their input.

We released our earnings in a press release at 9.30 this morning, Eastern Daylight Standard Time, and our presentation speaks to material from that release. The directions that point to the webcast were also contained at the back end of that release, and my comments begin on page 4, a slide titled third quarter 2011 highlights.

First Merchants Corporation reported improved core earnings per share for the third quarter, offset by a one time charge, due to the repayment of its participation in the Treasury's TARP program. Quarter to date earnings per share, including the one time charge, resulted in a loss of $0.25 per fully diluted common share. After adjusting for the one time charge, the normalized core earnings totaled $0.22 per fully diluted share. Our results, really, are a linkage of all of the bullet points on page 4, primarily the first and last, where our capital actions achieved our plans in the TARP repayment and gave rise to a reversal of the exchange gain from mid-2010. Mark will cover that more briefly, and John Martin intends to continue to talk about our improvement in credit quality, as highlighted on the third bullet point, so at this point I'll turn the program over to Mark.

Thanks, Mike. My portion of the presentation will begin on slide 6. Loans on line 2 declined by $4 million this quarter. However, our past grade loans increased by $30 million, as classified loans declined by $34 million for the quarter, the details of which John will discuss further on slide 18 in a few moments. Our allowance on line 3 totaled 2.68% of loans, or $73 million of which only $8.2 million comes from the specific reserves. Specifics declined by $5.5 million from last quarter, resulting in an overall increase in the general allocation. Line 5 highlights 2 new BOLI purchases, which closed on August 31, totaling $20 million. We added $15 million in policies with Northwestern Mutual, and $5 million with Guardian Life. The current tax equivalent yield is a 5.08%.

The composition of our loan portfolio on slide 7 is diversified, granular, and allows for pricing power. Our Community Bank balance sheet produced a 5.45% yield on loans for the quarter, down just 11 basis points from the first quarter of 2011, and 6 basis points from the second quarter of 2011. On slide 8 our $938 million bond portfolio continues to perform well, producing higher than average yields with a moderately longer duration than peer. Our 4.03% yield compares favorably with peer averages of approximately 3.36%, and our duration remains just a year longer, at 3.9 years. We have $68 million maturing through the remainder of 2011, with a yield of 3.5%, and $140 million of bonds that will mature in 2012 with a current yield of 3.40%. Given our current reinvestment rates, the portfolio should still produce approximately a 3.9% yield for all of 2012.

Line 1 -- I'm sorry, if you go to the next slide, line 1, our non-maturity deposits remained stable despite lower interest expense, and are reflective of the core value of the corporation. $26 million of the period end decline this quarter can be attributed to fluctuations in public funds. Customer time deposits on line 2 continued to decline despite our premium specials relative to the Federal Home Loan Bank and brokered deposits of approximately 20 basis points on the 2 and 3 year points on the curve. Line 4 increased during the quarter, as we extended Federal Home Loan Bank advances, new advances of $95 million early in the third quarter to regain our asset sensitive ALCO position. We did a few new borrowings during the quarter, threw them out on the curve in the 3 and 5 year category at relatively low interest rates, given the curve, and it allows us to perform better in a rising rate environment.

Line 7, 8 and 9 reflect the repayment of TARP, the issuance of preferred shares through our participation in SBLF, and the addition of 2.8 million shares of common stock issued on September 9th of 2011. The SBLF and TARP transaction closed on September 22 of 2011, and each of those significant events were reported on an 8-K on each of the respective dates, September 9 and September 22. Our changeable book value per share now totals $9.57.

On the next -- on slide 10, our mix, the mix of our deposits continues to improve and our total deposit expense is now just 92 basis points. Our least expensive categories, demand and savings, now total 67% of total deposits. All regulatory capital ratios on slide 11 are well above the OCC and Federal Reserve's definition of well-capitalized, and all of the Basel III proposed minimums. We're really pleased to have increased our tangible common equity from a low of 4.54% just 7 quarters ago to nearly 7%, while increasing our tangible book value per share by $0.32. We feel like our capital strategies have been prudent relative to the economic conditions, and shareholder sensitive as well.

Our net interest margin totaled 4.02% for the quarter, nearly equaling the highest level since 2005, and net interest income increased modestly, linked quarter-over-quarter. Total non-interest income on slide 13 always reflects some volatility due to line 6, securities gains and losses. However, when for normalized for bond portfolio activity, as reflected on line 10, the quarter in total was relatively strong.

Mortgage production on line 6 was up $738,000, and carries a strong pipeline into the fourth quarter, again, as income is recognized when the secondary market funding occurs. Insurance commissions on line 3 returned to normalized levels as expected for the quarter. And service charges on deposits on line 1 continue to regain speed, after disappointing declines throughout 2010.

Non-interest expense on slide 14 totaled $34.2 million for the third quarter of 2011, down slightly from the second quarter. As highlighted in our press release, benefits expense increased $597,000, all due to increases in health insurance claims during the quarter, and commission expense increased by $338,000, due to increased production in the mortgage and insurance businesses, as previously discussed on the non-interest income slide. Productions on line 5, OREO and credit related expenses are encouraging, and expected to continue on a declining trend throughout 2012, and obviously this line item is volatile by nature, and it's the reason for line 12.

If you could please turn to slide 15, I'd like to talk about pre-tax, pre-provision for a moment. Our pre-tax, pre-provision run rate remains strong, totaling $17.4 million for the quarter. Line 8 gains and losses create more noise in our financial statements than we would prefer, due to our TARP participation and exchange in 2010, and subsequent repayment in 2011. So on the next slide, slide 16, we have tried to normalize or adjust EPS to reflect our core earnings trends absent TARP gains and losses. As you can see when adjusting out the $0.40 gain in the second quarter of 2010, and the $0.47 loss in the third quarter of 2011, our EPS run rate is gaining traction. We're especially pleased with the last 4 quarter trend, from $0.10 in the fourth quarter of 2010, to $0.17 in the first quarter of 2011, $0.18 in the second quarter of 2011, and now $0.22 in the third quarter of 2011. That completes my prepared comments, and now John Martin, our Chief Credit Officer, will discuss our satisfying asset quality trends.

Thanks, Mark. Credit metrics continued to improve for the quarter. I'm starting on slide 18. With both classified and criticized assets declining $34.1 million, and $12.6 million, respectively, resulting in what Mark just referenced as the higher level of past grade loans. We continue to see improvement in the financial information we receive from our borrowers, which is the basis for these categories. And barring a recessionary turn, we would expect to see further improvement in both criticized and classified numbers through the remainder of the year, although at a somewhat slower pace than in the third quarter. On line 3, 90 days past due increased to $1.6 million, where we had 3 names totaling roughly $1.2 million, while these were elevated for the quarter, the credits are well secured and in the process of collection with resolution expected during the fourth quarter.

On lines 5 and 6, impaired loans continue to decline as we worked out, liquidated or charged off allowance specifically reserved for credits identified for individual impairment. This resulted in a roughly 10% reduction in non-accrual loans, a 19% reduction in impaired loans, with a 5% reduction in total allowance on line 7. As a result, the allowance as a percentage of total non-accrual loans increased from 88.1% to 92.6%. I will speak to both provisioning and charge-offs when we get to slide 20, but suffice it to say that despite the decrease in the allowance, most all other metrics improved at a rate greater than the absolute decline in the allowance.

Now, please turn to slide 19, where I'll walk through the NPA reconciliation. On line 1, to the far right in the column labeled Q3 '11, we began the quarter with total non-performing assets and 90 plus days delinquent at $109.5 million. For the quarter, we added $21.4 million in new non-accrual assets. This number continues to be elevated for the quarter. However, we expect this number to decline with the improving level of criticized and classified assets. There were 2 large relationships that totaled $8.8 million that drove the number higher than would be considered to be expected -- excuse me -- for the run rate for the quarter.

Moving to lines 3 and 4. The new non-accrual loans were offset by $8.7 million moving to accrual, paid off or restructured. On line 4, as mentioned in last quarter's call, there was movement from non-accrual to other real estate, a single related relationship that contained 3 multi-family properties moved from non accruing to ORE, as the bank was successful bidder at sheriff sale. Our outlook is optimistic for near term disposition of a portion of the property at values at or near our current carrying value. These properties have garnered meaningful interest from multiple investors in the market. Then moving down to line 5. Gross charge-offs were $11.6 million, down from previous quarter of $16.9 million. The result on line 6 showed an $8.6 million decline, then, in non-accrual loans.

On line 7, on other real estate owned, increased by the transfer of the relationship I just mentioned, and we reduced OREO by $5 million on line 8 during the quarter. Year-to-date, we've disposed of approximately $10.2 million, with losses on sales and write-downs to existing properties of $4.8 million. We've had approximately $600,000 on the gain on sale of ORE, which has resulted in a sale to carrying price of approximately 85%, which is a roughly 30% discount to market, the market value of the property. Properties are initially written down to roughly 80% of the appraised value when we transfer them to ORE, to allow for the cost of disposition. The net change in ORE for the quarter, then, is shown on line 10 of $4 million. Finishing out the quarterly migration, 90 day delinquent loans increased by $1.4 million, and restructured loans increased by $400,000. We expect to see this category increase further in the fourth quarter, as we've restructured a number of accounts that remain on non-accrual until payment is demonstrated; or payment performance, I should say.

As mentioned on prior calls, we primarily use A and B note restructures, and in these situations, the original loan is divided between an A note that has adequate cash flow and repayment capacity and which will be moved back to accrual, while the B note is charged off at or prior to the restructure. After a period of repayment performance, generally after 6 months, the A note is moved back to accrual and labeled as a restructured loan. This is the transfer, or the movement, that we'll see likely in the fourth quarter. If you look at line 1 in the far left corner in the orange box, I've highlighted the decline from where total non-performing assets started at Q3 2010 at $146.5 million, and declined over the last year to $106.7 million, on line 14, representing a 27% reduction in total non-performing assets. We expect that this trend will continue and remain choppy with the movement in OREO, non-accrual, and other restructured loans as we continue to work through the non-performing asset portfolio.

Please turn to slide 20. We're actually consistent, but at a slower pace with the decline in the non-performing assets that I just walked through, the allowance declined from $77.1 million to $73.1 million. Both the net charge-offs and provision expense remained relatively unchanged, as compared to the second quarter of 2011. The improvement in non-accrual loans vis-a-vis the allowance in charge-offs resulted in improvement in non-accrual loan coverage for the linked quarter from 88.1%, as mentioned before, to 92.6%.

Please turn to slide 21. So then in summary, our credit metrics are improving in most all categories. We continue to work down our non-performing assets through restructures and asset dispositions. Our criticized and classified assets have moderated, and the ORE and other credit related expenses continue to come down. Finally, while our provision expense has been lower than charge-offs in the last quarter, our non-accrual coverage continues to improve with overall improvement in credit quality.

I'll now turn the call back over to Mike Rechin for his comments.

Thank you, John. We will take questions momentarily, after just a few additional thoughts.

Before addressing the bullet points on page 23, I'd like to reference the work John just presented. Our provision has remained essentially flat in dollars each of the last 3 quarters. The provision level in combination with improving credit quality in virtually every credit metric we track, including our reserve adequacy, has produced a more moderate credit profile which continues to be a very high priority. Now I'm on page 23. The last bullet point reiterates the discussion Mark led on our capital raising activities in the quarter. Going back 2 years in time, our activities were geared to assure strengthening of our capital levels, and improving our capital mix. I feel like we've made bonafide efforts that reflect themselves in both the balance sheet numbers and the results.

We were pleased with the results of our September capital raise, and the addition of financial service industry investors who see value in our equity, our franchise, and our market opportunity. Absent acquisition opportunities that would require new equity, we see our capital levels ample for organic growth plans for 2012. The remaining bullet points on this page speak to our efforts to grow our revenue and earnings in a diverse market, traditional banking platform. Let me first address the asset side of the balance sheet. Our press release contained a comment citing loan balance stabilization. Mark spoke to it, John did as well. Not only stabilization in absolute dollars, arguably improved based on the credit rating of those same assets. While we didn't produce net growth in the third quarter, our activity levels grew as our market coverage continues. I'd like to offer a few measures of our originations and pipeline.

Our third quarter closed loans increased greater than $100 million from the second quarter level, totaling $352 million. Included in that figure is $98 million of mortgage loans, which are primarily sold as a fee component of our non-interest income. Our retail loan closings of $33 million were the highest in the past 5 quarters, as were our commercial loan closings, totaling $218 million in the quarter, and while I cite each of those as highest over the last 5 quarters, it's because our absolute tracking of them in a line of business format only dates back that far, but those of you familiar with our Company, and the size of the balance sheet that has come down somewhat over the last 2 full years, would easily recognize those activity levels as the highest since 2009.

Our pipeline for the fourth quarter, opportunities where we issued a commitment and the direction to close has also grown. The overall pipeline is $275 million, which compares to $172 million -- I'm sorry $275 million which compares to $172 million at June 30. Included in that pipeline also is our mortgage component, which at $89 million is $45 million higher than June 30. As such, the portion of the pipeline I just cited that you could expect to get to the balance sheet is approximately $180 million in commitments. The execution of our relationship-based model, serving our current clients, and new client acquisition leads our strategy to grow sources of non-interest income.

I, personally, was very pleased that we've strung together a couple of quarters, now, of resurrection of service charge levels. Our insurance business began to perform at a revenue run rate, as we had talked about last quarter, in concert with the efforts and the growth in that business. We look forward for that to continue. Our trust business has been steadily serving their customers in a market where the fees are driven by market values that have been volatile.

In conclusion, I feel our Company has momentum in all of our markets without meaningful improvement in the local economies. As such, we'll be taking a managed risk market penetration approach, where we feel very well positioned for a shallow climb, but a climb nonetheless. At this point of the year you can imagine we're spending a lot of time on 2012, and as we wrap up our plans, we're kind of couched in 2 measures, quite simply. Productivity, out of all of our lines of businesses and in all the markets we operate, and an eye towards efficiency, knowing that the yield curve doesn't necessarily work in our favor. And that while we've made some specific investments in business segments, business banking in particular, as well as upgrading all of our front line talent, we're mindful of the fact that efficiency on a go forward basis in this revenue environment needs to be watched.

Valerie, at that point, those are my prepared remarks, and if you want to activate the phone for calls, I believe we're ready.

Certainly. We will now begin the question-and-answer session. (Operator Instructions). At this time we will pause momentarily to assemble our roster. Our first question comes from Scott Siefers of Sandler O'Neill.

Good afternoon, guys.

Hi, good afternoon, Scott.

Mark, I guess first question is probably the most appropriate for you. Margins have been holding in pretty well, and you gave a lot of good color on kind of the individual components that flow into it. I guess the broad question is how do you think about your ability to sustain the margin in that roughly 4% range? And then I was hoping you could also speak to the kind of flexibility that you feel like you have left on the deposit side, with cost of deposits up around 92 basis points or so.

Well, as we've run our models for 2012, and trying to make sure that we're established for our 2012 plan, the margin has been holding up well, and our ability to decrease our borrowing -- our interest expense on borrowings, and decrease our interest expense on deposits, we're encouraged by some of the runway that we still have left. The big factor that we've continued to model a number of different ways is, how do our loan yields hold up? The portfolio yields are fairly predictable, as I mentioned in the call, and the loan yields are the real question. We're only down 11 basis points since the end of the first quarter, over a 6 month time frame, and so far we've been really pleased with the pricing power that we have in the loan portfolio, given the customer segment that we traditionally service. So the $50 million in sales and below companies, we feel like we're meeting their expectations, and delivering the product offering that they're looking for in a manner that allows us to have some pricing power. So the deposit side I feel really good about. We continue to move down our CD rates, and we still have $50 million to $60 million of CDs that are maturing on a monthly basis, and I'm looking here real quickly, but I've got that the interest expense on our CDs is still 130 basis points. And so with offer rates that are more like 50 to 80, there's still quite a bit of room to move our CD costs down as we go through the remainder of '11 and throughout 2012.

Okay. And then Mike, was just going to ask you, just sort of at a top level, obviously a lot of macro uncertainty, but it's not necessarily translating into customers kind of stepping back or anything. I guess at a very top level, in your conversations with customers, how are they feeling about things, willingness to borrow, invest, et cetera?

I would describe them as anxious. There is no great optimism, I feel, between all of the aspects outside their control that they have to manage, whether it's taxation, or the interest rate environment is beneficial to them. We had -- I think our -- as a Community Bank, I think our utilization of credit is probably higher than it would be for the banking industry at large. We don't have a lot of unused revolvers as a percent of our credit, so they're cautiously investing in their businesses. The agri business sector, even though it's come down seasonally, has had a good couple years' run here. In that business, unlike my prior comment about term, we really haven't been a big ag land lender, and so we're very much production oriented in the ag business. We're at that point when the harvest takes the outstandings away. But it's cautious as an overall outlook.

Okay. Thank you very much.

You're welcome.

Our next question comes from Brian Martin of FIG Partners.

Hi, guys, nice quarter.

Thank you, Brian.

Say, Mike, can you just comment a little bit about some of these -- the pace of shrinkage in the loan portfolio has slowed, as you were alluding to in your end comments there. Your expectations as far as seeing positive net loan growth in 2012?

Sure. Our plan would call for net loan growth, and you may recall from remarks that we would have had at the end of the first or end of the second quarter of this year, we were hoping that the turning point would take place this calendar year. I feel like it could. We're running out of quarters. It would have to be the fourth quarter. But our plan for '12 will show modest growth in it, at reasonable margins. It's that balance that the last question spoke to, in terms of how long can you hold on to your margin? We're really trying to focus on getting paid for the risk we take, and selling into relationships that bring either fee business, or deposits, or both with them. So that's kind of the philosophy that we have in the marketplace.

Okay. And as far as opportunities, this quarter there was more real estate gains, I guess on the loan side versus the C&I, which were down a little bit. Is that a trend you expect to continue? Do you think the C&I is where the growth comes from?

Well, I think every bank talks about C&I growth. I think it's hard to come by. We're, I think, pleased that when you look at our relative measures of either construction and development to capital, or overall CRE to capital, we're in a position where we can be a little bit contrarian, if we underwrite well, to take advantage of the healthiest of the demand in that category. There's a lot of banks, particularly community banks, that might not have that ability. In addition to which our growth markets, and Columbus in particular, has a big healthcare segment, and healthcare is one of the segments that is growing, and it tends to have investment real estate associated with it, or owner occupied real estate, if you think of it. So we look for a little bit of both to grow. The net numbers that you're referring to, obviously, speak to all of the activity that comes out of the retained strategy around the watch or classified assets, where we have to figure them out. But no, if your question is, is there concerted effort to grow investment real estate above other asset classes, there is not.

Okay. And just, I guess, one last thing on the expense side. Mark talked about it, maybe you can comment, just the healthcare costs being up this quarter and then just the mortgage production. I mean, outside of the mortgage, Mark, how do we think about the [center line]? You guys have made some good strides bringing this number down. As you talk about the OREO costs coming down, just kind of the core expense, when you look at that, how do we think about that for 2012? Is there more room to bring that lower on the core side or is it at a pretty good level right now?

I think you're asking about the overall non-interest expense. The levels where OREO were this quarter, we think are sustainable, which are down from where they've been prior quarters of the year. We're continuing to invest in people on the sales side, and looking to be more efficient in other areas of the Company to try to normalize those numbers. And the health insurance has been a disappointment this year. It's a category where we've had high amounts of claims. We are self-funded, and there's a couple million dollars difference between expected losses and maximum claims. And so it's a category where we are at risk for some volatility, and it's an area that we're trying to get our arms around in a better way. We would like to see those costs come down.

The rest of the categories, we think are going to remain really stable. When you look through quarter by quarter, it's been fairly consistent, stable, with some declining trends in a number of categories, with the only pressure where you see some increases are in the salary and benefits, and investment in people and the benefits that go along with them.

Brian, I would add to Mark's point. I think our FTE count is going to remain very steady. I think we're going to -- the investment in people that Mark talked about is effectively revenue generating people, where the absolute dollar amount of investment in them, or the cost in them is going to be a little bit higher than some of the efficiencies we seek through the balance of the Company. And they'll also be -- that same investment will be gauged against the productivity that we get from it on a couple of quarter lag, after we get those folks in place.

Okay. And just the bonus accruals, I guess with performance getting better, that was kind of what I was getting at. Would you expect, if the performance is better as you look to next year, that the bonus accruals would be higher than where they are presently?

I wouldn't. On an annualized basis, I wouldn't expect them, because the targets will be reset for whatever we achieve this year, and so that target moves, and it will be set at a rigorous level, and the performance against that. So we have had to play a little bit of catch up in the second and third quarter in those categories, based on the overall earnings level that we've achieved. But no, I wouldn't expect those variable compensation pieces to be higher level in 2012.

That's all I had. Thanks.

Stephen Geyen of Stifel Nicolaus.

Good afternoon. Maybe just a question for John. You provided some real nice color on the credit outlook, and I guess just general trends over the last few quarters. Maybe some additional thoughts on classified and criticized loans, just curious if you could provide a bit more color on that, where you're seeing declines, or why you're seeing declines. Is it refinance activity? Is it improved financials of those particular companies? Or what's driving it?

The primary driver is improved financial performance. I think what we're seeing is companies just turning in better quarters as they're reducing expenses. On the CRE side, we've seen some improved performance in terms of their ability to lease up space. So both of those are yielding improved performance in the respective portfolios, and you're seeing it in the criticized and classified numbers.

Okay. And maybe one thought, Mark, on the tax rate. It jumps around a little bit. Is kind of the 30%, around 30% range effective tax rate still a good number to use?

I think the year-to-date average is probably the best place to look. We did have some volatility, first, second and third quarter, primarily the movement in the second quarter. If you look at a year-to-date average, that's a good number.

Okay. Thank you.

Daniel Cardenas of Raymond James.

Good afternoon, guys.

Hey, Dan.

Congratulations. Good quarter. Question, for the loan growth that we did see this quarter, where was it geographically, where was it primarily coming from?

Primarily from central Indiana, but I'll tell you, I'm very pleased for markets where we have different expectations, not only in terms of the economic activity indigenous to a given market, but for the number of revenue producing, the number of relationship managers we have, particularly on the commercial side. We've been adding them to Indianapolis steadily now, going back 2 years to the time of the acquisition of Lincoln. So our expectation, beyond the dynamics of market, is that we would be doing better. But to answer your question, briefly, the greater Indianapolis market has outperformed the other regions we have but the backlog is really getting more balanced in that regard.

Okay. So then as you look forward to 2012, still primarily Indianapolis but should be helped by other regions of your footprint?

Columbus, to be sure, and I think contributions really from around the Company of a modest level.

Okay. So how do you maintain your margin in some of these more highly competitive markets like Indianapolis and Columbus?

I would say it's segment or niche participation, healthcare is -- we've done well with in the coupon that we earn in that extension of our balance sheet throughout the Company, but in Columbus, in particular, has held up real well. One of the earlier questions you heard, I'm sure, was around investment real estate. And the number of banks that are capable of participating in that now, have the appetite to participate in it, is a little bit thinner. But it's difficult. Mark referenced 11 basis points first to third quarter. I don't think our yield, I know, will not grow, but as we plan 2012, we don't see large erosion in it either.

Fair enough. And then regarding the SBLF funds, what's your timing in terms of how quickly you can reduce the rate on that instrument?

Well, that's a great question. We're looking. It's in the out-years, quite frankly. Absent the economy really returning, and beyond our own efforts to drive volume, we would need a strong economy, because if you can just look at the metrics of the size of our balance sheet going back to the beginnings of benchmarking associated with that program, we've got the better part of $175 million to make up in those categories germane to the measurement. So as we complete our 2012 planning, it will not include reduced cost in the SBLF capital.

Okay. And then one quick question on the credit quality side. Just looking at your coverage ratios, is it safe to assume that we're not going to see, I guess absent a turn in the economy, a buildup on the reserve levels in '12 in the fourth quarter?

Well, the allowance itself is obviously driven off of the performance of criticized and classified and the losses and the whole FAS 5 C350 component. So absent some build as a result of individual FAS 114 specific reserves, our model is really trending with the improvement in the performance, and where you see that coverage improve is where we can get those non-accrual assets and non-performing assets, non-performing loans lower, given what the model is requiring.

Okay. And then one last question. As I look at the third quarter loan to deposit ratio, around 88.5%, 89%. Is that a good way to think about that ratio going forward?

Yes. We absolutely think it is. As loan growth begins to occur, we expect to keep up with that, with growth in deposits, a little more aggressive pricing on the deposit side, less dependence on wholesale money like we have in prior years. So that's a -- I think a good number to use on a go forward basis.

Okay. Great. Thanks a lot, guys.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Rechin for any closing remarks.

Valerie, thanks for hosting the call. I really don't have any additional comments, other than my appreciation for today's participants, and I look forward to talking to you after the completion of 2011, come late January.

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