Fulton Financial Corp (FULT) 2008 Q2 法說會逐字稿

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  • Operator

  • Good day, everyone, and welcome to the Fulton Financial Second Quarter 2008 Earnings Results Conference Call. (OPERATOR INSTRUCTIONS.) To get us started today, I'm pleased to turn the floor over to Vice President, Corporate Communications Manager, Ms. Laura Wakeley. Please go ahead.

  • Laura Wakeley - VP Corporate Communications Manager

  • Thank you. Good morning and thank you for joining us for Fulton Financial Corporation's conference call and webcast to discuss our earnings for the second quarter of 2008. Your host for today's conference call is Scott Smith, Chairman, CEO, and President of Fulton Financial Corporation. Joining him is Charlie Nugent, Senior Executive Vice President and Chief Financial Officer.

  • Our comments today will refer to the financial information included with our earnings announcement, which we released at 4:30 yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Information and then on News.

  • Please remember that during this webcast, representatives of Fulton Financial Corporation may make certain forward-looking statements regarding future results or future financial performance of Fulton Financial Corporation. Such forward-looking information is based upon certain underlying assumptions, risks and uncertainties. Because of the possibility of change in the underlying assumptions, actual results could differ materially from these forward-looking statements.

  • Risks and uncertainties that may affect future results include pricing pressures on loans and deposits; action of bank and non-bank competitors; changes or adverse changes in economic, political, or regulatory conditions; a continuation or worsening of the current disruption in credit and other markets, including the lack of or reduced access to and the abnormal functioning of markets for mortgage and other asset-backed securities and for commercial paper and other short-term corporate borrowings; the impact on assets from adverse changes in the economy and in credit and other markets and resulting effects on credit risk and asset value; actions of the Federal Reserve Board; creditworthiness of current borrowers, the Corporation's success in merger and acquisition integration; and customers' acceptance of the Corporation's products and services.

  • Fulton Financial does not undertake any obligation to update any forward-looking statements to reflect circumstances or events that occur after the date on which such statements were made. Now I would like to turn the call over to your host, Scott Smith.

  • Scott Smith - Chairman, CEO, President

  • Thank you, Laura, and good morning, everyone, and thanks for joining us here today. After I provide a brief overview for the quarter, Charlie Nugent will discuss our financial results in more detail. Despite good results from core banking operations that I will discuss in a moment, overall second quarter earnings were negatively impacted by three significant events, one that had a positive effect on earnings and two that did not. In addition, credit quality continues to be a challenge and will likely remain so until we see stabilization in the real estate market as well as in the general economic activity.

  • Recent interpretations of guidelines for other than temporarily impaired assets were received late last week. Management believes that prudent implementation of these guidelines requires a $25 million non-cash write-down of other than temporarily impaired bank stock holdings. The other two events were reported separately in filed 8-Ks earlier in the quarter in the sale of our credit card portfolio, along with the potential transfer of illiquid auction rate certificates into the investment portfolio we're virtually offsetting.

  • As a result, we reported diluted net earnings per share of $0.15 for the quarter. It's important to point out, however, that if we exclude the noise of the events I have referenced, we would have reported earnings per share of $0.24 due to the strength of our core banking operations. We are hopeful that we can recoup all or part of the bank stock portfolio write-down when financial--when the financial sector shows the same upward price momentum.

  • In a related news release, our strong capital position enabled the Board to maintain our quarterly cash dividend of $0.15 payable in October. We are pleased with the positive trends we saw in a number of core banking activities - net interest income, net interest margin, non-interest income, and non-interest expense. During difficult times, it's even more critical that we execute the banking fundamentals well, and I believe we are doing that. I'd like to comment briefly on these core areas.

  • Total loans grew for the quarter contributing to growth in our net interest income. During our first quarter call, I said that our loan pipeline was holding steady, but it was not robust. That remains the case. The bright spot in this quarter was the growth in our consumer loan portfolio as a result of continued strong customer response to our OptionLine home equity line product. Home equity loans grew 9% year-over-year and in an environment where we are seeing continued pressure on loan quality metrics, consumer credit is holding up well.

  • Our net interest margin expanded from the first to second quarter. Last year at this time, we thought that interest margins could continue to decrease throughout 2008. But through a combination of steady loan growth in conjunction with reasonable deposit pricing, we saw our margin expand this quarter. I do not want to imply that we see further margin expansion in 2008, particularly in light of recent competitive deposit pricing.

  • Funding remains a continued challenge. We did see a slight shift in the mix toward core accounts from the first to second quarter. In an effort to sustain this trend, we have and will continue to allocate significant sales and marketing resources, increasing our customer funding levels, while at the same time striving to build deeper and more profitable customer relationships.

  • With the fierce competition for deposits that I mentioned, we are carefully managing the balance between our ongoing need for funding and our desire to maintain a relatively strong net interest margin. Organic growth has been and continues to be a top priority for us. We're pleased to see some key revenue and cost cutting initiatives started back in 2006 and 2007 reducing meaningful results in 2008. Non-interest income growth was strong with solid contributions coming from deposit account related revenue, credit card merchant activity, and interchange fees. These trends should continue for the remainder of the year.

  • Expenses were well controlled and we continue to see positive financial results from our workforce management initiatives in addition to our departmental standard--centralization and product standardization work.

  • With regard to asset quality and credit costs, we experienced significant increases in [in the late] quarter of non-performing loans and charge-offs and in the provisions. We continue to work closely with our customers who are facing the challenges of a very difficult economic climate. We're keeping a watchful eye on all our loan portfolios and monitoring changes very carefully and taking remedial steps as soon as we see a problem developing. At the same time, we are monitoring our reserve levels to allow for potential losses.

  • We continue to underwrite new loans in our traditional conservative credit standards. Until this economic environment improves, some of our customers, particularly real estate related businesses, will continue to struggle, some more than others depending on their individual situation. And our asset quality will continue to reflect that stress. Until we get meaningful economic upturns, we would not expect our loan metrics to improve. As we speak, we have no evidence that the economic conditions in our markets are improving, though time will tell what's in store going forward. Regardless of the timeframe required for an upswing in this economic activity, we will remain focused on the execution of our key strategies as we strive to position our company strongly for the future.

  • At this time, Charlie will provide details on our financial performance for the quarter, and then we will both be pleased to respond to your questions. Charlie?

  • Charlie Nugent - SVP, CFO

  • Okay. Thank you, Scott, and good morning, everyone. Unless otherwise noted, comparisons are of this quarter's results to the first quarter. As Scott mentioned, we reported earnings per share of $0.15 for the second quarter, which was $0.09 or 38% lower than the first quarter, and $0.08 or 35% below the second quarter of last year.

  • During the second quarter, we reported a $27.7 million non-cash charge related to our bank stockholdings that were determined to be other than temporarily impaired. On a net of tax basis this write-down was $16 million, or $0.09 per share. Excluding the impact of the charge, our earnings per share were $0.24.

  • This write-off reflects the continued weakness of the banking sector and stricter interpretations of existing accounting guidance recently provided by our independent accountants. This area is highly judgmental. In the past, there has been limited objective guidance on how impairment should be assessed and the adjusted cost basis of the bank stock portfolio is now $62 million with a market value as of June 30 of $53 million.

  • Two other notable non-reoccurring transactions occurred during the second quarter. First, in April, we sold our $87 million credit card portfolio resulting in a pre-tax gain of $13.9 million. In connection with the sale, we also entered into a joint marketing agreement with the purchaser under which we will earn a percentage of revenues generated in the future. The net result was a reduction in our consumer credit risk while preserving our future revenue stream.

  • The second transaction was offering--our offering of support to our customers who held illiquid auction rate certificates, or ARCs, in their trust accounts, and they were with our trust subsidiary, Fulton Financial Advisors. By agreeing to purchase these securities from their accounts we were required to record the estimated fair value of this guarantee, which resulted in a pre-tax charge to earnings of $13.2 million. Now through the end of the second quarter, we had purchased ARCs with par value of 132.5 million from customers at a total cost of $130.7 million. These ARCs are included in our investment portfolio at their estimated fair value of $125 million. ARCs with a par value of $200 million are still held in customer accounts and could be purchased in the future.

  • Net interest income increased $6 million, or 4.8%. Total average earnings assets were essentially unchanged. But the mix changed as average loans grew 128 million, or 1.1%, and investment securities declined 125 million, or 4%. Our net interest margin for the second quarter was 3.75%, a 17-basis-point improvement from the first quarter. Our yields on earning assets decreased 38 basis points while the cost of interest bearing liabilities decreased [63] basis points. Going forward, we expect that strong deposit competition will put pressure on our net interest margin.

  • Our loan growth occurred in commercial mortgages, which grew $150 million, or 4.2%, with 73 million in Pennsylvania, 38 million in Virginia, and 33 million in New Jersey. We have been able to generate the additional volume while maintaining our underwriting standards. Real estate construction loans decreased $38 million with declines of $15 million Virginia, $11 million in Pennsylvania, and $7 million in Maryland. Average commercial loans increased $38 million to 1.1% with the growth primarily in Pennsylvania of $15 million, and Maryland, $13 million. Commercial line of credit usage was approximately 41% at June 30 and March 31, as compared to 37% at the end of last June.

  • Consumer loans declined $97 million, or 20%, mainly as a result of selling our credit card portfolio, which accounted for 70 million of the average balance decrease. Direct and indirect consumer loans also declined $33 million. Home equity loans increased $42 million, or 2.7%, as a result of our OptionLine product. This product is primarily generated through our branch network and is generally limited to a 85% loan-to-value ratio.

  • Residential mortgages increased $34 million, or 4%, with 21 million of that increase in Pennsylvania and 10 million in Virginia. And this growth was realized in both traditional adjustable rate and fixed rate mortgages.

  • Investment securities decreased 125 million as interest rates continued to decline into the second quarter of 2008. We repositioned our investment portfolio through the sale of certain securities. We reinvested some of these proceeds and applied the remainder to fund our loan growth.

  • During the second quarter, we purchased $93 million of securities at an average yield of 5.25% and sold 383 million at an average yield of 5.09%. The net result of the second quarter activity was a decrease in the average investments outstanding, an improved interest rate sensitivity position, and a higher overall portfolio yield.

  • At June 30, the net unrealized loss on our debt securities was $25 million, compared to a net unrealized gain of 22 million at March 31. Approximately 31 million of this $47 million change was in mortgage backed securities and collateralized mortgage obligation market values. And this resulted from treasury rates increasing and this was partially offset by tightening the mortgage spreads.

  • Additional decreases in values were seen in the municipal bond portfolio, which declined $6.1 million and in trust preferred and subordinated debt values, which decreased $8.7 million due to a decline in the market for bank issued debt. As you know, Freddie Mac and Fannie Mae have been in the news recently and like others we are following the situation very closely. As of June 30, all of the 1.6 billion in our combined mortgage-backed securities and CMO portfolios, they are all Fannie Mae and Freddie Mac guaranteed issued--issues. In addition, we hold $19 million in callable bonds issued by the agencies and these available for sale securities are carried at fair value with unrealized losses or gains, recognized as a component of shareholders' equity.

  • The corporation realized net losses on security transactions of $21.6 million, compared to net gains of 1.2 million in the first quarter. The previously discussed $24.7 million charge was offset to some degree by net gains on the sale of debt and equity securities. In the first quarter, we realized 4.8 million in gains primarily on the sale of Visa and MasterCard stock, and these gains were offset by a $3.6 million other than temporary impairment charge on bank stockholdings.

  • Federal deposits were down $20 million, or .002%. However, recent initiatives to generate core deposits began to show results as total demand and savings deposits increased $138 million, or 2.5%. Savings deposits increased $70 million, or 3.3%. Non-interest-bearing demand deposits grew 46 million, or 2.8%. And NOW accounts increased $22 million, or 1.3%. These improvements have occurred in both personal and business accounts.

  • Of the $159 million decline in time deposits, 143 million was in brokered CDs and 40 million was in the jumbo certificate category. These decreases were partially offset by growth in retail time deposits. Total average borrowings increased $40 million, or 1%, with short-term borrowings decreasing 33 million and long-term debt increasing $73 million. The provision for loan losses increased 5.5 million to 16.7 million in the second quarter. Net charge-offs to average loans were 33 basis points in the second quarter, compared to 15 basis points in the first quarter.

  • The $9.6 million net charge-offs this quarter were primarily in commercial loans at $4.7 million and residential mortgages, $1.7 million, and occurred throughout our footprint. There were three charge-offs exceeding $1 million, two related to healthcare equipment that totaled 2.8 million, and one related to a builder that totaled 1.2 million. Non-performing assets to total assets increased to 102 basis points at June 30, compared to 90 basis points at March 31 and 49 basis points last June.

  • Non-performing loans increased $18 million and other real estate increased $1.8 million. At June 30, non-performing loans were spread across most categories with 40 million in commercial, 39 million in commercial mortgages, 37 million in construction, and $25 million in residential mortgages.

  • Excluding security losses or gains and a gain on the sale of our credit card portfolio, our other income increased $3.5 million, or 9.5%. Overdraft fees increased $950,000, or 12%, as these fees are at their seasonal lowest in the first quarter. Cash management fees grew 95,000, or 3%, and other deposit service charges were up 305,000, or 10%. Other service charges and fees increased 540,000, or 6%. Debit card fees grew 290,000, or 13%, as a result of higher transaction volumes. Foreign currency revenues increased 180,000, or 11%, also due to higher transaction volumes. Our foreign currency business consists of exchanging currency for our customers. We do not engage in any transactions for our own account. Gains on mortgage loan sales increased 359,000, or 16%. Residential mortgage loans sold were approximately [163 million] in both the second and first quarters.

  • (Inaudible) income decreased 370,000, or 4%, and this decline was primarily due to a 15% decrease in brokerage fees. The other category increased 1.6 million, largely as the result of $1.1 million of income earned under the joint marketing agreement with the purchaser of our credit card portfolio. Operating expenses increased 13.1 million, or 14%, mainly due to the $13.2 million charge related to the ARC situation. And this charge is reflected in the operating risk loss line item.

  • Salaries and benefits decreased 914,000, or 2%. Employment taxes were down 650,000 representing the decrease that seasonally occurs between the first and second quarters. Base salaries were up slightly and benefits were essentially unchanged. Occupancy and equipment expense showed a decrease of 336,000, or 2%, as a result of seasonally--seasonal decreases in utility expenses.

  • Advertising expenditures increased 614,000, or 21%, due to promotional efforts to increase core deposits and marketing costs associated with the opening of new branches. Our other operating expenses increased 758,000, or 4%, and are partially due to increased expenses related to other real estate owned. Our effective tax rate increased from 26% in the first quarter to 32% in the second quarter. In the second quarter we reported a $1.8 million increase for the tax provision to properly reflect the deferred tax assets associated with certain tax credits.

  • In the first quarter we reversed $2 million of tax reserves related to the calculation of disallowed interest on tax-free securities, and this reversal is based on a favorable outcome in a tax [board case].

  • Thank you for your attention and for your continued interest in Fulton Financial Corporation. And now, we would be glad to answer your questions.

  • Operator

  • Thank you, gentlemen. (OPERATOR INSTRUCTIONS.) And we'll take our first question from Rick Weiss at Janney.

  • Rick Weiss - Analyst

  • Hello?

  • Charlie Nugent - SVP, CFO

  • Hello, Rick.

  • Rick Weiss - Analyst

  • Hi. I was wondering if you could talk a little bit more about--I guess in terms of the charge-off levels that have ramped up, is this something kind of you would expect to see over the second half of 2008?

  • Scott Smith - Chairman, CEO, President

  • Rick, Scott here. It's very difficult to project, as I mentioned in my comments. And what I keep hearing from our folks is that this is a very individualized situation. In the real estate area, it's development by development. Some are selling, some are not. So it's awfully difficult for us to say, well, this is a good indicator of the next two quarters. What I will say is I'm not hearing anything anecdotally and I don't have any data from our folks or from published data that would indicate we're at the bottom and that this is over and we're turning upward and so forth. I also don't have any anecdotal information that says things are going to get a lot worse. So that's as candid as I can be about it.

  • Rick Weiss - Analyst

  • Let me--.

  • Scott Smith - Chairman, CEO, President

  • --It's very difficult to call. We're--a lot of things happening in Washington, a lot of things happening on Wall Street, and there's just a lot of things could impact us one way or the other. And our crystal ball is not any clearer than yours, quite frankly.

  • Rick Weiss - Analyst

  • Yes. I guess Yogi Berra had said predictions are always hard, especially about the future.

  • Scott Smith - Chairman, CEO, President

  • Yes, right.

  • Rick Weiss - Analyst

  • Let me ask you this though. Are most of the problem assets coming from Virginia and Maryland versus Pennsylvania, or is it kind of (inaudible) everywhere?

  • Scott Smith - Chairman, CEO, President

  • It's--and as Charlie mentioned, some of those healthcare related charge-offs in the first quarter were Pennsylvania and New Jersey. So the real estate market certainly is tighter in the Baltimore-Washington-Northern Virginia market than it is some other places. But at this point, they're holding up.

  • Rick Weiss - Analyst

  • Okay. Let me switch over to the OTTI charge. And let me--I guess first, were only a portion of your bank stock portfolio written down? And how many bank stocks do you have in that portfolio?

  • Charlie Nugent - SVP, CFO

  • Rick, there's--we wrote down 25 million and we have about 65 issues that would total between a position of 500,000. And I think our biggest is [2 million].

  • Rick Weiss - Analyst

  • Okay.

  • Charlie Nugent - SVP, CFO

  • We wrote down quite a bit. Now, the unrealized loss at June 30, we had costs of 62 million after we wrote this down. And the market value was 53 million, so there's a $9 million unrealized loss in there. And we looked this morning, and the unrealized loss now would be 5.7 million.

  • Rick Weiss - Analyst

  • Okay.

  • Charlie Nugent - SVP, CFO

  • Had a little bit of a rally there the last couple of days.

  • Rick Weiss - Analyst

  • Yes, yes. That's for sure. And also, do you hold any trust preferred securities or trust preferred pools that may be subject to the OTTI? Because we've just seen this happening with other banks.

  • Charlie Nugent - SVP, CFO

  • Yes. (Inaudible) we have 96 million in trust preferreds. These are straight issues from banks. They're all highly rated. The ones we have, we have Wells Fargo, Bank of America, JP Morgan Chase. And the rules right now--sometimes the rules change we found out, but the rules right now, if you have the intent to hold and the ability to hold these and there is no deterioration in the underlying credit, you would not have to write them down. And the only change we had this quarter was I think Bank of America was--moved down from AA2 to a AA3. That's the trust (inaudible). We also have pools-- [trump] pools of $35 million and a very high percentage of those are rated AAA to A3. And then, we do analysis on those and we don't--right now, they're not other than temporarily impaired.

  • Rick Weiss - Analyst

  • Okay.

  • Charlie Nugent - SVP, CFO

  • (Inaudible) a cash flow analysis to compare what you think the cash flow is going to be now to when you bought them. And we're not seeing anything there right now.

  • Rick Weiss - Analyst

  • All right. So you're not seeing any sort of potential hit that could impair capital or dividend or anything (inaudible)?

  • Charlie Nugent - SVP, CFO

  • Not right now. But as you know, the--all of these things aren't available for sale. All of these bonds aren't available for sale and they're already reflected in our book value and they're already reflected in our capital ratios, except for the regulatory capital ratio. The regulatory capital ratio changes in debt are not in there, but changes in our bank stock portfolio are.

  • Rick Weiss - Analyst

  • Okay. All right, good. Hey, thank you very much.

  • Scott Smith - Chairman, CEO, President

  • Thank you, Rick.

  • Operator

  • Next we'll hear from Collyn Gilbert with Stifel Nicolaus.

  • Collyn Gilbert - Analyst

  • Good morning, guys.

  • Scott Smith - Chairman, CEO, President

  • HI, Collyn.

  • Collyn Gilbert - Analyst

  • Just a question on the ARC portfolio. And Charlie, you had mentioned that there's 200 million that are still held at customer accounts that could be repurchased. Under what scenario would you be forced to repurchase those and is there any way we could sort of--or try to assess what a potential market could be on those?

  • Charlie Nugent - SVP, CFO

  • Basically, the agreement with our customers is--and this was in an account which was in their minds these were funds to be somewhat liquid. And so, what we have done is come to this agreement with customers that if they have a legitimate need for liquidity that we would provide that liquidity since the market failed and wasn't able to provide that. So we have to--that's based on our customers' need for it. And some have immediate needs and others, as you've seen. Even though it was a liquid account they'd didn't--they don't have specific needs for it that are immediate. But we'll manage that with customers as we go forward.

  • Collyn Gilbert - Analyst

  • Okay. So it's kind of hard to assess I guess at this point.

  • Charlie Nugent - SVP, CFO

  • Yes, Collyn, the--what we booked, the liability, is based on buying or guaranteeing we would buy back the whole 330 million. So we came up--it (inaudible) are illiquid, so we had trouble coming up with a market value. We talked to people and we also had a valuation expert evaluate what the ARCs are worth. And what we booked was based on the whole 330 million.

  • Collyn Gilbert - Analyst

  • Okay.

  • Charlie Nugent - SVP, CFO

  • And then, going forward I would think this would be subject to the other than temporary impairment rules again. And when we buy them back we wouldn't have to take any further adjustments unless there's a change in the credit. And all of these are backed by guaranteed (inaudible).

  • Collyn Gilbert - Analyst

  • Okay, great. That was it. Thanks.

  • Scott Smith - Chairman, CEO, President

  • Thanks, Collyn.

  • Operator

  • Our next question will come from Frank Schiraldi at Sandler O'Neill.

  • Frank Schiraldi - Analyst

  • Good morning, guys.

  • Scott Smith - Chairman, CEO, President

  • Good morning, Frank.

  • Frank Schiraldi - Analyst

  • Just a couple quick questions. First, on the trumps Charlie, are those--those are just banks in there?

  • Charlie Nugent - SVP, CFO

  • Primarily banks, but there's I think one or two, Frank, and I'll get back to you, that have insurance companies.

  • Frank Schiraldi - Analyst

  • Insurance. Oh, okay.

  • Charlie Nugent - SVP, CFO

  • It's nearly all banks, but it's--there are a couple of insurance companies.

  • Frank Schiraldi - Analyst

  • And then, when you're talking about the individual issue trust preferred, you were saying basically that--and correct me if I'm wrong--I just want to make sure I heard it right--that the fair value of these things has been marked down--they've been marked down to fair value through equity, but there's just no other than temporary impairment.

  • Charlie Nugent - SVP, CFO

  • Right. That's exactly right.

  • Frank Schiraldi - Analyst

  • Okay.

  • Charlie Nugent - SVP, CFO

  • And it goes through our regular--the accounting equity ratios. This one goes through our regulatory ratios (inaudible).

  • Frank Schiraldi - Analyst

  • Okay. And you mentioned guidance coming from your accountants. Is that something that came very recently?

  • Charlie Nugent - SVP, CFO

  • Very recently.

  • Frank Schiraldi - Analyst

  • Okay.

  • Charlie Nugent - SVP, CFO

  • There's nothing new other than temporary impairment rules. They've been around I think 20 years. And they've been very subjective. And I think the SEC tried to make them more specific in 2003 and 2004. And they proposed--they were thinking about some specific guidelines in terms of how far they'd be down and how long. And they revoked that, so it stayed subjective. And then, recently our independent accountants have come out with more specific guidelines and we use those.

  • Frank Schiraldi - Analyst

  • Okay. And then, I was just wondering if you could remind us just in terms of non-performing--total non-performing assets, including the 90-days-plus past due, how much of that is resource repurchases and what those have been--and what those have been written down to.

  • Charlie Nugent - SVP, CFO

  • Yes. The--in terms of repurchase requests, the repurchase requests outstanding are about the same. They are $22 million.

  • Frank Schiraldi - Analyst

  • Okay.

  • Charlie Nugent - SVP, CFO

  • And I think we had two or three come in. They totaled $1 million. And then, there were three that were transferred that we actually took possession of and they are non-performing loans now. And we sold some properties and we had a loss of 200,000 on the sale of those properties. And then, during the quarter we also wrote down $800,000 in the values of properties based on recent appraisals or based on what we thought the sale price of the house would be.

  • Frank Schiraldi - Analyst

  • Okay. So--and those are all in--anything you brought back you brought back into non-performing assets?

  • Charlie Nugent - SVP, CFO

  • Some--yes, everything we brought back, if it wasn't--if it was 90 days past due and went into non-performing, then it's in the process of being foreclosed on.

  • Frank Schiraldi - Analyst

  • Okay. And then, on the charge-offs you mentioned there was one builder that was in the charge-offs. Can you tell us where that was--where that builder was located?

  • Charlie Nugent - SVP, CFO

  • I think it was in Maryland.

  • Frank Schiraldi - Analyst

  • Okay.

  • Charlie Nugent - SVP, CFO

  • He was based in Maryland, but he might have done some building outside of Maryland.

  • Frank Schiraldi - Analyst

  • Okay. And finally, I was wondering if you could give us a little more color on the home equity program that you're running that's bringing in some pretty good business. Is that--those are current customers and across the footprint?

  • Scott Smith - Chairman, CEO, President

  • Yes. This is Scott. Back in the fall I think it was we introduced this home equity product where the customer can--it's a line. And if they choose to do so, they can fix a portion of that line--the interest rate on it. And that's been particularly appealing to folks. And these are all underwritten by our people in our markets and it's basically our customers and--as one of us mentioned, we're using fairly conservative underwriting standards to do that. So we're feeling very comfortable about that portfolio and the growth we're getting out of it, because it's a product that not every competitor has and we feel like it's making some nice inroads in getting us some nice relationships.

  • Frank Schiraldi - Analyst

  • Okay. And actually, one last question. Just trying for modeling purposes--as far as the sale of the credit card portfolio I'm wondering exactly when it was done. And I'm wondering that just so I can sort of figure out for the coming quarters what sort of fees there will be.

  • Scott Smith - Chairman, CEO, President

  • We mentioned in our results that this quarter so far has been 1.1 million in fees.

  • Frank Schiraldi - Analyst

  • Right.

  • Scott Smith - Chairman, CEO, President

  • And it was sold on April--oh, I think it was sold on April 14 or April 15. So you almost have a [clean] quarter in there.

  • Frank Schiraldi - Analyst

  • Okay, great. Thank you.

  • Charlie Nugent - SVP, CFO

  • You're welcome.

  • Scott Smith - Chairman, CEO, President

  • Yes, thank you, Frank.

  • Operator

  • (OPERATOR INSTRUCTIONS.) We'll hear from Andy Stapp at B. Riley and Company.

  • Andy Stapp - Analyst

  • Good morning.

  • Scott Smith - Chairman, CEO, President

  • Good morning, Andy.

  • Andy Stapp - Analyst

  • The medical equipment--the two loans related to medical equipment that went bad, can you give me some more color that you would think the medical industry would be more immune to the recessionary environment?

  • Scott Smith - Chairman, CEO, President

  • These--this equipment was equipment that's used for testing. And the reimbursement--I guess it's from Medicare--changed significantly earlier in the year. And as a result of that, it changed the cash flow on a lot of these--of these in particular. And so, they had some difficulties paying. Now, we have charged them off, but we're not done with it yet.

  • Andy Stapp - Analyst

  • Okay.

  • Scott Smith - Chairman, CEO, President

  • It was kind of a unique situation where they kind of got the rug pulled out from under them in terms of their reimbursement--the amount they were reimbursed per test. And as a result of that they got themselves--they didn't have the volume to make the cash flow work.

  • Andy Stapp - Analyst

  • And how much were the charge-offs for these two loans?

  • Scott Smith - Chairman, CEO, President

  • One was 1.7 million and it was in our central area. It was in Pennsylvania. And the other one was up in the Lehigh Valley and that was 1.1 million.

  • Andy Stapp - Analyst

  • 1.1?

  • Scott Smith - Chairman, CEO, President

  • Yes. And they totaled 2.8.

  • Andy Stapp - Analyst

  • Okay. Can you refresh my memory on your bank stock portfolio? Is it primarily public companies or do you have some small community banks in there?

  • Scott Smith - Chairman, CEO, President

  • They're primarily, Andy, publicly held companies. It's almost 100%. And we have a combination of everything, but primarily it's more community banks in the areas we operate in.

  • Andy Stapp - Analyst

  • Okay. And how--do you have a feel how much was it from valuation declines--just market driven versus deterioration in fundamentals for these community banks?

  • Scott Smith - Chairman, CEO, President

  • We go through--I think it's a combination of both to tell you the truth.

  • Andy Stapp - Analyst

  • Okay.

  • Scott Smith - Chairman, CEO, President

  • And what we did is we go through and--when we did--when it was on a more subjective basis we'd go through and look at their financial condition. And if they had cut their dividend or if they had significant asset quality problems or some other problem, we'd write them down right away. And now--.

  • Andy Stapp - Analyst

  • --Right--.

  • Scott Smith - Chairman, CEO, President

  • --We're on--the basic guidelines we're using now is basically how much they're under and for how long.

  • Andy Stapp - Analyst

  • Okay.

  • Scott Smith - Chairman, CEO, President

  • And our portfolio--I think it's doing better than--if we compare the overall performance of our portfolio to different indexes, I think we're doing better than the general market [from that extent].

  • Andy Stapp - Analyst

  • And are they primarily mid-Atlantic based?

  • Scott Smith - Chairman, CEO, President

  • Yes, it's--yes, to include Virginia and Maryland, yes.

  • Andy Stapp - Analyst

  • Okay.

  • Scott Smith - Chairman, CEO, President

  • But we--I don't want to give you the wrong impression. We've wandered out a little bit, too. We've went outside our area on some of these.

  • Andy Stapp - Analyst

  • Okay.

  • Scott Smith - Chairman, CEO, President

  • There's some of our peer group banks in there that we have a high regard for.

  • Andy Stapp - Analyst

  • Okay.

  • Scott Smith - Chairman, CEO, President

  • We have a couple--we have one big bank. We have Wells Fargo in there.

  • Andy Stapp - Analyst

  • Okay. And the OTTI guidelines you mentioned--.

  • Scott Smith - Chairman, CEO, President

  • --Right--.

  • Andy Stapp - Analyst

  • --These are provided by your outside auditor and not--this wasn't an AICPA pronouncement, correct?

  • Scott Smith - Chairman, CEO, President

  • That's still the way we look at it. The--if you look at the accounting guidance it's still subjective and--.

  • Andy Stapp - Analyst

  • --Okay--.

  • Scott Smith - Chairman, CEO, President

  • --(Inaudible) the guidance. The same with the SEC comments and there's just--we don't see anything like a bright line test. But our accountants--and they're saying all the Big Four firms that are going to be doing this are coming up with like a more specific stricter guideline than we've been using.

  • Andy Stapp - Analyst

  • Okay. And what do you estimate the effective tax rate to be for the second half of the year?

  • Scott Smith - Chairman, CEO, President

  • Usually it's 29 to 30%. [Depends] on the unusual adjustments in there going both ways.

  • Andy Stapp - Analyst

  • Yes. All right, thank you.

  • Charlie Nugent - SVP, CFO

  • Hey, Andy, could I just say something on this valuation of the bank stock portfolio?

  • Andy Stapp - Analyst

  • Sure.

  • Charlie Nugent - SVP, CFO

  • It was subjective in the past. It was in accordance with the guidelines. And everybody was in agreement. And now, there's some more specific guidelines that have just been--been asked to use. And we agree with them and we've booked it based on that.

  • Andy Stapp - Analyst

  • Yes, understood.

  • Charlie Nugent - SVP, CFO

  • It's something new.

  • Andy Stapp - Analyst

  • Yes.

  • Operator

  • Our next question today will come from Sandy Osborne at KBW.

  • Sandy Osborne - Analyst

  • Good morning, guys.

  • Scott Smith - Chairman, CEO, President

  • Good morning.

  • Charlie Nugent - SVP, CFO

  • Good morning, Sandy.

  • Sandy Osborne - Analyst

  • Firstly, can you please speak to the large increase in other assets? I think they increased about--or they've more than doubled since last year. Could you tell us what's in there?

  • Charlie Nugent - SVP, CFO

  • It's primarily net security sales that haven't settled yet.

  • Sandy Osborne - Analyst

  • Okay.

  • Scott Smith - Chairman, CEO, President

  • Wouldn't it be all debt?

  • Charlie Nugent - SVP, CFO

  • I think it's all debt [and] securities.

  • Sandy Osborne - Analyst

  • Okay. And back to resource, do you kind of think that you're over the bubble with respect to resource repurchase requests? (Inaudible) seeing a decline?

  • Scott Smith - Chairman, CEO, President

  • Well, we--as Charlie mentioned earlier, we continue to have activity there. We still believe that the reserves that we put aside last year are adequate for that process. Now, we--it's not over yet and it will be some time that we work through all of us [as we] (inaudible) and so forth. But we're still comfortable that the reserves we set aside last year are adequate.

  • Sandy Osborne - Analyst

  • Okay. So you anticipate further requests? You just think they are covered for them.

  • Scott Smith - Chairman, CEO, President

  • Yes. These come in monthly.

  • Sandy Osborne - Analyst

  • Okay.

  • Scott Smith - Chairman, CEO, President

  • Sandy, in the quarter we had three additional repurchase requests and they totaled $1 million. So it's slowing down from what it's been in the past, but it's kind of hard to gauge what's going to happen in the future.

  • Sandy Osborne - Analyst

  • Right.

  • Scott Smith - Chairman, CEO, President

  • I'd be surprised if it gets any--any more than we're getting right now.

  • Sandy Osborne - Analyst

  • Okay. And on the provision, how much of that increase was driven by construction? And can you just speak to the trends you're seeing in this portfolio?

  • Scott Smith - Chairman, CEO, President

  • I don't know that we can answer how much was driven by construction. It's done on a customer by customer basis. Do we aggregate it that way? Is somebody coming up with a number? Well, anyway, let me talk about the--the trends continue to be, as I mentioned earlier, individualized in markets. And in some of the markets where we have the most concern there's some developments doing fine.

  • And there are other--we're also hearing that if there is a strongest sector of this, it's the low end. And the assumption is that it's new--first-time home buyers and they don't have to sell a house. So--and they see some bargains, so they're ready to buy and they don't have the problem of liquidating the house they're in. So there still seems to be--there is more strength in that end of the market than others. But having said that, there's some high end stuff moving in certain markets and so forth.

  • And we're also getting some calls from national companies starting to talk about do you have any land for sale now. We're not ready to say they're ready to pay the price where we're interested in selling at. But there seems to be some movement from some of the larger players to begin to accumulate some land again, at least interested in talking about it.

  • Sandy Osborne - Analyst

  • Okay.

  • Charlie Nugent - SVP, CFO

  • Sandy was the--we--it's not--I don't think it's been--I'm looking through the allocation and I don't think it's driven by construction. It's equal commercial loans, commercial mortgages, and some construction. The important thing is we--I think--and you'll see this in our 10-Q when we issue it--that we increased our unallocated due to general overall business conditions from 8 to 12%. So we're moving up the unallocated where we haven't consistently seen anything related to (inaudible), but just increasing our overall unallocated reserves because of what we think just the general business can do.

  • Sandy Osborne - Analyst

  • Okay, that's helpful. And finally, can you discuss what your estimates are for regulatory capital ratios at the end of the quarter?

  • Charlie Nugent - SVP, CFO

  • I--it's--the regulatory, Sandy, it's hard to judge because we have to weight the assets.

  • Sandy Osborne - Analyst

  • Right.

  • Charlie Nugent - SVP, CFO

  • But that is kind of hard to judge. I--the tier one I would think would be at about 9.20.

  • Sandy Osborne - Analyst

  • Okay.

  • Charlie Nugent - SVP, CFO

  • And our total risk base would be 11.8.

  • Sandy Osborne - Analyst

  • All right.

  • Charlie Nugent - SVP, CFO

  • The leverage ratio should be about (inaudible).

  • Sandy Osborne - Analyst

  • I'm sorry. What was that?

  • Charlie Nugent - SVP, CFO

  • 7.3.

  • Sandy Osborne - Analyst

  • Okay. That was all I had. Thanks, guys.

  • Scott Smith - Chairman, CEO, President

  • You're welcome.

  • Operator

  • David Darst at FTN Midwest, your line is open.

  • David Darst - Analyst

  • Good morning.

  • Scott Smith - Chairman, CEO, President

  • Good morning, David.

  • Charlie Nugent - SVP, CFO

  • Good morning, David.

  • David Darst - Analyst

  • I'm a little late, so if I'm asking a redundant question just let me know and I'll get it from the transcript. But the increase in the other income, is that the credit card income that's been reclassified to that line?

  • Charlie Nugent - SVP, CFO

  • Yes, that's in there. And then, I think we've really been doing well in the other income categories. Nearly all of them are up except--quarter-to-quarter except investment trust fees.

  • David Darst - Analyst

  • Okay. And then, the non-performing loans, could you give the balance of construction--residential construction?

  • Charlie Nugent - SVP, CFO

  • Yes. The non-performing construction loans in there are--of the total non-performing that--non-performing loans were about 146 million. Construction is 37 million.

  • David Darst - Analyst

  • Okay. And then, within your [ORIO], how do you feel about the way--or the movement of properties in the second quarter? And are you more optimistic that you could get some things moving this quarter and maybe we would see a decline on that balance the third quarter?

  • Scott Smith - Chairman, CEO, President

  • This is Scott. We're never happy with the real estate of other real estate. And as I mentioned, I think in the first quarter call we would know a lot more about the housing market by June 30. And what we know is that it hasn't improved a whole lot. So I'm not optimistic that we're going to move those any quicker than we have, but we're working hard at it and we'll see what happens. But again, as I said earlier, I'm not seeing--I'm not hearing from our folks anecdotally that there's a lot of new demand although--.

  • David Darst - Analyst

  • --What about within your non-performing loans? Is there a high percentage of that that you think you can resolve in the next three to six months?

  • Scott Smith - Chairman, CEO, President

  • Well, I mean, typically we would. And again--and as I said about the overall metrics, I'm not here to tell you that those things are going to improve a lot because I'm sure we're going to see some more going in there.

  • David Darst - Analyst

  • Okay.

  • Scott Smith - Chairman, CEO, President

  • It's just--it's so cloudy it's very hard to tell. I would love to be optimistic and tell you things have turned, but they haven't. That's the plain truth.

  • David Darst - Analyst

  • Okay. Then, are you comfortable with the reserve level today or do you think it will continue to increase and you'll need to build it as [NCAs] continue to rise?

  • Scott Smith - Chairman, CEO, President

  • Well, we're comfortable--with what we know now, where we are now, we think we're where we need to be. As the quarter unfolds, we'll see how that all materializes and maybe we'll get lucky and we'll get some payoffs we didn't expect or all of those things that can happen. But there isn't anything in the information available to us that would indicate this is going to get a lot better anytime soon.

  • David Darst - Analyst

  • Okay. Have you given any indication of what you think your charge-offs or provision might be for the rest of the year?

  • Scott Smith - Chairman, CEO, President

  • No, we have not.

  • David Darst - Analyst

  • Okay, thanks.

  • Scott Smith - Chairman, CEO, President

  • Yes.

  • Operator

  • And at this point, we have no further questions in the queue. Gentlemen, I'll turn it back to you for any additional or closing remarks.

  • Scott Smith - Chairman, CEO, President

  • I'd like to end this call by thanking everyone for joining us today. We hope you will be able to be with us again for our third quarter earnings conference call, which is scheduled for October 22 at 10:00 a.m. Thanks, again.