Mercantile Bank Corp (MBWM) 2009 Q2 法說會逐字稿

Good day everyone, and welcome to the Mercantile Bank Corporation second quarter earnings conference call. There will be a question and answer period at the end of the presentation. (Operator Instructions).

Before we begin today's call I would like to remind everyone that this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure, as well as statements on the plans and objectives of the company or its management, statements on economic performance, and statements regarding the underlying assumptions of the company's business. The company's actual results could differ materially from any forward-looking statements made today due to important factors described in the company's latest Securities and Exchange Commission filings.

The Company assumes no obligation to update any forward-looking statements made during this call.

If anyone does not already have a copy of the press release issued by Mercantile today, you can access it on the company's website at www.MERCBANK.com.

On the conference today for Mercantile Bank Corporation we have Mike Price, Chairman, President and Chief Executive Officer, Mr. Bob Kaminski, Executive Vice President and Chief Operating Officer, and Mr. Chuck Christmas, Senior Vice President and Chief Financial Officer.

We will begin the call with management's prepared remarks and then open the call to questions.

At this point I'll turn the conference over to Mr. Price.

Good morning everyone, and welcome. The second quarter was again dominated by the severe economic conditions that persist. Because of our conservative recognition of potential problem loans, we again felt it prudent to aggressively enhance our loan-loss provision, creating a net loss for the quarter. Our COO, Bob Kaminski, will detail the dynamics of our loan portfolio during his comments.

While it may not be readily apparent by looking at the bottom line, Mercantile made important progress in many areas during the quarter. Net interest margin expanded and is trending upward. Changes in our branch locations and overhead will significantly lower overhead on a go-forward basis, and significant reductions were made in our level of commercial real estate loans and brokered deposits. Our CFO, Chuck Christmas, and Bob will cover the changes in their comments.

While these improvements were not robust enough to counteract the increased loan-loss expense, they should help us continue to improve results in the upcoming quarters.

At this time I'll turn it over to Chuck Christmas.

Good morning to everybody. What I would like to do this morning is give you an overview of Mercantile's financial condition and operating results for the second quarter 2009 and the first six months of this year as well, highlighting the major financial condition in performance balances and ratios.

We recorded a net loss of $6.4 million or $0.75 per share during the second quarter of 2009 compared to a net loss of $2.6 million or $0.31 per share during the second quarter of 2008. Excluding the impact of our branch consolidation and the one-time FDIC special assessment, the net loss during the second quarter of 2009 was $5.0 million or $0.59 per share.

We recorded a net loss of $10.9 million or $1.28 per share during the first six months of 2009 compared to a net loss of $6.4 million or $0.75 per share during the first six months of 2008. Again, excluding the one-time cost during the second quarter of 2009, the net loss during the first six months of 2009 was $9.5 million, or $1.12 per share.

The net loss recorded in all time periods primarily results from a significant provision expense which reflects the impact of local, state and national economic struggles on the condition of our loan and lease portfolio. Although in 2009 we've recorded increases in net interest income and reductions in controllable overhead costs, the significant provision expense has resulted in a loss position.

Net interest income during the second quarter of 2009 totaled $12.5 million, an increase of $1.9 million over the level earned during the second quarter of 2008.

Net interest income during the first six months of 2009 totaled $24.3 million, an increase of $2.3 million over the level earned during the first six months of 2008.

Our net interest margin during the second quarter of 2009 equaled 2.50%, up from the 2.15% margin during the second quarter of 2008. Although our yield on assets declined by about 45 basis points during this time period, primarily resulting from an increased level of nonperforming assets and a declining interest rate environment, our cost of funds declined by about 80 basis points as we were able to replace higher cost de-matured brokered CDs and FHLB advances at significantly lower rates.

We do expect our cost of funds to continue to decline throughout the remainder of 2009 and likely into 2010 as well. We have about $300 million of wholesale funds maturing during the third quarter at an average rate of 3.15% and an additional $250 million at an average of 3.35% coming due in the fourth quarter.

To put this into perspective, current rates generally range from 0.75% to 2.50%, depending on product and term, and during the second quarter of 2009 the average rate on new wholesale funds averaged about 1.00%.

We have started the process of extending the duration of our wholesale funding portfolio, which will likely result in an increase in the average rate of new wholesale funds in comparison to the second quarter. However, the cost savings should remain significant.

We believe that continued reduction of our cost of funds combined with the benefit of our strategic and pricing lending initiatives on our yield on assets should provide for further notable improvements in our net interest margin and net interest income, despite the difficulty of predicting the impact of asset quality.

The provision expense during the second quarter of 2009 equaled $11.5 million, an increase of $5.3 million from the of level expense during the second quarter of 2008, and the provision expense for the first six months of this year totaled $21.9 million, an increase of $6.6 million from the level of expense during the first six months of 2008.

Our loan-loss reserve totaled $32.6 million, or 1.91% of total loans at the end of the second quarter, compared to $27.1 million, or 1.46% of total loans, at the beginning of the year.

I will have specific and more detailed commentary on asset quality later during the conference call.

Noninterest income totaled $1.9 million during the second quarter of 2009, an increase of $105,000 or 6% from the second quarter 2008, and noninterest income totaled $3.9 million during the first six months of this year, an increase of $247,000 or about 7% from the first six months of 2008. The increases during both time periods primarily reflect higher mortgage banking activity fee income resulting from increased refinancing activity due to lower residential mortgage loan interest rates.

Noninterest expense totaled $12.4 million during the second quarter of 2009, an increase of $1.6 million over the level of expense during the second quarter of 2008. Excluding the charges associated with our branch consolidation and the FDIC special assessment, our noninterest expense totaled $10.3 million during the second quarter of 2009, or $0.5 million lower than the second quarter of 2008.

Noninterest expense totaled $23.1 million during the first six months of this year, an increase of $2.0 million over the level of expense in the first six months of last year. Again, adjusting for the one-time expenses during 2009, noninterest expense was $0.1 million lower during the first six months of 2009 when compared to the same time period last year.

Branch consolidation costs totaled $1.2 million during the second quarter of 2009, comprised of $0.5 million in severance costs and $0.7 million from the expensing of leasehold improvements and lease terminations. We expect an additional one-time charge of $0.2 million during the third quarter of 2009 associated with the branch consolidation. Moving forward, we expect the branch consolidation to result in about $200,000 per month reduction in overhead costs.

The bank industry-wide special FDIC assessment for us totaled $0.9 million, which was fully accrued for during the second quarter and will be paid on September 30. Our quarterly assessments have also increased during 2009 when compared to previous years, reflecting implementation of the FDIC's new assessment formula and rates.

Core salary and benefit costs were $0.4 million lower in the second quarter 2009 when compared to the second quarter of 2008, and $0.6 million lower in the first six months of 2009 compared to the first six months of last year. The majority of the decline results from a reduction in full-time equivalent employees.

With regards to funding, our funding strategy has not changed significantly as we continue to attempt to grow local deposits and bridge any funding gap with wholesale funds, namely brokered CDs and FHLB advances. Although our reliance on wholesale funds increased during 2008, we have seen a significant decline during the first six months of 2009, primarily reflecting an increase of $165 million in local deposits and sweep accounts, along with $150 million reduction in total loans and leases. Wholesale funds have declined by about $300 million during the first six months of 2009. Average wholesale funds to total funds during the month of June equaled 61% compared to December of 2008, when it was 71%.

And with regards to capital, we remain in a well-capitalized position per bank regulatory definition. The bank's total risk based capital ratio at the end of the second quarter of this year was 11.6%, almost $30 million above the 10% minimum will-capitalized threshold.

That's my prepared remarks. I'll now turn it over to Bob.

My comments this morning will focus on bank's asset quality. I'll start with a review of the asset quality headlines from the past several quarters, starting back with the commencement of these challenges with the residential real estate and development problems back in late 2007.

In the first quarter 2008, there was a continued deterioration of residential real estate, plus we identified some deterioration in commercial real estate and C&I loans. In the second quarter of 2008, there was a continued deterioration of commercial real estate loans previously identified as the stressed, including significant charges taken for degradation of real estate property values.

In the third quarter of 2008, some previously identified impaired loan losses were charged off. Additionally the bank identified some loan upgrades and payoffs that helped offset the influx of new problem loans.

In the fourth quarter '08, we saw continued stresses on the real estate values, including commercial real estate.

In the first quarter 2009 we saw further deterioration of some C&Is and commercial real estate credits. Real estate and equipment values of credits going into liquidation continued to be challenged.

The second quarter 2009 brought a continuation of stresses in the loan portfolio, specifically in the areas of C&I and commercial real estate. Some of the C&I loan issues were the result of automotive industry challenges, while others were more the product of a general recession. The large provision expense during this quarter was necessitated by distressed values on real estate collateral backing some nonperforming loans.

The oversupply of commercial real estate compared with the activity levels from potential tenants has continued to create challenges in this market. Provision expense was also necessitated from general allocations for credit downgrades. Proactive portfolio monitoring for any potential problem loans, and aggressive workout strategies on nonperforming assets remain the primary focus for 2009.

Additionally, we continue to look for opportunities to create a better balance in the mix of the portfolio, specifically our reductions in commercial real estate.

I will start with some general information on the loan portfolio. At June 30, the portfolio size was $1.708 billion, a reduction of $69.5 million from the end of the first quarter, and just over $148 million from the start of 2009.

The more significant components of the loan portfolio are as follows. Land and development and vacant lots comprise $119 million for the portfolio. One- to four-family construction consisted of $40 million. Commercial construction, $75 million. A one- to four-family including rental was $136 million. Multi-family was $48 million. Commercial owner occupied real estate was $360 million. Commercial non-owner occupied was $498 million. Commercial and industrial, $417 million. And other consumer and miscellaneous was $15 million.

These numbers reveal that the largest reductions came from C&I-related loans, followed by commercial real estate and development. Portfolio reductions from line paydowns were totaling $25 million during the quarter.

Regarding the loan loss reserve, we had a reserve of $32,604,000 at the end of the quarter, or 1.91% of the portfolio.

Regarding nonperforming assets, nonperforming assets were $86.6 million at June 30. The breakdown by loan purpose is as follows. Land development residential lots totaled $10.4 million. Commercial land development, $2.3 million. One- to four-family construction, $12.9 million. One- to four-family, $4.9 million. Commercial owner occupied, $17.4 million. Commercial non-owner occupied, $28.1 million. And commercial and industrial, $10.6 million -- again, totaling $86.6 million at the end of the second quarter.

The reconciliation of the nonperforming assets change from first quarter to second quarter is as follows. At the end of the first quarter, we had $83.7 million in nonperforming assets. During the quarter we had new nonperforming assets of $21.5 million. We had paydowns of just over $8 million, and we had charge-offs of $10.6 million. Again, reconciling to $86.6 million, or an increase of $2.8 million -- almost $2.9 million from March 31.

[Taxi] loans between 30 and 90 days were $7.9 million at June 30 compared to $10.1 million at the end of March.

Charge-offs. Second-quarter net loan charge-offs totaled $10.8 million. Of that amount, $5.8 million was from impairments reserved at the end of quarter number one. $2.5 million was newly identifiable losses on those previously classified loans as impaired. $2.7 million was for losses on previously identified watch credits not classified as impaired at March 31.

Breakdown of the charge-offs by loan purpose is as follows. Land development and vacant lots, residential, $1.0 million. Commercial land development, $74 million. One- to four-family construction, $1.0 million. One- to four-family, $729,000. Commercial owner occupied, $593,000. Commercial non-owner occupied, $2.3 million. Commercial and industrial, $4.9 million; and other miscellaneous, $35,000. For again, a total of 10 point -- just under $10.8 million.

Regarding the provision, provision expense for the quarter was $11.5 million. The breakdown of that provision by loan purpose is as follows. Land development and vacant lots, $1.3 million. One- to four-family construction, $620,000. Commercial construction, $360,000. One- to four-family residential $902,000. Commercial owner occupied, $1.1 million. Commercial non-owner occupied, $4.4 million. Commercial and industrial, $2.8 million. Again, for a total provision of expense for the quarter of $11.5 million.

Those are my prepared remarks on the analysis of the portfolio. I will turn it back over to Mike.

Thanks Chuck, and thank you Bob for your additional color to the numbers. At this time, Anthony, we would like to take questions.

(Operator Instructions). Jon Arfstrom, RBC Capital Markets.

Good morning. A couple quick questions. In terms of the inflows into nonperforming -- the nonperforming category, do you have that from the previous quarter, just so we can compare that?

From the previous quarter, inflows in the nonperforming was $21.5 million.

Was that -- that's the Q1 number as well?

Pardon me? (multiple speakers) Oh. Now, first quarter was $35.6 million.

Just curious if you could maybe gauge -- I think as analysts and investors, we all tend to look at that number as one of the key indicators in terms of how credit is really -- whether it's deteriorating or getting better. Can you give us an idea of how you feel about that category, and do you expect it to get worse from here or better from here? Or is it just something that's pretty difficult for you to gauge at this point?

Well, as you've suggested, it is very difficult to get a real good read on it. I guess it depends upon the segment of the portfolio, the segment of the economy that you are talking about.

Residential real estate, I think you've started to see some stabilization of that segment for the last few months. I think values are still very low, and there's still oversupply, but I think there is demonstrated somewhat stability there, such as it is.

Commercial real estate, we are certainly still seeing some challenges. Values continue to decline. I think the economic activity for landlords of commercial real estate properties continues to be very challenging. And you're seeing that with property owners that are able to garner tenants at very attractive rates for those tenants because of the oversupply.

Commercial and industrial, obviously the automotive situation has affected a lot of the segments of manufacturing. But I think what we are seeing now is -- with the bankruptcies of Chrysler and General Motors, I think people are realizing that there will be some light at the end of the tunnel in the restructured companies, and everyone is jockeying for position, trying to figure out where they fit into the new mix. I think things are tending to calm down a little bit there. I think we will hopefully see some more of that in the coming months and coming quarters.

But obviously there's still a lot of uncertainty out there, a lot of challenges that we are all trying to position ourselves best to make sure the bank is protecting itself from those deteriorations as they occur or further degradation. Some of the initiatives that we started certainly point us in that direction. And we're very pleased with some of the progress we've made, despite the heavy provision for the quarter, a lot of the things we have done to position the portfolio and mitigate the risk that continues to be present there.

Right. Adding on to what Bob said, it feels a lot like it did about a year ago. And as Bob mentioned, a year ago the issue was largely centered in the residential real estate and residential real estate development. And we had big provisions in the first and second quarter, and we had a trending down as far as new problem loans into the mix.

But then at the end of last year, the economy definitely took another turn downward, and the problem migrated into commercial real estate. As Bob indicated, that's the real issue now. And we are seeing that same downward trend. We've gone through that portfolio again, and we have been very aggressive, and high 30-percents of our nonperformers are contractually current. And so we feel pretty good, like we did about a year ago.

But just by all the things that Bob said, it's very unstable out there. If things were to continue on as they are now, I feel pretty good that that's going to continue to have fewer and fewer new credits trend into the nonperformer pen -- if you will. But we've all seen the last two years it's very hard to make predictions as to where the economy is going and how deep and wide it is. So we continue to be vigilant and very aggressive in adding to our provision.

Just a follow-up on that. Others are saying that -- outside of your region are saying that some of the straight C&I customers are seeing sales trends stabilize in their businesses, and sometimes maybe we have a different perception outside of Michigan than you might have inside of Michigan. But are you seeing those similar trends? Or would you say it's a bit worse than maybe some outside of your market have talked about?

Well again, I think as far as C&I goes, we are seeing basically our C&I customers shake out into two areas. And one -- and Bob touched upon this a little bit -- is the area that's involved with automotive. And we took some hits, mostly last quarter, first quarter, with some C&I automotive stuff. But that's pretty well settled down a little bit. Everybody is kind of waiting to see where GM comes out of.

But the other C&I customers that we have, I would agree with that statement. We are seeing the actually more positive things than negative things. We are seeing some optimism for maybe fourth-quarter '09 and the first part of 2010 and some orders increasing. So that's good. But the big thing that looms out there again is real estate and what's happening with real estate in our markets.

Okay. Chuck, just one question for you. How far out are you extending the duration of some of your wholesale funding?

What we are going to attempt to do is, historically we've kind of done a one-year average. We are going to extend that out probably to 18 to 24 months, but we are taking more of a barbell approach to that. Some of the brokered markets, you can get a lot of one-, two- and three-month money. And then in the larger markets and especially in the FHLB advances, we will be doing some two-, three-, maybe some four-year stuff. So I would expect that average to be out 18, 21 months. Maybe 24 months, depending on how the rates behave.

All right. Thanks guys.

Terry McEvoy, Oppenheimer.

Good morning. As you look at this shift in your nonperforming asset categories, which you just talk about in the release, and today's problems are the fastest growing category, owner-occupied commercial real estate. Would you agree with me that the severity rates and the losses on your owner-occupied commercial real estate will be meaningfully below the residential C&D portfolio of last year and the year before? So would that indicate at some point charge-offs and provisioning slowing down? And do you think we're going to see that over the next couple of quarters, or is that more likely a 2010 event?

I'll try to answer first, and let Bob jump in with his perspective.

But you kind of think that would be the case. But we are very cautious in making that conclusion, just because it seems like everybody got burned a little bit on that last year when we saw things -- at least we did as for the third and fourth quarter kind of settled down a little bit. And then November/December, things really fell off the table as far as the economy goes.

But we feel really good about where we are as far as identifying problems and making them nonperformers if they need to be and providing for them at the appropriate amount. But -- and I would like to believe -- it's nice to see the stock market rebounding, and it's nice to see some of the things that we are hearing out there, that's all good. But we really want to see a quarter or two of real, solid recovery before we make any comments like that.

I think with the owner-occupied commercial real estate, what you have there is, typically you have more to work with than you do on your straight commercial, non-owner-occupied properties where it's a vacant property, a vacant strip mall, and there's not really a whole lot there to grab onto other than to try to lease it up or to sell it.

With the commercial owner-occupied there's typically a business there, and sometimes the business is performing at greater degrees of efficiency than others. But when those go into liquidation, you've got some other things to work with there in terms of the receivables, the current assets and equipment. And our experience in liquidating some of those things has been actually fairly successful, been able to garner some recoveries of those assets that are typically greater than our percentage that's typical for those kinds of liquidations. So that can help offset a little bit some of the challenges with the real estate side of it.

But again, in terms of owner-occupied, there is usually more to work with there and more to latch onto in the overall scope of working the credit out or liquidating the credit, if it comes to that point.

So then just one other question, you've had nice success growing local deposits. Is there a change in strategy at all going after say more consumer or retail customers? Whereas in the past a lot of it has been business-related. And then is it the market growing, or do you get a sense that you're growing your market share within western Michigan?

Well, that's a multi-faceted answer, and I can tell you that we are hitting it on all cylinders. That's a very good question.

We clearly are focusing more on changing our strategy a little bit, even more strategy in the customer awareness category. For the first time in our history we did some television advertising on a fairly significant basis. We did a lot of billboard advertising, just letting more and more people on the retail side of our markets know who Mercantile was, where we were.

We ran some fairly aggressive rate campaigns in certain key areas where we could still gain margin, because of what we were repricing, but we got customers in the door. The idea here is then to cross sell them.

Our branches have done a very good job changing their focus a little bit from almost the strictly good servicing to good service and cross-selling. And so we've got some good programs going on there.

We've been much more aggressive with our commercial loan customers, and as the renewals come up and as we put new loans on the books, we are very honest with them, saying, you know what? We require now minimum compensating balances as part of the relationship. And those that cannot or will not do that, we ask them to leave and go somewhere else.

Even things like requiring tax escrow accounts for real estate taxes add a couple of million dollars to that amount.

So it's a multi-faceted approach, but it clearly -- we are focused on moving deposits as the number-one priority to the bank now for quite of few quarters, as far as our employees knowing that that's what we need to develop.

We've also rolled out a couple of products on the retail side, the consumer side. Consumer e-capture as well as mobile banking. We've always had a very robust cash management product on the commercial side, and we've had developed for a couple of years now these retail products, and we rolled that out in conjunction with our television ads this past couple quarters. And with the new sales efforts we are starting to get some real traction there with both new product offerings and new focus on sales efforts.

Right. That goes back to -- your question goes back to on my opening comment, and part of that opening comment was, while it's hard to see because of the bottom line, there was a lot of important work done for the bank in this quarter. And that's one of them.

And as Chuck mentioned, it's like almost $300 million on wholesale funding is off the books since the end of the year. We are changing the way that balance sheet looks, we are changing the way that our loan portfolio looks, we are changing the way that we manage the margin, we are definitely going to increase that margin. We have, and it's going to continue to do that way. But you don't do all those things in one or two quarters. But we are making very good progress across the board, and it will put us in good stead in the next few quarters here.

Thanks. It's noticeable. I'm all set. Thanks.

(Operator Instructions). Dennis Klaeser, Raymond James.

Good morning. Most of my questions were asked and answered. But maybe just a little bit more in terms of the migration issues around nonperforming loans. I think you noted that the 30- to 90-day delinquent loans is down, and I'm wondering if there's other sort of early-stage indicators that you could point to that might indicate a trend, such as your watch list or your amount of criticized assets.

It's a hard thing to gauge. We have customers that are in the pre watch list rating category that exhibit higher risk but not quite to watch status yet. We watch those very closely. 30- to 89-day past-dues, again as you said, were down. But it's hard at this point to draw any conclusions as far as trends there. Some customers who are struggling but exhibiting some signs of some positive movement, and that affects those numbers as well.

So I think at this point we are very happy they are down, although it's premature to draw real strong conclusions that it's a -- it will be sustained trends of lower nonperformers ultimately.

Sure. Good. And I -- just a little redundant as well with the -- Terry's question, but your strong growth of local CDs seems to be a strategy to replace brokered CDs. Are you able to get any pricing advantage there, or is it a kind of a equal swap in terms of pricing?

In effect, as has historically been the case, our market continues to be above the brokered market. We are probably paying premium, and this is a pretty wide range, but anywhere from maybe 25 to 75 basis points currently. (multiple speakers)

So you're willing to sacrifice that in order to get the local deposit and the local relationship?

Exactly. We -- now, what we looked at -- and I kind of put it in my commentary -- is some of the rates that are rolling off and kind of using some of that savings, that 3.25% now becoming say 1.00%. On the brokered we are using some of that savings to go ahead and offer some attractive rates in the local market to help us with that wholesale funding number. So kind of getting the best of both worlds to some degree.

It's definitely a change in strategy from where we have been. It doesn't always, as you can obviously see, help us initially on the margin side. But our goal is to get the customer indoctrinated to our level of service in the local part of Mercantile and then to cross sell them. That's -- we absolutely need to do that, and we're going to do that. But we also recognize that the investment community and the regulatory community, rightly or wrongly, reviews brokered and wholesale funding as much less favorable as they used to. And whether we agree with it or not, we recognize it, and we are adapting to those changes that we need to make.

Sure. That's a good strategy. And in terms of your balance sheet, I presume that when we look out over the next few quarters, relatively flat to no loan growth? Or even a little bit of negative growth is probably likely?

Yes. As you could see, because of conditions out there, there just has been a very, very strong drop-off in demand. And I think some of the numbers that both Chuck and Bob went over indicated for example that C&I lending is down, just from the standpoint that we still have the same customers, but instead of saying, hey, I need a $2 million line of credit. Now I only need a $1 million line of credit -- because we're just seeing some volume changes.

We are still actively making loans to good customers. We are very focused on that. But the natural byproduct of the economic downturn would lead us to believe that the number of new loan applications that have really dropped off the table will continue to be low in the next couple of quarters, and therefore we will probably see a negative loan growth, because you combine that with -- there are certainly certain higher risk customers that we are asking to leave the bank, and in some cases we're successful in getting them to move.

Right. And in terms of operating expense trends, it looks like you've picked up some good ongoing savings with your branch consolidation. I wonder in terms of your outlook there, are there other similar actions that you could take in the future? Or have you pretty well harvested the -- those cost savings at this point?

We have done a lot of things over the course of the last 18 months. We had a very active campaign where our employees gave us some great tips, and we employed that and saved us a couple hundred thousands of dollars.

We did some painful, painful cutting with -- as you could see, we are down about 40 FTEs from a year ago. That was very difficult to do. My feeling at this point is that the really -- the thing that's going to help us the most at this point is margin improvement and obviously asset quality improvement. We've cut a lot, and at a $2 billion bank, getting down to 270 E FTEs -- that's pretty thin. You need to make sure that you have the excellent service that we've always been known for.

Not to say that if we had to find more that we couldn't, but I think we've harvested a lot of good ideas, and we are really focused now on balance sheet improvement, margin improvement. And one of these quarters we are going to be able to say to you with a lot of confidence that we see asset quality going the right way.

Great. Thanks guys.

Eileen Rooney, KBW.

This is actually [John Barr] with KBW. I just had two quick questions for you guys. Hopefully you haven't covered them already. But I was just curious, what were the average rates of the wholesale deposits that matured this past quarter?

I don't have that off the top of my head here, but it's probably around 3.25%, 3.20%, somewhere in there.

Great. And last question, do you guys have a target mix between retail and wholesale deposits?

We don't have any specific targets or goals. Certainly we put budgets together. I think I would just kind of dovetail what Mike was talking about. We've got a campaign, we've got a strategy, and what we want to do is just continue to employ that strategy and continue to further reduce our reliance on wholesale funding. And kind of where it ends up it's going to end up. But we are certainly much more interested in what we are actually doing than the end result number.

Great. Thank you.

(Operator Instructions). Stephen Geyen, Stifel Nicolaus.

The repossessions in the press release was $13 million, and OREO was up about $3 million, I think -- as I look back at my model. Just wondering if you had some success selling some assets, and the types of assets you were able to sell, and the prices that you got.

It's been a good mix. As I mentioned, we had $8 million in pay-downs over the last quarter. That consists of a variety of mix. We had some commercial real estate that sold at or near the prices that we had charged them down to. We had some good experience, as I mentioned earlier, with some collections of some receivables and inventory on a C&I liquidation situation.

Some equipment values continue to be quite challenged, but we have been able to maximize some of the values there in some of the liquidations involved with C&I types of customers.

The biggest area of concern that we have is those guys on the commercial real estate side, and we are being very vigilant about monitoring those values every month, looking to see if we have the appropriate amount booked into ORE and if not, we take some charges there to get down to the estimated market value. That of course is a moving target based upon what the market is doing. And I think we are doing a good job of trying to stay on top of that and to make sure that we have appropriate reserves set aside for those assets.

It's a -- we have a very little glimmer of hope, but it was interesting to know. I think this was the first quarter we've had a sense of crisis that we're -- we actually sold some properties and we got small recoveries on them, meaning that we charged them down below where the market was.

And the reason why that's important, that was one of the things that was really very frustrating over the last prior quarters is that we charge these things down, we take them in ORE, and we charge them down again to say, okay, here's where the market is. And then sometimes we would sell them and have to take yet another charge-off. And every once in a while that still happens. But at least this quarter we had two, three, four situations where we sold some things, and it wasn't by a whole lot, but we actually got more than what we had them charged out. So that may be an early sign that we are able to see some stabilization out there.

Okay. And a second question, just wondering -- the charge-offs in the quarter, just wondering, was there any influence from the regulators as far as being a bit more aggressive on some of those specific reserves that were set aside for (multiple speakers)

No. We've always had a tremendous relationship with the regulators. We are midcycle right now as far as when they did the last exam and when the next one starts. So we've never had any influence from the regulators as to -- you need to do this, or you are missing the boat on that.

The charge-offs this quarter, like every quarter, are strictly management's best estimate as to what is appropriate. As Bob indicated, I believe a lot of what we charged off was stuff that was -- that had been on there as a specific reserve for a while. We finally took a hard look at it and said, yes, as much as we would like to think otherwise, we are probably not going to get any recovery out of these -- so we prudently took the charge-offs, and that's always been the way we operate.

Thanks for your time.

With no further questions in the queue, I'd like to turn the conference back over to you for any additional or closing remarks.

Well, thank you very much, and thanks to all of you for joining us today. If you have any additional questions or comments, please feel free to give Chuck or Bob or myself a call. And we will end the call at this time. Thank you.

This does conclude today's presentation. We thank everyone for their participation.