Beacon Financial Corp (BBT) 2009 Q4 法說會逐字稿

Good morning and welcome to the Berkshire Hills Bancorp Inc. Q4 earnings release 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 conference is being recorded.

I would now like to turn the conference over to David Gonci. Please go ahead, sir.

Thank you. Good morning. Thank you all for joining this discussion of our fourth-quarter results. Our news release is available in the investor relations section of our website, BerkshireBank.com, and will be furnished to the SEC.

Our discussion will include forward-looking statements and actual results could differ materially from those statements. For a discussion of related factors please see our earnings release and our most recent SEC reports on Forms 10-K and 10-Q.

Now I will turn the call over to Mike Daley, President and CEO.

Thank you, Dave. Good morning, everyone, and welcome to our fourth-quarter conference call. I am Mike Daly, President and Chief Executive Officer. With me this morning is Kevin Riley, our CFO, along with other members of the management team.

We released our fourth-quarter results yesterday and there was a lot in there, as you know. It included a charge on the loan portfolio which I am going to explain. I think in our time that we have this morning I can give you enough information to digest so you will understand and appreciate our decisions and our process.

I will address all of our strategic actions starting with the loan initiative and then Kevin will provide some color on our operating activities in the fourth quarter and first-quarter guidance. And then I will have concluding remarks. At the conclusion of our prepared remarks, of course, we will take questions from our callers.

Now this last quarter was a pretty intense quarter for us as our team devoted enormous time and energy to grapple with repositioning the organization for the changed environment that we are now in. Our work clearly showed the need for proactive steps now to prepare us for a different environment ahead.

Now I am well aware that banking and in particular commercial lending is a cyclical activity, but this has been a deeper recession than what we have seen in years. Many business borrowers with long histories of creditworthiness have faced unprecedented pressures and as lenders we have been impacted as well.

Now in the fourth quarter we stepped up to take the full measure of where we were in the cycle and what we had to do to get the Company in an optimal position, both to withstand economic uncertainties and to grow in 2010 and beyond. Now let me summarize the initiatives that we announced.

Thoroughly reviewing the loan portfolio in a hard-nosed, brutally objective manner to identify the magnitude of current and anticipated risks, and then acting on those concerns to get ahead for the future. Reengineering our insurance group for higher profit margins and a stronger, broader platform for revenue growth. Restructuring our borrowings while maintaining our asset-sensitive position and taking advantage of the anticipated rate environment.

Recruiting strong new teams and establishing new business ventures in asset-based lending and private banking and extending our product lines and our geographic reach. And adding executive leadership with incredibly strong profiles.

I would add that while we embarked on these initiatives and took appropriate charges that obviously impacted earnings, we also produced another quarter of solid organic growth and produced an operating EPS run rate before these charges that was consistent with our $0.15 per share guidance. Our loan initiative, of course, had the biggest financial impact on our results.

As I indicated, we would last quarter -- we conducted an incredibly thorough review of customer financial information and appraisals for our commercial portfolio, despite the fact that our loan performance had remained comparatively good over the last several quarters including the year end just completed with delinquency and non-performers remaining well below industry averages as they have for the last several years.

Indeed many of our non-accruing loans at year-end were current or near current, demonstrating that borrowers were continuing to support their debt service. But this is a complicated process and there is a lot of accounting convention that plays a role in the timing of how you can reduce problem loans.

For instance, when you take a charge on a loan, even if that loan is current and is anticipated to be resolved within a few weeks, the loan must be placed on a non-performing status. And, frankly, that was the case with several of the situations that we were working through at year-end. Now that is one of the reasons for the increase in our non-performers.

We expect them to be cut in half or more in the first couple of quarters of the year. And as a result of this process, we cut our substandard performing loans in half and we expect to see further upgrades in a number of these credits over the course of the year. Now I would rather go into 2010 with the outlook for improving credit quality rather than deterioration, though in some situations we designated current loans as non-accruing where we believed cash flows were becoming strained or other pressures were building.

It's important to remember that while our markets have fared better than most other regions and despite the fact that there may be some stabilization, and we hope there is, experience tells us that New England is traditionally slow in and slow out of recessions. I would add that many of our borrowers are seasonal and due to October tax filing deadlines and other factors the fourth quarter gave us the best opportunity to carefully analyze current financial information and to obtain updated appraisals on many properties.

Most of the loans evaluated were commercial real estate loans, reflecting the fact that real estate is most often a principal source of collateral for middle market loans. We focused on all our substandard loans and also looked at the majority of all other lower-rated credits. As we developed strategies, we consulted with third-party loan review professionals to affirm our conclusions.

We also reached out to third parties to obtain market pricing on a number of commercial relationships. And while there is an active market for these loans, the prices reflect high-return thresholds for buyers and in most cases these prices did not reflect our best economic value.

Instead, we often focused on the option of bifurcating loans to create a conforming A loan and a subordinate B loan, which in most cases is charged off. These bifurcations became one of our primary approaches, which retained our ability to recover principal if our performance allows for that.

In other cases we have pursued the local sale of notes or accepted the refinancing of the relationship elsewhere at a discount, and in some cases we simply moved forward with foreclosure. However, where we could we tried to work with our local borrowers after calibrating the loss potential and to support the local economy, and these results do reflect that.

I think it's fair to say that when markets are expanding appraisals can get ahead of other value indicators. And when markets are contracting appraisals can become more conservative than other value indicators. Also, many real estate markets are left liquid at this time which increases the liquidity discount in valuations. So market values swing sharply.

We of course use these appraisals in evaluating and structuring loans, and we simply have to manage through this and post the resulting numbers. In some cases we have noted that our approach appears conservative and some of our targeted resolutions include refinancing provided by others, sometimes at par. But based on the detail work we put in, we are confident that we are making the best decisions to maximize our shareholders' value based on choosing the best options in front of us in light of the economic outlook.

As we reported in the press release, we recorded commercial loan charge-offs of $28 million and we increased our loan loss allowance by $8 million. We upgraded $35 million in balances, mostly based on our restructurings, and we collected another $6 million in payoffs in the quarter.

Our press release provided information about the loans with larger charge-offs. These loans were spread amongst our major markets and included credits in three sectors that we had previously identified -- residential construction, community nonprofits, and lodging.

We ended the process with our substandard performing loans going down by more than 50%. And while our non-performers increased by $16 million, we expect this to go right back down to lower than where it was as we anticipate the completion of $20 million or more of resolutions that were in process at year-end. Where we anticipated any shortfall we either took the charge or we specifically reserved for it.

While this resulted in a temporary increase in non-performers at year-end, we could not let timing get in the way of making right decisions. Following our loan-by-loan review of potential problem loans in the portfolio I am confident that we have identified and dealt with the loans with higher-than-normal risk. We expect our total charge-offs on the rest of the portfolio to come down under 50 basis points where they have been in the past.

I would also note we charged off about $3 million relating primarily to higher balance residential mortgages and home equity lines in the fourth quarter. This was also part of our initiative as we took a hard look at any potential problem situations that could be identified. We expect our charge-offs in the retail portfolios to average under 40 basis points in 2010.

This will also benefit from the run-off of our indirect auto portfolio, which will essentially be gone by the end of the year.

Our loan charge-off ratios are significantly below FDIC national and northeast region numbers for each of the last three years. They are, of course, higher than we anticipated but they reflect reality. And we anticipate that we may be well within a peer range for the duration of this hold cycle based on some projections for further shakeout in commercial real estate. So we believe we are getting ahead of the curve as a result of this initiative.

Now I would add this -- maintaining strong asset quality and strong credit discipline has been a priority for us. We have not operated subprime programs, and both our retail and commercial operations have followed conforming underwriting practices. This includes getting personal guarantees, which I think has been a significant contributor to the low delinquency numbers that we have had.

In going through this process there have been a few isolated cases where I wish we had a do-over. We made misjudgments on some of these, particularly as we expanded regionally and integrated new personnel. But these charges mostly reflect the impacts on cash flows and collateral in our markets where long-standing borrowers grew their businesses in a healthy way and then ran into a 100-year storm.

The best action we can take is the one we have taken -- to right-size and restructure and to keep our focus on building our franchise. Now naturally we are limiting any new exposures to the most troubled commercial sectors and we will continue to aggressively monitored the portfolio. We are prudently resolving the risks that are in front of us now and we expect that going forward our borrowers will see some stabilization in their operations.

If we are seeing hints of a move towards an economic recovery, now is the best time for the actions we have taken. But we all need to remain cognizant that high unemployment still exists and the state and municipal fiscal situation isn't good. Now this portfolio initiative is a necessary and important step to assure that our portfolio is now strengthened and the Company is in a better position to focus on growth in 2010 and beyond.

Now another of our most important accomplishments has been the leadership that we recruited. This includes the strong new commercial leadership we have brought in as regional executives in Springfield and New York and Vermont. These individuals sit on our executive loan committee and they give us much more bench strength and experience in managing the origination process.

Their contribution has also been incredibly important as we work through this initiative working along Mike Oleksak, our Senior Loan Executive, and Shep Rainie, our Risk Executive. Now speaking of Shep, he will be returning to Boston to be with his family and we will miss him. He has been a major contributor to this process and he has also agreed to stay for a while to help with the transition.

We have been fortunate to recruit Richard Marotta, who will take on the role of Chief Risk Officer, bringing his extensive experience in risk management as one of the top risk officers at KeyBank. Now Richard just joined us on Monday and he is here with us this morning along with Shep. Richard is an experienced hand at credit management and he also has extensive experience to support our expansion into asset-based lending.

Our leadership took another major step forward when we welcomed Bob Curley as a Director and our New York Chairman. Bob previously managed the $20 billion Citizens New York operation and he is highly regarded as a prominent leader in Northeastern and Eastern banking over his career.

Another significant announcement this quarter was the recruitment of Paul Flynn and his team to serve middle market companies in New England and northeastern New York. Paul and his colleagues, Mark Foster and Jim Hickson, collectively have 65 years experience in this business line. They have managed more than $1 billion in loans in their prior responsibilities at TD Bank, arguably the premier middle-market asset-based lending group in New England.

Now this initiative rounds out and diversifies our commercial loan offerings and lets us reach a broader market and achieve more cross-sale penetration. We expect the operation to be above breakeven by the fourth quarter and for it to add $0.10 to $0.15 per year to EPS by 2011 and to be a core part of this franchise.

We also recruited a private banking team to be located in our Springfield region and they also come from TD Bank. This represents an up-leveling of private banking in our organization and we will be looking to expand this model from Springfield into our other regions. This has been part of our long-term plan and we seize the opportunity to move forward with it at this time.

This will enhance our deposit acquisition, which complements our lending expansions and ABL, and it knits together the cross-sale opportunity we have with our banking products and our integrated service products in wealth management and insurance. We also recruited a very prominent wealth management professional from Bank of America who joined us in Springfield at the same time as our private banking team. We expect favorable synergies with these functions as we develop our franchise towards the east.

We have competed for and recruited strong new talent, as you can see. These leaders have been drawn to our strong positioning and our bright prospects and to the talent and culture that we have built here. This is also born out by the developments in our insurance business.

As we noted in our earnings release, we are reengineering this group to enhance our sales and service platform and to improve profitability. Here, too, we have seen challenging developments in our environment, including the entry of the Geicos and the Progressives into the Massachusetts personal lines market.

We recruited David Farrell earlier in the year to lead our integrated insurance and wealth management services. He has also worked intensely with our team to develop a highly customer centric and more efficient operation that will allow us to build our long-term insurance earnings despite the impact of the soft markets on our current operations.

Now as this market hardens this will provide strong fee income.

I would like to end this section with this. Our intent in this environment is to deal proactively with our portfolios, value our loans as realistically as possible, post the required charges for our value determinations, analyze each troubled situation in terms of lessons learned, and set the stage for a far more satisfactory performance in 2010.

To this latter point, this year marks the first time in my tenure as CEO that we will enter the year with all key positions filled. This coupled with our other new initiatives mentioned gives me great confidence that our prospects are bright.

I am going to ask Kevin to comment now on some of the highlights for the quarter and guidance on next quarter. Then I will return to complete our discussion with a look at guidance for next year and our capital and strategic position. Kevin?

Thanks, Mike, and good morning, everyone. As you have heard from Mike, a lot has happened in the fourth quarter so what I will try to do this morning is give you some color on how these actions affected the fourth-quarter results and give you some sense of how we see the first quarter shaking out.

Even though the overall results did not meet your expectations or ours, positive things were happening during the quarter in earnings performance of the Company. Core revenue exceeded our expectations for the fourth quarter and were up $300,000 over the third. Net interest income led the increase by increasing $800,000. Fee income was seasonally down for the quarter; however, non-interest income was strong.

At the end of the third quarter we forecasted our net interest margin to be around 3.05% for the fourth quarter, up from the third quarter of 2.96%. The fourth-quarter margin came in at 3.05% and it included all the interest accrual adjustments on loans charged-off or put on non-accrual. Absent of these interest adjustments, the margin would have been 3.10%.

For the quarter, average loans deposits grew on an annualized rate of 7% and 9%, respectively. With those new regional lending teams in place quarterly commercial loan growth continues to be solid. We believe this strong growth will continue as long-term relationships of our new team members move their business to us.

During the fourth quarter we restructured or pre-paid $75 million in borrowings which will benefit us on an interest cost basis by approximately $700,000 a quarter. With that said, we expect our margin to be in the low range of [320] for the first quarter.

Non-interest income came in above our expectation for the fourth quarter and for the $2.1 million charge we took in restructuring our borrowings. The fourth quarter is seasonally low for us. However, when we compare it to the prior year we were up 5%.

Looking at the first quarter we are projecting non-interest income to be around $8.1 million. Just a reminder, our first quarter is normally seasonally high due to timing of insurance contingency revenue which are received in the first and second quarter. We do expect our contingency revenue to be down for 2010 for the insurance industry dealing with tighter margins.

Just a side note, in our insurance business, as Mike has mentioned, we are dealing with this revenue softness by reorganizing and cutting our overall cost to operate and adding new products. Our other fee income businesses should experience increases year over year.

The provision for the fourth quarter of $39 million represents charges on loans and the growth in the allowance for loan losses from 1.22% of outstanding loans to 1.62%. For 2010 we expect the provision for loan losses to stay within 60 basis points of total loans. This will cover charge-offs as well as growth.

Going forward, one needs to remember that the allowance is made up of two components -- there is a general pool of reserves and there is specific reserves on loans with potential losses, however, not yet confirmed. These reserves amounted to approximately $6 million.

The majority of these specific reserves center mainly around three credits and the future charge-offs against these reserves may not be replaced through the provision that the general allowance is not affected. Naturally loan losses by quarters could be uneven throughout the year.

Non-interest expense for the quarter was $21.2 million. This included a number of one-time expenses associated with all the work done in the fourth quarter. These expense items added to about $2 million of additional costs for the quarter and are not indicative of our cost structure run rate.

During the quarter, in order to assure ourselves we had all the relative facts and moving the Company forward profitably, we hire third parties to analyze our loan portfolios, our markets, our investments, organizational structure, and our goodwill to ensure that we had all the relevant facts in moving this company forward profitably. So we incurred extra costs with regards to professional fees, severance, sign-on bonus, and others.

Before these one-time costs our total non-interest expense was $19.2 million for the quarter which was slightly higher than our previous guidance. Looking at the first quarter we expect our non-interest expense to be in the range of $20.4 million.

The increase for the fourth-quarter run rate includes seasonal resets of payroll taxes, increase in benefit expenses, mainly healthcare, and the additional cost of the new business lines, asset-based lending and private banking. These new lines will initially impact EPS. However, in the third quarter they will start to attribute to direct profit.

Due to our fourth-quarter loss our tax rate for the year was a benefit of 42%, which is consistent with our marginal rate. We had ample room based on our carrybacks and forward earnings to fully utilize this benefit. Looking forward to 2010 we anticipate our tax rate to be around 20%.

To summarize our outlook for the first quarter of 2010, we expect earnings of $0.23 in earnings per share. This assumes a flat rate environment. This will be down from the $0.27 we posted in the first quarter of 2009, primarily due to the start-up impact of our business initiatives and a lower net interest margin. However, we do expect our operating results to outpace 2009 quarterly levels starting in the second quarter.

I would like to conclude with a couple comments. Management takes these results for the fourth quarter very seriously. Be assured that management and the employees of Berkshire will work tirelessly to move this company forward to the levels of profitability our shareholders and we expect.

We have strong capital and a strong liquidity to support our growth plans. We have a clean investment portfolio and we are poised to profit from rising rates, which we see as inevitable.

With that I will turn the call back over to Mike.

Thanks, Kevin. As Kevin has noted, our first-quarter guidance of $0.23 includes the start-up costs of our initiatives, and we expect to see growing contributions from them in each quarter going forward.

As Kevin also indicated, year-over-year EPS growth is expected to pick up after the first quarter. At this time our EPS guidance for the full year ahead is in the range of $0.85 to $0.95. This estimate will be an improvement in the area of 20% to 35% over the 2009 operating run rate. And this includes the startup costs of ABL, private banking, two new de novo branches that we plan in New York later in the year, as well as the costs of maintaining our asset sensitivity.

Where we land in the range will depend in part on whether interest rates rise during the year, which is something we anticipate and are positioned for. This will provide a sustained boost in earnings in 2010 and beyond when it does happen. And of course, we expect our new business initiatives to provide a boost to earnings in 2011 and beyond.

We will be working as hard as we can to get EPS back over $2 where we were before this recession. Meanwhile, we are continuing our dividend which will be paid from the earnings that we generate. Our focus is on shareholders' return. Accordingly, in 2009 there were no bonuses paid to our executives. That is just the right thing to do.

Finally, let's look at the element that underpins our ability to take decisive action and the confidence it gives us for the future. Our capital; we have a strong capital footing as we move forward with our growth strategy. And after the fourth-quarter charge our ratio of tangible common equity to assets was a strong 8.3% at year-end.

The Bank's risk-based capital ratio is near 11%. Based on our guidance our projected return on tangible equity is in the range of 5% to a 6%, which will support a good part of the projected asset growth that we anticipate for the year. This strong capital base will allow us to continue to look for an accretive acquisitions or strategic partnerships.

Based on our strong capital and our proven management and ability to integrate acquired operations, we believe we are well-positioned to take advantage of any opportunity in and around our markets for an FDIC-assisted transaction. But I would add this, in the near-term we may be less focused on other types of bank acquisitions.

And our reason for this is simple. We feel our currency has significantly more value than the level at which it has been trading, so we would be cautious about using it at these levels unless there is an unusual situation.

Now let me conclude that the actions we have announced today make us a stronger institution. They were aggressive, but they are also prudent. And the fact that we have built such a strong capital base over time has enabled us to take decisive action while strengthening our franchise for the future.

We continue to assess an environment that remains uncertain, but we are committed to building in 2010 and beyond a strong earnings-driven company providing attractive long-term returns for our shareholders. Our Chairman, Larry Bossidy, commented in our earnings release that he was very optimistic about the growth prospects and earnings potential of this enterprise. And I can assure you that our entire Board of Directors and all of us who run this company feel the exact same way.

Now this does conclude my prepared remarks. We will now turn it over to the operator who will ask for any questions.

(Operator Instructions) Mark Fitzgibbon, Sandler O'Neill.

Good morning, guys. First question I had for you, if you sort of look at your markets what inning would you say we are in the credit cycle in those markets? Also, could you give us a sense for within the geographies that you operate where you are seeing the most issues on the credit front?

Sure. First of all, I would say that Massachusetts and New York probably differ a little. Massachusetts, I would say, is somewhere in the sixth or seventh inning and I think time will tell on that. But that would be my guess.

New York I would suggest is probably much later on in the game and we are seeing many more signs of a potential rebounding in the Albany area anyways where we do business. And that has more to do with, I think, some of the technology things that are occurring over there than it does the overall economy.

With respect to where we found our credit issues when we did this process, I would say they are pretty evenly distributed across the region. There were two or three loans in each region. We looked at the largest potential issues and we resolve them. So there was no concentration in any one of our three or four areas.

Okay. And you made a statement in your opening remarks that you expect NPAs will be cut in half in the first few quarters of '10 which seems like a bold statement. What gives you the comfort to be able to feel like you have recognized and dealt with all of the loan issues in your portfolio?

One of the things I can tell you, Mark, is that this wasn't a process that we turned over to a few workout guys. This is a process that I was deeply involved with, Kevin was deeply involved with, Mike Oleksak, Shep. We went through every one of these loans ourselves night after night after night.

This was a loan-by-loan review by this team. So I can say with a little more confidence perhaps than I could if I was hearing it third-party that the non-accruals that we have we have put resolutions in place for. And, frankly, the reason that I am confident we can cut those in half quickly is that some of those are on non-accrual because we did have resolution in the fourth quarter and we couldn't get it done in time. So it's on non-accrual until we complete the transaction.

Okay. And then the last question I had is you had talked about some initiatives within the insurance agency business and I recognize there is pricing pressure there, but what kinds of things are you doing in terms of restructuring those agencies? Are you consolidating them? Are you changing the platform? What is sort of going on there?

I am going to give you a couple of comments and Dave Ferrell is here so, Dave, if you would like to add to this please do.

One of the things that Dave was able to get done over the past few months was a very intense Lean Sigma project that took into consideration, not only technology, but people and service. He really was able to mobilize and put most of our operations under one roof, have a customer-centric center, and use technology to streamline the process.

It's some of the big guys that are doing insurance right now that is how they are able to operate. And it was really one of those things we had to do in order to compete effectively. Dave, could you add to that?

That was a pretty complete description of it, Michael. I would say in the cycle of improving a platform for growth we are really completing the integration stage of these acquisitions that were made a couple of years go onward to leveraging the platform with the bank units both commercial and retail. It gives us an easy platform to assimilate deals in the future as well.

But Mike hit it hard. It's really about improving service, inculcating the sales culture, and doing it very efficiently.

Okay, thank you.

(Operator Instructions) Damon DelMonte, KBW.

Good morning, guys. Can we talk a little bit about the asset-based lending group? I think you had mentioned you expect to break even with this group in 2010. Is that correct?

Yes, and I am always the optimistic one. I would like to see us be making money by the end of the year with these guys.

What kind of actual dollars in loan growth are you expecting there?

$100 million, I think, over the course of the year, Mike? Yes.

Great. And then could you just tell us what your total TDRs were for the quarter?

Sure, and that is an interesting question. I think it's about $17 million, Shep, in TDRs?

$17 million performing, $13 million non-performing.

Now the $17 million performing will be gone, correct?

All but six of them will be gone.

So we will have --

Eleven will go this first quarter.

Okay, that will go at the end of this first quarter. One of the reasons for that is when you do a TDR, again, accounting convention would lead to this place, Damon. You have to go through a fiscal year before you can take it out of TDR, so we expect that number to come down significantly as well.

Great. How many loans did you say were the -- made up the $17 million non-performing?

About 10.

10 loans, okay. Great. And then have you guys quantified any potential impact of the NSF legislation that is being passed in July?

Sean?

Absolutely. We have got a team, an integration team, and what we are doing is focusing on product bundling. One of the good success stories of the year was 19% in demand deposit growth. So part of our relationship model is focusing on enhancements to those product bundles that will offset some of the NFS fee impact that potentially could happen.

Okay, great. And then lastly, Mike, the tone coming out of last quarter's call was that you may have some lumpy quarters of provisioning here or there when you saw a -- in construction loan, for example, that was going bad. Like you did last quarter, you were aggressive to charge-off a portion of it and try to sell it and get it off your books.

I think that from -- that approach from last quarter to what we saw this quarter was a pretty drastic move. Did things just totally deteriorate in the Berkshire County marketplace or --? I have had a couple of calls from people today and I think people are scratching their heads kind of wondering how things went from some lumpiness to such an aggressive action in less than a quarter.

There were -- I had said actually at the end of the third quarter, if you remember, Damon, and I repeated this a couple of times over the past several months, that we weren't really looking to move forward with uncertainty and that we were going to take a very deep dive in the fourth quarter to determine what we had, what we thought the potential losses were, and what we could do about it.

So this wasn't an action or a reaction. I would say it was more of a proactive approach. We are in a position at this point where we think that we will look back on this and say this was one of the smart moves in this industry. And that we can go forward with a better understanding and a better consistency with earnings having done this.

Okay. So you feel comfortable after this exercise that you are not going to see any other surprises around the corner?

Yes, I do.

Okay. Thank you very much.

Thank you. This concludes today's question-and-answer session. I would like to turn the call back over to Mr. Daly for any closing remarks.

Thank you, operator. I want to thank everyone for listening on the call today and for your questions. We certainly look forward to having you back next quarter.

Oh, we got one more question? We can take it, if the operator is still on.

[John Corsia], Sandler O'Neill

It's actually John Stewart calling. Just a quick balance, couple quick balance questions. Steve, do you have the potential problem loan balance? I think it was $122 million at the end of the third quarter.

Yes, that was cut to $60 million in this process.

Okay. And how about the 90-days past due still accruing?

We will get that for you. I don't think we have any. Minimal, if any.

And then, Mike, I know you mentioned that some of the $20 million estimated outflow in NPLs has already happened. Can you just give a little more color around that? How are these credits being resolved? Were these credits that were split A and B that they are moving out? Just give us a little more color there.

Sure. I know that one of them we are waiting for the conclusion to the sale of a note. And because we took the charge on that to the degree that the note would be sold, we had to put the balance on non-accrual.

We have got, I think, one or more bifurcated loans that we are waiting for a refinancing on. That will take those out. So there are probably five or six loans where the timing is already -- it's in front of us and we know what we are going to be doing with them.

So how much of the $39 million that is in NPA, or excuse me, NPL now are A notes, the bifurcated credits?

Shep, do you want to get these?

There is 35 in NPLs right now.

35.

Not 39.

Right.

And the question is how many total of those are coming out?

No, no, no. How many of those are bifurcated, the A note, B note?

There wouldn't be a lot of the A or B notes there.

Yes, I would say there is about $2 million of B notes that are sitting in the -- that are in the non-accrual bucket that will be coming out over the next 12 months.

So refinancing, the sale of notes --

Or finalizing an A, B note --

Or finalizing an A, B note would be the major components for the reduction in the non-performers.

And when you do that does the A note piece come out right away or does it have to stay in NPL for six months? How does that work?

If it's done properly, meaning that you have sufficient cash flows and you have sufficient collateral -- and remember these collateral values they have to be new appraisals, we know what the swings are there, and they have to be 80% or 85% of that new appraised value. So if you are able to put a bifurcated loan together under those conditions, John, you can upgrade it immediately.

Could I add one thing to that, Mike?

Please.

You have to -- if you have not been getting paid, it stays on non-accrual. Virtually every one of ours we had been getting paid in due course and many of these loans were current. So the A note could automatically go back on performing status once it has been structured that way, because we are already receiving payments in at least that amount.

That is an excellent point.

It was current on the original terms, not having to be current on the new terms.

That is correct.

Correct.

And then how many -- what would be the balance of A notes that are performing?

We will get that right now.

Just looking quickly at our TDR list, it's about $20 million.

So they are all on TDR, that is what the balance is?

Not all of those notes. Some of them came out.

Right. But some of those or more of those will come out in the first quarter because you need to run through the fiscal year in order to take them down.

Okay. And then I guess finally, Mike, just going back to some of the detail you gave us on the condo construction book last quarter, I think there are about $17 million that were not in non-accrual. I know $8 million of that was substandard. Can you give us an update on where we stand on the construction book now?

I know that Rich or Shep or Mike can.

On the construction book right now we have got total -- what we would put in the single-family construction or the condo construction of about $60 million. Of that we have about $5.5 million which is substandard and about $12 million which is non-performing.

The total of that $60 million that is condo focused is $19 million.

And what is the substandard balance there?

$5.5 million. And those would have been the loans that we went through in our process to determine potential loss.

Okay. All right, thank you, guys.

Sir, at this time we have no further questions in the queue.

Okay. So I will repeat myself, thank everyone for listening, thank them for their questions, and look forward to getting back with some real performance next quarter.

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