United Community Banks Inc (UCBIO) 2012 Q2 法說會逐字稿

Good morning and welcome to United Community Banks' second quarter conference call. Hosting the call today are President and Chief Executive Officer, Jimmy Tallent; Chief Financial Officer, Rex Schuette; and Chief Risk Officer, David Shearrow.

United's presentation today includes references to core pre-tax, pre-credit earnings and other non-GAAP financial information. For each of these non-GAAP financial measures, United has provided reconciliation to GAAP in the financial highlights section of the news release and at the end of the investor presentation. Both are included on the website at ucbi.com. Copies of today's earnings release and investor presentation for the first quarter were filed on Form 8-K with the SEC and a replay of this call will be available on the Company's Investor Relations page at ucbi.com.

Please be aware that during this call, forward-looking statements may be made by United Community Banks. Any forward-looking statements should be considered in light of risks and uncertainties described on page four of the Company's Form 10-K and other information provided by the Company in its filings with the SEC and included on its website. At this time, we will begin the conference call with Jimmy Tallent.

Good morning, everyone, and thank you for joining us for our earnings call. Our June 30 results marks the fourth profitable quarter since the execution of our capital raise and problem asset disposition plan in March of 2011. I'll start this morning with some highlights from the quarter.

Core pre-tax, pre-credit earnings were $28.3 million, down $997,000 from the first quarter and up $3.9 million from the second quarter of 2011. Net income was $6.5 million or $0.06 per share. Severance charges this quarter, which are excluded from core earnings, decreased net income by $1.2 million or $0.02 per share.

Core operating expenses continued to decline as a result of our ongoing improvement in operating efficiency. Loans were down slightly after growing $18 million in the first quarter, but remain up year-to-date. Overall, credit costs were up $1 million from the first quarter. We incurred $18 million in loan loss provision and $1.9 million in OREO expense.

Net charge-offs for the second quarter of $18.9 million slightly exceeded the $18 million provision. Our allowance for loan losses remained strong at 2.74% of loans. Non-performing assets at quarter-end were $146 million, down $16 million from the previous quarter and represented 2.2% of total assets at quarter-end.

Our core transaction deposits grew by $12 million this quarter, after growing $151 million in the first quarter. The annualized growth rate is 11% year-to-date. Our net interest margin was 3.43%, down 10 basis points from the first quarter, primarily due to a lower yield on our securities portfolio and all of our capital ratios improved this quarter.

Now, David will provide detail on our credit performance and Rex will follow with details of our financial results. David?

Thank you, Jimmy, and good morning. This quarter, we provided $18 million for loan losses, up from $15 million in the first quarter. Net charge-offs were $18.9 million in the second quarter, up $3 million from last quarter. Our charge-offs were elevated this quarter, primarily due to an increase in residential construction charge-offs.

Non-performing assets declined $16 million from $161.6 million last quarter to $145.8 million this quarter. The reduction in NPAs was due to a decline in NPL inflow and an increase in ORE sales this quarter. Non-performing assets included $115.3 million of non-performing loans and $30.4 million in foreclosed properties. The net inflow of new NPLs was $29.4 million this quarter compared to $32.4 million last quarter. We had no accruing loans that were past due 90 days or more. The ratio of non-performing assets to total assets was 2.16% compared to 2.25% last quarter.

Our performing classified loans increased $7 million from $317 million to $324 million on a linked-quarter basis. However, we saw a sizable $41.4 million decline in our performing lots or criticized loans to $170.2 million this quarter due to a slowing of negative migration.

Accruing TDRs totaled $141.6 million and increased $15.8 million from last quarter. Most of the increase in TDRs occurred in CRE, commercial construction, and residential mortgage categories. 94% of accruing TDRs were classified substandard this quarter which is flat from last quarter. In addition, 85% of our total TDRs remained on accrual this quarter compared to 79% last quarter. It's worth noting that 78% of our accruing TDRs in the second quarter were accruing at interest rates of 4% or higher.

Early delinquency for our entire portfolio improved significantly this quarter. The 30 to 89-day past-due loans for the entire portfolio were 65 basis points, down from 86 basis points last quarter. Although the real estate market remained challenged, we saw a small pickup in foreclosed property sale this quarter. We sold $10.5 million of foreclosed properties this quarter versus $8.6 million in the first quarter.

We are selling out of a much lower base of ORE inventory at this point which gives us less opportunity for higher dollar sales. Therefore, I would expect to see our foreclosed property sales range from $8 million to $12 million over the next two quarters.

Foreclosed property expense totaled $1.9 million this quarter, down from $3.8 million in the first quarter. The second quarter included $1.1 million for maintenance cost, $269,000 in net gains on sales, and $1 million in further write-downs on properties. At quarter-end, foreclosed properties had been written down to 39% of their original unpaid principal balance. In addition, non-performing loans were written down to 69% of their unpaid principal balance. As a reminder, our policy is to write down OREO and NPL to 80% of current appraised value or lower.

Let me now provide some detail on our portfolio by segment. First, commercial loans. Our total commercial loan portfolio of $2.46 billion increased $6 million or 1% on an annualized basis over the first quarter. C&I loans were the primary driver of growth in the commercial portfolio this quarter. New loan commitments totaled $132.4 million this quarter and $66.9 million of the total were in commercial categories.

Owner-occupied real estate loans represented 78.4% of new commercial real estate commitments this quarter, as we continue to focus on small business in our markets. Within the total commercial portfolio, we had $72.3 million of NPLs, down $13.4 million from last quarter. Total commercial net charge-offs were $5.2 million for the second quarter compared to $4.7 million last quarter.

Moving on to our residential mortgage portfolio, we ended the quarter at $1.1 billion, flat from last quarter and down $49 million from a year ago. In this portfolio, we had $16.6 million of NPLs, down $2.1 million from last quarter. Net charge-offs were $3.9 million for the second quarter, down from $5.4 million last quarter. Home equity is included within our residential mortgage portfolio. This portfolio, which totaled $292.9 million, declined $600,000 from last quarter. Home equity line usage was flat at 60% in the second quarter compared to last quarter. Overall, residential mortgage early delinquency decreased in both our home equity and core mortgage portfolios this quarter.

In summary, while high unemployment and property devaluation continued to impact the portfolio, residential mortgage remained stable with some improvement in credit. Our total residential construction portfolio of $409 million is down $27 million from the first quarter and down $93 million from a year ago. The residential construction portfolio breaks down into $326 million in dirt loans, $49 million in spec houses, and $34 million in pre-sold houses.

Looking at credit quality, our residential construction portfolio had $25.5 million of NPLs, up $1.2 million from $24.3 million last quarter. Net charge-offs in this portfolio increased to $9.6 million this quarter from $5.3 million last quarter. At quarter-end, our allowance for loan losses was $112.7 million or $2.74% of loans, flat with last quarter. Our allowance coverage to non-performing loans was 98% compared to 88% last quarter.

We continue to make progress in working through our credit challenges. As we've mentioned in prior calls, we have expected some lumpiness in net charge-offs and we saw that this quarter with a higher level of charge-offs, which led to an increased loan loss provision. On the other hand, we reported declines in ORE expense, NPAs, NPL inflow and past dues.

Looking ahead, we continue to expect our credit metrics to improve over the next several quarters, although not necessarily on a straight line. Total NPAs will continue to be impacted by our ability to liquidate foreclosed properties in this very challenging market, and new NPL inflow and net charge-offs could continue to have some lumpiness.

Economic conditions in our markets remain mixed. We continue to see some strengthening of our commercial and industrial base. However, the drag from real estate devaluation and unemployment continues. In summary, based on our visibility today, overall credit trends are expected to gradually improve through the remainder of 2012.

And with that, I'll turn the call over to Rex.

Thank you, David, and good morning. My comments today will refer to slides within our investor presentation and tables included in our earnings release. Core pre-tax, pre-credit earnings for the second quarter of 2012, as shown on slide 22 of the investor presentation, were $28.3 million, down $997,000 from last quarter, but up $3.9 million from a year ago. The decrease from last quarter was primarily due to lower net interest revenue which is reflective of the lower yield on our securities portfolio that resulted from accelerated prepayments on our mortgage-backed securities.

Net interest revenue of $56.8 million was down $2 million from last quarter and $2.1 million from a year ago. As in the prior two quarters, prepayment acceleration lowered the yield on our securities portfolio due to a higher level of premium amortization. Also, the yields on the replacement securities were lower than the yields on the prepaid securities.

Due to the significant decline in long-term rates this past quarter, the impact on the second quarter was much greater than the prior two quarters. Heavy prepayment volumes and CPR speeds accelerated the amortization of premiums, causing the security portfolio yield to decline 36 basis points from last quarter.

Also impacting our margin this quarter, competition for loans and pricing pressures lowered the yields on the loan portfolio this quarter by 14 basis points on a linked quarter, as shown on slide 25. Offsetting this partially, the average rate of interest-bearing deposits declined 7 basis points from last quarter, mostly due to lower CD rates and a more favorable mix of deposits.

Late in the quarter, we took steps to improve our net interest margin and stabilize net interest revenue through a series of restructuring transactions in which we sold $175 million of investment securities and prepaid $75 million of high fixed rate wholesale borrowings. The $6.5 million gain from the sale of these securities more than offset the $6.2 million prepayment charge on the wholesale borrowings.

These restructuring transactions and the resulting smaller balance sheet improved our interest rate sensitivity and will improve our net interest margin by 9 basis points in the third quarter due to the smaller balance sheet while being neutral to net interest revenue.

As shown on slides 27 and 28, core transaction deposits rose $12 million in the second quarter, following a $151 million rise during the first quarter of 2012. The $263 million year-to-date increase represents an annualized rate of 11%, up slightly from the 10% growth year-over-year. Non-interest-bearing demand deposits accounted for nearly 90% of the year-to-date growth. We will continue to focus on core transaction deposit growth throughout 2012.

Looking at interest rate sensitivity, a 200 basis point ramp up continues to show us as slightly asset sensitive at 1.12% and down from 1.3% last quarter.

Turning to fee revenue and operating expenses, as noted on slide 29, core fee revenue of $12.8 million for the second quarter was down $327,000 from last quarter and up $1.7 million from a year ago. The decline from last quarter was another fee revenue and primarily related to timing items included in the first quarter and not in the second quarter. Excluded from core fee revenue for the second quarter 2012, as shown on slide 31, were hedge ineffectiveness losses of $180,000, securities gains of $6.5 million and $6.2 million in charges for the prepayment of Federal Home Loan Bank advances and structured repurchase agreements.

Core fee revenue for the first quarter of 2012 and second quarter of 2011 excluded similar items to provide a consistent run rate for comparison of prior quarters. Also as noted on slide 31, our first quarter 2012 core fee revenue excluded $1.1 million in interest on a 2008 federal tax refund and a $728,000 gain from the sale of low income housing tax credits.

On slide 29, total service charge fees of $7.8 million for the second quarter were up $33,000 from last quarter and up $208,000 year-over-year. The increase from a year ago was primarily due to new service fees on demand deposit accounts that became effective on January 1, 2012. The new service fees more than offset lower overdraft and debit card usage fees.

Mortgage loan fees of $2.3 million were up $1.4 million from a year ago and $223,000 from last quarter. Refinancing activities brought on by record-low mortgage rates continued through the second quarter. We closed $80 million in loans this quarter compared to $82 million last quarter and $50 million a year ago. Other fee revenue of $1.8 million was down $579,000 from last quarter and $28,000 from a year ago. Most of the decrease from last quarter was due to timing of miscellaneous revenue items recognized last quarter.

Looking at core operating expenses on slide 30, they totaled $41.3 million for the second quarter, down $1.4 million from last quarter and down $4.4 million from a year ago. The decrease from a year ago was primarily in staffing as well as spread among nearly every expense category. A decrease from last quarter was mostly in salaries and employee benefit costs.

The $1.6 million decrease in staff expense from last quarter and $2.1 million decrease from a year ago was primarily due to lower staffing levels and related lower group medical insurance costs. A significant portion of the salary cost savings has come through workflow improvements and corresponding reduction of staff positions. At June 30, 2012, we had 1,614 employees compared to 1,707 at the end of the first quarter and 1,767 a year ago. Also contributing to the decrease from a year ago was a lower FDIC insurance assessment, down $1.1 million, due to a decrease in our assessment rate. Slide 31 of the investor package reconciles core earnings to our reported net income and net loss for each period.

Turning to capital, as shown on slide 33, our regulatory holding company capital ratios were as follows. Tier 1 risk-based capital was 14.2%; total risk-based capital was 15.9% and our leverage ratio was 9.1%. Tier 1 common risk base was 8.7%. Also, our tangible equity-to-asset ratio was 8.2% and tangible book value per share in our earnings release was $6.48.

And finally, deferred tax assets. As noted previously, each quarter, we analyze changes that affect the realizability of our deferred tax assets. We'll continue to evaluate and weigh the positive and negative evidence going forward and when the weight of evidence shifts such that the positive evidence outweighs the negative evidence, the valuation allowance will be adjusted or completely reversed, as appropriate. As a reminder, our deferred tax valuation allowance is $277 million or about $4.80 per share.

With that, I'll turn the call back over to Jimmy.

Thank you, Rex. At the end of 2011, I shared with you our plan to improve our core pre-tax, pre-credit earnings run rate by $10 million annually or $2.5 million per quarter by the fourth quarter of 2012. I want to give you a brief report on our progress to date.

As I said earlier, our core pre-tax, pre-credit earnings for the second quarter were $28.3 million, up $1.7 million from the fourth quarter of 2011. That increase represents almost 70% of our $2.5 million goal. We are confident that we will meet our target. Our most recognizable accomplishments have been in reducing expenses. In the past two quarters, we have reduced our core expense run rate by $2.5 million. This savings is spread among all expense categories, with the most significant reduction in personnel cost.

Headcount is down 140 positions year-to-date to 1,614. Some of these positions were eliminated late in the second quarter and have not yet been reflected in our expense run rate. We were expecting further cost reductions through the remainder of the year. Some of this will come as we move forward with our loan and deposit workflow process improvements and with other operating expense reductions that are currently underway. More initiatives are being developed and some will be implemented by year-end. Process improvement is becoming a core part of the United culture.

We've also made progress on the revenue side. Effective January 1, we added new service fees to deposit accounts and we renegotiated our debit card and ATM network service provider contracts. This renegotiation increased revenue and lowered cost. And as a result, second quarter service charges and fees were up nearly $600,000 from the fourth quarter despite lower overdraft fees.

We began offering customer interest rate swaps under a back-to-back program that has added both fee revenue and new loan relationships. We're seeing good traction with this expanded offering. We're in the process of leveraging our high customer satisfaction scores by expanding and enhancing our retail loan product offerings.

We are developing standardized products that will be offered throughout our footprint that will allow us to more effectively and efficiently meet the credit needs of our retail customers. These products will be supported by an aggressive but targeted marketing campaign and employee incentives tied to results.

Our most recent offering has been a successful home equity line of credit promotion. One important initiative that has been ongoing throughout the economic cycle is improving our business mix in both loans and deposits. The results of these efforts have a tendency to be overlooked. We've already talked about our progress in growing core customer transaction deposits, but I want to emphasize the importance of this on our overall franchise value.

At the end of 2008, when we sharpened our focus on these deposits, they represented only 34% of our total non-broker deposits. Today, they represent 55%, a significant improvement and one that we believe provides a tremendously up to the value of our franchise. Not only does it lower our overall cost of funds, it also provides excellent cross-selling opportunities with the new customers gained in the process.

On the loans side, we continue to improve our business mix in ways that provide a much better balance and more favorable risk profile. For the past several years, we set out to significantly reduce our concentration of construction loans. At the end of 2009, construction loans, both residential and commercial, were 26% of the portfolio and commercial loans were 43%.

Today, construction is 14% and commercial is 56%, again a significant improvement. Those efforts are ongoing. Construction loan balances have fallen by $119 million in the past year. Over that same time period, they have been replaced with $148 million in owner-occupied commercial real estate and C&I loans.

While our loan growth overall remains a challenge, we are making great strides in improving the mix and risk profile of our portfolio. So let me just quickly summarize our goal for the reminder of 2012 and then we will get to your questions. First, we will continue to improve the loan portfolio mix by focusing on growing loans in the business and consumer segments we've identified. We will continue to improve operational efficiency and drive down our expense base.

We will continue to expand our customer relationships through targeted needs-based cross-sales efforts which will not only deepen our customer relationships but also add to fee revenue. And we will continue to aggressively work through our remaining credit challenges with a goal of continuing to show meaningful improvement in all of our credit metrics.

Now, Rex, David, and I will be pleased to answer your questions.

(Operator Instructions). Jefferson Harralson, KBW.

Hi, thanks. I want to ask the first question to Rex on the margin. He guided to a 9 basis points up next quarter from there. So we just think about it as, as long as rates stay this low, we should see I guess a slowdown from there or is it you think it can be kind of offset by improved cost of funds and improved NPAs, that kind of thing?

Thanks, Jefferson. (inaudible) from that was the balance sheet restructuring (inaudible) that will improve the margin going into Q3. As we look at it and the impact on our margin this quarter was impacted by lower yields on the loan portfolio that (inaudible) impact on the margin.

[You just sound a little faraway].

All right. Jefferson, can you hear me now?

Yes, I can hear you. You just sound a little faraway.

Okay, I think (inaudible). The impact on the margins as we got -- again, the impact on the margin for the quarter, there were three key components impacting the margins. Our lower loan yields lowered our margin by 8 basis points. (inaudible). Jefferson, is this better?

It sounds kind of same, you're just faraway, but we can hear you.

So you can hear me, okay.

I'll call you back.

(inaudible). On the margin, I was indicating there are three key components impacting the margin this quarter. Our loan yields, down 14 basis points, had about an 8 basis point impact on the quarter, with securities portfolio dropping down 36 basis points which I think we'll see a good part of that come back in Q3 had about a 11 basis point negative impact on the quarter. That was offset by positive impact, again continued lower interest-bearing funds in the quarter. They were down nine basis points and that had a seven basis point positive impact on margin this quarter. And we had a slightly smaller balance sheet with the restructuring that improved margin by about 2 basis points.

So net-net, the 9 basis points, I mentioned is again be driven by the restructuring when we sold off some of the mortgage-backed portfolio but additionally by a smaller balance sheet. I do think in the securities portfolio which is probably the biggest negative impact this quarter was driven by again the significant drop we had this quarter in the ten-year rate and that accelerated prepayments during the quarter. And again, the CPR speeds and we are seeing projections though CPR speeds will decline in the second half of the year and we do expect to see a good part of that come back in Q3 with lower accelerated amortization of our premiums. So I do see net interest revenue -- would see that improving on a linked-quarter basis. And again, our margin improving both with our smaller balance sheet and again with the security portfolio.

Thanks. Now, as a quick follow-up on the upcoming relatively small debt maturity, are you more likely to write a check for that or you think that will be replaced with another piece of some sort of capital?

Yes, we will probably look at here in Q3 replacing that with some senior notes, Jefferson. So I guess that will be our plan. We have sufficient cash. We have about $59 million -- $58 million, $59 million of excess cash at the parent company at this time. But I think we want to continue to maintain a two to three-year cash flow at the parent company. So we'll look at refinancing that.

All right. Thank you.

Kevin Fitzsimmons, Sandler O'Neill.

Thank you. If I could just ask a question on credit, I mean this in terms of outlook for provisioning in net charge-offs and specifically this quarter, I guess while I wasn't all that surprised to see an increase in net charge-offs, I was surprised to see the increase in provision. I guess I would have thought a lot of that would have been provided for already identified and do we start getting next quarter into a place where provisions can start coming down and we could start seeing some reserve releasing? Thanks.

Sure. Kevin, this is David. A couple of things I guess to help provide some context. This quarter's net charge-off number was impacted -- I mean this gets to your reserve question -- was impacted to a degree by a classified loan that we had specifically reserved, but we -- it was a residential construction loan, we came up to time to do an updated valuation, new appraisals on the relationship which ultimately drove a pretty significant loss in the quarter. In fact, about $6 million, the loss -- total net charge-offs this quarter were related to this one relationship.

So we had it always specifically reserved based on the prior year's appraisals, but we had a significant devaluation on the new appraisal and of course, we could argue about the validity of the appraisal. Nevertheless, our process would be that we look at that and then write down accordingly. And that loan was placed on non-accrual and charged down accordingly. That's part of why you didn't see the under-provisioning as deep as maybe you were expecting this quarter.

The other issue as far as kind of looking out, as far as charge-offs go, I still would -- much like I've said in my comments, there is going to be some lumpiness. And I think, in terms of range of net charge-offs, I think we're -- what you saw this quarter is probably at the high end of what I would expect over the next couple of quarters and maybe the low end would be in the $13 million, $14 million, $15 million range. So it's -- that would -- I'd have a range of maybe let's call it $14 million to $19 million over the next couple of quarters net charge-offs.

I think the provisioning at what you saw this quarter, $18 million, would be kind of at the high watermark as well. And I would probably expect a range of somewhere between $13 million and $18 million per quarter over the next couple of quarters. Again, of course, these things are heavily driven by the circumstances that may occur in that quarter. But I feel like we will -- you will see a little bit larger level of reserve release over the next couple of quarters. But we're going to be cautious, Kevin. We've said that all along in terms of pulling down our reserves. So I don't see an aggressive pull down, at least in the near term in any case. Hopefully that's helpful.

That is helpful. David, could you just follow-up with -- we saw in the news this past quarter Fletcher declaring bankruptcy. And can you comment on what that means for you all and was that loaned at all? That loan wasn't the loan you're referring to, that had the elevated loss this quarter. But just generally, what that event means to you. Thanks.

Right, right. Well, first of all, no, the relationship I was just discussing is a totally unrelated situation. The -- our relationship with our largest borrower and the bankruptcy filing you're talking about really does not affect our borrowers. The structure of the loans that we have in place are to [effectuate] the bankruptcy remote entities.

The only assets in these entities are the assets purchased and then they are -- they were capitalized by our loan and their equity contribution. As such, there is really nothing to put any pressure on those entities for bankruptcy other than at some point if there was a potential default down the road and at which point we would have to exercise our remedies. And in that case, I guess, they would have that option if they wanted to, but [I guess] in terms of what you're reading in the press, we see no connection whatsoever between that and the current status of our borrowers.

And how long -- I know there is a deposit account affiliated with that, that was set up when the original transaction was done. How long do you have in that account of payments that, that should cover it?

Yes. Well, right now, there is -- there are payments, again, it's all non-accrual today, so you know. But in terms of technical default, first of all, the borrower has the option to continue to fund it, but we still have roughly $5 million of cash carry on our loan balances today which depending on draws for things like taxes and whatnot should be sufficient without any asset sales to carry us through the end of this year and probably into the first part of next year.

Okay, thank you.

Jennifer Demba, SunTrust Robinson.

Thank you. I have two questions. Jimmy, you said you were going to deploy some more cost reduction efforts in the second half of this year. If you have anymore color there, it would be appreciated. And my second question is, could you characterize the C&I growth that you had during the quarter, where it was, kind of average loan size, demand you're seeing, et cetera?

Sure, Jennifer. I'll take the first question in regard to the cost. We're looking at everything within the Company certainly from headcount to just basic operational cost to underperforming branches. As you probably will recall, we actually closed a couple last year. We've consolidated a couple already this year. Our initiatives in regards to improved efficiency is really beginning to show more and more opportunities from a cost standpoint and a lot of these just take time. That's the reason I mentioned that a few moments ago.

The deposit piece actually is fully implemented by the end of this month. We just start seeing the benefits throughout this year. The loan process again and in our overall initiatives, there seems to be significant opportunities with that as well. Everything is on the table. We realize the $2.5 million increase in core earnings by Q4 which we stated two quarters ago is very important in achieving that. We will achieve that. It doesn't stop at that point. So we'll continue to see the benefit of cost improvements but also a very strong renewed focus on the other earnings capabilities for our Company going forward.

Jennifer, this is David. I think the second part of your question is a little bit about some color around where the originations are occurring in C&I and the average loan size. When you look at kind of where the production is, there is a breakdown in the investor presentation on page 14. But you'll see our primary area of growth is Atlanta, followed by North Georgia and then the coast in Tennessee.

We've got -- as you know, we've hired some additional lenders over the past year, particularly in some of the more metro areas and we're getting some good production out of those, both in Atlanta and the coastal markets, particularly. I think some of the success we're having in the North Georgia market will be driven more by taking advantage of some of the lost share situations in these markets and some of the bank failures and being able to pick off some good customers out of those banks once they go into a lost share situation.

With regard to average loan size in the C&I book, I don't have an exact number, but I can tell you, our real focus is on the smaller business side of things. So most of our production on the C&I side is going to be somewhere between $500,000 and $2 million, I would say would be a fairly good proxy for a range on average. I'm sorry. Do you have a follow-up?

No. No. Thank you.

Okay. Thank you.

Christopher Marinac, FIG Partners.

Thanks. I want to drill down the credits from another angle because we saw the increase in the performing classifieds and also the accruing TDRs. Would that portend perhaps an improvement on special mention or have there been sort of net new problems that have kind of graduated from the past to a different debt risk rate?

Yes, Chris. I made a mention of that in my remarks and it was pretty brief. I'm glad you asked that question because we saw a sizable drop in our special mention credits, criticized credits. We had a $41 million decline on that pool of loans. So it was a significant reduction there, which I guess [have early] -- and that was primarily because of a slowing of negative migration on a path into that bucket. And then, on the performing classified, obviously, we still had some continued negative migration out of our criticized to classified.

So that was still occurring, but at the same time, we also saw -- we started to see a few upgrades from non-performing loans and performing to that is based on continued performance. Our normal process is, once a loan is in non-performing, they would have to perform on a current basis for at least six months before we would move it back to performing. In that case, we had some of that occur this quarter which also bumped up the performing classifieds a little bit. Hopefully, that's helpful.

Okay. So David, is there -- what is the risk, as you look at the next couple of quarters into next year of just the [path rated] bucket from the top, seeing that negative migration? I mean, is there a big risk from here or do you think you've captured most of it, it's simply we're going to see this movement along the risk grades quarter-to-quarter?

Well, I think we have done a very good job of capturing the appropriate risk grading in our portfolio, first of all. And as far as continued negative migration, while there will still be some level of that, most all of the indicators we're looking at, the early indicators, would indicate a continued improvement in our portfolio. And it's obviously very evident in the past dues, in the grade -- in the criticized loans this quarter particularly which are early leading indicators. So there is going to continue to be obviously some level of these performing classified loans that are going to default. That pace of default is slowing as well based on the decline in the NPL inflow. So I think most all these indicators are getting better. It's a question of how much, how fast and that's a little bit difficult to predict, other than to say we do see the trends continuing to improve.

Okay. That's great. Thank you very much for the color.

Okay. I'm showing no further questions in the queue. I would like to turn the conference back to your hosts for any concluding remarks.

Well, thank you, operator. We'd like to thank everyone for being on the call today. We look forward to reporting our results for Q3. I would also like to just recognize our team of employees and thank them for their continued good work and dedication to this Company. Thanks, again, and hope you have a great day.

Okay. Ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.